<PAGE>
As filed with the Securities and Exchange Commission on March 12, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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)
---------------
Steven D. Shackelford
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 Potts & Trowbridge
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. [_]
CALCULATION OF REGISTRATION FEE
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Proposed
Amount Maximum Amount of
Title of each Class of to be Aggregate Registration
Securities to be Registered Registered Offering Price Fee
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<S> <C> <C> <C>
Common Stock, par value $.01 per
share........................... 61,000,000(2) $610,000,000 $169,580
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Callable Notes................... $243,427,000(3) (3) (3)
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o), promulgated under the Securities Act of 1933, as
amended.
(2) Represents the maximum number of shares of Common Stock (the "APF Shares")
issuable upon consummation of the transactions described herein.
(3) The maximum principal amount of the Callable Notes (the "Notes") that will
be issued is approximately $243,427,000 million. Limited Partners whose
Units are exchanged or cancelled will receive APF Shares or, in certain
specified circumstances, may receive Notes. To the extent Notes are issued
to certain Limited Partners in lieu of APF Shares, the proposed maximum
aggregate offering price of the APF Shares will be proportionately
reduced. Accordingly, no further fee is due for the registration of the
Notes.
---------------
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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----------------
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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<S> <C>
CNL Income Fund, Ltd. CNL Income Fund X, Ltd.
CNL Income Fund II, Ltd. CNL Income Fund XI, Ltd.
CNL Income Fund III, Ltd. CNL Income Fund XII, Ltd.
CNL Income Fund IV, Ltd. CNL Income Fund XIII, Ltd.
CNL Income Fund V, Ltd. CNL Income Fund XIV, Ltd.
CNL Income Fund VI, Ltd. CNL Income Fund XV, Ltd.
CNL Income Fund VII, Ltd. CNL Income Fund XVI, Ltd.
CNL Income Fund VIII, Ltd. CNL Income Fund XVII, Ltd.
CNL Income Fund IX, Ltd. CNL Income Fund XVIII, Ltd.
</TABLE>
James M. Seneff, Jr., Robert A. Bourne and CNL Realty Corporation, as the
general partners of each of the 18 CNL Income Funds listed above (the "Funds"),
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 each
Fund by CNL American Properties Fund, Inc. ("APF") 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 Fund. After the Acquisition, APF will
own, through a subsidiary, all of the assets of the Funds. The
Agreement and Plan of Merger for each of the Funds, which describes the
terms of the Acquisition in detail is attached to the Supplement for
each Fund as Appendix B; and
(b) Other Business. At the special meeting, you will also consider such
other business as may properly come before the meeting or any
adjournment thereof.
Only limited partners of each of the 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 postponements thereof.
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: _________________________________
Title: Chief Executive Officer
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.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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.
shares of common stock, par value $.01 per share, and % Callable Notes,
Due , 2006
If you are a limited partner of any of the following, your vote is very
important:
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<S> <C>
CNL Income Fund, Ltd. CNL Income Fund X, Ltd.
CNL Income Fund II, Ltd. CNL Income Fund XI, Ltd.
CNL Income Fund III, Ltd. CNL Income Fund XII, Ltd.
CNL Income Fund IV, Ltd. CNL Income Fund XIII, Ltd.
CNL Income Fund V, Ltd. CNL Income Fund XIV, Ltd.
CNL Income Fund VI, Ltd. CNL Income Fund XV, Ltd.
CNL Income Fund VII, Ltd. CNL Income Fund XVI, Ltd.
CNL Income Fund VIII, Ltd. CNL Income Fund XVII, Ltd.
CNL Income Fund IX, Ltd. CNL Income Fund XVIII, Ltd.
</TABLE>
As described in detail in this Prospectus/Consent Solicitation Statement, CNL
American Properties Fund, Inc, which we refer to as APF, has offered to acquire
each of the 18 CNL Income Funds listed above, which we refer to as the Funds.
APF is a real estate investment trust (or a REIT) whose primary business, like
the Funds, is the ownership of restaurant properties leased to operators of
national and regional restaurant chains on a triple-net lease basis. We, James
M. Seneff, Jr., Robert A. Bourne and CNL Realty Corporation, as the general
partners of the Funds, are soliciting your consent to APF's proposed
acquisition. In the acquisition, APF will issue shares of common stock or, in
certain specified situations, cash and % Callable Notes to the limited
partners of the Funds. At the completion of the acquisition, you will be a
stockholder (or noteholder, as the case may be) of APF and will no longer be a
limited partner in your respective Funds. We expect that the APF Shares will be
listed for trading on the New York Stock Exchange under the symbol " ." The
Notes will not be listed for trading.
APF has proposed the acquisition as part of its strategic plan to maximize
its stockholder value by, among other things, significantly increasing its size
by acquiring restaurant properties similar to those operated by the Funds. We
believe that the proposed acquisition is the best means to realize the value of
your investment in the Funds, as opposed to liquidating your Fund or continuing
your Fund unchanged. In addition, we believe that the acquisition will provide
you with liquidity in your investment, growth potential and risk
diversification.
Through this Consent Solicitation and the accompanying supplement, we are
asking you, as the limited partners of each of the Funds, to vote on whether to
approve the acquisition. Limited partners holding in excess of 50% of the
outstanding units in each 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 Funds, strongly 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 certain risks and potential disadvantages associated with the
acquisition. You should carefully read "Risk Factors" beginning on page 37 and
"Federal Income Tax Consequences" beginning on page 147 for a more detailed
description of such matters. In particular, you should consider the following:
. The APF Shares may trade at prices below the Exchange Value of the APF
Shares, which APF has established to be $10.00 as set forth in the Consent
Solicitation.
. The acquisition is a taxable transaction and may result in adverse tax
consequences for those limited partners who are subject to Federal income
taxation.
. James M. Seneff, Jr. and Robert A. Bourne, two of the three general
partners of the Funds, participated in the structuring of the acquisition
in their capacities as directors and officers of APF and have certain
potential conflicts of interest with respect to its completion.
. APF's use of increased borrowings to increase its real estate asset
portfolio may subject APF to risks associated with leverage.
. Your investment will change from constituting an interest in one or more
Funds, each of which has a fixed portfolio of restaurant properties in
which you participate in the profits from the rental of its restaurant
properties, to holding common stock of APF, an operating company that will
own an interest in 1,437 restaurant properties, assuming the acquisition
of all the Funds, and will engage in mortgage financing transactions.
. If your Fund approves the acquisition, but you have voted against it, you
do not have any appraisal or other dissenters' rights under Florida law
and none will be offered in the acquisition.
. A public market for the % Callable Notes is not expected to develop. If
the % Callable Notes are sold, they may 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.
<PAGE>
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 Funds....................................... 7
APF.................................................................. 7
The Funds............................................................ 9
The Acquisition........................................................ 9
Principal Components of the Acquisition.............................. 9
What You Will Receive if Your Fund is Acquired in the Acquisition.... 10
Consideration Paid to Funds.......................................... 11
Our Reasons for Supporting the Acquisition............................. 13
Benefits of Participation in the Acquisition......................... 13
Factors to Consider.................................................. 14
Our Recommendation to You............................................ 15
Why We Believe the Acquisition is Fair to You........................ 15
Fairness Opinions.................................................... 15
Appraisals........................................................... 16
Alternatives to the Acquisition that We Considered................... 16
Prices for Fund Units................................................ 17
The Restaurant Properties.............................................. 19
Financing Services..................................................... 20
Voting................................................................. 21
Voting Procedures.................................................... 21
Amendments to Your Fund's Partnership Agreement...................... 22
No Rights to Independent Appraisal................................... 22
Comparison of Ownership of APF Shares and the Cash/Notes Option........ 22
Acquisition Expenses................................................... 24
Conditions to the Acquisition.......................................... 24
Your Right to Investor Lists and to Communicate with Other Limited
Partners.............................................................. 24
Benefits to General Partners........................................... 24
Federal Income Tax Considerations...................................... 25
The Acquisition will be a Taxable Transaction for Limited Partners
Subject to
Federal Income Taxation............................................. 25
Taxable Gain and Loss Estimates Per Average $10,000 Original Limited
Partner Investment.................................................. 25
Qualification of APF as a REIT....................................... 26
Summary Financial Information.......................................... 26
Summary Selected Historical, Consolidated Financial Data of
CNL American Properties Fund, Inc. ................................. 27
Summary Selected Combined Unaudited Historical Financial Data of the
CNL Income Funds.................................................... 29
Summary Selected Unaudited Pro Forma Condensed Combined Financial
Data................................................................ 30
APF, Funds, Advisor and CNL Restaurant Financial Services Group
Nine months ended september 30, 1998................................ 30
Summary Selected Unaudited Pro Forma Condensed Combined Financial
Data.................................................................. 34
APF, Funds, Advisor and CNL Restaurant Financial Services Group
Year ended December 31, 1997........................................ 34
</TABLE>
i
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RISK FACTORS.............................................................. 37
Risk Factors Related to APF and Resulting from the Acquisition........... 37
Uncertainty Regarding the Exchange Value and Trading Price of APF Shares
Following Listing...................................................... 37
Conflicts of Interest in the Acquisition; Substantial Benefits to
Related Parties........................................................ 37
Dilution of Existing Stockholders in Public Offering.................... 38
Majority Vote of Limited Partners of Funds Binds all Limited Partners... 38
Partners Have No Cash Appraisal Rights and May Elect to Receive Cash and
Notes.................................................................. 38
Uncertainties at the Time of Voting on Size of APF after Acquisition.... 38
Fundamental Change in Nature of Investment.............................. 38
Dependence on Major Tenants............................................. 39
Risks Involved in Hedging Transactions.................................. 39
Effect of Interest Rate Fluctuations on Price of APF Shares............. 39
Limited Liability of Officers and Directors of APF...................... 40
Risk of Default on Mortgage Loans and Market Risks associated with
Securitizations........................................................ 40
Risks Associated with Leverage.......................................... 41
Acquisition and Development Risks....................................... 41
Uncertainties Related to Future Property Purchases...................... 41
Failure of APF to Qualify as a REIT for Tax Purposes.................... 41
Risks Relating to Lease of Restaurant Properties........................ 42
Risks Associated with Loans Secured by Personal Property................ 42
Risks Associated with Distribution Requirements......................... 43
Limitations on Share Ownership.......................................... 43
Other Tax Liabilities................................................... 43
Changes in Tax Law...................................................... 43
Risk Factors Related to Restaurant Properties............................ 43
Lack of Control of Restaurant Property Management....................... 43
Expiration of Leases.................................................... 44
Risks Related to Tenant Repurchase Rights and Rights of First Offer..... 44
Risks of Real Property Investments...................................... 44
Risk of Environmental Liabilities....................................... 44
Risks Relating to Trends in the Restaurant Industry..................... 45
Risks Resulting from Competition........................................ 45
BACKGROUND OF AND REASONS FOR THE ACQUISITION............................. 46
Background of the Funds................................................. 46
Investment Objectives of Funds.......................................... 46
Our Efforts to Liquidate the Funds...................................... 47
Chronology of the Acquisition........................................... 48
Background of Our Recommendation that the Funds by Acquired by APF...... 53
Our Reasons for Proposing the Acquisition............................... 54
Comparative Valuation Analysis.......................................... 55
OUR RECOMMENDATION AND FAIRNESS DETERMINATION............................. 57
General................................................................. 57
Material Factors Underlying Belief as to Fairness....................... 57
Relative Weight Assigned to Material Factors............................ 60
Fairness to Limited Partners Receiving APF Shares in the Acquisition.... 60
Fairness in View of Conflicts of Interest............................... 60
THE ACQUISITION........................................................... 61
Conditions to Acquisition............................................... 61
Merger Agreements....................................................... 61
Approval and Recommendation of the General Partners..................... 61
</TABLE>
ii
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Vote Required for Approval of the Acquisition........................... 62
Consideration........................................................... 62
Estimated Value of APF Shares Payable to Funds.......................... 63
No Fractional APF Shares................................................ 64
Effect of the Acquisition on Limited Partners Who Vote Against the
Acquisition............................................................ 64
Effect of Acquisition on Funds Not Acquired............................. 64
Acquisition Expenses.................................................... 64
Accounting Treatment.................................................... 64
BENEFITS OF THE ACQUISITION............................................... 65
Growth Potential........................................................ 65
Risk Diversification.................................................... 65
Operational Economies of Scale.......................................... 65
Liquidity............................................................... 66
Future Development and Mortgage Loan Opportunities...................... 66
Possible Premium Pricing................................................ 66
Public Market Valuation of Assets....................................... 66
Regular Quarterly Cash Distributions.................................... 66
Greater Access to Capital............................................... 66
Greater Reduction of Conflicts of Interest.............................. 67
CONFLICTS OF INTEREST..................................................... 67
Affiliated General Partners............................................. 67
Substantial Benefits to General Partners................................ 67
COMPARISON OF OWNERSHIP OF UNITS, NOTES AND APF SHARES.................... 68
Form of Organization and Purpose........................................ 68
Length and Type of Investment........................................... 68
Business and Property Diversification................................... 69
Borrowing Policies...................................................... 69
Other Investment Restrictions........................................... 70
Management Control...................................................... 71
Fiduciary Duties........................................................ 71
Management's Liability and Indemnification.............................. 72
Antitakeover Provisions................................................. 73
Sale.................................................................... 73
Merger.................................................................. 74
Dissolution............................................................. 74
Amendments.............................................................. 74
Compensation and Fees................................................... 75
Compensation and Fees................................................... 76
Review of Investor Lists................................................ 76
Nature of Investment.................................................... 77
Additional Equity/Potential Dilution.................................... 78
Liability of Investors.................................................. 78
Voting Rights........................................................... 79
Liquidity............................................................... 79
Expected Distributions and Payments..................................... 80
Taxation of Taxable Investors........................................... 81
Taxation of Tax-Exempt Investors........................................ 82
VOTING PROCEDURES......................................................... 83
Distribution of Solicitation Materials.................................. 83
</TABLE>
iii
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Special Meetings....................................................... 83
Required Vote and Other Conditions..................................... 84
SELECTED HISTORICAL FINANCIAL DATA OF APF................................ 85
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS OF APF.................................................... 86
Overview............................................................... 86
Results of Operations.................................................. 86
The Years Ended December 31, 1997, 1996 and 1995....................... 87
Funds from Operations ("FFO").......................................... 88
Liquidity and Capital Resources........................................ 89
Year 2000.............................................................. 90
Future Business Plans.................................................. 90
APF'S BUSINESS AND THE RESTAURANT PROPERTIES............................. 92
APF'S BUSINESS........................................................... 92
General................................................................ 92
Business Objectives and Strategies..................................... 93
Competitive Advantages................................................. 95
APF's Recent Expansion of Services..................................... 95
The Restaurant Properties............................................... 97
General................................................................ 97
Evaluation of Investment Opportunities................................. 99
Financial Products and Services........................................ 101
The Food Service Industry.............................................. 104
Restaurant Finance Industry............................................ 106
Environmental Matters.................................................. 106
Insurance.............................................................. 106
Competition............................................................ 107
Regulation of Mortgage Loans and Equipment Leases...................... 107
Franchise Regulation................................................... 107
Employees.............................................................. 107
Legal Proceedings...................................................... 107
BUSINESS OF THE FUNDS.................................................... 108
General................................................................ 108
Management Services.................................................... 109
Site Selection and Acquisition of Restaurant Properties................ 109
Standards for Investment............................................... 110
Description of Restaurant Properties................................... 111
Description of Leases.................................................. 112
Joint Venture/Co-Tenancy Arrangements.................................. 115
Financing.............................................................. 116
Sale of Restaurant Properties.......................................... 116
Competition............................................................ 117
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES.............................. 118
APF..................................................................... 118
Investment Policies.................................................... 118
Financing Policies..................................................... 119
Miscellaneous Policies................................................. 119
Working Capital Reserves............................................... 119
</TABLE>
iv
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The Funds................................................................. 120
Investment Policies...................................................... 120
Financing................................................................ 120
MANAGEMENT................................................................. 121
Directors and Executive Officers......................................... 121
Board of Directors....................................................... 124
Executive Compensation................................................... 125
Employment Agreements.................................................... 126
Option and Restricted Share Plans........................................ 126
Incentive Compensation................................................... 126
PRINCIPAL STOCKHOLDERS OF APF.............................................. 127
FIDUCIARY RESPONSIBILITY................................................... 128
Directors and Officers of the Company.................................... 128
General Partners of the Funds............................................ 128
DESCRIPTION OF CAPITAL STOCK............................................... 130
Preferred Stock.......................................................... 130
Ownership Limits and Restrictions on Transfer............................ 130
Registrar and Transfer Agent............................................. 132
DESCRIPTION OF THE NOTES................................................... 133
General.................................................................. 133
Principal and Interest................................................... 133
Redemption............................................................... 134
Limitation on Incurrence of Indebtedness................................. 134
Merger, Consolidation or Sale............................................ 135
Events of Default, Notice and Waiver..................................... 135
Modification of the Indenture............................................ 137
Satisfaction and Discharge............................................... 137
No Conversion Rights..................................................... 137
Governing Law............................................................ 137
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS TO THE GENERAL PARTNERS..... 138
REPORTS, OPINIONS AND APPRAISALS........................................... 139
General.................................................................. 139
Fairness Opinions........................................................ 139
Valuation of APF......................................................... 141
Valuation of Funds....................................................... 141
Fund Appraisals.......................................................... 142
FEDERAL INCOME TAX CONSIDERATIONS.......................................... 146
Certain Tax Differences between the Ownership of Units and APF Shares.... 146
Tax Consequences of the Acquisition...................................... 147
Taxation of APF.......................................................... 151
Taxation of Stockholders................................................. 158
EXPERTS.................................................................... 161
LEGAL MATTERS.............................................................. 161
WHERE YOU CAN FIND MORE INFORMATION........................................ 161
</TABLE>
v
<PAGE>
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 18
limited partnerships (which we refer to as the 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 Funds, are soliciting your approval for the
Acquisition.
Q: Do you, as the general partners of my Fund, recommend that I vote in favor
of 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 Fund, as opposed to liquidating your Fund's
portfolio or continuing unchanged the investment in your Fund.
Q: What is CNL American Properties Fund, Inc.?
A: APF is a full-service real estate investment trust (or a REIT), formed in
1994, whose primary business, like the Funds, is the ownership of
restaurant properties leased to operators of national and regional
restaurant chains on a triple-net lease basis. As a full-service REIT, 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 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 certain income tax requirements are
satisfied, which substantially eliminates the "double taxation" (tax
imposed at both the corporate and stockholder levels) that generally
results from investments in a corporation.
Q: What will I receive if my Fund approves the Acquisition?
A: In the event that your Fund approves the Acquisition, you will be entitled
to receive shares of APF common stock (or APF Shares) in exchange for the
units of limited partnership interest (or Units) that you own in your 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 September 30, 1998, APF (assuming it
had acquired the CNL Restaurant Businesses as described on page 8 on such
date) would own an interest in 816 restaurant properties (and, assuming the
acquisition of all of the Funds,
1
<PAGE>
would have owned an interest in 1,437 restaurant properties). An investment
in APF will provide you with lower risk through diversification
geographically, by restaurant chain and by restaurant operator than does
your Fund investment. 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 liquid, freely-tradable securities.
Q: How many APF Shares will I receive if my Fund is acquired by APF?
A: The number of APF Shares that will be paid to each Fund in the Acquisition
is set forth in the chart on page under the caption "Summary--The
Acquisition--Consideration Paid to the Funds" and in the Supplement
accompanying this Consent Solicitation. You will receive your pro rata
portion of such shares in accordance with the terms of your Fund's limited
partnership agreement.
Q: How did APF determine the number of APF Shares to be paid to each Fund?
A: APF evaluated several factors, including the appraised value of the
restaurant properties owned by the Funds.
Q: What is the value of an APF Share?
A: APF has assigned a value, which we refer to as the Exchange Value, of
$10.00 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 approximately 75 million APF Shares through three public offerings at
offering prices per APF share equal to the Exchange Value. At December 31,
1998 of the approximately $750 million raised by APF, APF has used
approximately $550 million to acquire restaurant properties and to make
mortgage loans and had approximately $120 million in uninvested proceeds
which it expects to invest during the first quarter of 1999. The remaining
proceeds were to pay fees and other expenses.
Q: Did you receive a fairness opinion in connection with APF's acquisition of
my Fund?
A: Yes. Legg Mason Wood Walker, Incorporated, an independent financial
advisor, rendered an opinion that the APF Share consideration offered by
APF to your Fund is fair to the Fund from a financial point of view.
Q: Is the purchase price being paid to my Fund greater than its appraised
value?
A: Based on the Exchange Value, the purchase price payable by APF to your Fund
is greater than your Fund's appraised value assuming the Fund was to
liquidate or continue unchanged. To assist us in our evaluation of APF's
offer, we engaged Valuation Associates, an independent third party
appraiser, to appraise the restaurant properties owned by your 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 always distribute at least 95% of its taxable income to its
stockholders on an annual basis.
As an APF stockholder, you will also have the ability to participate in any
appreciation in value of the APF Shares, which will be listed for trading
on the NYSE. Going forward, we believe that, unlike your Fund, APF will
grow in assets, revenues and cash flows, resulting in an increase of its
earnings and its funds from operations. As a result, the price of APF
Shares, as reflected on the NYSE, may increase due to such growth.
2
<PAGE>
Q: In the event that my Fund is acquired by APF, may I choose to receive
something other than APF Shares?
A: Yes, subject to certain limitations. If you vote "Against" the Acquisition,
but your Fund is nevertheless acquired by APF, you may elect to receive a
payment that is 10% in cash and 90% in % Callable Notes due , 2006 (or
Notes) based on the liquidation value of your Fund, as determined by
Valuation Associates. Such liquidation value will be lower than the
aggregate Exchange Value of the APF Shares offered to your Fund in the
Acquisition. The Notes will bear interest at a fixed rate equal to %,
which was determined based on 120% of the applicable federal rate as of
, 1999. Please note that you may only receive the cash/note option if
you vote "Against" the Acquisition and you elect to receive the cash and
Notes on your consent form. You will receive APF Shares if your 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
cash/notes option on your consent form. 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 December 1998, APF has raised
approximately $750 million in three public offerings, each at an offering
price per APF Share equal to the Exchange Value. As of September 30, 1998
and assuming the acquisition of the CNL Restaurant Businesses, APF owned an
interest in 816 restaurant properties, originated mortgage loans of over
$483.1 million and had approximately 28,000 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. 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 Fund.
Q: Why is APF seeking to acquire the Funds, including my Fund?
A: Because the restaurant properties owned by the Funds are very similar to
those owned by APF, APF believes, and we agree, that the combination of the
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 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 have a positive impact on the value of the APF
Shares that will be listed on the NYSE.
Q: Is APF's acquisition of my Fund dependent on its acquisition of the other
Funds?
A: There is no requirement that a minimum number of Funds be acquired by APF.
APF has received a fairness opinion from Merrill Lynch & Co., an
independent investment banking firm, stating that the aggregate
consideration to be paid by APF for the acquisition of all of the 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 Funds approve the
Acquisition, 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 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 Funds will be
acquired.
Q: What benefits will the general partners of my Fund receive as a result of
the Acquisition?
A: Like you, we have an ownership interest in your Fund. Accordingly, we will
be entitled to receive our portion of the APF Shares paid for your Fund in
accordance with the terms of your Fund's partnership agreement. To
determine if we are receiving any APF Shares, please
3
<PAGE>
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 Funds are tax-deferred or tax-exempt entities
(for example, 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 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 cash/notes option, your tax will be based upon your allocable
share of the gain which will be recognized by your Fund; your Fund's gain
will generally equal the excess, if any, of the value of the APF Shares and
cash received by your Fund over the tax basis of your Fund's net assets.
Some of the gain may be subject to the 25% rate of tax applicable to certain
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 Funds in
greater detail, see pages 146 through 150 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 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 a Fund to be acquired by APF, limited partners holding Units
constituting greater than 50% of the outstanding Units of a Fund must
approve the Acquisition. Such an approval by your 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 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 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 how you want to vote, and sign
and mail it in the enclosed return envelope as soon as possible, so that at
the Special Meeting of limited partners, your Units may be voted "For" or
"Against" the acquisition of your Fund. If you sign and send in your consent
and do not indicate how you want to vote, your consent will be counted as a
vote in favor of 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 15230-012, our
vote tabulator.
Q: I am a limited partner of more than one Fund. Why did I receive only one
Consent Solicitation?
A: Many of the limited partners in the Funds own Units in more than one Fund.
To reduce
4
<PAGE>
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 Fund. If you are
one of these limited partners, we have enclosed a page with multiple,
detachable consent forms as well as the different Supplements relating to
each of the 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 investment considerations
generic to all of the Funds. The purpose of the Supplement is to describe
the investment considerations particular to your 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 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
December 31, 1999.
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 Fund(s),
you should contact our solicitation firm which we hired to assist us in
answering your questions and administering the special meeting:
D.F. King & Co., Inc.
77 Water Street
New York, New York 10005
(800) 207-3159
6
<PAGE>
SUMMARY
This Summary highlights selected information from this Prospectus/Consent
Solicitation Statement (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 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 162.
Purpose of This Consent Solicitation
This Consent Solicitation describes the proposed Acquisition by CNL American
Properties Fund, Inc., a Maryland corporation, of up to 18 CNL Income Funds.
Through this Consent Solicitation we, as the general partners of the Funds, are
asking you to approve APF's acquisition of your Fund. APF will acquire your
Fund in the Acquisition (assuming the other conditions to the Acquisition are
satisfied) if the Limited Partners in your Fund that hold greater than 50% of
the outstanding Units of limited partnership interest in your Fund vote to
approve the Acquisition.
Description of APF and the Funds
APF
APF is a leading provider 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 been able to cultivate long-standing
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, Pizza Hut,
Shoney's, Steak and Ale(R) Restaurant, 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 DenAmerica Corp.
Through triple-net leases and mortgage loans on restaurant properties, APF,
a real estate investment trust (or REIT), 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 41 restaurant chains and more than 90 operators of
national and regional restaurant chains in 42 states as of September 30, 1998.
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.
7
<PAGE>
APF's current portfolio of triple-net leases has an average remaining lease
term of 17 years, and its current portfolio of mortgage loans has an average
remaining loan term of approximately 15 years.
Since APF's inception in 1994 through December 1998, APF raised
approximately $750 million in three public offerings and used approximately
$550 million of those proceeds to acquire restaurant properties and to make
mortgage loans. Of the remaining proceeds, APF intends to invest an additional
$120 million in the first quarter of 1999. As of September 30, 1998 and
assuming the completion of the acquisition of the CNL Restaurant Businesses as
described below, APF's portfolio consisted of investments in 816 restaurant
properties, including 357 properties represented by investments in real estate,
171 restaurant properties represented by mortgage loans, and 288 properties
represented by securitized mortgage loans in which APF held a residual
interest. Generally, the real estate owned by APF consists of land and
buildings. Additionally, as of September 30, 1998, APF had made mortgage loans
for related buildings on 44 of the 45 restaurant properties on which it holds
title to the land only.
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, including:
. 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 CNL Fund Advisors, Inc. (which we refer to as 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 and servicing and accounting services.
APF also provides restaurant development services including site
selection and construction management.
. 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
two affiliated entities, CNL Financial Corp. and CNL Financial Services,
Inc. (which we refer to as 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" a
portion of the mortgage loans that it originated and also retained the
servicing rights for such mortgage loans. The acquisition of the CNL
Restaurant Financial Services Group has provided a platform for the
expansion of APF's existing financing capabilities to include such
securitization transactions, which APF believes enables it to access more
financing opportunities and, ultimately, to increase cash available to be
distributed to its stockholders. APF believes securitization transactions
may permit it to obtain additional capital with greater ease and at a
lower cost at times when market conditions are not suitable for raising
funds on economically attractive terms through the issuance of APF's
equity or debt securities.
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 for such portfolio, and assumed the
warehouse lines of credit of the CNL Restaurant Financial Services Group.
As of September 30, 1998, the CNL Restaurant Financial Services Group had
originated $465 million in mortgage loans on 458 restaurant properties in
37 states, had secured approximately $135 million in loan commitments and
had securitized approximately $269 million of the $465 million of
originated mortgage loans.
8
<PAGE>
As consideration for its acquisition of the CNL Restaurant Businesses, APF
issued 12.3 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 and telephone number are 400 East South Street, Orlando,
Florida 32801, (407) 650-1000. Any questions regarding the Acquisition should
be directed to the solicitation firm that is assisting us, D.F. King, 77 Water
Street, New York, New York 10005 (800) 207-3159.
The Funds
The Funds are finite-life, Florida limited partnerships that we formed from
1985 to 1995 to invest in triple-net leased restaurant properties. As of
September 30, 1998, the Funds owned, in the aggregate, 621 restaurant
properties located in 39 states which, for the nine months ended September 30,
1998, had aggregate gross revenues of approximately $37 million. The 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 Funds consist of the following 18 limited partnerships:
<TABLE>
<S> <C>
. CNL Income Fund, Ltd. . CNL Income Fund X, Ltd.
. CNL Income Fund II, Ltd. . CNL Income Fund XI, Ltd.
. CNL Income Fund III, Ltd. . CNL Income Fund XII, Ltd.
. CNL Income Fund IV, Ltd. . CNL Income Fund XIII, Ltd.
. CNL Income Fund V, Ltd. . CNL Income Fund XIV, Ltd.
. CNL Income Fund VI, Ltd. . CNL Income Fund XV, Ltd.
. CNL Income Fund VII, Ltd. . CNL Income Fund XVI, Ltd.
. CNL Income Fund VIII, Ltd. . CNL Income Fund XVII, Ltd.
. CNL Income Fund IX, Ltd. . CNL Income Fund XVIII, Ltd.
</TABLE>
Our address and telephone number, as general partners of the Funds, are 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 (800) 207-3159.
The Acquisition
Principal Components of the Acquisition
The Acquisition will consist of the following principal components:
. APF Acquires the Funds. APF will acquire, in exchange for APF Shares, the
Funds in which Limited Partners holding in excess of 50% of the Units
approve the Acquisition. Consequently, APF will own the acquired Funds'
restaurant properties and other assets after the completion of the
Acquisition. The Acquisition will be accomplished by merging the acquired
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 ("NYSE") 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 December
31, 1999.
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
9
<PAGE>
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.
What You Will Receive if Your Fund is Acquired in the Acquisition
You will receive APF Shares as consideration for your Units, unless you vote
against the acquisition of your Fund by APF and elect the Cash/Notes Option, as
described below.
. APF Shares. The consideration paid to your Fund upon the consummation of
the Acquisition will consist of APF Shares, reduced by the expenses of
the Acquisition that are incurred by your 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 Cash/Notes Option.
You should note that if you vote against the Acquisition, and do not
specifically choose to receive the Cash/Notes Option, you will receive
APF Shares in the event that your Fund approves the Acquisition.
The number of APF Shares that you will receive for your Units will be
determined in accordance with your Fund's partnership agreement which
specifies how consideration is distributed to partners in the event of a
liquidation of your 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 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 Fund to your investment in the Funds, the estimated value of APF
Shares per average $10,000 original investment in each Fund.
. Cash/Notes Option. If your 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 the form of
10% cash and 90% APF % Callable Notes (which we refer to as the Notes),
due , 2006 (the "Cash/Notes Option"). The payment received by you and
other Limited Partners who elect the Cash/Notes Option will be equal to
your portion of the amount that the Fund would receive upon an orderly
liquidation of the restaurant properties over a 12-month period pursuant
to the partnership agreement governing your Fund, based upon a
liquidation value appraisal prepared by Valuation Associates. Such
liquidation value will be lower than the value of the APF Shares offered
to your Fund in the Acquisition based on the Exchange Value. If you
properly elect to receive the Cash/Notes Option on your consent form, you
will receive (i) a cash payment equal to the value of 10% of the amount
you would have received in an orderly liquidation of your Fund's net
assets, based upon Valuation Associates' liquidation value, and (ii)
Notes, the principal amount of which will be equal to 90% of the amount
you would have received in an orderly liquidation of your Fund's net
assets, based upon Valuation Associates' liquidation value. The Notes
will bear interest at %, which was determined based on 120% of the
applicable federal rate as of , 1999, and will mature on , 2006.
10
<PAGE>
Consideration Paid to Funds
The following table sets forth for each Fund (i) the aggregate amount of
original limited partner investments in each Fund less any distributions of net
sales proceeds paid to the limited partners of that Fund, (ii) the original
amount of limited partner investments in each Fund less any distributions of
net sales proceeds per average $10,000 investment, (iii) the number of APF
Shares to be paid to that Fund, (iv) the estimated value of the APF Shares to
be paid to that Fund based on the Exchange Value, (v) the estimated Acquisition
expenses allocated to each Fund, (vi) the estimated value, based on the
Exchange Value of APF Shares paid to that Fund after Acquisition expenses, and
(vii) the estimated value of APF Shares, based on the Exchange Value, you will
receive for each $10,000 of your original investment:
<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
Fund Proceeds(1) Investment(1) Fund(2) Fund(3) Expenses Expenses(3) Investment(3)
---- ------------- ------------- ---------- ------------ ----------- ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C>
I.................... $12,597,200 $ 8,398 1,157,759 $11,577,590 $161,000 $11,416,590 $ 7,611
II................... 23,768,000 9,507 2,393,267 23,932,670 267,731 23,664,939 9,466
III.................. 23,522,253 9,409 2,082,901 20,829,010 237,562 20,591,448 8,237
IV................... 28,766,256 9,589 2,668,016 26,680,160 338,472 26,341,688 8,781
V.................... 23,161,673 9,265 2,049,031 20,490,310 232,046 20,258,264 8,103
VI................... 35,000,000 10,000 3,730,388 37,303,880 426,713 36,877,167 10,429
VII.................. 30,000,000 10,000 3,202,371 32,023,710 336,341 31,687,369 10,456
VIII................. 35,000,000 10,000 4,042,635 40,426,350 472,595 39,953,755 11,259
IX................... 35,000,000 10,000 3,700,097 37,000,970 420,663 36,580,307 10,356
X.................... 40,000,000 10,000 4,243,243 42,432,430 482,089 41,950,341 10,391
XI................... 40,000,000 10,000 4,394,196 43,941,960 485,944 43,456,016 10,759
XII.................. 45,000,000 10,000 4,768,496 47,684,960 532,871 47,152,089 10,400
XIII................. 40,000,000 10,000 3,886,185 38,861,850 486,515 38,375,335 9,594
XIV.................. 45,000,000 10,000 4,313,041 43,130,410 524,930 42,605,480 9,468
XV................... 40,000,000 10,000 3,733,901 37,339,010 450,338 36,888,672 9,222
XVI.................. 45,000,000 10,000 4,320,947 43,209,470 515,521 42,693,949 9,488
XVII................. 30,000,000 10,000 3,014,377 30,143,770 353,644 29,790,126 9,930
XVIII................ 35,000,000 10,000 3,299,149 32,991,490 390,024 32,601,466 9,315
</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
September 30, 1998, an adjustment to the Limited Partners' original
investments based on distributions of net sales proceeds received from
sales of properties made pursuant to the partnership agreements for CNL
Income Fund, Ltd. through CNL Income Fund V, Ltd.
(2) The APF Shares payable to each Fund as set forth in this chart will not
change if APF acquires fewer than all of the Funds in the Acquisition. This
number assumes that none of the Limited Partners of the Fund has elected
the Cash/Notes Option.
(3) 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.
11
<PAGE>
Why we are showing a $10,000 original investment. You may have originally
invested more or less than $10,000 in your Fund. We used a $10,000 original
investment because it is easier to illustrate the purchase prices with a round
number. In order to determine the approximate value, based on the Exchange
Value, of APF Shares you will receive if your Fund is acquired in the
Acquisition, you would multiply the figure in the last column (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 $10,759 by 2.5 (equal to $25,000 divided by $10,000),
which would result in your receiving an estimated value of $26,898 in APF
Shares in the Acquisition.
Our basis for believing that the terms of the Acquisition are reasonable. We
believe that the terms of the Acquisition, including the Exchange Value, are
reasonable for the following reasons:
. We engaged Legg Mason as an independent financial advisor to us in the
Acquisition and to express its opinion as to the fairness of the APF
Share consideration payable from a financial point of view. We have
received such an opinion from Legg Mason for each of the Funds.
. APF raised approximately $750 million in gross proceeds in three
offerings between April 1995 (APF's initial public offering) and December
1998 (APF's most recently completed public offering). In each offering,
the offering price per APF Share equaled the Exchange Value.
. Based on recorded transfers of APF Shares, the average price at which APF
Shares sold during 1998 was $8.65 per share. 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
69,514 APF Shares from stockholders at $9.20 per share. We believe that
this discount to the original offering price of $10.00 is reasonable in
light of the current illiquidity of the APF Shares. The number of 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.
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:
. 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.
. While sales of APF Shares 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 September 30, 1998, the net book value
of an APF Share was $8.88. 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.
. Upon the listing of the APF Shares on the NYSE, current investors holding
APF Shares, as well as the 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.
We also will receive APF Shares in the Acquisition. With respect to our
ownership interest in the Funds we, as the general partners of your Fund, also
will receive APF Shares in exchange for our general partner
12
<PAGE>
interests in certain Funds acquired by APF. If your Fund is acquired, the APF
Shares paid to your 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 Fund's partnership agreement, as if your Fund's restaurant
properties and other assets were sold and your 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 Funds is the best way to maximize the value of your
investment. We believe that the addition of the Funds' restaurant properties to
APF's portfolio will likely result in higher values being paid to the Funds
than if such restaurant properties were sold individually and the 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 Limited
Partner of your Fund on 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 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 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 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 September 30, 1998, 93%
of APF's financing relationships were either with the franchisor of the
restaurant chain or with 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 Fund.
. Operational Economies of Scale. The combination of the 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 Funds are all public entities subject to the reporting
requirements of the Securities and Exchange Commission, or SEC, the
combination of the Funds into a single public company in APF would save
compliance costs with respect to SEC reporting. In addition, if your Fund
is acquired, we will no longer have to supply a Schedule K-1 to you and
each of the other Limited Partners 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
13
<PAGE>
basis upon which to value the Units. Because your 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, assuming APF acquires all of the 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 60,000 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 listed on the NYSE,
there will be very few instances, if any, where you will have to sell your
APF Shares at a discount to 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 and expanded 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 chain either through
triple-net lease financing or mortgage loan financing are in excess of
$333 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 has a relationship with CNL Advisory Services, Inc. which
will enhance APF's financing business. CNL Advisory Services, Inc.
provides merger, acquisition and strategic planning services to the same
operators of national and regional restaurant chains with which APF does
business.
Factors to Consider
There are certain factors, which are more fully discussed beginning at page
in "Risk Factors," that you should consider in determining whether to vote in
favor of the Acquisition. The following list summarizes certain of these
factors:
. 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 Funds, will receive substantial financial benefits from
the Acquisition.
. 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.
. The acquisition by APF of your Fund involves a fundamental change in the
nature of your investment. If the Acquisition is approved, you will no
longer hold an interest in a Fund which has a fixed portfolio of
restaurant properties, but will instead be a stockholder in an operating
company that will own interests in 1,437 restaurant properties (assuming
APF acquired all of the Funds on September 30, 1998), will be able to
make future acquisitions of restaurant properties using equity or
indebtedness and will make mortgage loans and securitize those mortgage
loans. Further, your ability to utilize passive losses to offset income
derived from your investment in the 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 funds from operations. APF does, however, have a policy of
maintaining a ratio of total indebtedness to total assets of not more
than 45%.
14
<PAGE>
. The Acquisition is a taxable transaction. While a significant percentage
of the Limited Partners of the Funds are tax-deferred or tax-exempt
entities (for example, pension plans, 401(k) plans and IRAs), if you are
a person 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 the Cash/Notes Option, your tax will be
based upon your allocable share of the gain which will be recognized by
your Fund; your Fund's gain will generally equal the excess, if any, of
the value of the APF Shares and cash received by your Fund over the tax
basis of your Fund's net assets. Some of the gain may be subject to the
25% rate of tax applicable to certain real property gain.
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" 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 .
. We reviewed the value of the consideration to be received by you if your
Fund is acquired by APF, and we compared it to the consideration that you
might have received under the alternatives to the Acquisition (those
alternatives being the continuation of the Funds without change and the
liquidation of the 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 the Cash/Notes Option if your Fund
approves the Acquisition.
. We considered the financial advice and the fairness opinions rendered by
Legg Mason, and the appraisals of Valuation Associates, each of which is
described below.
Fairness Opinions
In deciding to recommend the Acquisition, we considered the fairness
opinions of Legg Mason which we engaged to advise us in connection with the
Acquisition. In particular, we considered their opinion as to the fairness from
a financial point of view of the APF Share consideration to be offered to each
Fund. Because the Acquisition of any single Fund is not a condition of the
Acquisition of any other Fund, we obtained from Legg Mason with respect to each
Fund a fairness opinion that did not assume that APF acquired any other Funds.
The fairness opinion for your Fund is attached as Appendix A to your 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
Fund in the Acquisition is fair from a financial point of view.
15
<PAGE>
Appraisals
In making our recommendation, we also considered the appraisals of each Fund
prepared by Valuation Associates, an independent real estate appraisal firm. We
compared the value of the APF Shares payable to each Fund, based on the
Exchange Value, with the appraised value of each Fund's restaurant property
portfolio. Based on this comparison, we determined that the number of APF
Shares payable to each 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 Fund: (i) continuation of each Fund pursuant to its existing
partnership agreement and (ii) liquidation of each Fund.
Benefits and Disadvantages of Continuation Alternative. Continuing each Fund
without change would have the following effects, some of which you might
perceive as benefits:
. your 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 Fund's performance would not be affected by the performance of APF
and the other Funds that APF intends to acquire in the Acquisition;
. eventually, your Fund would liquidate its holdings and distribute the
proceeds received in liquidation in accordance with the terms of the
Fund's partnership agreement;
. there would be no change in the nature of your voting rights and no
change in your Fund's operating policies;
. your Fund would not incur Acquisition expenses, ranging from
approximately $161,000 to $533,000 depending on the size of the Fund (for
a breakdown of the expenses with respect to your Fund, see the Supplement
accompanying this Consent Solicitation);
. income from your 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
. 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 Funds as separate entities would
have the following disadvantages:
. since the majority of the Funds' operating expenses are fixed, as the
restaurant properties are sold and revenues from the portfolio decrease,
we do not expect that the Funds will sustain their current level of
distributions;
. since the Funds are not authorized to raise additional funds either
through equity issuances or by incurring indebtedness for investment, the
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;
16
<PAGE>
. your 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 Fund's ability to make distributions than it would on APF;
and
. your Fund cannot acquire, develop, or finance restaurant properties or
take advantage of the other potential benefits of the Acquisition, which
are described above.
Benefits and Disadvantages of Liquidation Alternative. As an alternative to
the Acquisition, each 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 and the
other Limited Partners (as well as 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 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 Fund's
restaurant properties;
. in our view, liquidation of the restaurant properties would be less
desirable and could result in various adverse consequences; specifically,
we believe that (i) the liquidation valuation provided by Valuation
Associates shows that the liquidation values of the Funds are lower than
the values of the APF Shares, based on the Exchange Value, to be paid to
the Funds in the Acquisition and (ii) 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. Your Supplement contains estimates of the value of your investment
if your Fund continues in operation without change and of the net liquidation
proceeds that might be available if your Fund were liquidated. The methodology
and assumptions used to derive these estimated values are explained there.
Prices for 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 nine months ended September 30, 1998 that we
obtained from various sources, including the distribution reinvestment plans of
the Funds. Other than the information from the 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 Funds as a result of the relative
illiquidity of the Units being sold.
17
<PAGE>
All historical price information in the chart below is on a per Unit basis
for the nine months ended September 30, 1998.
<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 Average Average Average Average
Investments Proceeds per Number $10,000 $10,000 $10,000 $10,000
less any average of Units Original Original Original Original
Original Distribution $10,000 Number Traded Limited Limited Limited Limited
Cost per of Net Sales Original of Units as Percent Partner Partner Partner Partner
Fund Unit Proceeds(1) Investment(1) Traded of Total Fund Investment Investment Investment Investment(2)
---- -------- ------------ ------------- -------- ------------- ---------- ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
I............... $500 $12,597,200 $8,398 116 0.6% $8,435 $8,198 $8,336 $7,611
II.............. 500 23,768,000 9,507 285 0.6 9,507 7,210 9,078 9,466
III............. 500 23,522,253 9,409 345 0.7 9,600 7,580 9,104 8,237
IV.............. 500 28,766,256 9,589 419 0.7 10,000 7,740 9,291 8,781
V............... 500 23,161,673 9,265 235 0.5 10,000 7,780 9,316 8,103
VI.............. 500 35,000,000 10,000 571 0.8 9,701 7,981 9,422 10,429
VII............. 1 30,000,000 10,000 188,721 0.6 9,500 8,700 9,400 10,456
VIII............ 1 35,000,000 10,000 298,648 0.9 9,800 8,000 9,400 11,259
IX.............. 10 35,000,000 10,000 25,458 0.7 10,000 8,740 9,400 10,356
X............... 10 40,000,000 10,000 29,265 0.7 10,000 7,800 9,080 10,391
XI.............. 10 40,000,000 10,000 38,763 1.0 9,500 7,980 9,230 10,759
XII............. 10 45,000,000 10,000 33,697 0.7 10,000 5,790 9,180 10,400
XIII............ 10 40,000,000 10,000 34,866 0.9 9,500 7,900 9,000 9,594
XIV............. 10 45,000,000 10,000 37,863 0.8 9,950 7,950 9,250 9,468
XV.............. 10 40,000,000 10,000 26,729 0.7 9,500 6,100 8,640 9,222
XVI............. 10 45,000,000 10,000 14,811 0.3 10,000 8,000 9,100 9,488
XVII............ 10 30,000,000 10,000 7,811 0.3 9,500 7,730 9,320 9,930
XVIII........... 10 35,000,000 10,000 13,224 0.4 9,500 7,700 9,280 9,315
</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
September 30, 1998, an adjustment to the Limited Partners' original
investments based on distributions of net sales proceeds received from
sales of properties made pursuant to the partnership agreements 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.
18
<PAGE>
The Restaurant Properties
Assuming that APF acquires all of the Funds and that the Acquisition had
occurred on September 30, 1998, APF would have owned and leased on a triple-net
basis 978 restaurant properties. The restaurant properties would be leased to
more than 150 tenants, operated by more than 60 different restaurant chains,
located in 45 states and approximately 96 percent leased as of September 30,
1998. The average age of the buildings on restaurant properties in the
portfolio would be approximately 8.7 years. The following table sets forth
certain annualized restaurant property information for restaurant properties
owned as of September 30, 1998 (assuming the Acquisition occurred on this date)
with respect to significant restaurant chains operating a restaurant property.
<TABLE>
<CAPTION>
Total Number Average
of Age of Annualized Percentof
Restaurant Buildings Aggregate Total Total Rental
Restaurant Chain Properties (years) Rental Revenue Revenue
- ---------------- ------------ --------- --------------- ------------
<S> <C> <C> <C> <C>
Golden Corral.............. 102 6.0 $14,400,000 15.3%
Jack in the Box............ 96 5.2 9,731,000 10.4
Burger King................ 74 10.8 7,083,000 7.6
Denny's.................... 61 10.2 5,792,000 6.2
Boston Market (1).......... 50 2.7 4,781,000 5.1
Hardee's................... 64 7.3 4,472,000 4.8
Bennigan's................. 22 15.4 4,100,000 4.4
Shoney's................... 31 7.9 3,513,000 3.7
IHOP....................... 24 4.1 3,263,000 3.5
Steak and Ale Restaurant... 18 21.1 2,774,000 3.0
Black-eyed Pea............. 22 5.9 2,400,000 2.6
Darryl's................... 17 17.9 2,341,000 2.5
Wendy's.................... 29 9.0 2,373,000 2.5
Arby's..................... 29 5.2 2,290,000 2.4
Long John Silver's (2)..... 43 7.6 2,064,000 2.2
Checkers................... 47 5.0 1,932,000 2.1
Chevy's Fresh Mex.......... 8 5.1 1,814,000 1.9
Applebee's................. 12 4.0 1,676,000 1.8
Pizza Hut.................. 67 16.1 1,692,000 1.8
Ground Round............... 15 18.1 1,615,000 1.7
Pollo Tropical............. 11 4.7 1,538,000 1.6
KFC........................ 18 9.1 1,265,000 1.3
Popeyes.................... 20 11.9 1,065,000 1.1
Other...................... 98 8.9 9,843,000 10.5
--- ----------- -----
Total.................... 978 $93,817,000 100.0%
=== =========== =====
</TABLE>
- --------
(1) In October 1998, tenants of 44 Boston Market restaurant properties filed
voluntary petitions for bankruptcy under Chapter 11 of the U.S. Bankruptcy
Code. To date, the tenants have closed 19 of these restaurant properties.
APF and the relevant Funds are currently actively marketing these
restaurant properties to existing and prospective clients.
(2) 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. To
date, the tenant has closed 16 of these restaurant properties. APF is
currently actively marketing these restaurant properties to existing and
prospective clients.
Since the acquisition of one Fund is not dependent upon the acquisition of
any other Fund, it is possible that APF would not acquire all of the Funds in
the Acquisition. Consequently, after the Acquisition, APF will not necessarily
own all of the restaurant properties listed above.
19
<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 September 30, 1998, APF would have originated more
than $483.1 million in mortgage loans, of which $269 million had been
securitized. The following table shows certain annualized information regarding
mortgage loans made by APF on restaurant properties in which APF owned an
interest as of September 30, 1998, including the restaurant chain, the number
of restaurant properties subject to mortgage loans per restaurant chain, the
aggregate revenue per restaurant chain and the outstanding balance of mortgage
loans per chain.
<TABLE>
<CAPTION>
Aggregate Percent of Aggregate Percent of
Number of Total Total Outstanding Outstanding
Restaurant Chain Properties Revenue Revenue Balance Balance
- ---------------- ---------- ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Applebee's.......... 53 $ 5,342,000 31.7% $ 65,909,000 34.9%
T.G.I. Friday's..... 12 2,336,000 13.8% 23,111,000 12.2%
Burger King......... 29 1,888,000 11.2% 22,570,000 11.9%
Pizza Hut........... 47 1,764,000 10.5% 16,440,000 8.7%
Taco Bell........... 27 1,442,000 8.6% 17,988,000 9.5%
Denny's............. 10 1,100,000 6.5% 11,243,000 6.0%
Shoney's............ 7 630,000 3.7% 6,138,000 3.3%
Fazoli's............ 7 606,000 3.6% 6,283,000 3.3%
Ruby Tuesday........ 5 454,000 2.7% 4,721,000 2.5%
Golden Corral....... 2 337,000 2.0% 3,881,000 2.1%
Del Taco............ 4 311,000 1.8% 3,300,000 1.8%
Houlihan's.......... 1 236,000 1.4% 2,360,000 1.2%
Captain D's......... 2 117,000 0.7% 1,343,000 0.7%
Papa John's......... 6 116,000 0.7% 1,337,000 0.7%
Popeyes............. 2 73,000 0.4% 805,000 0.4%
Wendy's............. 1 70,000 0.4% 806,000 0.4%
Arby's.............. 1 58,000 0.3% 760,000 0.4%
--- ----------- ----- ------------ -----
Total............. 216 $16,880,000 100.0% $188,995,000 100.0%
=== =========== ===== ============ =====
</TABLE>
20
<PAGE>
The following table shows, for restaurant properties in which APF owned an
interest and assuming the acquisition of the CNL Restaurant Businesses,
information by restaurant chain, for mortgage loans that APF has securitized.
<TABLE>
<CAPTION>
Aggregate
Number of Outstanding Percent of
Restaurant Chain Properties Balance(1) Outstanding Balance
- ---------------- ---------- ------------ -------------------
<S> <C> <C> <C>
T.G.I. Friday's.................... 35 $ 54,289,000 20.2%
Wendy's............................ 50 48,695,000 18.1%
Bennigan's......................... 22 36,950,000 13.8%
Taco Bell.......................... 56 34,086,000 12.7%
Burger King........................ 36 32,334,000 12.0%
Ruby Tuesday....................... 13 17,479,000 6.5%
Steak and Ale Restaurant........... 6 8,650,000 3.2%
KFC................................ 10 8,390,000 3.1%
Applebee's......................... 4 6,066,000 2.3%
Fazoli's........................... 5 5,244,000 2.0%
Papa John's........................ 33 4,968,000 1.8%
Sonny's Real Pit Bar-B-Q........... 8 4,331,000 1.6%
Morton's of Chicago................ 2 2,278,000 0.8%
Denny's............................ 2 1,624,000 0.6%
Arby's............................. 3 1,553,000 0.6%
Del Taco........................... 2 1,030,000 0.4%
Popeyes............................ 1 673,000 0.3%
--- ------------ -----
Total............................ 288 $268,640,000 100.0%
=== ============ =====
</TABLE>
- --------
(1) Of the total securitized portfolio of $268.6 million, APF has retained a
subordinated interest in $23.4 million, which, assuming no prepayment or
default by the borrower, will generate on an annualized basis approximately
$4.0 million in interest income and servicing fees.
Voting
Voting Procedures
Please mark the enclosed consent form to vote "For" or "Against" approval of
the Acquisition. If you have invested in more than one Fund, you will receive
only one copy of this Consent Solicitation and you will receive a Supplement
and a consent form for each Fund in which you hold Units. Because each Fund
will vote separately on whether or not to approve the Acquisition, you must
complete one consent form for each 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 the Cash/Notes
Option if your Fund is acquired by APF. If your Fund approves the Acquisition,
you will receive APF Shares if you vote "Against" the Acquisition but do not
elect to receive the Cash/Notes Option or you do not vote. You must elect to
receive the Cash/Notes Option on the consent form or you will receive APF
Shares.
Your consent form must be received by D.F. King & Co. 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 Fund approves the Acquisition.
If
21
<PAGE>
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 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
Fund.
Amendments to Your Fund's Partnership Agreement
For certain Funds, 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 Funds. These amendments will authorize certain actions that
are necessary to complete successfully APF's acquisition of your 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 Fund approves the Acquisition, but you voted "Against" the
Acquisition, you will not have any right to have an independent valuation of
your Fund paid for by APF or by us.
Comparison of Ownership of APF Shares and the Cash/Notes Option
Your rights and obligations as an investor in a Fund currently are governed
by your Fund's partnership agreement. If your Fund is acquired by APF, you will
become either a stockholder of APF (if you receive APF Shares in the
Acquisition) or a noteholder of APF (if you vote "Against" the Acquisition and
elect the Cash/Notes Option). In order to assist you in deciding whether to
approve the Acquisition and whether to elect to receive APF Shares or the
Cash/Notes Option if your Fund approves the Acquisition, we have summarized
below some of the advantages and disadvantages of owning APF Shares versus
receiving a cash payment and holding Notes.
APF Shares
The advantages of owning APF Shares versus Notes include:
. The market for the APF Shares, which will be traded on the NYSE, likely
will be more active than the market for the Notes, since the Notes will
not be listed on the NYSE. This means you will have the opportunity to
liquidate, at your convenience, all or any portion of the APF Shares that
you hold.
. You will be a stockholder in an operating company which is in a position
to take advantage of external growth opportunities because, unlike the
Funds, it can raise additional funds through equity or debt financing and
can reinvest net sales or refinancing proceeds in new investments.
. As a holder of APF Shares, you will be entitled to participate in the
dividends and distributions made by APF with respect to the APF Shares.
This means you will be entitled to receive such dividends and
distributions based on your percentage ownership interest of the
outstanding APF Shares.
. The anticipated initial dividends to be paid on the APF Shares are
expected to be higher than the initial interest payments expected to be
made on the Notes. For example, an APF stockholder may be expected to
receive a dividend yield of %, based on the Exchange Value, whereas a
holder of Notes would only receive % interest on the Notes.
. We expect that the initial value of the APF Shares to which you are
entitled will be greater than the value of the Cash/Notes Option because
the amount paid to dissenting Limited Partners who select the
22
<PAGE>
Cash/Notes Option will be based on the estimated liquidation value of the
restaurant properties of your Fund.
. Unlike a holder of Notes, you will be entitled to vote on matters
presented at meetings of APF's stockholders and you will have the rights
to access APF's books and records.
The disadvantages of owning APF Shares versus Notes include:
. Your right to receive dividends or distributions as an APF stockholder is
subordinated to the interest payments payable with respect to all debt
obligations of APF or the Operating Partnership. This means that prior to
making any dividend or other distribution to you, APF must pay the
interest owed with respect to the Notes and its other debt obligations.
Thus, to the extent that APF does not have sufficient cash to make a
dividend distribution or other distribution after it makes the required
interest payments and payments on other debt obligations, you will not
receive a distribution.
. Your percentage ownership interest in APF may be diluted at anytime
through the issuance, by APF, of additional securities, including
securities that have priority to cash flow generated from APF's
operations and to liquidation proceeds derived from the sale of APF's
assets.
Notes
The advantages of owning Notes versus APF Shares include:
. The Notes are senior, unsecured indebtedness and represent fixed
obligations of APF. Payments to you as a holder of Notes will be superior
to the rights of holders of APF Shares to receive dividend distributions.
. Payments of principal and interest on the Notes are not dependent upon
the profits derived from APF's operations.
. The Notes provide that, following the consummation of the Acquisition, if
APF sells or refinances any restaurant property acquired from a Fund, APF
must redeem Notes held by the former Limited Partners of such Fund in an
aggregate amount equal to 80% of the net cash proceeds of the sale or
refinancing.
The disadvantages of owning Notes versus APF Shares include:
. The Notes will be unsecured obligations of APF and thus they will be
subordinate to all secured debt of APF. To illustrate what this means if
you elect the Cash/Notes Option, if you assume that the Acquisition had
been consummated prior to September 30, 1998 and that all of the Funds
are acquired in the Acquisition, then as of that date, APF would have had
aggregate consolidated secured liabilities to which the Notes would be
subordinated of approximately $150.5 million.
. The initial distribution rate on the APF Shares is expected to be higher
than the interest rate on the Notes.
. APF may redeem the Notes at any time, in whole or in part, at the face
value of the Notes, with no prepayment penalty or premium.
. Unlike the APF Shares which will be listed for trading on the NYSE, there
likely will be no public market for your Notes.
. Unlike a holder of APF Shares, you will have no right to participate in
the profits derived from APF's assets or from the sale or refinancing of
APF's restaurant properties, you will not be entitled to vote with regard
to matters presented to APF's stockholders and you will not be entitled
to access APF's books and records. Additionally, the initial dividend
payments on APF Shares are expected to be greater than the initial
interest payments expected to be paid on the Notes.
23
<PAGE>
Acquisition Expenses
APF and each Fund will bear their own expenses incurred in connection with
the Acquisition. If your Fund approves the Acquisition and your Fund is
acquired by APF, the number of APF Shares you receive will reflect a reduction
for your Fund's expenses of the Acquisition. For a breakdown of the expenses
estimated to be paid in the Acquisition, please see the Supplement attached to
this Consent Solicitation.
If the Acquisition is rejected by your Fund, then your Fund will bear the
portion of its Acquisition expenses based upon the percentage of "For" votes
and we, as the general partners of the 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 amendment and restatement
of APF's Articles of Incorporation to, among other things, increase the
number of 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 Funds.
. If fewer than all of the Funds approve the Acquisition, APF must receive
an additional fairness opinion from Merrill Lynch stating that the
aggregate consideration payable to the approving Funds is fair to APF
from a financial point of view.
Your Right to Investor Lists and to Communicate
with Other Limited Partners
We are required under applicable federal securities laws, upon receipt of a
written request from you, to provide you with the following information: (i) a
statement of the approximate number of Limited Partners in your Fund, and (ii)
the estimated cost of mailing a consent statement, form of consent or other
similar communication to those Limited Partners. In addition, you have the
right, at our option, either to (a) at your expense, have us mail copies of any
consent statement, consent form or other soliciting material furnished by you
to any of your Fund's Limited Partners that you designate, or (b) have us
deliver to you (at a cost to you of $0.25 per page for mailing and
duplication), within five business days of when we receive your request, a
reasonably current list of the names, addresses and number of Units held by the
Limited Partners in your Fund.
Benefits to General Partners
As a result of the Acquisition (assuming all of the Funds are acquired), we,
as the general partners of the Funds, will receive certain benefits. These
benefits include:
. With respect to our ownership in the Funds, we may be issued up to an
estimated 273,499 APF Shares in the aggregate in accordance with the
Funds' partnership agreements. The APF Shares issued to us will have an
estimated value, based on the Exchange Value of approximately $2,734,990
million.
. Following the Acquisition, 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 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 are likely to exceed the
benefits that they would derive from the Funds if the Acquisition does
not occur.
24
<PAGE>
Federal Income Tax Considerations
The Acquisition will be a Taxable Transaction for Limited Partners Subject to
Federal Income Taxation
Currently, the Funds are organized as limited partnerships and treated as
partnerships for federal income tax purposes. As partnerships, the 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
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 Fund in the Acquisition, you will recognize taxable gain or loss
whether you elect to receive APF Shares or the Cash/Notes Option. The amount of
gain or loss that you will recognize will depend upon whether you or any other
Limited Partners elect the Cash/Notes Option. If you do not elect the
Cash/Notes Option, 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 the Cash/Notes Option, your tax will be
based upon the share of the gain recognized by your 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.
Taxable Gain and Loss Estimates Per Average $10,000 Original Limited Partner
Investment.
The estimated taxable gain and loss, as of September 30, 1998, based on the
Exchange Value, for an average $10,000 original Limited Partner investment in a
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
Fund Partner Investment(1)
- ---- ---------------------
<S> <C>
CNL Income Fund, Ltd. .................................... $1,953
CNL Income Fund II, Ltd. ................................. 1,541
CNL Income Fund III, Ltd. ................................ 749
CNL Income Fund IV, Ltd. ................................. 919
CNL Income Fund V, Ltd.................................... 410
CNL Income Fund VI, Ltd. ................................. 1,730
CNL Income Fund VII, Ltd. ................................ 2,385
CNL Income Fund VIII, Ltd. ............................... 2,811
CNL Income Fund IX, Ltd. ................................. 1,918
CNL Income Fund X, Ltd. .................................. 1,799
CNL Income Fund XI, Ltd. ................................. 2,109
CNL Income Fund XII, Ltd. ................................ 1,669
CNL Income Fund XIII, Ltd. ............................... 752
CNL Income Fund XIV, Ltd.................................. 348
CNL Income Fund XV, Ltd. ................................. (47)
CNL Income Fund XVI, Ltd. ................................ 124
CNL Income Fund XVII, Ltd................................. 229
CNL Income Fund XVIII, Ltd. .............................. (525)
</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.
25
<PAGE>
Qualification of APF as a REIT
APF currently qualifies as a REIT under the Internal Revenue Code of 1986,
as amended (the "Code"), and expects to continue to qualify as a REIT following
the consummation of the Acquisition. Accordingly, if your 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 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.
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 certain income tax
requirements are satisfied, which substantially eliminates the corporate level
of the "double taxation" (tax imposed at both the corporate and stockholder
levels) that generally results from investments in a corporation.
Summary Financial Information
Summary Unaudited Pro Forma Condensed Combined Financial Data
The following tables set forth certain financial information for APF and the
Funds on a historical basis (see pages 27 and 29) and for APF, the Funds and
the CNL Restaurant Businesses on a pro forma basis (see pages 30 and 34), 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 statement of earnings combines information from the
historical consolidated statements of earnings of APF, the 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, 1997. The unaudited pro forma balance sheet combines information
from the historical consolidated balance sheets of each giving effect to the
Acquisition and the acquisition of the CNL Restaurant Businesses as if APF had
completed each transaction on September 30, 1998.
We are providing this 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 necessarily 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.
26
<PAGE>
SUMMARY SELECTED HISTORICAL, CONSOLIDATED FINANCIAL DATA
CNL AMERICAN PROPERTIES FUND, INC.
and subsidiaries
<TABLE>
<CAPTION>
Nine months ended
September 30, Year ended December 31,
-------------------------- ---------------------------------------
1998 1997 1997 1996 1995
------------ ------------ ------------ ------------ -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating Data:
Revenues:
Rental and earned
income................ $ 22,947,199 $ 9,636,626 $ 15,490,615 $ 4,357,298 $ 539,776
Interest and other
income................ 6,117,911 2,615,824 3,967,318 1,849,386 119,355
------------ ------------ ------------ ------------ -----------
Total revenues......... 29,065,110 12,252,450 19,457,933 6,206,684 659,131
------------ ------------ ------------ ------------ -----------
Expenses:
General and
administrative........ 1,539,004 717,919 1,010,725 601,540 142,878
Management and advisory
fees.................. 1,248,393 493,921 804,879 251,200 23,078
State taxes............ 397,569 173,604 251,358 56,184 20,189
Depreciation and
amortization.......... 2,693,020 1,105,611 1,795,062 521,871 104,131
------------ ------------ ------------ ------------ -----------
Total expenses......... 5,877,986 2,491,055 3,862,024 1,430,795 290,276
------------ ------------ ------------ ------------ -----------
Net earnings before
equity in earnings of
joint ventures/minority
interests.............. 23,187,124 9,761,395 15,595,909 4,775,889 368,855
------------ ------------ ------------ ------------ -----------
Equity in earnings of
joint ventures/minority
interests.............. (23,271) (23,586) (31,453) (29,927) (76)
------------ ------------ ------------ ------------ -----------
Net earnings............ $ 23,163,853 $ 9,737,809 $ 15,564,456 $ 4,745,962 $ 368,779
============ ============ ============ ============ ===========
Other Data:
Weighted average number
of shares of common
stock outstanding
during period (1)...... 47,633,909 20,368,867 23,423,868 8,071,670 1,898,350
Total properties owned
at end of period (2)... 357 214 244 94 18
Funds from operations
(3).................... $ 26,408,569 $ 11,042,307 $ 17,732,888 $ 5,355,464 $ 471,670
Earnings per share...... $ 0.49 $ 0.48 $ 0.66 $ 0.59 $ 0.19
Cash distributions
declared per share of
common stock(4)........ $ 0.57 $ 0.55 $ 0.74 $ 0.71 $ 0.31
<CAPTION>
September 30, December 31,
-------------------------- ---------------------------------------
1998 1997 1997 1996 1995
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Real estate assets,
net.................... $415,996,732 $209,593,964 $252,951,781 $ 75,448,118 $21,097,608
Mortgages/notes
receivable............. $ 33,523,506 $ 17,657,131 $ 31,170,054 $ 13,389,607 $ --
Accounts receivable,
net.................... $ 575,104 $ 736,931 $ 635,796 $ 142,389 $ 113,613
Investment in/due from
joint ventures......... $ 631,374 $ -- $ -- $ -- $ --
Total assets............ $566,383,967 $288,151,045 $339,077,762 $134,825,048 $33,603,084
Total
liabilities/minority
interest............... $ 14,478,585 $ 32,547,767 $ 17,439,661 $ 11,957,621 $ 1,622,436
Total stockholders'
equity................. $551,905,382 $255,603,278 $321,638,101 $122,867,427 $31,980,648
</TABLE>
- --------
(1) The weighted average number of APF Shares outstanding is based upon the
period APF was operational.
(2) As of September 30, 1998, APF had acquired 357 restaurant properties for an
aggregate purchase price of $379 million.
(3) Funds from operations ("FFO"), based on the revised definition adopted by
the Board of Governors of the National Association of Real Estate
Investment Trusts ("NAREIT") and as used herein, means net earnings
determined in accordance with generally accepted accounting principles or
GAAP, excluding gains or losses from debt restructuring and sales of
restaurant properties and gain on securitization, plus depreciation and
amortization of real estate assets plus amortization of direct financing
leases, and after adjustments for unconsolidated partnerships and joint
ventures. (Net earnings determined in accordance with GAAP include the
noncash effect of straight-lining rent increases throughout the lease term
and/or rental
27
<PAGE>
payments during the construction of a restaurant property prior to the date
it is placed in service. Straight-lining rent is a GAAP convention
requiring real estate companies to report rental revenue based on the
average rent per year over the life of the lease. During the nine months
ended September 30, 1998 and 1997, and the years ended December 31, 1997,
1996 and 1995, net earnings included $2,315,968, $1,259,180, $1,941,054,
$517,067 and $39,142, respectively, of these amounts.) FFO was restated by
APF for the nine months ended September 30, 1998 and 1997, and for the
years ended December 31, 1997, 1996 and 1995 to add back the amortization
of direct financing leases. FFO, on a historical basis, was developed by
NAREIT as a relative measure of performance and liquidity of an equity REIT
in order to recognize that income-producing real estate historically has
not depreciated on the basis determined under GAAP. However, FFO (i) does
not represent cash generated from operating activities determined in
accordance with GAAP (which, unlike FFO, generally reflects all cash
effects of transactions and other events that enter into the determination
of net earnings), (ii) is not necessarily indicative of cash flow available
to fund cash needs and (iii) should not be considered as an alternative to
net earnings determined in accordance with GAAP as an indication of APF's
operating performance, or to cash flow from operating activities determined
in accordance with GAAP as a measure of either liquidity or APF's ability
to make distributions. Accordingly, APF believes that in order to
facilitate a clear understanding of the consolidated historical operating
results of APF, FFO should be considered in conjunction with APF's net
earnings and cash flows as reported in the accompanying consolidated
financial statements and notes thereto.
(4) Approximately 12%, 10%, 8%, 13% and 42% of cash distributions ($0.07,
$0.06, $0.06, $0.09 and $0.13 per APF Share) for the nine months ended
September 30, 1998 and 1997, and the years ended December 31, 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.
28
<PAGE>
SUMMARY SELECTED COMBINED UNAUDITED HISTORICAL FINANCIAL DATA
CNL INCOME FUNDS
<TABLE>
<CAPTION>
Nine months ended
September 30, Year ended December 31,
-------------------------- ----------------------------------------
1998 1997 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating Data
Revenues:
Rental and earned
income................ $ 35,891,418 $ 37,959,609 $ 51,340,020 $ 50,949,983 $ 48,448,434
Interest and other
income................ 1,528,771 1,350,822 1,815,714 1,608,501 1,207,475
------------ ------------ ------------ ------------ ------------
Total revenues......... 37,420,189 39,310,431 53,155,734 52,558,484 49,655,909
------------ ------------ ------------ ------------ ------------
Expenses:
General and
administrative........ 3,037,610 2,560,951 3,691,750 3,253,683 3,056,180
Management and advisory
fees.................. 210,414 195,992 263,766 236,823 210,908
State taxes............ 248,468 229,361 234,022 187,257 211,391
Depreciation and
amortization.......... 4,646,985 4,538,047 6,066,059 5,856,467 5,554,902
------------ ------------ ------------ ------------ ------------
Total expenses......... 8,143,477 7,524,351 10,255,597 9,534,230 9,033,381
------------ ------------ ------------ ------------ ------------
Net earnings before
equity in earnings of
joint ventures/minority
interests, gain on sale
of properties,
provision for loss on
land and building and
other income
(expenses)............. 29,276,712 31,786,080 42,900,137 43,024,254 40,622,528
Equity in earnings of
joint ventures/minority
interests.............. 2,507,758 2,813,159 3,678,871 2,969,010 2,566,728
Gain on sale of
properties............. 2,239,278 2,932,959 4,224,500 524,722 10,822
Provision for loss on
land and building...... (577,405) (224,347) (665,574) (316,548) (207,844)
Other income
(expenses)............. (45,150) -- 214,000 -- --
------------ ------------ ------------ ------------ ------------
Net earnings............ $ 33,401,193 $ 37,307,851 $ 50,351,934 $ 46,201,438 $ 42,992,234
============ ============ ============ ============ ============
Other Data:
Total properties owned
at end of period....... 621 684 689 671 639
Funds from operations
(1).................... $ 36,908,784 $ 39,899,403 $ 53,497,919 $ 52,625,612 $ 49,460,708
Total cash distributions
declared (2)........... $ 45,063,628 $ 38,536,152 $ 52,492,839 $ 49,760,239 $ 46,856,173
Cash distributions
declared per $10,000
Investment............. $ 733 $ 643 $ 871 $ 864 $ 854
<CAPTION>
September 30, December 31,
-------------------------- ----------------------------------------
1998 1997 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Real estate assets,
net.................... $423,023,449 $435,340,114 $439,470,490 $428,986,658 $416,148,000
Mortgages/notes
receivable............. $ 4,836,808 $ 5,609,876 $ 5,586,571 $ 4,894,615 $ 2,627,418
Accounts receivable,
net.................... $ 314,049 $ 1,211,720 $ 1,337,121 $ 1,706,649 $ 1,478,015
Investment in/due from
joint ventures......... $ 50,429,925 $ 37,138,957 $ 42,936,915 $ 32,895,042 $ 29,432,410
Total assets............ $523,441,709 $532,048,369 $537,140,278 $514,640,301 $486,778,595
Total
liabilities/minority
interest............... $ 17,203,055 $ 19,427,828 $ 19,186,549 $ 18,782,159 $ 16,318,644
Total equity............ $506,238,654 $512,620,541 $517,953,729 $495,858,142 $470,459,951
</TABLE>
- --------
(1) For a definition of "funds from operations," see footnote 3 on page 27.
(2) 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 nine months ended September 30, 1998 include
special distributions of net sales proceeds received from the sale of
properties.
29
<PAGE>
SUMMARY SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
APF, FUNDS, ADVISOR AND CNL RESTAURANT FINANCIAL SERVICES GROUP
Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
Historical
----------------------------------------------------
CNL
Restaurant
Financial
Services Combined
APF Funds Advisor Group Historical
------------ ------------ ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Operating Data
Revenues:
Rental and
earned income.. $ 22,947,199 $ 35,891,418 $ -- $ -- $ 58,838,617
Management
fees........... -- -- 21,405,127 5,122,366 26,527,493
Interest and
other income... 6,117,911 1,528,771 751 18,463,647 26,111,080
------------ ------------ ----------- ------------ --------------
Total revenue... 29,065,110 37,420,189 21,405,878 23,586,013 111,477,190
Expenses:
General and
administrative.. 1,539,004 3,037,610 6,701,115 6,704,482 17,982,211
Advisory fees... 1,248,393 210,414 -- 1,026,231 2,485,038
State taxes..... 397,569 248,468 15,226 220,180 881,443
Depreciation and
amortization... 2,693,020 4,646,985 131,539 1,000,493 8,472,037
Interest
expense........ -- -- 105,668 14,234,533 14,340,201
Paid to
affiliates..... -- -- 256,456 1,569,202 1,825,658
------------ ------------ ----------- ------------ --------------
Total expenses.. 5,877,986 8,143,477 7,210,004 24,755,121 45,986,588
------------ ------------ ----------- ------------ --------------
Net earnings
(loss) before
income taxes.... 23,187,124 29,276,712 14,195,874 (1,169,108) 65,490,602
Equity in
earnings of
joint
ventures/minority
interests....... (23,271) 2,507,758 -- 12,452 2,496,939
Gain (loss) on
sales of
properties...... -- 2,239,278 -- -- 2,239,278
Provision for
loss on
properties...... -- (577,405) -- -- (577,405)
Lease Termination
income (loss)... -- (45,150) -- -- (45,150)
Gain on
securitization.. -- -- -- 3,018,268 3,018,268
Provision for
federal income
taxes........... -- -- 5,607,415 708,666 6,316,081
------------ ------------ ----------- ------------ --------------
Net earnings..... $ 23,163,853 $ 33,401,193 $ 8,588,459 $ 1,152,946 $ 66,306,451
============ ============ =========== ============ ==============
Other Data:
Weighted average
number of shares
of common stock
outstanding
during period... 47,633,909 N/A N/A N/A N/A
Total properties
owned at end of
period.......... 357 621 N/A N/A N/A
Funds from
operations (*).. $ 26,408,569 $ 36,908,784 N/A N/A N/A
Total cash
distributions
declared(**).... $ 26,460,446 $ 45,063,628 N/A N/A N/A
Cash
distributions
declared per
$10,000
investment...... $ 572 $ 733 N/A N/A N/A
<CAPTION>
Pro Forma
-----------------------------------------
Pro Forma Combined Pro
Adjustments Forma
---------------------- ------------------
<S> <C> <C>
Operating Data
Revenues:
Rental and
earned income.. $ 10,584,064 (a)(b) $69,422,681
Management
fees........... (24,796,800)(c)(d) 1,730,693
Interest and
other income... 1,526,547 (e) 27,637,627
---------------------- ------------------
Total revenue... (12,686,189) 98,791,001
Expenses:
General and
administrative.. (3,628,474)(f)(g)(h) 14,353,737
Advisory fees... (2,485,038)(i) --
State taxes..... 601,369 (j) 1,482,812
Depreciation and
amortization... 4,358,736 (k)(l) 12,830,773
Interest
expense........ (68,670)(m) 14,271,531
Paid to
affiliates..... (1,825,658)(n) --
---------------------- ------------------
Total expenses.. (3,047,735) 42,938,853
---------------------- ------------------
Net earnings
(loss) before
income taxes.... (9,638,454) 55,852,148
Equity in
earnings of
joint
ventures/minority
interests....... -- 2,496,939
Gain (loss) on
sales of
properties...... -- 2,239,278
Provision for
loss on
properties...... -- (577,405)
Lease Termination
income (loss)... -- (45,150)
Gain on
securitization.. -- 3,018,268
Provision for
federal income
taxes........... (6,316,081)(o) --
---------------------- ------------------
Net earnings..... $ (3,322,373) $62,984,078
====================== ==================
Other Data:
Weighted average
number of shares
of common stock
outstanding
during period... -- 130,673,371 (p)
Total properties
owned at end of
period.......... -- 978
Funds from
operations (*).. -- $72,211,884
Total cash
distributions
declared(**).... -- $72,211,884
Cash
distributions
declared per
$10,000
investment...... -- $ 553
<CAPTION>
Historical Combined
September 30, 1998 Historical
---------------------------------------------------- --------------
<S> <C> <C> <C> <C> <C>
Balance Sheet
Data
Real estate
assets, net..... $407,663,180 $423,023,449 $ -- $ -- $ 830,686,629
Mortgages/notes
receivable...... $ 33,523,506 $ 4,836,808 $ -- $173,776,981 $ 212,137,295
Accounts
receivable,
net............. $ 575,104 $ 314,049 $ 7,544,985 $ 7,342,103 $ 15,776,241
Investment in/due
from joint
ventures........ $ 631,374 $ 50,429,925 -- -- $ 51,061,299
Total assets..... $566,383,967 $523,441,709 $ 8,429,809 $197,528,789 $1,295,784,274
Total
liabilities/minority
interest........ $ 14,478,585 $ 17,203,055 $ 5,049,152 $185,998,045 $ 222,728,837
Total equity..... $551,905,382 $506,238,654 $ 3,380,657 $ 11,530,744 $1,073,055,437
<CAPTION>
Pro forma
September 30, 1998
-----------------------------------------
<S> <C> <C>
Balance Sheet
Data
Real estate
assets, net..... 143,027,768 (q)(r) $ 973,714,397
Mortgages/notes
receivable...... 849,195 (q) $ 212,986,490
Accounts
receivable,
net............. (8,795,102)(s) $ 6,981,139
Investment in/due
from joint
ventures........ 13,158,851 (q) $ 64,220,150
Total assets..... 122,165,505 $1,417,949,779
Total
liabilities/minority
interest........ (11,954,756)(q)(s)(t) $ 210,774,081
Total equity..... 134,120,261 (q)(t) $1,207,175,698
</TABLE>
- -------
(*) For the definition of "funds from operations," see footnote 3 on page 27.
(**) 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 nine months ended September 30, 1998 include
special distributions of net sales proceeds received from the sale of
properties.
(a) Represents rental and earned income as if 1) properties that had been
previously constructed and acquired from January 1, 1998 through
November 30, 1998 had been acquired and leased on January 1, 1997 and
2) properties
30
<PAGE>
that were developed by APF from January 1, 1998 through November 30,
1998 had been placed in service on May 1, 1997 (assumes a four month
development period.)
<TABLE>
<S> <C>
Rental and earned income on Property Transactions by APF.... $9,635,208
Rental and earned income on Property Transactions by CNL
XVIII...................................................... 112,185
----------
$9,747,393
==========
</TABLE>
(b) Represents $836,671 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, 1997.
(c) Represents the elimination of intercompany fees between APF, the Funds,
the Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees.......................................... $ (1,569,202)
Secured equipment lease fee............................... (44,424)
Advisory fees............................................. (1,932,795)
Reimbursement of administrative costs..................... (627,662)
Acquisition fees.......................................... (15,757,119)
Underwriting fees......................................... (254,945)
Administrative fees....................................... (148,493)
Executive fee............................................. (310,000)
Guarantee fees............................................ (93,750)
Servicing fee............................................. (1,014,117)
Development fees.......................................... (166,876)
Consulting fee............................................ (1,511)
------------
Total................................................... $(21,920,894)
============
</TABLE>
(d) Represents the deferral of $2,875,906 in origination fees collected by
CNL Restaurant Financial Services Group that should be amortized over
the term of the loans originated (20 years) in accordance with the
Statement of Financial Accounting Standards #91 "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring
Loans and Initial Direct Costs of Leases."
(e) Represents interest income of $1,318,870 earned from Other Investments
acquired and mortgage notes issued from January 1, 1998 through
November 30, 1998 as if this had occurred on January 1, 1997 and the
amortization of $207,677 of deferred origination fees collected during
the year ended December 31, 1997 and during the nine months ended
September 30, 1998, which were capitalized and deferred in (d) above as
if they had been collected on January 1, 1997. These deferred fees are
being amortized and recorded as interest income.
(f) Represents the elimination of intercompany expenses paid between APF,
the Funds, the Advisor and the CNL Restaurant Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs...................... $ (627,662)
Servicing fee.............................................. (1,014,117)
-----------
$(1,641,779)
===========
</TABLE>
31
<PAGE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by APF were
subject to capitalization during the entire period and 2) costs
relating to properties not developed by APF were subject to
capitalization up through the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs........................... $(1,415,100)
</TABLE>
(h) Represents savings of $571,595 in professional services and
administrative expenses resulting from reporting on one combined
company versus 22 separate entities.
(i) Represents the elimination of fees between APF, the Funds, the Advisor
and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Advisory fees............................................... $(1,932,795)
Administrative fees......................................... (148,493)
Executive fee............................................... (310,000)
Guarantee fees.............................................. (93,750)
-----------
$(2,485,038)
===========
</TABLE>
(j) Represents additional state taxes of $601,369 resulting from assuming
that acquisitions from January 1, 1998 through November 30, 1998 had
been acquired on January 1, 1997 and assuming that the Funds had
operated under a REIT structure.
(k) Represents an increase in depreciation of the building portion of the
properties acquired from January 1, 1998 through November 30, 1998 as
if they had been acquired on January 1, 1997 and the step up in basis
referred to in footnote (q) from acquiring the Fund portfolios using
the straight-line method over the estimated useful lives of generally
30 years.
<TABLE>
<S> <C>
Depreciation expense.......................................... $2,870,103
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of the
CNL Restaurant Financial Services Group referred to in footnote 2 to
the Unaudited Pro Forma Financial Statements attached to this Consent
Solicitation.
<TABLE>
<S> <C>
Amortization of goodwill..................................... $1,488,633
</TABLE>
(m) Represents elimination of interest expense recorded for the
amortization of $350,000 in arrangement fees collected during the year
ended December 31, 1997 which were eliminated in note (d) on page 35.
<TABLE>
<S> <C>
Interest expense............................................... $(68,670)
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees incurred
between APF, the Funds, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Origination fees............................................ $(1,569,202)
Underwriting fees........................................... (254,945)
Consulting fee.............................................. (1,511)
-----------
$(1,825,658)
===========
</TABLE>
(o) Represents the elimination of $6,316,081 in the provision for income
taxes as a result of the acquisition. APF expects to continue to
qualify as a REIT and does not expect to incur federal income taxes.
(p) APF Shares issued during the period required to fund acquisitions as if
they had been acquired on January 1, 1997 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 the proposal to amend and restate APF's articles of
incorporation to increase the number of authorized APF Shares.
32
<PAGE>
(q) Represents the payment of $7,175,000 in cash and the issuance of
72,582,500 APF Shares in consideration for the purchase of the Funds,
Advisor and CNL Restaurant Financial Services Group at September 30,
1998 using the Exchange Value of $10 per APF Share plus estimated
transaction costs. The acquisitions of the Funds and the CNL Restaurant
Financial Services Group have been accounted for under the purchase
accounting method and goodwill was recognized to the extent that the
estimated value of the consideration paid exceeded the fair value of
the net tangible assets acquired. As for the acquisition of the Advisor
from a related party, the consideration paid in excess of the fair
value of the net tangible assets received has been accounted for as
costs incurred in acquiring the Advisor from a related party because
the Advisor has not been deemed to qualify as a "business" for purposes
of applying APB Opinion No. 16 "Business Combinations." Upon
consummation of the Acquisition, this expense will be recorded as an
operating expense on APF's statement of earnings. APF will not deduct
this expense for purposes of calculating funds from operations due to
the nonrecurring and non-cash nature of the expense. As of September
30, 1998, $249,403 of transaction costs had been incurred by APF.
<TABLE>
<S> <C>
Funds...................................................... $610,000,000
Advisor.................................................... 76,000,000
CNL Restaurant Financial Services Group.................... 47,000,000
------------
Total Purchase Price (cash and shares)................... 733,000,000
Less cash paid to Funds.................................... (7,175,000)
------------
Share consideration...................................... 725,825,000
Transaction costs of APF................................... 8,933,000
------------
Total costs ............................................. $734,758,000
============
</TABLE>
In addition, APF i) used $8,933,000 in cash to pay the transaction costs
related to the Acquisition, ii) made an upward adjustment to the Funds
carrying value of land and building on operating leases by $92,857,763,
net investment in direct financing leases by $24,117,264, investment in
joint venture by $13,158,851; made downward adjustments to the carrying
value of accrued rental income of $18,089,015; made downward adjustments
to other assets of $4,673,130; and made downward adjustments to deferred
income of $168,790 to adjust historical values to fair value, iii)
recorded goodwill of $39,696,874 for the acquisition of the CNL
Restaurant Financial Services Group, iv) reduced retained earnings by
$73,545,548 for the excess consideration paid over the net assets of the
Advisor and removed the historical common stock balance of $12,000,
additional paid in capital balance of $9,602,287, retained earnings
balance of $5,297,114, and partners' capital balance of $506,238,654 of
the Funds, Advisor and CNL Restaurant Financial Services Group.
(r) Represents the use of $26,901,936 in cash and cash equivalents at
September 30, 1998 to acquire $26,052,741 in properties and issue
$849,195 in mortgage notes which occurred from October 1, 1998 through
November 30, 1998.
(s) Represents the elimination by the Funds of $945,723 in related party
payables recorded as receivables by the Advisor, the elimination by the
CNL Restaurant Financial Services Group of $6,641,379 in related party
payables recorded as receivables by CNL Restaurant Financial Services
Group and the elimination by APF of $1,208,000 in related party
payables recorded as receivables by the Advisor.
(t) Represents the elimination of income taxes payable of $2,990,864 from
liabilities assumed in the acquisition of the CNL Restaurant Businesses
since the acquisition agreements require 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.
33
<PAGE>
SUMMARY SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
APF, FUNDS, ADVISOR AND CNL RESTAURANT FINANCIAL SERVICES GROUP
Year ended December 31, 1997
<TABLE>
<CAPTION>
Historical Pro Forma
------------------------------------------------ ---------------------------------
CNL
Restaurant
Financial Combined
Services Historical Pro Forma Combined
APF Funds Advisor Group Subtotal Adjustments Pro Forma
----------- ----------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data
Revenues:
Rental and earned
income............... $15,490,615 $51,340,020 $ -- $ -- $66,830,635 $26,343,180 (a)(b) 93,173,815
Management fees....... -- -- 8,310,836 6,038,814 14,349,650 (12,749,188)(c)(d) 1,600,462
Interest and other
income............... 3,967,318 1,815,714 165,569 10,932,843 16,881,444 249,395 (e) 17,130,839
----------- ----------- ---------- ----------- ----------- ----------- -----------
Total revenue......... 19,457,933 53,155,734 8,476,405 16,971,657 98,061,729 13,843,387 111,905,116
Expenses:
General and
administrative....... 1,010,725 3,691,750 4,266,169 2,718,752 11,687,396 (3,372,243)(f)(g)(h) 8,315,153
Advisory fees......... 804,879 263,766 -- 1,802,532 2,871,177 (2,871,177)(i) --
State taxes........... 251,358 234,022 12,084 2,894 500,358 110,893 (j) 611,251
Depreciation and
amortization......... 1,795,062 6,066,059 66,583 992,538 8,920,242 7,094,549 (k)(l) 16,014,791
Interest expense...... -- -- 162,153 8,503,315 8,665,468 (81,594)(m) 8,583,874
Paid to affiliates.... -- -- 151,041 594,041 745,082 (745,082)(n) --
----------- ----------- ---------- ----------- ----------- ----------- -----------
Total expenses........ 3,862,024 10,255,597 4,658,030 14,614,072 33,389,723 135,346 33,525,069
----------- ----------- ---------- ----------- ----------- ----------- -----------
Net earnings before
income taxes.......... 15,595,909 42,900,137 3,818,375 2,357,585 64,672,006 13,708,041 78,380,047
Equity in earnings of
joint
ventures/minority
interests............. (31,453) 3,678,871 -- (126,627) 3,520,791 -- 3,520,791
Gain on sales of
properties............ -- 4,224,500 -- -- 4,224,500 -- 4,224,500
Provision for loss on
properties............ -- (665,574) -- -- (665,574) -- (665,574)
Other Income........... -- 214,000 -- -- 214,000 -- 214,000
Gain on
securitization........ -- -- -- -- --
Provision for federal
income taxes.......... -- -- 1,508,258 954,348 2,462,606 (2,462,606)(o) --
----------- ----------- ---------- ----------- ----------- ----------- -----------
Net earnings.......... $15,564,456 $50,351,934 $2,310,117 $ 1,276,610 $69,503,117 16,170,647 85,673,764
=========== =========== ========== =========== =========== =========== ===========
Other Data
Weighted average number
of shares of common
stock outstanding
during period......... 23,423,868 N/A N/A N/A N/A N/A 131,446,067(p)
Total properties owned
at end of period...... 244 689 N/A N/A N/A N/A 933
Funds from operations
(*)................... $17,732,888 $53,497,919 N/A N/A N/A N/A $96,053,362
Total cash
distributions
declared(**).......... $16,854,297 $52,492,839 N/A N/A N/A $96,053,362
Cash Distributions
declared per $10,000
investment............ $ 745 $ 871 N/A N/A N/A $ 731
</TABLE>
- -------
(*) For the definition of "funds from operations," see footnote 3 on page 27.
(**) Cash distributions for the year ended December 31, 1997 include additional
amounts earned in 1997, but declared payable in the first quarter of 1998.
(a) Represents rental and earned income as if 1) properties that had been
previously constructed and acquired from January 1, 1998 through November
30, 1998 had been acquired and leased on January 1, 1997 and 2) properties
that were developed by APF from January 1, 1997 through November 30, 1998
had been placed in service on May 1, 1997 (assumes a four month development
period).
<TABLE>
<S> <C>
Rental and earned income on Property Transactions by APF... $24,048,982
Rental and earned income on Property Transactions by CNL
XVIII..................................................... 1,232,511
-----------
$25,281,493
===========
</TABLE>
34
<PAGE>
(b) Represents $1,061,687 in accrued rental income resulting from the
recalculation of 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, 1997.
(c) Represents the elimination of intercompany fees between APF, the Funds, the
Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees.......................................... $ (594,041)
Secured equipment lease fee............................... (375,219)
Advisory fees............................................. (2,039,446)
Reimbursement of administrative costs..................... (439,377)
Acquisition fees.......................................... (4,337,634)
Underwriting fees......................................... (151,041)
Administrative fees....................................... (269,231)
Executive fee............................................. (250,000)
Guarantee fees............................................ (312,500)
Arrangement fees.......................................... (350,000)
Servicing fee............................................. (598,988)
Development fees.......................................... (369,570)
------------
Total................................................... $(10,087,047)
============
</TABLE>
(d) Represents the deferral of $2,662,141 in origination fees collected by CNL
Restaurant Financial Services Group that should be amortized over the term
of the loans originated (20 years) in accordance with the Statement of
Financial Accounting Standards #91, "Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases."
(e) Represents (i) the elimination of interest income of $1,931,331 earned
during the year ended December 31, 1997 assuming all monies raised during
1997 and all cash held on January 1, 1997 was used to effect the
Acquisition on January 1, 1997, (ii) interest income of $2,047,619 earned
from Other Investments acquired and mortgage notes issued from January 1,
1998 through November 30, 1998 as if this had occurred on January 1, 1997
and (iii) recognition of $133,107 of origination fees collected during the
year ended December 31, 1997 which were deferred in (d) and are being
amortized and recorded as interest income.
(f) Represents the elimination of intercompany expenses paid between APF, the
Funds, the Advisor and the CNL Restaurant Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs...................... $ (439,377)
Servicing fee.............................................. (598,988)
-----------
$(1,038,365)
===========
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by APF were subject
to capitalization during the entire period and 2) costs relating to
properties not developed by APF were subject to capitalization up through
the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs........................... $(1,619,238)
</TABLE>
(h) Represents savings of $714,640 in professional services and administrative
expenses resulting from reporting on one combined entity versus 22 separate
entities.
35
<PAGE>
(i) Represents the elimination of fees between APF, the Funds, the Advisor and
the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Advisory fees............................................... $(2,039,446)
Administrative fees......................................... (269,231)
Executive fee............................................... (250,000)
Guarantee fees.............................................. (312,500)
-----------
$(2,871,177)
===========
</TABLE>
(j) Represents additional state taxes of $110,893 resulting from assuming that
acquisitions from January 1, 1997 through November 30, 1998 had been
acquired on January 1, 1997 and assuming that the Funds had operated under
a REIT structure.
(k) Represents increase in depreciation of the building portion of the
properties acquired from January 1, 1997 through November 30, 1998 as if
they had been acquired on January 1, 1997 and the step up in basis referred
to in footnote (2) to the Notes to the Pro Forma Financial Statements
attached to this Consent Solicitation from acquiring the Funds' portfolios
using the straight-line method over the estimated useful lives of generally
30 years.
<TABLE>
<S> <C>
Depreciation expense.......................................... $5,109,705
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of the CNL
Restaurant Financial Services Group referred to in footnote (2) of the
Notes to the Pro Forma Financial Statements attached to this Consent
Solicitation.
<TABLE>
<S> <C>
Amortization of goodwill..................................... $1,984,844
</TABLE>
(m) Represents elimination of yearly amortization of arrangement fees of
$350,000 capitalized as deferred costs and amortized as interest expense
and the capitalization of interest expense during the period that
properties were under development.
<TABLE>
<S> <C>
Amortization of arrangement fees.............................. $(24,144)
Capitalization of interest during development period.......... (57,450)
--------
$(81,594)
========
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees incurred
between APF, the Funds, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Origination fees.............................................. $(594,041)
Underwriting fees............................................. (151,041)
---------
$(745,082)
=========
</TABLE>
(o) Represents the elimination of $2,462,606 in the provision for income taxes
as a result of the acquisition of the CNL Restaurant Businesses. APF
expects to continue to qualify as a REIT and does not expect to incur
federal income taxes.
(p) APF Shares issued during the period were assumed to have been issued and
outstanding as of January 1, 1997. For purposes of the pro forma financial
statement, it is assumed that the stockholders approved the proposal to
amend and restate APF's articles of incorporation increase the number of
authorized common shares of APF.
36
<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 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.
Risk Factors Related to APF and Resulting from the Acquisition
Investment Risks
Uncertainty Regarding the Exchange Value and Trading Price of APF Shares
Following Listing
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 per share book value of the assets of APF. The APF Shares have
been approved for listing on the NYSE, subject to official notice of issuance.
Prior to listing, the existing APF stockholders have not had an active trading
market in which they could sell their APF Shares. Additionally, any Limited
Partners of the Funds who become APF stockholders as a result of the
Acquisition, will have transformed their investment in non-tradable Units into
an investment in freely tradable APF Shares. Consequently, some of these
stockholders may choose to sell their APF Shares upon listing at a time when
demand for APF Shares is 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.
Conflicts of Interest in the Acquisition; Substantial Benefits to Related
Parties
There are certain conflicts of interest inherent in the structure of the
Acquisition. 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 that may or may not be aligned with your
interests as the Limited Partners of the Funds or with their own positions as
the general partners of the Funds. Assuming all of the Funds are acquired in
the Acquisition, we will receive an estimated aggregate of 273,499 APF Shares.
For information on the number of APF Shares to be paid to us if your Fund is
acquired, please see the Supplement relating to that Fund accompanying this
Consent Solicitation. In the event that one or more Funds is not acquired,
however, we, as the general partners of the Funds, may be required to pay all
or a substantial portion of the Acquisition costs allocated to such Funds to
the extent that you or other Limited Partners of your Fund vote against the
Acquisition. When you consider the recommendation of Messrs. Seneff and Bourne,
as the individual general partners of your Fund, keep in mind that their
interests may differ significantly from your interests with respect to certain
matters.
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Dilution of Existing Stockholders in 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 January 31, 1999
and assuming APF had acquired the CNL Restaurant Businesses as of that date, if
all of the Funds are acquired by APF, APF will have 147,279,427 APF Shares
outstanding (net of expenses to be paid by the Funds in the Acquisition in the
form of a reduction in the number of APF Shares paid to each Fund). Of such
outstanding shares 134,979,427 will be freely tradable in the open market.
Majority Vote of Limited Partners of Funds Binds all Limited Partners
Each Fund will be acquired by APF if the Limited Partners of that 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 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 and May Elect to Receive Cash and Notes
If your Fund approves the Acquisition and you have voted "Against" it, and
you do not wish to receive APF Shares, you will have the right to receive
instead, as your portion of the consideration received by your Fund (and
subject to your compliance with certain procedures), a combination of 10% cash
and 90% Notes. The amount of cash and Notes you will receive will be based upon
the proceeds you would receive as determined by Valuation Associates in an
orderly liquidation of your Fund over a 12-month period in accordance with the
terms of your Fund's partnership agreement. 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 seven years after the Acquisition, if APF chooses to repay the
Notes prior to the maturity date, 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 September
30, 1998 and that all of the Funds were acquired, then as of that date, APF
would have had aggregate consolidated secured liabilities of approximately
$150.5 million which APF would have to repay before repaying the Notes.
Uncertainties at the Time of Voting on Size of APF after Acquisition
Although APF is currently an operating company which owns an interest in 816
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 Funds will approve the Acquisition and be acquired by
APF, and thus, which restaurant properties will be acquired by APF (which will
affect the post-Acquisition size and scope of APF).
Fundamental Change in Nature of 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 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 Funds were acquired as of
September 30, 1998) 978 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. These risks are more fully discussed below under "--Real
Estate/Business Risks."
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As an APF stockholder, you will receive the benefits of your investment
through (i) dividend distributions, and (ii) increases in the value of your APF
Shares. In addition, 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 the 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
Fund would, on the other hand, permit you eventually to receive liquidation
proceeds, if any, from the sale of the 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 Cash/Notes Option). An investment in APF may not
outperform your investment in a Fund.
Dependence on Major Tenants
Foodmaker, Inc. accounted for 10% or more of APF's rental, earned and
interest income for the nine months ended September 30, 1998. Assuming APF had
acquired all of the Funds and the CNL Restaurant Businesses, such tenant would
have accounted for 10.02% and Golden Corral Corporation would have accounted
for 12.70% of APF's combined historical rental, earned and interest income for
the nine months ended September 30, 1998. If either tenant 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. Additionally, in October 1998,
tenants of 44 Boston Market restaurant properties of APF and all of the Funds
filed voluntary petitions for bankruptcy under Chapter 11 of the U.S.
Bankruptcy Code. To date, the tenants have closed 19 of these restaurant
properties. For the nine months ended September 30, 1998 and assuming the
Acquisition of all the Funds, Boston Market restaurant properties represented
approximately 6.5% of APF's total rental, earned and interest income. In June
1998, the tenant of 36 Long John Silver's restaurant properties of the Funds
filed a voluntary petition for bankruptcy under Chapter 11 of the U.S.
Bankruptcy Code. To date, the tenant has closed 16 of these restaurant
properties. For the nine months ended September 30, 1998 and assuming the
Acquisition of all the Funds, Long John Silver's restaurant properties
represented 3.2% of APF's total rental, earned and interest income.
Risks Involved in Hedging Transactions
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.
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 September 30, 1998, the CNL Financial Services Group had
outstanding interest rate swap contracts aggregating $133.6 million in notional
amount. Based on prevailing interest rates, the CNL Financial Services Group
would have paid approximately $8.5 million if it had terminated the swap
contracts at September 30, 1998. 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.
Effect of Interest Rate Fluctuations on Price of APF Shares
Like the 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. Assuming APF maintains its current level of debt for acquiring
future restaurant properties, the expected distribution rate per APF Share will
be 8.8% (assuming a $10.00 per APF Share price based on the Exchange Value, the
annualized dividend per year is expected to be $0.88 per APF Share). As a
result, interest
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<PAGE>
rate fluctuations can effect the value of your APF Shares, assuming there is an
active trading market in the APF Shares. 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.
Limited Liability of Officers and Directors of APF
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 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. Under the Articles and Bylaws, APF
generally is obligated to indemnify its officers and directors against certain
liabilities 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.
Real Estate/Business Risks
Risk of Default on Mortgage Loans and Market Risks associated with
Securitizations
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. 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 oversees 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.
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.
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) and
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.
Risks Associated with Leverage
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. At
the time of the consummation of the Acquisition, as a general policy, APF's
Board of Directors 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 funds from operations and its ability to
make required distributions to its stockholders.
Acquisition and Development Risks
APF plans to pursue its growth strategy through the acquisition and
development of additional restaurant properties. To the extent that APF does
pursue this growth strategy, we do not know that it 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.
Uncertainties Related to Future Property Purchases
Although APF does have specified criteria for evaluating new restaurant
properties, because such properties have not yet been identified, it is not
possible to provide you with information to evaluate the merits of the
restaurant properties in which APF intends to invest in the near future. You
also will not have the ability as a stockholder or noteholder of APF to approve
or disapprove of APF's investments. As APF acquires or develops new restaurant
properties or makes mortgage loans with respect to restaurant properties, we
cannot be sure that it will be able to buy these properties on financially
attractive terms, or that all of the restaurant property leases or mortgages
made by APF will be profitable.
Tax Risks
Failure of APF to Qualify as a REIT for Tax Purposes
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 Potts & Trowbridge, that it has met the requirements for
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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 Code provisions, applicable regulations issued under the Code, and
reported administrative and judicial interpretations of the Code and
regulations, upon Shaw Pittman's review of relevant documents and upon the
assumption that APF will operate in the manner described in this Consent
Solicitation.
You should be aware, however, that opinions of counsel are not binding on
the IRS or on any court. Furthermore, the conclusions stated in the opinions
are conditioned on, and APF's continued qualification as a REIT will depend on,
APF's management meeting various requirements which are discussed in more
detail under the heading "Federal Income Tax Considerations--Taxation of APF"
beginning on page .
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.
The amount of income taxes payable by you and other Limited Partners as a
result of the Acquisition may exceed the amount of cash received by you in
connection with the Acquisition if you elect the Cash/Notes Option.
Risks Relating to Lease of Restaurant Properties
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 adverse tax consequences
for APF, in particular that APF would not be entitled to claim depreciation
deductions with respect to such restaurant property (although APF would be
entitled to treat part of the payments it receives under the arrangement as the
repayment of principal). In such event, in certain taxable years, APF's taxable
income, and the corresponding obligation to distribute 95% of such taxable
income, would be increased. Any increase in APF's distribution requirements may
limit APF's ability to invest in additional restaurant properties and to make
additional mortgage loans.
Risks Associated with Loans Secured by Personal Property
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 ("Qualified Real Estate
Assets"). 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 (other than a REIT) which 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.
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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.
Risks Associated with Distribution Requirements
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
For the purposes of protecting its REIT status, APF's Amended and Restated
Articles of Incorporation limit the ownership by any single stockholder (other
than James M. Seneff, Jr.) of any class of APF capital stock, including APF
Shares, to 7.5% of the outstanding shares of such class. The Articles 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.
Other Tax Liabilities
Even if APF qualifies as a REIT, it may be subject to certain federal, state
and local taxes on its income and property that could reduce its operating cash
flow and distributable funds.
Changes in Tax Law
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.
Risk Factors Related to Restaurant Properties
If your Fund approves the Acquisition, you and the other Limited Partners
will be subject to the risks described above, to which you are not currently
exposed as a Limited Partner of your Fund. The following risk factors describe
the risks to which you, as a Limited Partner in a Fund, are already exposed,
and to which you will continue to be exposed if your Fund approves the
Acquisition.
Real Estate Risks
Lack of Control of Restaurant Property Management
APF leases, and will continue to lease, its restaurant properties pursuant
to triple-net leases. These leases essentially provide, with a few exceptions,
that the management of the restaurant properties is the responsibility
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of the tenants, not of APF. APF aims to enter into leases with tenants who have
experience in the restaurant industry in order to avoid poor management of the
restaurant properties. Nevertheless, we cannot be sure that APF's existing or
any future tenants will properly manage the restaurant properties in order to
maintain their value.
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.
Risks Related to Tenant Repurchase Rights and Rights of First Offer
A number of the leases of the restaurant properties give the tenant the
right to purchase the restaurant property from APF under certain conditions.
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.
Risks of Real Property Investments
Like your investment in the 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.
Risk of Environmental Liabilities
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 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.
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Restaurant Industry Risks
Risks Relating to Trends in the Restaurant Industry
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.
Risks Resulting from Competition
APF will compete with other entities for the acquisition of restaurant sites
and completed restaurants. The restaurant business itself is highly
competitive, and any restaurant operated on a restaurant property will compete
with other restaurants in the area. The success of the tenants operating the
restaurants on the restaurant properties will directly affect how much
percentage rent, in excess of the base rent, APF receives.
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BACKGROUND OF AND REASONS FOR THE ACQUISITION
Background of the Funds
Formation of the Funds. During the latter half of the 1980s and through the
mid 1990s, we sponsored 18 Florida limited partnerships formed to acquire
restaurant properties triple-net leased to restaurant chains. The Funds raised
capital of $615 million in 18 registered public offerings and as of September
30, 1998 had more than 43,000 limited partners.
The table below sets forth the number of restaurant properties owned,
capital raised and distributions made, by each of the Funds since such Fund's
inception through the quarter ending September 30, 1998:
<TABLE>
<CAPTION>
Total of
Total Distributions
Distributions Estimated and Estimated
to Value of Value
Limited Partners APF Shares per of APF Shares Date of Last
Total Aggregate Per Average Average $10,000 Combined per Admission
Number of Distributions $10,000 Limited Original Limited Average $10,000 of Original
Properties Total Capital to Limited Partner Original Partner Limited Partner Partners
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 $19,080,807 $11,156 $ 7,611 $18,767 Dec. 1986
CNL Income Fund II,
Ltd................ 38 25,000,000 27,848,255 10,956 9,466 20,422 Aug. 1987
CNL Income Fund III,
Ltd................ 28 25,000,000 26,127,387 10,273 8,237 18,510 Apr. 1988
CNL Income Fund IV,
Ltd................ 37 30,000,000 28,241,711 9,247 8,781 18,028 Dec. 1988
CNL Income Fund V,
Ltd................ 25 25,000,000 23,106,567 9,109 8,103 17,212 Jun. 1989
CNL Income Fund VI,
Ltd. .............. 42 35,000,000 27,946,726 7,774 10,429 18,203 Jan. 1990
CNL Income Fund VII,
Ltd. .............. 40 30,000,000 22,202,623 7,260 10,456 17,716 Aug. 1990
CNL Income Fund
VIII, Ltd. ........ 36 35,000,000 25,047,143 6,959 11,259 18,218 Mar. 1991
CNL Income Fund IX,
Ltd. .............. 41 35,000,000 22,273,090 6,227 10,356 16,583 Sept. 1991
CNL Income Fund X,
Ltd. .............. 48 40,000,000 23,743,142 5,743 10,391 16,134 Apr. 1992
CNL Income Fund XI,
Ltd. .............. 39 40,000,000 21,220,128 5,162 10,759 15,921 Oct. 1992
CNL Income Fund XII,
Ltd. .............. 49 45,000,000 21,208,791 4,697 10,400 15,097 Apr. 1993
CNL Income Fund
XIII, Ltd. ........ 47 40,000,000 16,878,406 4,237 9,594 13,831 Sept. 1993
CNL Income Fund XIV,
Ltd. .............. 56 45,000,000 16,920,319 3,747 9,468 13,215 Mar. 1994
CNL Income Fund XV,
Ltd. .............. 50 40,000,000 13,165,947 3,401 9,222 12,623 Sept. 1994
CNL Income Fund XVI,
Ltd. .............. 44 45,000,000 12,523,018 2,934 9,488 12,422 Jul. 1995
CNL Income Fund
XVII, Ltd. ........ 28 30,000,000 5,282,464 1,993 9,930 11,923 Oct. 1996
CNL Income Fund
XVIII, Ltd. ....... 24 35,000,000 3,326,495 1,245 9,315 10,560 Feb. 1998
</TABLE>
- --------
(1) Includes restaurant properties owned through joint ventures or as tenants
in common with affiliates of the 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 Funds
For CNL Income Fund, Ltd. through CNL Income Fund VI, Ltd., the primary
investment objectives were to preserve and protect Fund capital, while
providing:
. the potential for increased income and protection against inflation
through participation in the growth and sales of certain 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.
46
<PAGE>
For CNL Income Fund VII, Ltd. through CNL Income Fund XVIII, Ltd., the
primary investment objectives were to preserve and protect Fund capital, while
providing:
. cash distributions in the initial year of each Fund's operations in
amounts that exceed current taxable income (due to the fact that
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 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 Funds' investment objective of liquidating on favorable terms.
With respect to each Fund, we have set forth in the following table the age
of the Fund relative to (i) the original term of the Fund as set forth in the
applicable partnership agreement and (ii) the anticipated remaining holding
period of the Fund's investments as set forth in the original offering
materials.
<TABLE>
<CAPTION>
Years
Original Remaining in
Anticipated Original
Legal Life of Partnership Holding Anticipated
Fund Formed Period Holding
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
CNL Income Fund XVII,
Ltd. ..................... 30 Feb. 1995 7 to 12 3-8
CNL Income Fund XVIII,
Ltd. ..................... 30 Feb. 1995 7 to 12 3-8
</TABLE>
Our Efforts to Liquidate the Funds
Because, at their inception, we expected your Fund and the other Funds to
hold their investments for a number of years after their formation, we, as the
general partners of the Funds, did not make any efforts to sell the restaurant
properties in the early years of the Funds' existence. Instead, we concentrated
our initial efforts on making suitable investments for the Funds, consistent
with the Funds' investment policies and restrictions, and managing the
restaurant properties efficiently in order to maximize the cash flow from the
restaurant
47
<PAGE>
properties. As the contemplated period for liquidation of the restaurant
properties approached, we began to explore the feasibility of selling the
restaurant properties.
Since 1995, we have considered a variety of alternative approaches to
liquidating certain 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 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 certain restaurant properties might be difficult to sell at fair prices.
If we chose to sell the restaurant properties individually, the Funds would
continue to be responsible during that process for all the costs of maintaining
the Funds as public companies, including accounting and SEC reporting
requirements and other administrative costs. We believe that the cost of
operating the 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 September 30, 1998, the Funds have sold 95 restaurant
properties for total consideration of approximately $76.8 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 Fund.
We also considered the alternative of selling the entire portfolio of
restaurant properties for a given 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 growing, operating company in a business substantially similar
to that of the Funds, 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 Funds and their operations and is in the best
position to value accurately each 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 Funds; and
. in our view, liquidation of the restaurant properties would be premature
and could result in various adverse consequences. Specifically, we
believe that (i) the liquidation valuation provided by Valuation
Associates shows that the liquidation values of the Funds are lower than
the value of the APF Shares, based on the Exchange Value, to be paid to
the Funds in the Acquisition and (ii) 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 a general partner of the Funds), began exploring certain strategic
alternatives designed to increase APF's stockholder value.
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
48
<PAGE>
investment banking firms that would potentially represent APF in the
implementation of any strategic alternative to two, Merrill Lynch & Co. and
Salomon Smith Barney.
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, 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, as
described below. 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.
The Special Committee also 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 following strategic alternatives (the "Strategic Alternatives"):
. 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 Funds and eight CNL
Income & Growth Funds (the "Growth Funds") and other affiliated entities
which have comparable properties leased on a triple net basis;
. listing APF's stock on a national stock exchange or on an automated
quotation system, and if so, when such listing should take place;
. becoming internally advised (i) by acquiring the Advisor, (ii) by
acquiring an unaffiliated third-party advisor, (iii) by hiring the
current management of the Advisor or (iv) by hiring new management;
. acquiring the CNL Restaurant Financial Services Group;
. acquiring CNL Advisory Services, Inc., an affiliate of 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.
On May 20, 1998, representatives of APF's management, including Mr. Bourne,
Shaw Pittman, Merrill Lynch, Salomon Smith Barney and Rogers & Wells, counsel
to Merrill Lynch and Salomon Smith Barney, met to discuss the various Strategic
Alternatives and the time frames for implementation of any of the Strategic
49
<PAGE>
Alternatives. Representatives at the meeting discussed extensively the
structure of APF's potential acquisition of the Funds and the Growth Funds,
with particular emphasis on the tax considerations to the limited partners of
those funds. The advantages and disadvantages of three structures were
discussed at length and are summarized as follows:
. Tax-Free OP Unit Structure. This structure would involve acquiring the
Funds and the Growth Funds by exchanging units of limited partnership
interest in the Operating Partnership for units of limited partnership in
the Funds and the Growth Funds. A transaction structured in this manner
would be tax free to the limited partners of the Funds 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 Funds
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
Funds and the Growth Funds.
. Tax-Free NewCo Structure. This structure would involve forming a new
company and combining APF, the Funds 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 Funds 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.
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 Funds and Growth Funds, acquiring the CNL
Restaurant Businesses and listing the APF Shares were the Strategic
Alternatives most likely to maximize APF stockholder value. Mr. Hostetter, the
Chairman of the Special Committee, suggested that the members of the Special
Committee further consider Merrill Lynch's and Salomon Smith Barney's
evaluation of the Strategic Alternatives and that the Special Committee
reconvene on July 20.
On July 20, 1998, the Special Committee met for the fifth time by telephone.
Representatives of Shaw Pittman participated by telephone. After discussing the
Merrill Lynch and Salomon Smith Barney
50
<PAGE>
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 Funds 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 APF to provide a fairness opinion to 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 Strategic Alternatives. During
the first day of meetings, the primary focus emphasized the manner in which the
Funds 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 Funds 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.
The representatives 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. While APF and its counsel could meet the
SEC's reporting requirements, the representatives 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 also noted
that, based on information from APF's management, the taxes that would likely
be incurred by the Limited Partners of the Funds if the Taxable Stock Structure
were used would not be substantial.
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. Certain
representatives opined 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 determined, 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 Funds. Overall,
while the
51
<PAGE>
representatives viewed favorably the ability of APF to accomplish the Tax-Free
NewCo Structure in a tax efficient manner for the limited partners of the 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 the representatives.
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, the representatives remarked that the taxable gain that would
be recognized by the limited partners would not be significant for limited
partners in most of the Funds and that a substantial number of limited partners
in the Funds would incur no taxable gain because of their status as a tax-
exempt entity. In addition, the representatives 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 representatives was that the transaction was
straightforward and immediately created a larger stockholder base in the APF
Shares. In addition, the representatives noted that if the tax consequences
were too severe for a particular Fund or Growth Fund, the limited partners had
the option of rejecting the proposed Acquisition. Finally, the representatives
noted that the acquisition costs and the future reporting costs of APF in
structuring the transaction as either a Tax-Free OP Unit Structure or Tax-Free
NewCo Structure versus a Taxable Stock Structure would be greater and therefore
not in the best interests of APF's existing stockholders.
After the discussions of the advantages and disadvantages of each Strategic
Alternative, the representatives 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 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
Funds and the Growth Funds in connection with the Acquisition. In addition,
Shaw Pittman provided to the members of the Special Committee an oral summary
by legal counsel on all significant matters regarding the progress of the
proposed acquisition.
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 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 and the Funds.
On December 1, 1998, the representatives 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 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 Funds 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.
52
<PAGE>
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
certain assets 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 concluded that it would be
in the best interests of APF's stockholders not to pursue the acquisition of
the Growth Funds.
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 and the
Funds 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 Funds be $600,000,000 or 60,000,000 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 Funds
for an aggregate of 60,000,000 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 Funds from $600,000,000 to $610,000,000 (or from 60,000,000 APF
Shares to 61,000,000 APF Shares based on the Exchange Value). After discussing
the proposed counter-offer, the Special Committee unanimously agreed to accept
our proposal, provided that the fairness opinion from Merrill Lynch to be
presented at the February 10, 1999 meeting of the Board of Directors supported
the Special Committee's acceptance of the counter-offer of the consideration to
be paid to the Funds and the Advisor based on the Exchange Value.
On February 10, 1999, Merrill Lynch provided an oral and written fairness
opinion to the Special Committee stating that the aggregate consideration to be
paid by APF for the Acquisition of the Funds was fair to APF from a financial
point of view.
Background of Our Recommendation that the 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 Funds, we anticipated that we might receive an offer from APF to
purchase the Funds 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
Funds in the event APF offered to acquire one or more of the Funds.
In September 1998, we engaged Valuation Associates to (i) complete a
restaurant property-by-restaurant property appraisal for each Fund, (ii) 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 Funds and (iii)
work with all parties involved in the Acquisition to fully explain its
valuation methodologies and conclusions. In accordance with the engagement
letter with Valuation Associates, each Fund will pay Valuation Associates
between approximately $2,600 and $9,600, depending on the number of restaurant
properties in the Fund.
In September 1998, we selected Legg Mason to provide financial advice and to
provide the fairness opinions to the Funds. Legg Mason has received $5,000 from
each Fund and will receive up to $25,000 from each Fund upon rendering its
fairness opinion to each Fund and reimbursement of out-of-pocket expenses not
to exceed $4,000 per Fund or $50,000 in the aggregate.
53
<PAGE>
On November 21, 1998, Valuation Associates presented its appraisal reports
to us with respect to each of the Funds.
On December 1, 1998, we received from APF's management a proposal to
acquire for an aggregate of 60,000,000 APF Shares (based on the Exchange
Value) all of the Funds.
On January 27, 1999, we submitted a counter-offer to the management of APF
proposing an increase in the consideration payable to the Funds from an
aggregate of 60,000,000 to 61,000,000 APF Shares, which APF valued as
aggregate consideration of $610,000,000, based on the Exchange Value.
On January 27, 1999, we received from certain representatives of APF an
acceptance of our counter-offer proposing an increase in the consideration
payable to the Funds from $600,000,000 to $610,000,000 (or from 60,000,000 APF
Shares to 61,000,000 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 Funds, (b) the aggregate APF Shares offered with
respect to the Funds and (c) the method of allocating the APF Shares among the
Funds.
On March , we accepted APF's offer to acquire each of the Funds, subject
to your approval, and proceeded to negotiate definitive acquisition
agreements.
Our Reasons for Proposing the Acquisition
We are proposing that the 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, 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 (which
includes 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;
. although the originally contemplated time frame for liquidation of the
restaurant properties of CNL Income Fund XV, Ltd. through CNL Income Fund
XVIII, Ltd. was no earlier than the year 2000, based upon our contacts
with representatives of investment banks and their observations of the
changes in the market for real estate since the formation of the Funds,
we determined that substantial benefits and cost savings would accrue to
the partners in CNL Income Fund XV, Ltd. through CNL Income Fund XVIII,
Ltd. if they were acquired along with CNL Income Fund, Ltd. through CNL
Income Fund XIV, Ltd. which have already entered into the seven-to-12-
year time frame anticipated for liquidation; and
. the APF Share consideration offered by APF to acquire the 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 Funds. In the event that we were to
auction the Funds in an effort to receive a higher purchase price, there
is a risk that there will be no interest in acquiring the Funds or that
there will be an interest in only acquiring a portion of the Funds. If
this were to happen, there is no guarantee that APF will subsequently
attempt to acquire the Funds or if it does, that the purchase prices it
offers for the Funds will be as great.
54
<PAGE>
Therefore, we believe that the Acquisition by APF of all the Funds, rather
than a liquidation, will result in the greatest possible value of the
investment for you and the other Limited Partners.
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 certain 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
Funds.
The following table summarizes the results of our comparative valuation
analysis:
<TABLE>
<CAPTION>
Original Original Weighted
Limited Limited Partner Values of APF Estimated Average per
Partner Investments less Shares Paid Estimated Liquidation Average
Investments any Distribution per Going Concern Value per $10,000
less any of Net Sales average $10,000 Value per Average Original
Distribution Proceeds per Limited Partner Average 10,000 $10,000 Limited
of Net Sales $10,000 Original Original Original Original Partner
Fund Proceeds(1) Investment(1) Investment(2) Investment(3) Investment(4) Investment
- ---- ------------ ---------------- --------------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
I....................... $12,597,200 $ 8,398 $ 7,611 $ 7,589 $ 7,030 $8,336
II...................... 23,768,000 9,507 9,466 9,419 8,724 9,078
III..................... 23,522,253 9,409 8,237 8,214 7,650 9,104
IV...................... 28,766,256 9,589 8,781 8,753 8,102 9,291
V....................... 23,161,673 9,265 8,103 8,085 7,520 9,316
VI...................... 35,000,000 10,000 10,429 10,386 9,727 9,422
VII..................... 30,000,000 10,000 10,456 10,411 9,754 9,400
VIII.................... 35,000,000 10,000 11,259 11,229 10,473 9,400
IX...................... 35,000,000 10,000 10,356 10,311 9,650 9,400
X....................... 40,000,000 10,000 10,391 10,350 9,646 9,080
XI...................... 40,000,000 10,000 10,759 10,730 10,000 9,230
XII..................... 45,000,000 10,000 10,400 10,357 9,500 9,180
XIII.................... 40,000,000 10,000 9,594 9,571 8,672 9,000
XIV..................... 45,000,000 10,000 9,468 9,430 8,513 9,250
XV...................... 40,000,000 10,000 9,222 9,182 8,290 8,640
XVI..................... 45,000,000 10,000 9,488 9,449 8,616 9,100
XVII.................... 30,000,000 10,000 9,930 9,894 9,137 9,320
XVIII................... 35,000,000 10,000 9,315 9,284 8,569 9,280
</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
September 30, 1998, an adjustment to the Limited Partners' original
investments based on distributions of net sales proceeds received from
sales of properties made pursuant to the partnership agreements 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) 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 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 January 1, 1998 through September 30, 1998. A
substantial majority of the transfer prices in this column reflect
purchases by the Funds of Units as part of their repurchasing programs, and
do not necessarily reflect the prices for the Units in a secondary market.
55
<PAGE>
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.
56
<PAGE>
OUR RECOMMENDATION AND FAIRNESS DETERMINATION
General
We believe the Acquisition to be fair to, and in the best interests of each
of, the Funds and their respective 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 certain alternatives
to the Acquisition and a review of the financial condition and performance of
APF and the Funds and the terms of critical agreements, such as the Funds'
partnership agreements.
We also believe that the Acquisition is procedurally fair for several
reasons. First, with respect to each participating Fund, the Acquisition is
required to be approved by Limited Partners holding a majority of the
outstanding Units of such Fund and is subject to certain conditions. Second,
all Limited Partners of Funds that approve the Acquisition and who vote against
the Acquisition will be given the option of receiving APF Shares or the
Cash/Note Option.
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, (i) our realization of
substantial economic benefits upon completion of the Acquisition, and (ii) our
relief from certain ongoing liabilities with respect to Funds that are acquired
by APF. For a further 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 Fund is acquired, please review your Supplement.
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 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 Funds. We believe that the form and amount of consideration offered to
us and the Limited Partners, including dissenting Limited Partners who select
the Cash/Notes Option, 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 and is the best way to maximize return on your investment
in light of the values of such consideration.
2. Similarity of Funds. We do not believe that there are any material
differences among the Funds that would affect the fairness of the Acquisition
to you or the other Limited Partners in any particular Fund. Substantially all
of the assets of the Funds are restaurant properties leased on a triple-net
basis which are similar in most respects, and the Funds have substantially the
same capital structures. In addition, the investment objectives of each of the
Funds are substantially the same.
57
<PAGE>
The primary differences among the Funds are:
. Date of Formation. The Funds were formed at different times and,
therefore, would have begun liquidation at different times. As a result,
the Funds formed earlier have already sold some restaurant properties.
. 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 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 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 Fund's
restaurant properties and of Legg Mason to provide the fairness opinions
assisted us in the fulfillment of our fiduciary duties to the Funds and the
Limited Partners, notwithstanding that each of Valuation Associates and Legg
Mason received fees for its services and notwithstanding that Legg Mason has
previously provided investment banking services to the Funds and to Commercial
Net Lease Realty, Inc., a former affiliate of ours. See "Reports, Opinions and
Appraisals--Fairness Opinions." We note that because the acquisition of any one
Fund is not a condition of the acquisition of any other Fund, the fairness
opinions analyze each Fund separately, not in combination with other Funds. See
"Reports, Opinions and Appraisals."
On 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 Funds, (b) the aggregate APF Shares offered with respect to the
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 Cash/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 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.
58
<PAGE>
Legg Mason's fairness opinion does not constitute a recommendation to you as
to how to vote on the Acquisition or as to whether you should elect to receive
the APF Share consideration or the Cash/Notes Option.
4. Valuation of Alternatives. Based on the appraisals of each Fund's
restaurant properties prepared by Valuation Associates, we estimated the value
of the Funds as going concerns and if liquidated. 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 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 Fund to Fund. In addition to the receipt
of cash available for distribution, you and the other Limited Partners whose
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 Funds. We calculated the book value of the Funds
under generally accepted accounting principles, or GAAP, as of September 30,
1998 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 true fair market value of the Funds. This
figure was compared to the (i) value of the Fund if it commenced an orderly
liquidation of its investment portfolio on December 31, 1998, (ii) value of the
Fund if it continued to operate in accordance with its existing partnership
agreement and business plans, and (iii) estimated value of the APF Shares,
based on the Exchange Value, paid to each Fund per average $10,000 invested.
Summary of Valuations
(per average $10,000 original investment)
<TABLE>
<CAPTION>
Estimated
Value of APF
Shares per
Going Average $10,000
GAAP Book Liquidation Concern Original Limited
Fund Value Value(1) Value(1) Partner Investment(2)
- ---- --------- ----------- -------- ---------------------
<S> <C> <C> <C> <C>
CNL Income Fund, Ltd. ... $5,626 $ 7,030 $7,589 $7,611
CNL Income Fund II,
Ltd. ................... 7,062 8,724 9,419 9,466
CNL Income Fund III,
Ltd. ................... 6,396 7,650 8,214 8,237
CNL Income Fund IV,
Ltd. ................... 6,810 8,102 8,753 8,781
CNL Income Fund V,
Ltd. ................... 6,558 7,520 8,085 8,103
CNL Income Fund VI,
Ltd. ................... 8,190 9,727 10,386 10,429
CNL Income Fund VII,
Ltd. ................... 8,109 9,754 10,411 10,456
CNL Income Fund VIII,
Ltd. ................... 8,848 10,473 11,229 11,259
CNL Income Fund IX,
Ltd. ................... 8,418 9,650 10,311 10,356
CNL Income Fund X,
Ltd. ................... 8,602 9,646 10,350 10,391
CNL Income Fund XI,
Ltd. ................... 8,517 10,000 10,730 10,759
CNL Income Fund XII,
Ltd. ................... 8,860 9,500 10,357 10,400
CNL Income Fund XIII,
Ltd. ................... 8,520 8,672 9,571 9,594
CNL Income Fund XIV,
Ltd. ................... 8,791 8,513 9,430 9,468
CNL Income Fund XV,
Ltd. ................... 8,941 8,290 9,182 9,222
CNL Income Fund XVI,
Ltd. ................... 8,752 8,616 9,449 9,488
CNL Income Fund XVII,
Ltd. ................... 8,740 9,137 9,894 9,930
CNL Income Fund XVIII,
Ltd. ................... 8,730 8,569 9,284 9,315
</TABLE>
- --------
(1) 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."
(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.
59
<PAGE>
We do not know of any factors that may materially affect (i) the value of
the consideration to be received by the Funds that are acquired in the
Acquisition, (ii) the value of the Units for purposes of comparing the expected
benefits of the Acquisition to the potential alternatives considered by us or
(iii) 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 one through
five above in reaching our conclusions as to the fairness of the Acquisition.
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 Fund who
receive APF Shares because such investment has substantially more growth
potential than an investment in the Units and the APF Shares will be a more
liquid investment than an investment in the Units.
Fairness in View of Conflicts of Interest
We have fiduciary duties to you and the other Limited Partners. We are
expected, in handling the affairs of the 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 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 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."
60
<PAGE>
THE ACQUISITION
In order to effect the Acquisition of the Funds by APF or its subsidiaries,
the 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 by and between APF and each of the
Funds (the "Merger Agreements"), the copy or copies of which for your 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 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 amendment and restatement
of APF's Articles of Incorporation to, among other things, increase the
number of shares authorized to be issued by APF, at a special meeting of
APF stockholders scheduled for , 1999.
. if fewer than all of the Funds approve the Acquisition, the receipt by
APF of a fairness opinion from Merrill Lynch stating that the
consideration payable to the approving Funds is fair to APF from a
financial point of view.
It is presently APF's intention, upon listing of the APF Shares or shortly
thereafter to undertake an underwritten public offering if market conditions
permit. Such a public offering, however, is not a condition to closing of the
Acquisition.
Merger Agreements
If your Fund approves the Acquisition, that approval also constitutes
consent to the merger of the Fund with and into the Operating Partnership
pursuant to the terms and conditions of the Merger Agreement into which your
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 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 participating Fund will be deemed to have been transferred
to the Operating Partnership.
If your Fund approves the Acquisition, it will also have consented to all
actions necessary or appropriate to accomplish the Acquisition, provided that,
with respect to certain Funds, a separate vote will be required to approve any
required amendments to the partnership agreement governing that Fund. For
information regarding whether your Fund's partnership agreement is being
amended in connection with approval of the Acquisition, we encourage you to
read the Supplement pertaining to your Fund that accompanies this Consent
Solicitation.
Approval and Recommendation of the General Partners
We, as the general partners of the 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
61
<PAGE>
"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 Funds versus an
investment in APF in "Comparison of Ownership of Units, Notes and APF Shares."
As we have already discussed, if your 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 Fund, Limited Partners holding a majority
of the outstanding Units of the Fund must vote in favor of the Acquisition. As
long as a single 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 Fund regardless of whether any other Fund votes in favor of the
Acquisition.
Consideration
If your Fund is acquired by APF, you will receive APF Shares unless you vote
against the Acquisition and affirmatively elect the Cash/Notes Option described
below. If your Fund votes against the Acquisition, your Fund will continue as
an independent entity which will contract with APF to provide restaurant
property management services.
APF Shares. The consideration payable to each 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 Fund's partnership agreement
which specifies how consideration is distributed to partners in the event of a
liquidation of your Fund. In addition, in the event that your Fund approves the
Acquisition, the aggregate number of APF Shares paid to your Fund will be
reduced by your Fund's pro rata share of certain expenses of the Acquisition.
You will receive APF Shares unless you vote "Against" the Acquisition and
expressly elect to receive the Cash/Notes Option, in which case you would
receive your portion of the purchase price in a payment of 10% cash and 90%
Notes.
Cash/Notes Option. 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
the Cash/Notes Option. The payment received by you or other Limited Partners
who elect the Cash/Notes Option will be equal to your portion of the amount
that the Fund would receive upon an orderly liquidation of the restaurant
properties over a 12 month period pursuant to the partnership agreement
governing your Fund, as determined by Valuation Associates. Such liquidation
will be lower than the value of the APF Shares, based on the Exchange Value,
offered to your Fund in the Acquisition. If you properly elect to receive the
Cash/Notes Option, you will receive (i) a cash payment equal to the value of
10% of this liquidation value, and (ii) Notes, the principal amount of which
will be equal to 90% of this liquidation value. The Notes will bear interest at
% annually and will mature on , 2006 redeemable at any time. The cash
portion of the Cash/Notes Option will be paid by APF from cash reserves or from
cash borrowing from APF's line of credit.
General Partners. We, as the general partners of the Funds (assuming that
all of the Funds are acquired in the Acquisition), also will receive an
estimated aggregate of 273,449 APF Shares as a result of our general partner
interests in the Funds. The APF Shares allocated to your Fund will be issued to
and allocated between you and the other Limited Partners (other than those
Limited Partners that elected the Cash/Notes Option), and us in the same manner
as net liquidation proceeds would be distributed under your Fund's partnership
agreement as if your Fund's restaurant properties and other assets were sold
and your Fund were distributing net liquidation proceeds in an amount equal to
the value of the number of APF Shares paid to each Fund by APF. For a
discussion of the portion of the consideration payable to us if your Fund is
acquired, see the Supplement accompanying this Consent Solicitation.
62
<PAGE>
Estimated Value of APF Shares Payable to Funds
The following table sets forth, for each Fund (i) the aggregate amounts of
original limited partners investments in each Fund less any distributions of
net sales proceeds paid to the limited partners of that Fund, (ii) the original
limited partners investments in each Fund less any distributions of net sales
proceeds per average $10,000 invested, (iii) the estimated total number of APF
Shares to be paid to that Fund, (iv) the estimated value of APF Shares payable
to that Fund based on the Exchange Value, (v) the estimated Acquisition
expenses payable by each Fund, (vi) the estimated value of APF Shares based on
the Exchange Value after Acquisition expenses and (vii) the estimated value,
based on the Exchange Value of APF Shares per average $10,000 of original
investment by you and the other Limited Partners of your Fund.
<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 Payable to Acquisition after Acquisition Partner
Fund Proceeds(1) Investment(1) Fund(2) Fund(3) Expenses Expenses(3) Investment(3)
- ---- ------------- ------------- --------- ----------- ----------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
I....................... $12,597,200 $8,398 1,157,759 $11,577,590 $161,000 $11,416,590 $7,611
II...................... 23,768,000 9,507 2,393,267 23,932,670 267,731 23,664,939 9,466
III..................... 23,522,253 9,409 2,082,901 20,829,010 237,562 20,591,448 8,237
IV...................... 28,766,256 9,589 2,668,016 26,680,160 338,472 26,341,688 8,781
V....................... 23,161,673 9,265 2,049,031 20,490,310 232,046 20,258,264 8,103
VI...................... 35,000,000 10,000 3,730,388 37,303,880 426,713 36,877,167 10,429
VII..................... 30,000,000 10,000 3,202,371 32,023,710 336,341 31,687,369 10,456
VIII.................... 35,000,000 10,000 4,042,635 40,426,350 472,595 39,953,755 11,259
IX...................... 35,000,000 10,000 3,700,097 37,000,970 420,663 36,580,307 10,356
X....................... 40,000,000 10,000 4,243,243 42,432,430 482,089 41,950,341 10,391
XI...................... 40,000,000 10,000 4,394,196 43,941,960 485,944 43,456,016 10,759
XII..................... 45,000,000 10,000 4,768,496 47,684,960 532,871 47,152,089 10,400
XIII.................... 40,000,000 10,000 3,886,185 38,861,850 486,515 38,375,335 9,594
XIV..................... 45,000,000 10,000 4,313,041 43,130,410 524,930 42,605,480 9,468
XV...................... 40,000,000 10,000 3,733,901 37,339,010 450,338 36,888,672 9,222
XVI..................... 45,000,000 10,000 4,320,947 43,209,470 515,521 42,693,949 9,488
XVII.................... 30,000,000 10,000 3,014,377 30,143,770 353,644 29,790,126 9,930
XVIII................... 35,000,000 10,000 3,299,149 32,991,490 390,024 32,601,466 9,315
</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
September 30, 1998 an adjustment to the Limited Partners' original
investments based on distributions of net sales proceeds received from
sales of properties made pursuant to the partnership agreements for CNL
Income Fund, Ltd. through CNL Income Fund V, Ltd.
(2) The APF Shares payable to each Fund as set forth in this chart will not
change if APF acquires fewer than all of the Funds in the Acquisition. This
number assumes that none of the Limited Partners of the Fund has elected
the Cash/Notes Option.
(3) 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.
63
<PAGE>
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 0.49 is approximately $4.90 (on a per Limited Partner, not
a per Unit, basis), assuming the Exchange Value.
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 Fund. If you vote
"Against" the Acquisition, you do have the right to elect the Cash/Notes Option
if your Fund otherwise approves the Acquisition. Under this option you would
receive (i) a payment in cash equal to 10% of the amount that you would be paid
upon an orderly liquidation of the Fund's restaurant properties and (ii) Notes,
the principal amount of which would be equal to 90% of the amount that you
would be paid upon an orderly liquidation of the Fund's restaurant properties.
The terms of the Notes are described in more detail under "Description of
Notes" on page 133. The liquidation valuation amount for your 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 Funds Not Acquired
If APF does not acquire your 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 Fund, and the 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 Funds. Thus, for any Funds not acquired in the Acquisition, APF will
provide such management functions.
Acquisition Expenses
If APF acquires your Fund in the Acquisition, your 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 Fund's expenses of the Acquisition.
If your Fund votes "Against" the Acquisition, then your 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 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 that the
expected benefits of the Acquisition outweigh the risks of the Acquisition, as
set forth in "Risk Factors" above, and we believe that it is the best way for
you to maximize returns on your investment. 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 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 above, 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
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 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%.
. Risk Diversification. The combination of the restaurant properties owned
by the 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 September 30, 1998, 93% of APF's
financing relationships were directly with the franchisor of the
restaurant chain or with 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 Fund.
. Operational Economies of Scale. The combination of the 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 Funds are all public entities subject to the SEC's reporting
requirements, the combination of the Funds into a single public company
in APF would save compliance costs. In addition, if your Fund is
acquired, we will no longer have to supply a Schedule K-1 to you and each
of the other Limited Partners 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.
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<PAGE>
. 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 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
Funds, you will be a stockholder of a company that will have total assets
of approximately $1.5 billion and more than 60,000 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 and expanded its 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 $333 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. ("CAS") will enhance
APF's financing business. CAS provides merger, acquisition, divestiture
and strategic planning services to operators of national and regional
restaurant chains which desire to grow or streamline their business
operations. For the nine months ending September 30, 1998, CAS negotiated
the acquisition of 24 restaurant properties having an aggregate purchase
price of in excess of $37.6 million. CAS has granted to APF the right of
first refusal to provide triple-net lease or mortgage loan financing to
CAS' clients. We believe this represents an additional pipeline of
potential customers to which APF can target its financial products.
. Possible Premium Pricing. We believe that the likely value of the APF
Shares will be higher than the likely return of capital if the Funds'
restaurant properties were sold on an individual basis and the Funds were
liquidated at this time.
. 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 of the 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 Funds' current
distributions, the ability to receive distributions quarterly and in
regular amounts would be enhanced, because, unlike the Funds, APF will
have the ability to increase its portfolio of assets from which income
will be derived.
. 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 Funds individually, APF expects to have
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<PAGE>
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 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 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. The incorporation of
all aspects of the REIT's management into APF assures a commitment to
hands-on management. 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 Funds, we each have an independent obligation
to assess whether the terms of the Acquisition are fair and equitable to the
Limited Partners in each Fund without regard to whether the Acquisition is fair
and equitable to any of the other participants (including the Limited Partners
in other Funds). James M. Seneff, Jr. and Robert A. Bourne act as the
individual general partners of all of the 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 Fund, there is an inherent
conflict of interest in serving, directly or indirectly, in a similar capacity
with respect to all of the other Funds and also on APF's Board of Directors.
Substantial Benefits to General Partners
As a result of the Acquisition (assuming all of the Funds are acquired), we
expect to receive certain benefits. These benefits include:
. With respect to our ownership in the Funds, we may be issued up to an
estimated aggregate of 273,499 APF Shares in accordance with the terms of
the Funds' partnership agreements. The 273,499 APF Shares issued to us
will have an estimated value, based on the Exchange Value, of
approximately $2,734,990.
. 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 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 Funds if
the Acquisition does not occur.
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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 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 are eligible for and choose, the Cash/Notes Option. 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 balance of
this Consent Solicitation as well as the accompanying Supplement for additional
important information.
Form of Organization and Purpose
- --------------------------------------------------------------------------------
Funds APF
- --------------------------------------------------------------------------------
Each of the Funds is a Florida APF is a Maryland corporation which
limited partnership. The Funds' has qualified as a REIT during 1995,
primary business is to invest in 1996, 1997 and 1998 and expects to
fast-food, family-style and casual continue to qualify as a REIT under
dining restaurant properties. The the Code. APF's primary business,
Funds lease the restaurant like the Funds, is the ownership and
properties on a triple-net lease management of restaurant properties
basis to operators of national and leased to operators of national and
regional restaurant chains. regional restaurant chains on a
triple-net lease basis. Upon APF's
acquisition of the CNL Restaurant
Businesses described on page 95, 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 Fund and will have
access to additional financing opportunities which are currently not accessible
to your Fund. Inherent in several of the additional financing opportunities are
certain risks which do not exist in the case of your Fund, and we encourage you
to review "Risk Factors" for detailed description of such risks.
Length and Type of Investment
- --------------------------------------------------------------------------------
Funds APF
- --------------------------------------------------------------------------------
Each Fund is a finite-life entity APF will have a perpetual term and
with a stated term which expires intends to continue its operations
between 2017 and 2031. As a Limited for an indefinite time period. To
Partner of your Fund, you are the extent APF sells or refinances
entitled to receive cash its assets, the net proceeds
distributions out of your Fund's net therefrom will generally be
operating income, if any, and to reinvested in additional properties
receive cash distributions, if any, or retained by APF for working
upon liquidation of your Fund's real capital and other corporate
estate investments. purposes, except 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
certain former Limited Partners as a
result of sales of restaurant
properties formerly held by their
Funds.
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The Funds are structured to dissolve when the assets of the Funds are
liquidated (or after a period ranging between 30 and 40 years, depending on the
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
- --------------------------------------------------------------------------------
Funds APF
- --------------------------------------------------------------------------------
The investment portfolio of each Assuming the acquisition of the CNL
Fund currently consists of between Restaurant Businesses had occurred
17 and 56 restaurant properties and on September 30, 1998, APF would
certain related assets. have had triple-net leases or
mortgage loans with respect to 816
restaurant properties. Assuming all
of the Funds are acquired by APF,
APF will own an interest in,
directly or indirectly through the
Operating Partnership, a portfolio
of up to 1,437 restaurant
properties.
The investment portfolio of each Fund currently consists of between 17 and
56 restaurant properties. Through the Acquisition, and through additional
investments that may be made by APF from time to time, APF intends to maintain
an investment portfolio substantially larger and more diversified than the
assets of any of the 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 (for example, mortgage loans and
securitizations) with multiple brands 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 Fund.
Borrowing Policies
- --------------------------------------------------------------------------------
Funds APF
- --------------------------------------------------------------------------------
Your Fund is not authorized to incur APF is not restricted under its
borrowings or is restricted in the Articles of Incorporation from
amount and nature of borrowings. incurring debt. At the time of the
Further, your Fund does not incur Acquisition, APF will have a policy
borrowings in the ordinary course of of incurring debt only if
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 indebtedness 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.
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<PAGE>
Other Investment Restrictions
- --------------------------------------------------------------------------------
Funds APF
- --------------------------------------------------------------------------------
The partnership agreements of the Neither APF's Articles of
Funds contain provisions that Incorporation nor its Bylaws impose
prohibit (i) the reinvestment in the any restrictions upon the types of
Fund of cash available for investments that may be made by APF,
distribution, (ii) the purchase or except that under the Articles of
lease of any real property without Incorporation, the Board of
the support of an appraisal report Directors is prohibited from taking
of an independent appraiser of any action that would terminate
restaurant properties, (iii) the APF's status as a REIT, unless a
acquisition of any property in majority of the stockholders vote to
exchange for interests in the Fund, terminate such status. APF's
(iv) the acquisition of securities Articles of Incorporation and Bylaws
of other issuers or (v) the making do not impose any restrictions upon
of mortgage loans, junior deeds of the vote to terminate such status.
trust or similar obligations. The APF's Articles of Incorporation and
Funds are generally not authorized Bylaws do not impose any
to raise additional funds for (or restrictions on dealings between APF
reinvest net sales or refinancing and directors, officers and
proceeds in) new investments, absent affiliates thereof. The Maryland
amendments to their partnership General Corporation Law ("MGCL"),
agreements, and a substantial number however, requires that the material
of the Funds are not authorized to facts of the relationship, the
reinvest net sales or refinancing interest and the transaction must be
proceeds in new investments or (i) disclosed to the Board of
redeem or repurchase Units. Directors and approved by the
affirmative vote of a majority of
the disinterested directors, (ii)
disclosed to the stockholders and
approved by the affirmative vote of
a majority of the disinterested
stockholders, or (iii) 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 affiliates thereof must be
approved by the affirmative vote of
a majority of the disinterested
directors.
Some of the Fund's partnership agreements contain provisions which prohibit
or hinder further investment by the 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
- --------------------------------------------------------------------------------
Funds APF
- --------------------------------------------------------------------------------
As the general partners of the The Board of Directors will direct
Funds, we are generally vested with the management of APF's business and
the exclusive right and power to affairs subject to restrictions
conduct the business and affairs of contained in APF's Articles of
the Funds and may appoint, contract Incorporation and Bylaws and
or otherwise deal with any person, applicable law. The Board of
including employees of our Directors, the majority of which
affiliates, to perform any acts or will be independent directors, will
services for the Funds necessary or be elected at each annual meeting of
appropriate for the conduct of the the stockholders. The policies
business and affairs of the Funds. adopted by the Board of Directors
As a Limited Partner of a Fund, you may be altered or eliminated without
have no right to participate in the a vote of the stockholders.
management and control of your Fund Accordingly, except for their vote
and have no voice in your Fund's in the elections of directors and
affairs except on certain limited their vote in certain major
matters that may be submitted to a transactions, stockholders will have
vote of the Limited Partners under no control over the ordinary
the terms of your Fund's partnership business policies of APF. The Board
agreement. Under each Fund's of Directors cannot change APF's
partnership agreement, Limited policy of maintaining its status as
Partners have the right to remove us a REIT, however, without the
by a majority vote in interest with majority vote of the stock entitled
or without cause. In all cases, to be voted.
however, our removal can only occur
if the Limited Partners find a
successor general partner.
Under the partnership agreements for the Funds, we generally are vested with
the exclusive right and power to conduct the business and affairs of the Funds.
As a Limited Partner, you have no voice in the affairs of the Funds except on
certain limited matters. All of the 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 certain major transactions,
stockholders have no control over the management of APF.
Fiduciary Duties
- --------------------------------------------------------------------------------
Funds APF
- --------------------------------------------------------------------------------
As a Florida limited partnership, Under the MGCL, the directors must
Florida law provides that we are perform their duties in good faith,
accountable as fiduciaries to the in a manner that they reasonably
Funds and owe the Fund and its believe to be in the best interests
Limited Partners a duty of loyalty of APF and with the care of an
and a duty of care, and are required ordinary prudent person in a like
to exercise good faith and fair position. Directors of APF who act
dealing in conducting the affairs of in such a manner generally will not
the Funds. The duty of good faith be liable to APF for monetary
requires that we deal fairly and damages arising from their
with complete candor toward the activities.
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 Funds. The duty of fair dealing
also requires that all transactions
between ourselves and the Funds be
fair in the manner in which the
transactions are effected and in the
amount of the consideration received
by us.
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<PAGE>
We, as the general partners of the 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
- --------------------------------------------------------------------------------
Funds APF
- --------------------------------------------------------------------------------
Under Florida law, we, as the APF's Articles of Incorporation
general partners of the Funds, are provide that the liability of APF's
liable for the repayment of Fund directors and officers to APF and
obligations and debts, unless its stockholders for money damages
limitations upon such liability are is limited to the fullest extent
expressly stated in the document or permitted under the MGCL. The
instrument evidencing the obligation Articles of Incorporation and the
(for example, a loan structured as a MGCL provide broad indemnification
nonrecourse obligation). Each Fund's to directors and officers, whether
partnership agreement generally serving APF or at its request any
provides that we will not be held other entity, to the fullest extent
liable for any costs arising out of permitted under the MGCL. APF will
our action or inaction that we indemnify its present and former
reasonably believed to be in the directors and officers, among
best interests of a Fund except that others, against judgments,
we will be liable for any costs penalties, fines, settlements and
which arise from our own fraud, reasonable expenses actually
negligence, misconduct or other incurred by them in connection with
breach of fiduciary duty. In cases any proceeding to which they may be
in which we are indemnified, any made a party by reason of their
indemnity is payable only from the service in those or other
assets of the Fund. capacities, unless it is established
that (a) the act or omission of the
director or officer was material to
the matter giving rise to the
proceeding and (i) was committed in
bad faith or (ii) 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 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
- --------------------------------------------------------------------------------
Funds APF
- --------------------------------------------------------------------------------
For each 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 have the effect
of the Fund. See "Management of delaying or discouraging a change
Control" above for a discussion in control of APF, even if the
regarding our removal as general change in control might be in the
partners of a Fund. In addition, we best interests of stockholders.
may restrict transfers of your These provisions include, among
Units. An assignee of Units may not others, (i) authorized capital stock
become a substitute Limited Partner, that may be classified and issued as
entitling him, her or it to vote on a variety of equity securities in
matters that may be submitted to the the discretion of the Board of
partners for approval, unless we Directors, including securities
consent to such substitution. having superior voting rights to the
APF Shares, (ii) restrictions on
business combinations with persons
who acquire more than a certain
percentage of APF Shares, (iii) 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 (iv)
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 Funds and APF could be
used to deter attempts to obtain control of the Funds or APF in transactions
not approved by us or by APF's Board of Directors, respectively.
Sale
- --------------------------------------------------------------------------------
Funds APF
- --------------------------------------------------------------------------------
Each Fund's partnership agreement Under the MGCL, the Board of
allows the sale of all or Directors is required to obtain
substantially all of the assets of approval of the stockholders by the
the Fund with the consent of the affirmative vote of two-thirds of
Limited Partners holding a majority all the votes entitled to be cast on
of the outstanding Units. 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 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 Funds or APF does not require any
consent of the Limited Partners or APF's stockholders, respectively.
73
<PAGE>
Merger
- --------------------------------------------------------------------------------
Funds APF
- --------------------------------------------------------------------------------
Each Fund's partnership agreement is Under the MGCL, the Board of
silent with respect to the vote Directors is required to obtain
required for a Fund to participate approval of the stockholders by the
in a merger. Under Florida law, a affirmative vote of two-thirds of
merger may be effected upon our all the votes entitled to be cast on
approval and the approval of the the matter in order to merge or
Limited Partners holding a majority consolidate APF with another entity
of the outstanding Units, and the not at least 90% controlled by it.
satisfaction of certain other
procedural requirements.
Under applicable law and APF's Articles of Incorporation, mergers by the
respective Funds or APF is permitted subject to a certain level of Limited
Partner or APF stockholder consent, respectively.
Dissolution
- --------------------------------------------------------------------------------
Funds APF
- --------------------------------------------------------------------------------
Each Fund may be dissolved with the Under the MGCL, the Board of
consent of the Limited Partners Directors is required to obtain
holding a majority of the approval of the stockholders by the
outstanding Units. affirmative vote of two-thirds of
all votes entitled to be cast on the
matter in order to dissolve APF.
Under each 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
- --------------------------------------------------------------------------------
Funds APF
- --------------------------------------------------------------------------------
Each Fund's partnership agreement Amendments to APF's Articles of
permits amendment of most of its Incorporation must be approved by
provisions with the consent of the Board of Directors and by
Limited Partners holding a majority holders of a majority of the
of the outstanding Units. Amendments outstanding APF Shares entitled to
to the Funds' partnership agreements be voted. An amendment relating to
that require unanimous consent termination of REIT status requires
include: (i) converting the interest a vote of the holders of a majority
of a Limited Partner into a general of the stock entitled to be voted.
partner's interest, (ii) any act
adversely affecting the liability of
a Limited Partner, (iii) 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, (iv) reducing
the percentage of partners required
to consent to any action in the
partnership agreements, or (v)
limiting in any manner our liability
as general partners.
We may amend a Fund's partnership
agreement without the consent of the
Limited Partners to reflect a
ministerial amendment, and,
specifically with respect to certain
Funds, amendment required by state
law.
74
<PAGE>
Amendment to each 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
Each Fund's partnership agreement In each of the Funds, our right to
provides that we, as general receive a portion of distributable
partners of the Fund, are entitled cash flow is subordinated to your
to receive a percentage of the net right to receive a preferred return
cash available for distribution to on your investment. APF will pay all
the partners of the Fund. For CNL management expenses, including
Income Funds I through XVI, this salaries and other compensation
percentage equals 1%. For CNL Income payable to employees of APF, but as
Funds XVII and XVIII, this an internally-advised REIT, APF will
percentage equals 5%. not otherwise pay a portion of net
cash flow or allocations to
management, except to the extent
they are entitled to such as a
result of owning APF Shares. Such
management expenses will reduce the
funds available for distribution by
APF.
Management Fees
Each Fund's partnership agreement The officers and directors of APF
provides for the payment of a will receive compensation for their
management fee to the Advisor, our services as described herein under
affiliate, which provides the day- "Management." APF will not otherwise
to-day management operation of the pay any management fees.
Fund's assets. For CNL Income Fund,
Ltd. through CNL Income Fund III,
Ltd. the management fee equals 0.5%
of the value of the total assets
under management valued at cost. For
CNL Income Fund IV, Ltd. through CNL
Income Funds XVIII, Ltd., the
management fee equals 1% of the
gross revenues derived from the
restaurant properties.
In each of the Funds, the Advisor's
right to receive this fee is
subordinated to your right to
receive a preferred return on your
investment.
Real Estate Disposition Fee
Each Fund's partnership agreement None. Certain employees of APF may
provides for the payment to the receive incentive compensation based
Fund's Advisor, our affiliate, of a upon APF's profitability.
real estate disposition fee upon the
sale of a restaurant property equal
to the lesser of (i) a competitive
real estate brokerage commission, or
(ii) 3% of sales price of the
restaurant property or properties.
In each of the Funds, the Advisor's
right to receive this fee is
subordinated to your right to
receive a non-cumulative preferred
return on your investment plus your
aggregate adjusted capital
contributions.
75
<PAGE>
Share of Distributions of Net Sales Proceeds (Not in Liquidation)
Each Fund's partnership agreement None. Distributions made by APF to
provides for the payment to us of a its stockholders will be based
portion of distributable net sales solely on the profitability of APF
proceeds following the payments to and will not be based on asset
the Limited Partners of preferred dispositions.
returns and returns of capital
required by the partnership
agreements. For all of the Funds,
our portion of distributable net
sales proceeds equals 5% of the
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
Each Fund's partnership agreement As a full-service REIT, APF's
provides that operating expenses expenses will be paid from its
(which, in general, are those revenues as expenses are incurred.
expenses relating to the
administration of the 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 Fund in the same geographical
area.
One of the benefits of the Acquisition is to eliminate the inherent
conflicts currently existing among the Funds, our affiliates and us, as the
general partners of the Funds.
Review of Investor Lists
- --------------------------------------------------------------------------------
Funds APF
- --------------------------------------------------------------------------------
Under your Fund's partnership Under the MGCL, as a stockholder you
agreement, you are entitled, at your must hold at least 5% of the
expense and upon reasonable request, outstanding APF Shares before you
to obtain a list of the other have the right to request a list of
Limited Partners in your Fund. APF's stockholders. If you meet this
requirement, you may, upon written
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 Funds and the
stockholders of APF are entitled to inspect and, at their own expense, make
copies of investor lists.
76
<PAGE>
The following discussion describes the investment attributes and legal
rights associated with your ownership of Units, Notes if you elect the
Cash/Notes Option, and APF Shares.
Nature of Investment
- --------------------------------------------------------------------------------
Units Notes APF Shares
- --------------------------------------------------------------------------------
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 pro rata share will be issued pursuant holder of APF Shares,
of cash distributions to an indenture you will be entitled to
made to the partners of qualified under the your pro rata share of
your Fund. The Trust Indenture Act of any dividends or
partnership agreement 1939, as amended. APF distributions paid with
for each Fund specifies may issue additional respect to the APF
how the cash available senior debt, which may Shares. The dividends
for distribution, be secured, only in payable to you are not
whether arising from compliance with the fixed in amount and are
operation or sales or covenants contained in only paid if, when and
refinancing, is to be the Notes and the as declared by the Board
shared among us, as Indenture for the of Directors. In order
general partners of your issuance of senior debt. to continue to qualify
Fund, and you and the The Notes will bear as a REIT, APF must
other Limited Partners interest at % annually distribute at least 95%
of your Fund. The and will mature on of its taxable income
distributions payable by , 2006. Prior to (excluding capital
your Fund to its maturity, interest only gains), and any taxable
partners are not fixed payments will be made to income (including
in amount and depend you, on a semi-annual capital gains) not
upon the operating basis, and on , distributed will be
results and net sales or 2006, the outstanding subject to corporate
refinancing proceeds principal balance, plus income tax.
available from the interest accruing since
disposition of your the last payment, will
Fund's assets. Your Fund be payable to you.
is not authorized to
raise additional funds
for (and is generally
not authorized to
reinvest net sales or
refinancing proceeds in)
new investments, absent
amendments to the
partnership agreement of
your Fund.
The Units and the APF Shares constitute equity interests. As a Limited
Partner of your Fund, you are entitled to your pro rata share of the cash
distributions of your Fund, and as a stockholder of APF, you will be entitled
to your pro rata 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 Funds and APF,
respectively. 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.
77
<PAGE>
Additional Equity/
Potential Dilution
- --------------------------------------------------------------------------------
Units Notes APF Shares
- --------------------------------------------------------------------------------
Since your Fund is not Since the Notes will be At the discretion of the
authorized to issue unsecured debt Board of Directors, APF
additional equity obligations of APF, may issue additional
securities, there can be their payment will have equity securities,
no dilution of priority over dividends including APF Shares and
distributions to you and or distributions payable shares which may be
the other Limited to APF's stockholders. classified as one or
Partners. 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 result in the
in APF's real and dilution of your
personal property, and percentage ownership
such security interests, interest in APF.
if granted, would permit
the holders thereof to
have a priority claim
against such collateral
in the event of APF's
default under the
secured obligations.
Also, such secured
obligations would have
payment priority over
the Notes and other
unsecured indebtedness
of APF.
As an APF stockholder, your percentage ownership interest in APF will be
diluted 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 prior claims against the collateral given for security in the event
APF defaults in the payments of those secured obligations and will have payment
priority over the Notes and other unsecured indebtedness of APF.
Liability of Investors
- --------------------------------------------------------------------------------
Units Notes APF Shares
- --------------------------------------------------------------------------------
Under your 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.
Fund's debts and obligations of APF.
obligations is generally
limited to the amount of
your investment in the
Fund, together with an
interest in
undistributed income, if
any.
As a holder of Units, your liability for the debts and obligations of your
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.
78
<PAGE>
Voting Rights
- --------------------------------------------------------------------------------
Units Notes APF Shares
- --------------------------------------------------------------------------------
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 Fund have voting on certain major APF stockholders at the
rights only on transactions, including annual meeting of APF.
significant Fund the merger of APF or the The MGCL requires that
transactions to the sale of all or certain major
extent provided in your substantially all of transactions, including
Fund's partnership APF's assets. most amendments to APF's
agreement. Such voting Articles of
rights include Incorporation, may not
incurrence of debt, sale be consummated without
of all or substantially the approval of
all of the assets of stockholders. You will
your Fund, certain have one vote for each
amendments to the APF Share you own. APF's
partnership agreement or Articles of
our removal. Incorporation permits
the Board of Directors
to classify and issue
shares of capital stock
in one or more series
having voting power
which may differ from
that of your APF Shares.
See "Description of
Capital Stock."
As a Limited Partner of your 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
- --------------------------------------------------------------------------------
The Units that represent While the Notes you hold The APF Shares will be
your ownership interest will be freely freely transferable upon
in your Fund are transferable, APF will registration under the
relatively illiquid not list the Notes, and Securities Act. The APF
investments with a no market for the Notes Shares will be listed on
limited resale market. is expected to develop. the NYSE, and APF
The trading volume of You should not elect to expects a public market
the Units in the resale receive Notes unless you for the APF Shares to
market is limited and are prepared to hold the develop. The breadth and
the prices at which Notes until their strength of this market
certain Funds' Units maturity which is will depend, among other
trade are generally not approximately seven things, upon the number
equal to their net book years from the date that of APF Shares
value (and applicable the Acquisition occurs. outstanding, APF's
federal income tax rules You should note that, financial results and
and the partnership due to the lack of prospects, and the
agreements of the Funds market in the Notes and general interest in
effectively prevent the their consequent lack of APF's dividend yield and
development of a more liquidity, your tax growth potential
active or substantial liability as a result of compared to that of
market for these Units). the Acquisition may other debt and equity
Neither you nor any exceed the liquid assets securities. See "The
other Limited Partner, you receive if you have Acquisition--
individually, can elected the Cash/Notes Consideration."
require a Fund to Option.
dispose of its assets or
redeem your or any other
Limited Partner's
interest in the Fund.
79
<PAGE>
Your Units have a limited resale market. If APF acquires your Fund in the
Acquisition and you receive APF Shares, however, 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
the Cash/Notes Option, 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
- --------------------------------------------------------------------------------
Your 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 pro rata share of interest payments amount of such dividends
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
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 Funds the Code for
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
Funds, APF is not
required to distribute
net proceeds from the
sale or refinancing of
restaurant properties.
Dividends will be paid if, as and when declared by the Board of Directors of
APF in its discretion out of funds legally available therefor. If you become a
stockholder of APF, you will receive your pro rata 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.
80
<PAGE>
Taxation of Taxable Investors
- --------------------------------------------------------------------------------
Units Notes APF Shares
- --------------------------------------------------------------------------------
Your 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
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 Fund for income, which cannot be
inclusion on your offset by "passive
federal income tax losses" from other
returns. investments. The
distributions from APF
You must file state may, in certain
income tax returns and circumstances,
incur state income tax constitute a larger
in most states in which portion of taxable
your Fund has restaurant income than in the case
properties. of your Fund. This is
because a partnership's
operating income is
sheltered from current
taxation by the
partnership's
depreciation deductions,
while the amount of a
REIT distribution that
is taxable as a dividend
is computed under less
favorable rules. During
January of each year,
APF stockholders
(including you) 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.
Each 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 APF has taxable income (after
taking into account the "dividends paid" deduction), such income is taxed at
APF's level
81
<PAGE>
at the standard corporate tax rates. Dividends paid to APF stockholders will
constitute portfolio income and not passive income. Holders of Notes will
recognize portfolio income on the interest payments received on the Notes.
Taxation of Tax-Exempt Investors
- --------------------------------------------------------------------------------
Units Notes APF Shares
- --------------------------------------------------------------------------------
None of the type of Interest income received Dividends received from
income distributed by by certain tax-exempt APF by tax-exempt
the Funds is investors will not be investors should not
characterized as characterized as UBTI so constitute UBTI if the
unrelated business long as the tax-exempt tax-exempt APF
taxable income (or UBTI) investor does not hold stockholder did not
if the tax-exempt its Notes subject to finance its acquisition
investor did not finance acquisition of the APF Shares with
its acquisition of the indebtedness. indebtedness.
Units with indebtedness.
A tax-exempt entity is treated as owning and carrying on the business
activity conducted by a partnership in which such entity owns an interest.
Accordingly, to the extent a tax-exempt entity owns Units in the Funds, the
income received by the 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.
82
<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 (we refer,
collectively, to the power of attorney and Limited Partner consent as the
consent form), constitute the solicitation materials being distributed to you
and the other Limited Partners to obtain their votes "For" or "Against" your
Fund's participation in the Acquisition.
In order for APF to acquire your Fund, the Limited Partners holding units
greater than 50% of the outstanding Units of your Fund must approve the
Acquisition. Your 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 Fund.
Therefore, if you are not planning to attend the special meeting of the Limited
Partners of your 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"). 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 December 31,
1999. 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 Fund is acquired.
The consent form consists of two parts. Part A seeks your consent to the
Acquisition and certain related matters. The exact matters which a vote in
favor of the Acquisition will be deemed to approve differ for each Fund and are
explained in detail in the individual Supplement for each Fund. Some Funds are
required to have amendments to their partnership agreements in order to permit
APF to acquire such Funds in the Acquisition. You should review the Supplement
to see if your Fund's partnership agreement requires amendment. If you have
interests in more than one Fund, you will receive multiple Supplements and
consent forms which will provide for separate votes for each 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 (including the
Acquisition), 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 Funds, have scheduled special meetings of the
Limited Partners of each of the Funds (the "Special Meetings") 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 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.
83
<PAGE>
Required Vote and Other Conditions
In order for APF to acquire your Fund, Limited Partners of your Fund holding
a majority of the outstanding Units and we, as the general partners of your
Fund, must approve the Acquisition and, with respect to certain Funds, approve
the amendments to the Fund's partnership agreement. For a more detailed
discussion relating to your 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 Funds. As of September 30, 1998, 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
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 2,208 50,000 25,001
CNL Income Fund III, Ltd 2,043 50,000 25,001
CNL Income Fund IV, Ltd 2,917 60,000 30,001
CNL Income Fund V, Ltd 2,485 50,000 25,001
CNL Income Fund VI, Ltd 2,987 70,000 35,001
CNL Income Fund VII, Ltd 3,154 30,000,000 15,000,001
CNL Income Fund VIII,
Ltd 3,437 35,000,000 17,500,001
CNL Income Fund IX, Ltd 3,394 3,500,000 1,750,001
CNL Income Fund X, Ltd 3,527 4,000,000 2,000,001
CNL Income Fund XI, Ltd 3,189 4,000,000 2,000,001
CNL Income Fund XII, Ltd 3,452 4,500,000 2,250,001
CNL Income Fund XIII,
Ltd 3,050 4,000,000 2,000,001
CNL Income Fund XIV, Ltd 3,017 4,500,000 2,250,001
CNL Income Fund XV, Ltd 2,709 4,000,000 2,000,001
CNL Income Fund XVI, Ltd 3,016 4,500,000 2,250,001
CNL Income Fund XVII,
Ltd 1,610 3,000,000 1,500,001
CNL Income Fund XVIII,
Ltd 1,567 3,500,000 1,750,001
</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 (the "Exchange Act"), your Fund is required, upon your written request,
to provide to you (i) a statement of the approximate number of Limited Partners
in your Fund and (ii) the estimated cost of mailing a proxy statement, form of
proxy or other similar communication to your Fund's Limited Partners. In
addition, you have the right, at our option, either (a) to have your 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
Fund or (b) to have the 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 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. An automated 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 vote
against the Acquisition, as will the failure to return a consent form and
broker nonvotes (where a broker submits a consent but does not have authority
to vote a Limited Partner's Units on one or more matters).
Revocability of Consent. You can change your vote at any time before your
consent is voted at the Special Meeting. You can do this in three ways: first,
you can send us a written statement that you would like to revoke your consent;
second, you can send us a new consent form; or third, you can attend the
special meeting and vote in person.
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<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.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
------------------------- -------------------------------------
1998 1997 1997 1996 1995
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Revenues................ $ 29,065,110 $ 12,252,450 $ 19,457,933 $ 6,206,684 $ 659,131
Net earnings............ 23,163,853 9,737,809 15,564,456 4,745,962 368,779
Cash distributions (1).. 26,460,446 10,879,969 16,854,297 5,436,072 638,618
Funds from operations
(2).................... 26,408,569 11,042,307 17,732,888 5,355,464 471,670
Earnings per APF Share.. 0.49 0.48 0.66 0.59 0.19
Cash distributions
declared per APF
Share.................. 0.57 0.55 0.74 0.71 0.31
Weighted average number
of APF Shares
outstanding (3)........ 47,633,909 20,368,867 23,423,868 8,071,670 1,898,350
<CAPTION>
September 30, December 31,
------------------------- -------------------------------------
1998 1997 1997 1996 1995
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Total assets............ $566,383,967 $288,151,045 $339,077,762 $134,825,048 $33,603,084
Total stockholders' eq-
uity................... 551,905,382 255,603,278 321,638,101 122,867,427 31,980,648
</TABLE>
- --------
(1) Approximately 12%, 10%, 8%, 13% and 42% of cash distributions ($0.07,
$0.06, $0.06, $0.09 and $0.13 per APF Share) for the nine months ended
September 30, 1998 and 1997, and the years ended December 31, 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.
(2) Funds from operations ("FFO"), based on the revised definition adopted by
the Board of Governors of the National Association of Real Estate
Investment Trusts ("NAREIT") and as used herein, means net earnings
determined in accordance with GAAP, excluding gains or losses from debt
restructuring and sales of restaurant properties, plus depreciation and
amortization of real estate assets, plus amortization of direct financing
leases, and after adjustments for unconsolidated partnerships and joint
ventures. (Net earnings determined in accordance with GAAP include the
noncash effect of straight-lining rent increases throughout the lease term
and/or rental payments during the construction of a restaurant property
prior to the date it is placed in service. Straight-lining rent is a GAAP
convention requiring real estate companies to report rental revenue based
on the average rent per year over the life of the lease. During the nine
months ended September 30, 1998 and 1997, and the years ended December 31,
1997, 1996 and 1995, net earnings included $2,315,968, $1,259,180,
$1,941,054, $517,067 and $39,142, respectively, of these amounts.) FFO was
restated by APF for the nine months ended September 30, 1998 and 1997, and
for the years ended December 31, 1997, 1996 and 1995 to add back the
amortization of direct financing leases. FFO was developed by NAREIT as a
relative measure of performance and liquidity of an equity REIT in order to
recognize that income-producing real estate historically has not
depreciated on the basis determined under GAAP. However, FFO (i) does not
represent cash generated from operating activities determined in accordance
with GAAP (which, unlike FFO, generally reflects all cash effects of
transactions and other events that enter into the determination of net
earnings), (ii) is not necessarily indicative of cash flow available to
fund cash needs and (iii) should not be considered as an alternative to net
earnings determined in accordance with GAAP as an indication of APF's
operating performance, or to cash flow from operating activities determined
in accordance with GAAP as a measure of either liquidity or APF's ability
to make distributions. Accordingly, APF believes that in order to
facilitate a clear understanding of the consolidated historical operating
results of APF, FFO should be considered in conjunction with APF's net
earnings and cash flows as reported in the accompanying consolidated
financial statements and notes thereto.
(3) 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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<PAGE>
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 September 30, 1998. Accordingly, it does not reflect the
acquisition of the CNL Restaurant Businesses which occurred on , 1999, as
discussed elsewhere in this Consent Solicitation.
Statements contained in this Consent Solicitation, particularly in the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" sections, including, without limitation, the Year 2000 compliance
disclosure, that are not historical facts may be forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Exchange Act. 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, APF's ability to raise capital from debt and equity offerings,
APF's ability to invest the proceeds of its offerings, APF's ability 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.
Overview
APF provides real estate financing to operators of national and regional
restaurant chains primarily through triple-net lease financing. As of September
30, 1998, APF had invested more than $480 million in 357 restaurant properties
diversified among 35 restaurant chains in 37 states.
The financial results for the nine months ended September 30, 1998 and 1997
and years ended December 31, 1997, 1996 and 1995 reflect the consolidated
results of APF. During 1998, APF formed two wholly-owned subsidiaries, which
serve as the general partner and limited partner of a newly formed UPREIT. APF
expects eventually to place all properties currently owned by APF into the
limited partnership of the UPREIT and operate APF as a holding company which
will conduct its business through this limited 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 expects to 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. APF's
ability to make potential acquisitions 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.
Results of Operations
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September
30, 1997
APF's revenues and net earnings more than doubled for the nine months ended
September 30, 1998 as compared to the same period in 1997. Revenues increased
$16.8 million primarily a result of increased financing to operators of
national and regional restaurant chains totaling $168.9 million during the nine
months ended September 30, 1998 compared to $131.7 million for the same period
in 1997. APF continues to focus on providing net-lease and mortgage financing
to restaurant chains and top franchisees in certain restaurant systems. As of
September 30, 1998, approximately 90% of APF's financings was provided to
either the franchisor or top five franchisee in a particular chain (based on
sales). Weighted average base lease rates on the new investments were 9.98% for
the nine months ended September 30, 1998 as compared to 10.80% for the
corresponding period in 1997. APF's growth has resulted in increased chain
diversification as APF's tenants and borrowers include 38 restaurant chains
compared to 26 at September 30, 1997. In addition, APF's restaurants are
geographically dispersed among 37 states at September 30, 1998 versus 32 states
at September 30, 1997.
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<PAGE>
The increase in other interest income to $4.8 million for the nine months
ended September 30, 1998 compared to $1.3 million for the corresponding period
in 1997 related to higher cash and cash equivalents balances pending
investment. APF's weighted average cash and cash equivalents balance was $87.7
million and $39.8 million during the nine months ended September 30, 1998 and
1997, respectively. This increased cash balance resulted from equity proceeds
of $259.6 million raised during the nine months ended September 30, 1998
compared to $149.2 million for the nine months ended September 30, 1997.
Operating expenses, including depreciation and amortization, increased to
$5.9 million for the nine months ended September 30, 1998 compared to $2.5
million for the nine months ended September 30, 1997. The increased expense was
a function of a larger property portfolio. General operating and administrative
expenses decreased to 5.0% of revenues from 5.4% for the nine months ended
September 30, 1998 and 1997, respectively, as a result of the increase in APF's
assets and increased operating and administrative efficiencies.
In October 1998, Boston Chicken, Inc and its affiliates, tenants of 27
Boston Market restaurant properties, filed a voluntary petition for bankruptcy
protection under Chapter 11 of the U.S. Bankruptcy Code, and two additional
Boston Market operators, tenants in three additional Boston Market restaurant
properties, also filed voluntary petitions for bankruptcy protection. As a
result of these bankruptcy filings, these tenants have the legal right to
reject or affirm one or more leases with APF. To date the restaurants on 13 of
these restaurant properties have been closed. Of the 13 properties with closed
restaurants, the tenants have rejected 12 leases, accounting for approximately
3% of APF's rental, earned and interest income for the year ended December 31,
1998. While the tenants have not rejected or affirmed the remaining 18 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 rejection of all 30 leases
could have an adverse effect on the results and operations of APF if APF is
unable to re-lease the restaurant properties in a timely manner. Currently, APF
is actively marketing the 13 closed restaurant properties to existing and
prospective clients and operators of local and regional restaurant chains.
During the nine months ended September 30, 1998, one of APF's lessees and
borrowers, Foodmaker, Inc., contributed more than 10% of APF's total rental,
earned and interest income relating to its restaurant properties, mortgage
loans, secured equipment leases and certificates. In addition, two restaurant
chains, Jack in the Box and Golden Corral Family Steakhouse Restaurants each
accounted for more than 10% of APF's total rental, earned and interest income
relating to restaurant properties. In the event that certain lessees, borrowers
or restaurant chains contribute more than 10% of APF's rental, earned income
and interest income in future years, any failure of such lessees, borrowers or
restaurant chains could materially affect APF's income. Each of these chains is
expected to be a relatively smaller portion of the entire portfolio as APF
grows.
Approximately 86% of APF's net leases provide a purchase option and
approximately 10% 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 of purchase options to be
significant. APF sold three and five properties during the nine months ended
September 30, 1998 and 1997, respectively. The properties were sold at their
carrying value and no gain or loss was recognized for financial reporting
purposes. APF reinvested the proceeds from the sale of restaurant properties in
additional restaurant properties. In addition, three restaurant properties were
exchanged for replacement properties during the nine months ended September 30,
1998. No gain or loss was recognized due to these transactions being accounted
for as nonmonetary exchanges of similar assets.
The Years Ended December 31, 1997, 1996 and 1995
APF's revenues and net earnings increased over the three year period.
Revenues increased to $19.5 million for the year ended December 31, 1997 from
$6.2 million and $659,131 for the years ended December 31, 1996 and 1995,
respectively. The increase was primarily a result of increased financing to
operators of national and regional restaurant chains totaling $179.1 million
during year ended December 31, 1997 compared to $69.0 million and $24 million
for the same period in 1996 and 1995, respectively. APF focused on providing
triple-net lease and mortgage financing to restaurant chains and top
franchisees of certain restaurant chains. At
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<PAGE>
December 31,1997, approximately 90% of APF's financing was provided to either
the franchisor or top franchisee in a particular restaurant chain (based on
sales). Weighted average base lease rates on the new investments were 10.69% in
1997 as compared to 11.15% and 11.09% in 1996 and 1995, respectively. APF's
growth has resulted in increased restaurant chain and geographic
diversification. APF's tenants and borrowers include 29 restaurant chains at
December 31, 1997 compared to 13 at December 31, 1996 and six at December 31,
1995. In addition, APF's restaurants were dispersed among 35 states at December
31, 1997 versus 20 at December 31, 1996.
The increase in other interest income to $2.3 million for the year ended
December 31, 1997 compared to $773,404 and $118,859 during 1996 and 1995,
respectively, was primarily a result of higher cash and cash equivalent
balances pending investment. APF's weighted average cash and cash equivalents
balance for 1997 was $42.1 million compared to $17.8 million and $2.9 million
in 1996 and 1995, respectively. This increased cash balance resulted from
equity proceeds of $222.5 million raised during 1997 compared to $100.8 million
in 1996 and $38.5 million in 1995.
Operating expenses, including depreciation and amortization, increased to
$3.9 million during 1997 from $1.4 million in 1996 and $290,276 in 1995. The
increasing expense was a function of a larger portfolio. Total assets increased
to $339 million at December 31, 1997 from $135 million at December 31, 1996.
General and administrative expenses decreased to 4.9% of total revenues during
1997 compared to 8.7% and 20.4% in 1996 and 1995, respectively, as a result of
the increase in APF's assets and increased operating and administrative
efficiencies.
During 1997, three of APF's lessees and borrowers, or affiliated groups of
lessees and borrowers, Castle Hill, Foodmaker, Inc. and Houlihan's Restaurants
Inc., each contributed more than 10% of APF's total rental, earned income and
interest income relating to its restaurant properties, mortgage loans and
secured equipment leases. Castle Hill is a Pizza Hut franchisee and Foodmaker
operates and franchises Jack in the Box restaurants. Houlihan's Restaurants is
the franchisor of a casual dining chain. In addition, four restaurant chains,
Pizza Hut, Golden Corral Family Steakhouse Restaurants, Jack in the Box and
Boston Market, each accounted for more than 10% of APF's total rental, earned
income and interest income relating to restaurant properties. In the event that
certain lessees, borrowers or restaurant chains contribute more than 10% of
APF's rental, earned income and interest income in future years, any failure of
such lessees, borrowers or restaurant chains could materially affect APF's
income.
Funds from Operations ("FFO")
FFO, as defined by the Board of Governors of the National Association of
Real Estate Investment Trusts ("NAREIT") and as used herein, means net income
(loss) (determined in accordance with GAAP), excluding gains (or losses) from
debt restructuring and sales of property, plus depreciation and amortization of
real estate assets, plus amortization of direct financing leases, and after
adjustments for unconsolidated partnerships and joint ventures. FFO was
restated by APF for the years ended December 31, 1997, 1996 and 1995. FFO was
developed by NAREIT as an alternative measure of performance and liquidity of
an equity REIT because income-producing real estate historically has not
depreciated on the basis determined under GAAP. FFO alone does not represent
cash generated from operating activities in accordance with GAAP and therefore
should not be considered an alternative to net earnings as an indication of
APF's performance. The following summarizes FFO of APF for the nine months
ended September 30, 1998 and 1997 and for each of the three years ended
December 31, 1997.
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<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
----------------------- -------------------------------
1998 1999 1997 1996 1995
----------- ----------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C>
Net Earnings............ $23,163,853 $ 9,737,809 $15,564,456 $4,745,962 $368,779
Adjustments:
Depreciation and amorti-
zation of real estate
assets................. 2,690,021 1,101,590 1,791,064 517,870 101,813
Amortization of direct
financing leases....... 554,695 202,908 377,368 91,632 1,078
----------- ----------- ----------- ---------- --------
FFO..................... $26,408,569 $11,042,307 $17,732,888 $5,355,464 $471,670
=========== =========== =========== ========== ========
</TABLE>
Liquidity and Capital Resources
During the nine months ended September 30, 1998, APF originated $189.4
million in triple-net lease and mortgage financing. The investments were funded
by equity proceeds received in offerings that totaled $233.6 million at
September 30, 1998, after offering expenses. Since inception, APF has raised
equity proceeds net of offering expenses of $557.2 million which has funded
more than $453.7 million in triple-net lease restaurant real estate and
mortgages. APF completed its most recent offering at the end of 1998 at which
time APF had an equity capitalization of approximately $750 million. The
uninvested offering proceeds will be used to invest in restaurant properties
and to originate mortgages.
APF invested $16.1 million of the offering proceeds in franchise loan
certificates in a mortgage loan securitization sponsored by an affiliate of the
Advisor. APF believes this investment represents an opportunity for APF to
achieve investment returns similar to those generated by its triple-net leased
restaurant properties. In addition, APF has pre-existing triple-net leasing
arrangements with the majority of the borrowers underlying the pool of loans.
Prior to acquiring the securitization interests, APF engaged a nationally
recognized investment banking firm to evaluate its investment in the
securitization interests and the firm provided a valuation letter to APF that
the purchase price paid by APF was consistent with the estimated value of the
cash flow expected to be generated from the securitization interests. APF
invested in securities rated BB and B as well as a non-rated class.
At September 30, 1998, APF had cash, cash equivalents and a certificate of
deposit of $90.7 million and had $28.2 million available on its $35 million
line of credit. These commitments were extended to several large operators of
national and regional restaurant chains such as Jack in the Box, RTM and Sybra,
which are large Arby's franchisees, Golden Corral and DenAmerica. APF's current
line of credit expires in July 1999 and provides financing for equipment
leases. The unsecured revolving line provides that borrowings thereunder bear
interest at the then current LIBOR plus a margin spread of 1.65%. Approximately
$27.7 million in equipment financing has been funded since inception. APF, from
time to time, uses uninvested net offering proceeds to repay a portion of or
all of the balance outstanding under the line of credit pending the investment
of such offering proceeds in restaurant properties or mortgage loans in order
to reduce APF's interest cost during such period.
APF anticipates that it will increase and renegotiate the line of credit in
the first quarter of 1999 increasing the line to approximately $250 million to
$300 million at which time it will provide equipment, triple net lease and
mortgage financing. The remaining equity financing combined with a larger
revolving line of credit is expected to provide adequate funding through 1999.
APF generated $27.0 million in operating cash flow during the nine months
ended September 30, 1998 and distributed $26.5 million to stockholders
representing a yield of 7.625%. 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.
Generally, APF's leases as of September 30, 1998 were triple-net leases and
generally contain provisions that management believes will mitigate the adverse
effect of inflation. Such provisions include clauses requiring
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<PAGE>
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 APF'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
The Year 2000 problem results from a programming convention in many computer
systems and applications that abbreviates dates by eliminating the first two
digits of the year, assuming that these two digits would always be "19". Unless
corrected, this shortcut would cause system malfunctions when the century date
occurs. On or before that date, some computer programs may misinterpret the
date January 1, 2000 as January 1, 1900. This could cause systems to
incorrectly process critical financial and operational information, or stop
processing altogether.
APF does not currently have any information technology systems. To date the
Advisor has provided all services requiring the use of information technology
systems pursuant to a management agreement with APF. The maintenance of
embedded systems, if any, at APF's restaurant properties is the responsibility
of the tenants of the properties in accordance with the terms of APF's leases.
The Advisor and its affiliates have established a team dedicated to reviewing
the internal information technology systems used in the operation of APF, and
the information technology and embedded systems and the Year 2000 compliance
plans of APF's tenants, significant suppliers, financial institutions and
transfer agent.
The information technology infrastructure of the Advisor consists of a
network of personal computers and servers that were obtained from major
suppliers. The Advisor utilizes various administrative and financial software
applications on that infrastructure to perform the business functions of APF.
The inability of the Advisor to identify and timely correct material Year 2000
deficiencies in the software and/or infrastructure could result in an
interruption in, or failure of, certain of APF's business activities or
operations. Accordingly, the Advisor has requested and is evaluating
documentation from the suppliers of the Advisor regarding the Year 2000
compliance of their products that are used in the business activities or
operations of APF. The costs expected to be incurred by the Advisor to become
Year 2000 compliant will be incurred by the Advisor.
APF has material third party relationships with its tenants, financial
institutions and transfer agent. APF 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. If any of these third parties
are unable to meet their obligations to APF because of the Year 2000
deficiencies, such a failure may have a material impact on APF. Accordingly,
the Advisor has requested and is evaluating documentation from APF's tenants,
financial institutions, and transfer agent to gauge whether they have fully
considered and investigated any potential material impact of the Year 2000
deficiencies. Therefore, the Advisor, does not, at this time, know of the
potential costs to APF of any adverse impact or effect of any Year 2000
deficiencies by these third parties.
The Advisor currently expects that all Year 2000 compliance testing and any
necessary remedial measures on the information technology systems used in the
business activities and operations of APF will be completed prior to June 30,
1999. Based on the progress the Advisor has made in identifying and addressing
APF's Year 2000 issues and the plan and timeline to complete the compliance
program, the Advisor does not foresee significant risks associated with APF's
Year 2000 compliance at this time.
APF does not believe that the acquisition of the CNL Restaurant Businesses,
including the costs of becoming Year 2000 compliant, had any significant impact
on APF's Year 2000 readiness or on its results of operations.
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Future Business Plans
Subsequent to consummating the Acquisition, APF anticipates further
increasing its line of credit to fund future growth.
Assuming the Acquisition is completed in the fourth quarter of 1999, APF
anticipates a public offering of APF Shares either contemporaneously 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. APF believes that the combination of equity financing,
conduit facilities, unsecured revolving line of credit 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-rated
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.
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APF'S BUSINESS AND THE RESTAURANT PROPERTIES
APF'S BUSINESS
General
APF is a leading provider 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 been able
to cultivate long-standing 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, Pizza Hut, Shoney's, Steak and Ale(R) Restaurant, 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
DenAmerica Corp.
Since APF's inception in 1994 through December 1998, 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 September 30, 1998 and assuming the completion of the acquisition of the
CNL Restaurant Businesses as described on page 95, APF's portfolio consisted
of investments in 816 restaurant properties, including 357 properties
represented by investments in real estate, 171 restaurant properties
represented by mortgage loans, and 288 properties represented by securitized
mortgage loans in which APF held a residual interest. APF also held title to
the equipment on approximately 3% of these restaurant properties as of
September 30, 1998. Generally, the real estate owned by APF consists of land
and buildings. Additionally, as of September 30, 1998, APF made mortgage loans
for related buildings on 44 of the 45 restaurant properties on which it holds
title to the land only.
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 41 restaurant chains and more than 90 operators of national and regional
restaurant chains in 42 states as of September 30, 1998. 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 17 years, and its current portfolio of
mortgage loans has an average remaining loan term of approximately 15 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 funds from
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 also has a strategic
alliance with CAS through which it has a right of first refusal to
provide financing for restaurant properties in connection with any merger
or acquisition with respect to which CAS is providing advisory services.
APF 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.
. Focusing on strong, recognized brand name franchises and 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 certain 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. A majority of APF's financing relationships were
either with 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 15-20 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 15-20 year base
term and bear interest at a targeted premium over the prevailing treasury
bond rate. The loans contain strict operating covenants and are fully
amortizing. The restaurant chain operator typically is required to
maintain a fixed charge coverage ratio of at least 1.20.
. 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
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acquisitions and development opportunities. This pipeline is further
enhanced by APF's strategic alliance with CAS. APF's pipeline for
restaurant property financing includes a combination of new construction,
refinancing of 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. APF's real estate investments are, as of
September 30, 1998 (assuming the acquisition of the CNL Restaurant
Businesses), comprised of 816 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 42 states as of September 30, 1998.
Restaurant Chain Diversification. APF's portfolio contains
restaurant properties operated by many different restaurant chains. As
of September 30, 1998, APF had investments in more than 41 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, Pizza Hut, Shoney's, Steak and Ale(R),
T.G.I. Friday's and Wendy's.
Restaurant Chain Operator Diversification. APF focuses its
investments in restaurant properties operated by top franchisees of
national brands in the restaurant chain industry. A majority of APF's
financing relationships were with the top five franchisees (based on
sales) or with the franchisor of a particular restaurant chain.
Investment Type Diversification. APF further diversifies its risk
profile by offering a variety of financial services to its operators of
national and regional restaurant chains including triple-net lease
financing, mortgage financing and secured equipment financing.
. Managing and Monitoring Investments. APF, through its asset management
group, actively manages the 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. At September 30, 1998, APF's
restaurant properties were approximately 96% leased.
. Maintaining a conservative capital structure. APF operates with a
moderate use of indebtedness with the objective, set by its board of
directors, of maintaining debt to total assets ratio of less than 45%.
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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. APF, when market conditions are suitable, also
intends to access capital by securitizing its mortgage loans.
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 it is positioned as one of the largest REITs in
the United States providing financing to the restaurant industry and
restaurant property services. The large capitalization of APF will permit
it to obtain capital from numerous sources at competitive rates.
. Variety of Financing Options. Currently, 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 CAS,
provides APF with a competitive advantage in the restaurant finance
business.
. Experienced Management. APF has developed a senior management team with
an average of more than 17 years of experience in developing and
operating restaurant properties and in the real estate and financial
services industry. APF believes that its management has a specialized
ability to invest in and manage restaurant real estate that will decrease
investment risk and enhance stockholders' returns.
APF'S Recent Expansion of Services
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 September 30, 1998, 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
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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 REITs that are traded on the NYSE and have an equity market
capitalization of more than $1 billion, approximately 92% 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 makes loans and securitizes them by selling them to a special
purpose entity which issues certificates representing beneficial interests in
the pool of mortgage loans. The CNL Restaurant Financial Services Group
receives from a securitization (i) the net proceeds (less a placement fee and
other offering expenses) from the sale of the certificates, (ii) 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 (iii) fees for servicing mortgage loans that have been
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 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.
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 September 30, 1998, the CNL Restaurant Financial Services Group had
made $465 million in mortgage loans on 458 restaurant properties in 37
states, had secured approximately $135 million in loan commitments and
had securitized approximately $269 million of the $465 million of
originated mortgage loans.
As consideration in its acquisition of the CNL Restaurant Businesses, APF
paid 12.3 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.
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APF also has entered into a strategic alliance with CAS, a wholly-owned
subsidiary of CNL Group, Inc., which advises operators of national and regional
restaurant chains on the merger and acquisition of restaurant businesses. Under
the terms of the agreement, APF has the right of first refusal to provide
financing for restaurant properties in connection with any merger or
acquisition with respect to which CAS is providing advisory services. APF did
not attempt to acquire CAS because the income generated by CAS does not qualify
under the gross income tests for a REIT. APF's management believes, however,
that its agreement with CAS 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.
The Restaurant Properties
General
The following table provides certain annualized information with respect to
the restaurant properties owned and leased on a triple-net basis by APF for
restaurant properties owned as of September 30, 1998.
<TABLE>
<CAPTION>
Total Number of Average Age Annualized Percent of
Restaurant Number of Restaurant Aggregate Total Total
Restaurant Chain Properties of States Properties Rental Revenue Revenue
- ---------------- --------------- --------- ------------- --------------- ----------
<S> <C> <C> <C> <C> <C>
Golden Corral........... 33 13 2.5 $ 4,816,000 11.7%
Jack in the Box......... 40 7 2.2 4,250,000 10.3
Bennigan's.............. 20 7 15.3 3,749,000 9.1
Boston Market(1)........ 30 17 2.4 3,310,000 8.0
Steak and Ale Restau-
rant................... 18 6 21.1 2,774,000 6.7
Black-eyed Pea.......... 20 7 5.8 2,177.000 5.3
Darryl's................ 15 7 17.8 2,125,000 5.2
IHOP.................... 14 7 2.4 1,892,000 4.6
Applebee's.............. 12 3 4.0 1,676,000 4.1
Pollo Tropical.......... 11 1 4.7 1,538,000 3.7
Ground Round............ 13 8 18.3 1,419,000 3.4
Arby's.................. 17 9 3.1 1,396,000 3.4
Burger King............. 9 5 4.9 1,185,000 2.9
Chevy's Fresh Mex....... 5 4 5.4 1,156,000 2.8
Tumbleweed Southwest
Mesquite Grill & Bar... 7 2 8.9 1,036,000 2.5
Sonny's Real Pit Bar-B-
Q...................... 7 1 12.1 877,000 2.1
Pizza Hut............... 44 3 15.5 858,000 2.1
Wendy's................. 8 2 2.0 596,000 1.4
Shoney's................ 4 3 1.8 514,000 1.2
Houlihan's.............. 3 1 25.0 498,000 1.2
Denny's................. 4 3 8.8 442,000 1.1
Other................... 23 11 2.5 2,943,000 7.2
--- --- ---- ----------- -----
Total................. 357 $41,227,000 100.0%
=== =========== =====
</TABLE>
- --------
(1) In October 1998, tenants of 29 Boston Market restaurant properties filed
voluntary petitions for bankruptcy under Chapter 11 of the U.S. Bankruptcy
Code. To date, the tenants have closed 13 of these restaurant properties.
APF is actively marketing these restaurant properties for release or sale.
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As of September 30, 1998, APF leased on a triple-net basis 357 restaurant
properties in 37 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 Funds as of September
30, 1998, APF would own 978 restaurant properties available for triple-net
leasing located in 45 states.
APF typically either acquires, owns and manages freestanding restaurant
properties leased to individual tenants or makes mortgage loans to operators of
national and regional restaurant chains. The restaurant properties typically
are located within intensive commercial traffic corridors near traffic
generators such as regional malls, business developments and major
thoroughfares. APF's management believes that restaurant properties with these
characteristics are desired by tenants because they offer high visibility to
passing traffic, ease of access, tenant control over the site's hours of
operation and maintenance standards and distinctive building design which
promotes greater customer identification. In addition, APF's management
believes that freestanding restaurant properties permit tenants to open new
restaurants quickly, due to the short development cycles generally associated
with such restaurant properties, and provide tenants with flexibility in
responding to changing retail trends.
The buildings on the restaurant properties owned by APF or with respect to
which APF extends mortgage loans are generally of the current design of the
restaurant chain. The restaurants are generally rectangular buildings and are
constructed from various combinations of stucco, steel, wood, brick and tile.
Buildings generally range from 1,300 to 12,700 square feet, with the larger
restaurants having a greater seating and equipment area. Building and site
preparation vary depending upon the size of the building and the site and the
area in which the restaurant is located. Buildings and site preparation costs
generally range from $250,000 to $1,250,000 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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The following table sets forth certain information regarding the geographic
diversification of APF's real estate investments (which include mortgage
financings and securitizations) by geographic region:
Regional Property Distribution
(as of September 30, 1998)
<TABLE>
<CAPTION>
Total Number of
Restaurant
Restaurant Chain Properties(1) West Central South East
- ---------------- --------------- ---- ------- ----- ----
<S> <C> <C> <C> <C> <C>
Taco Bell............................. 84 0 25 6 53
Burger King........................... 74 4 8 26 36
Applebee's............................ 69 10 0 38 21
Wendy's............................... 59 3 0 24 32
T.G.I. Friday's....................... 49 20 8 9 12
Pizza Hut............................. 46 0 0 0 46
Bennigan's............................ 42 0 15 19 8
Jack in the Box....................... 40 20 20 0 0
Papa John's........................... 39 1 0 21 17
Golden Corral......................... 35 0 17 12 6
Boston Market......................... 30 6 11 2 11
Steak and Ale Restaurant.............. 24 0 8 13 3
Arby's................................ 21 3 0 11 7
Black-eyed Pea........................ 20 7 11 1 1
Ruby Tuesday.......................... 20 7 11 0 2
Denny's............................... 16 1 3 11 1
Darryl's.............................. 15 0 0 13 2
Sonny's Real Pit Bar-B-Q.............. 15 0 0 15 0
IHOP.................................. 14 2 8 3 1
Ground Round.......................... 13 0 3 0 10
Fazoli's.............................. 12 0 0 12 0
KFC................................... 11 0 0 10 1
Shoney's.............................. 11 3 0 8 0
Pollo Tropical........................ 10 0 0 10 0
Tumbleweed Southwest Mesquite Grill &
Bar ................................. 7 0 1 6 0
Del Taco.............................. 6 6 0 0 0
Popeyes............................... 6 0 0 6 0
Chevy's Fresh Mex..................... 5 2 1 0 2
Houlihan's............................ 4 0 1 0 3
Other................................. 19 0 3 11 5
--- --- --- --- ---
Total............................... 816 95 154 287 280
=== === === === ===
</TABLE>
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 8.2 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.
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In addition to acquiring restaurant properties, APF also provides mortgage
loans to tenants. 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. Since APF's inception through September 30, 1998
(assuming the acquisition of the CNL Restaurant Businesses), this group
originated, for APF or certain affiliates, a total of $1.2 billion in
triple net-leases and mortgage loans in the restaurant chain industry.
The total volume of investments by APF has increased from $146 million in
1995 to $254 million in 1998. In analyzing potential restaurant property
acquisitions and investments, APF carefully underwrites each aspect of
the transaction, including the tenant, 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 certain 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 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 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.
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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 September 30, 1998, the average remaining
initial lease term with respect to APF's 357 restaurant properties was
approximately 17 years. Leases accounting for 95% of annualized base rent for
restaurant properties owned as of September 30, 1998, have initial lease terms
extending until at least December 31, 2009.
The following table shows the number of leases in APF's restaurant property
portfolio which expire each calendar year through the year 2009, as well as
the number of leases which expire after December 31, 2009. 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>
1999................................................. -- $ -- -- %
2000................................................. -- -- --
2001................................................. -- -- --
2002................................................. 1 134,000 0.3
2003................................................. -- -- --
2004................................................. -- -- --
2005................................................. -- -- --
2006................................................. 1 109,000 0.3
2007................................................. -- -- --
2008................................................. 2 200,000 0.5
2009................................................. 1 95,000 0.2
Thereafter........................................... 337 39,555,000 98.7
--- ----------- -----
Totals(1).......................................... 342 $40,093,000 100.0%
=== =========== =====
</TABLE>
- --------
(1) Excludes the leases of 15 restaurant properties with aggregate base rental
income of $1,608,000, including 13 Boston Market restaurant properties,
which have been terminated. APF is actively marketing the restaurant
properties for re-lease or sale.
As of September 30, 1998, leases in APF's restaurant property portfolio
representing approximately 18% of base rent include periodic contractual
increases in base rent only; leases representing approximately 16% of base
rent include percentage rent provisions only; and leases representing
approximately 65% of base rent include both contractual increases in base rent
and percentage rent provisions. The contractual increases in base
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rent and the percentage rent formulas are generally tied to increases in
certain 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 5% 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
nine months ended September 30, 1998, APF recognized percentage rent of $46,151
(approximately 0.2% of total revenues).
Substantially all of 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. The remainder of APF's
leases are on terms which management believes are substantially the same as
those of its triple-net leases. 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 funds from operations or borrowings.
Lease provisions relating to casualty loss and condemnation vary among APF's
leases. The leases on restaurant properties generally obligate the tenant to
repair and restore the restaurant property or to substitute another restaurant
property for the damaged or condemned restaurant property. Under the leases of
the remaining restaurant properties, APF generally is required to repair or
restore a restaurant property in the event of casualty loss or condemnation,
although it is entitled to casualty insurance proceeds, including proceeds, if
any, for loss of rent, or condemnation proceeds in such circumstances. To the
extent that the tenant may abate its rent payments pending the repair or
restoration of a restaurant property and such abatement is not offset by
insurance proceeds, APF's rental income may be adversely affected. In a number
of APF's leases, the tenant may terminate its lease upon casualty or
condemnation. In substantially all of these leases, the tenant's right to
terminate the lease is conditioned on one or more of the following factors: (i)
the damage or the taking being of a material nature; (ii) 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 (iii) the period of time
necessary to repair the premises exceeding a specified number of months.
A substantial number of APF's leases include purchase options in favor of
the tenant, generally at no less than fair market value, or a right of first
refusal if APF should seek to sell a restaurant property. Under certain
circumstances, a tenant generally may assign its lease or sublet the property
without APF's approval, although the tenant typically remains liable under the
lease and the guarantor, if any, typically remains liable under its guaranty
subsequent to assignment or sublease. Under certain of the leases, the tenant
has a right, under specified circumstances, to substitute a comparable property
for a property leased from APF.
Mortgage Loans. APF provides mortgage loans to operators of national and
regional restaurant chains, or their affiliates, to enable them to acquire
restaurant properties. APF's management believes that the criteria for
investing in the mortgage loans are substantially the same as those involved in
APF's investments in its triple-net-lease restaurant properties. Therefore, APF
uses the same underwriting criteria as described above in "--Evaluation of
Investment Opportunities."
Generally, APF's management believes the rate of return and terms of these
transactions are similar to those of the leases. The borrower is responsible
for all of the expenses of owning the building and
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<PAGE>
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 annualized information regarding mortgage
loans made by APF on restaurant properties in which APF owned an interest as of
September 30, 1998 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 revenue per
restaurant chain and the outstanding balance of mortgage loans per restaurant
chain.
<TABLE>
<CAPTION>
Annualized
Aggregate Percent of Aggregate Percent of
Number of Total Total Outstanding Outstanding
Restaurant Chain Properties Revenue Revenue Balance Balance
- ---------------- ---------- ----------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Applebee's.......... 53 $5,342,000 31.7% $ 65,909,000 34.9%
T.G.I. Friday's..... 12 2,336,000 13.8% 23,111,000 12.2%
Burger King......... 29 1,888,000 11.2% 22,570,000 11.9%
Pizza Hut........... 47 1,764,000 10.5% 16,440,000 8.7%
Taco Bell........... 27 1,442,000 8.6% 17,988,000 9.5%
Denny's............. 10 1,100,000 6.5% 11,243,000 6.0%
Shoney's............ 7 630,000 3.7% 6,138,000 3.3%
Fazoli's............ 7 606,000 3.6% 6,283,000 3.3%
Ruby Tuesday........ 5 454,000 2.7% 4,721,000 2.5%
Golden Corral....... 2 337,000 2.0% 3,881,000 2.1%
Del Taco............ 4 311,000 1.8% 3,300,000 1.8%
Houlihan's.......... 1 236,000 1.4% 2,360,000 1.2%
Captain D's......... 2 117,000 0.7% 1,343,000 0.7%
Papa John's......... 6 116,000 0.7% 1,337,000 0.7%
Popeyes............. 2 73,000 0.4% 805,000 0.4%
Wendy's............. 1 70,000 0.4% 806,000 0.4%
Arby's.............. 1 58,000 0.3% 760,000 0.4%
--- ----------- ----- ------------ -----
Total............. 216 $16,888,000 100.0% $188,995,000 100.0%
=== =========== ===== ============ =====
</TABLE>
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<PAGE>
The following table shows, for restaurant properties in which APF owned an
interest, as of September 30, 1998 and assuming the acquisition of the CNL
Restaurant Businesses, information by restaurant chain for mortgage loans that
APF has securitized.
<TABLE>
<CAPTION>
Aggregate Percent of
Number of Outstanding Outstanding
Restaurant Chain Properties Balance(1) Balance
- ---------------- ---------- ------------ -----------
<S> <C> <C> <C>
T.G.I. Friday's............................ 35 $ 54,289,000 20.2%
Wendy's.................................... 50 48,695,000 18.1%
Bennigan's................................. 22 36,950,000 13.8%
Taco Bell.................................. 56 34,086,000 12.7%
Burger King................................ 36 32,334,000 12.0%
Ruby Tuesday............................... 13 17,479,000 6.5%
Steak and Ale Restaurant................... 6 8,650,000 3.2%
KFC........................................ 10 8,390,000 3.1%
Applebee's................................. 4 6,066,000 2.3%
Fazoli's................................... 5 5,244,000 2.0%
Papa John's................................ 33 4,968,000 1.8%
Sonny's Real Pit Bar-B-Q................... 8 4,331,000 1.6%
Morton's of Chicago........................ 2 2,278,000 0.8%
Denny's.................................... 2 1,624,000 0.6%
Arby's..................................... 3 1,553,000 0.6%
Del Taco................................... 2 1,030,000 0.4%
Popeyes.................................... 1 673,000 0.3%
--- ------------ -----
Total.................................... 288 $268,640,000 100.0%
=== ============ =====
</TABLE>
- --------
(1) Of the total securitized portfolio of $268.6 million, APF has retained a
subordinated interest in $23.4 million, which, assuming no prepayment of
default by the borrower, will generate on an annualized basis approximately
$4.0 million in interest income and servicing fees.
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.
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<PAGE>
The food service industry is typically divided into three major food
segments: commercial, institutional and military. The commercial food service
sector includes full-service and fast-food restaurants, cafeteria/buffet
restaurants, social caterers and ice cream/yogurt retail stores. Within the
restaurant industry, the fast-food group is typically defined as those
restaurants perceived by consumers as fast-food or take-out establishments
without table service, specializing in pizza, chicken, hamburgers and similar
food items. Full-service restaurants include those in the family, steak and
casual dining sections that have table service and generally have a broader
selection of menu items with longer preparation times than do fast-food
restaurants. Although these segments can be further differentiated by price, it
is consumer perception, as well as average meal price, that influences how
individual restaurant chains are categorized.
APF's business is focused exclusively on the restaurant industry. The
restaurant industry employs more people and has more locations than any other
retail industry in the United States. According to Nation's Restaurant News,
there were nearly 799,000 restaurants in the United States as of December 31,
1997. According to NPD Recount, a national consulting group which specializes
in the restaurant industry, restaurant chains having three or more properties
accounted for approximately 47% of all restaurants in the United States in
1997. The majority of these properties are fast food restaurants, with others
generally in the full service segment. Of the 210,000 chain restaurants having
an identified restaurant concept as of December 31, 1997, approximately 117,500
were within the 100 largest restaurant chains. Each of these restaurant chains
had 1997 projected total system-wide sales exceeding $182 million. According to
Nation's Restaurant News, the top 200 restaurant chains represented 42% of
restaurant properties. According to the National Restaurant Association, fast-
food restaurants experienced a 5.6% increase in overall sales and full-service
restaurants experienced a 5.3% increase in 1998.
Sales in the restaurant industry have increased from $173.7 billion in 1985
to $354 billion as projected for 1999. The top 200 franchisees of national
restaurant chains based on sales volume (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.
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<PAGE>
Restaurant Finance Industry
The restaurant finance industry has changed significantly in the past 20
years. In many respects this change has coincided with the maturation of the
franchising business in the restaurant industry and the increasing use of debt
securitization in the capital markets. Restaurants were viewed as high-risk
investments by lenders. As a result, financing options were limited to local
banks or loans or equity investments from friends and family. The development
of marketing, brand identification and delivery systems in major chain
restaurants has dramatically reduced the failure rate of restaurants over the
last two decades and made them more attractive credit risks.
In the early 1990's, companies began to recognize the strengthening profile
of franchisees and franchise systems. Investment vehicles were designed to pool
and securitize restaurant loans. This securitization process has increased the
capital available to franchisees, especially smaller franchisees, and has
fueled much of the consolidation in the restaurant industry over the past three
years. As a result, a number of new competitors have entered the restaurant
finance arena.
Over the past six years, the total volume of commercial mortgage backed
securities has grown to more than $290 billion and is the fastest-growing
source of capital in the real estate market. Upon acquiring the CNL Restaurant
Financial Services Group, APF increased its origination of mortgage loans, will
securitize those loans, when market conditions are suitable, and will retain
the servicing rights. APF's management believes that the economics of the
securitizations will permit APF to focus on and capitalize on financing
opportunities existing in a low interest rate environment. However, as interest
rates rise, restaurant chain operators will tend to prefer triple-net lease
financing. The ability to originate both triple-net lease and debt financing
allows APF to provide restaurant chain operators with flexible financing
options in a changing economic environment.
Environmental Matters
APF will undertake a third-party Phase I investigation of potential
environmental risks when evaluating an acquisition. A "Phase I investigation"
is an investigation for the presence or likely presence of hazardous substances
or petroleum products under conditions which indicate an existing release, a
post release or a material threat of a release. A Phase I investigation does
not typically include any sampling. Where warranted, further assessments are
performed by third-party environmental consulting and engineering firms. APF
may acquire a restaurant property with environmental contamination, subject to
a determination of the level of risk and potential cost of remediation. APF
generally will require restaurant property tenants to fully indemnify it
against any environmental problem or condition existing as of the date of
purchase and will obtain environmental insurance for any contaminations on
restaurant properties. In some instances, APF will be the assignee of or
successor to the buyer's indemnification rights. Additionally, APF will
generally structure its leases to require the tenant to assume all
responsibility for environmental compliance or environmental remediation and to
provide that non-compliance with environmental laws be deemed a lease default.
Insurance
Under their leases, APF's tenants 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.
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<PAGE>
Competition
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.
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 among other things, regulating credit granting
activities, establishing maximum interest rates and finance charges, requiring
disclosures to customers, governing secured transactions and setting
collection, repossession, claims handling procedures and other trade practices.
In addition, certain states may have enacted legislation requiring the
licensing of mortgage bankers or other lenders, and these requirements may
affect APF's ability to effectuate its mortgage loans and secured equipment
leases. Whether APF can operate in these or other jurisdictions may be
dependent upon a finding by the appropriate authority in the jurisdiction of
financial responsibility, character and fitness of APF. APF may determine not
to make mortgage loans or enter into secured equipment leases in any
jurisdiction in which it believes APF has not complied in all material respects
with applicable requirements.
Franchise Regulation
Many states regulate the franchise or license relationship between a
tenant/franchisee and a restaurant chain. APF will not be an affiliate of any
restaurant chain, and is not currently aware of any states in which the
relationship between APF as lessor and the tenant will be subjected to those
regulations, but it will comply with 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
APF is not a party to any material legal proceedings.
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<PAGE>
BUSINESS OF THE FUNDS
The following discussion describes the current business of the Funds, the
methods by which the Funds' evaluate and acquire the restaurant properties and
the terms upon which the Funds' restaurant properties are leased. As of
September 30, 1998, all of the proceeds raised by the Funds in their respective
offerings of Units have been invested in restaurant properties or other
investments permitted by the terms of their partnership agreements. At this
time, we do not expect to reinvest the proceeds from the sale of any restaurant
properties in new restaurant properties or other investments. Instead, we
expect to distribute such proceeds to the Limited Partners in accordance with
the terms of each Fund's partnership agreement.
General
Between 1985 and 1995, each 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 Funds are leased under arrangements requiring base annual rent
equal to a specified percentage of the 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 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 Funds. For instance, the 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 Funds, the Funds' leases provide that a minimum level
of rent is payable regardless of the amount of gross sales at a particular
restaurant property. The 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 Funds impose no restrictions on the geographic area or areas
within the United States in which restaurant properties acquired by any
particular 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 Funds are located throughout the United States. While the Funds may
acquire restaurant properties in both fee and by leasehold, the Funds mostly
hold restaurant properties in fee.
We believe that freestanding, triple-net leased restaurant properties of the
type in which the Funds have invested are attractive to tenants because
freestanding properties typically offer high visibility to passing traffic,
108
<PAGE>
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.
Management Services
Upon APF's acquisition of the Advisor, APF assumed the obligations of the
Advisor to provide management services relating to the Funds and their
restaurant properties pursuant to the terms of the management agreement that is
currently in place between each Fund and the Advisor. In this section, we will
describe the services historically provided to the Funds as being provided by
the Advisor.
The Advisor is responsible for assisting the 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
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 Fund which, generally, is an annual fee equal to: (a) 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 (b) for CNL Income
Funds IV, Ltd. through XVIII, Ltd., 1% of the sum of gross rental revenues
(excluding noncash lease accounting adjustments) that the 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 Funds the management fee is subordinated to the Limited
Partners receipt of their preferred return. The management agreement continues
until a 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 Funds purchase and lease restaurant properties based principally on an
examination and evaluation by the Advisor of the potential value of the site,
the financial condition and business history of the proposed lessee, the
demographics of the area in which the restaurant property is located or to be
located, the proposed purchase price and proposed lease terms, geographic and
market diversification, and potential sales expected to be generated by the
restaurant. In addition, the potential lessee must meet at least the minimum
standards established by a restaurant chain for its operators. The Advisor also
performs an independent break-even analysis of the potential profitability of a
restaurant property using historical data and other data developed by the
Advisor and provided by the restaurant chains.
In each restaurant property acquisition, the Advisor negotiates the land and
building lease agreement with the lessee. In certain instances, the Advisor
negotiates an assignment of an existing lease if 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 Fund. In
such cases, the terms of the lease may vary substantially from the 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 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
109
<PAGE>
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 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 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 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
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 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
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.
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<PAGE>
. The initial lease term typically was at least 15 to 20 years.
. In evaluating prospective tenants, the Advisor examined, among other
factors, the lessee's ranking in its market segment, trends in sales in
each restaurant chain, overall changes in consumer preferences, and the
lessee's ability to adapt to changes in market and competitive
conditions, the lessee's historical financial performance, and its
current financial condition.
In general, a 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 September 30, 1998, the Funds owned, in the aggregate, 621
restaurant properties, all of which are currently triple-net leased. The
following table provides certain annualized information with respect to the
Funds' restaurant properties owned as of September 30, 1998.
<TABLE>
<CAPTION>
Number of
States in
Total which Average
Number of Restaurant Age of Aggregate Percent
Restaurant Properties Restaurant Total of Total
Fund Properties(1) are Located Properties Revenue Revenue
- ---- ------------- ----------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C>
CNL Income Fund, Ltd.... 17 11 13.4 $1,102,000 2.1%
CNL Income Fund II,
Ltd.................... 38 18 12.2 2,200,000 4.2
CNL Income Fund III,
Ltd.................... 28 17 10.9 1,858,000 3.5
CNL Income Fund IV,
Ltd.................... 37 15 11.2 2,467,000 4.7
CNL Income Fund V,
Ltd.................... 25 13 12.2 1,554,000 3.0
CNL Income Fund VI,
Ltd.................... 42 17 10.6 3,301,000 6.3
CNL Income Fund VII,
Ltd.................... 40 13 10.3 2,736,000 5.2
CNL Income Fund VIII,
Ltd.................... 36 12 9.9 3,300,000 6.3
CNL Income Fund IX,
Ltd.................... 41 17 10.1 3,284,000 6.2
CNL Income Fund X,
Ltd.................... 48 17 10.2 3,525,000 6.7
CNL Income Fund XI,
Ltd.................... 39 20 9.2 3,750,000 7.1
CNL Income Fund XII,
Ltd.................... 49 15 7.3 4,183,000 8.0
CNL Income Fund XIII,
Ltd.................... 47 17 7.2 3,172,000 6.0
CNL Income Fund XIV,
Ltd.................... 56 16 5.7 3,699,000 7.0
CNL Income Fund XV,
Ltd.................... 50 18 6.5 3,238,000 6.2
CNL Income Fund XVI,
Ltd.................... 44 18 7.5 3,621,000 6.9
CNL Income Fund XVII,
Ltd.................... 28 12 4.5 2,649,000 5.0
CNL Income Fund XVIII,
Ltd.................... 24 14 5.0 2,951,000 5.6
</TABLE>
- --------
(1) The total number of properties for each Fund includes wholly-owned
properties and properties held in joint ventures and as tenants in common
with a third party or another Fund.
Land. Lot sizes generally range from 25,000 to 65,000 square feet depending
upon building size and local demographic factors. Restaurants located on land
within shopping centers will be freestanding and may be located on smaller
parcels if sufficient common parking is available. Restaurant properties
purchased by a Fund are in locations zoned for commercial use which were
reviewed for beneficial traffic patterns and volume of traffic. Generally, the
cost of the underlying land ranges from $150,000 to $500,000, 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 Funds are one of a restaurant chain's approved
designs. Building and site preparation costs have varied
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depending upon the size of the building and the site and the area in which the
restaurant property is located. Building and site preparation costs ranged from
$250,000 to $1,250,000 for each restaurant property.
Generally, the restaurant properties acquired by the Funds consist of both
land and building, although in a number of cases the 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 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.
The following table shows the distribution of restaurant properties of the
Funds by restaurant chain as of September 30, 1998.
<TABLE>
<CAPTION>
CNL Income Fund(1)
----------------------------------------------------------------------------
I II III IV V VI VII VIII IX X XI XII XIII XIV XV XVI XVII XVIII
--- --- --- --- --- --- --- ---- --- --- --- --- ---- --- --- --- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Arby's.................. -- 1 -- 2 2 1 -- -- -- -- -- 1 1 -- -- 2 3 2
Boston Market........... -- 1 -- 1 1 -- 1 -- -- 1 -- -- -- 4 4 5 4 4
Burger King............. 1 1 1 -- 2 5 10 13 18 12 12 2 5 1 -- -- 4 1
Checkers................ -- 2 -- 1 -- -- 1 -- -- -- -- -- 8 15 14 6 -- --
Chevy's Fresh Mex....... 1 1 1 -- 1 1 1 -- -- 1 -- -- 1 -- -- -- -- 1
Denny's................. -- 3 2 4 3 2 -- 1 4 3 7 9 3 6 2 9 2 --
Golden Corral........... 5 6 6 3 2 5 5 5 2 4 3 2 3 4 5 6 4 5
Hardee's................ -- -- -- -- 1 2 6 4 6 7 5 11 11 6 7 -- -- --
IHOP.................... -- 2 2 1 1 5 -- -- 1 -- -- -- -- -- -- 2 -- 2
Jack in the Box......... -- 1 -- 1 -- 1 3 2 -- 5 8 10 5 6 4 5 4 4
KFC..................... -- 3 4 1 -- 3 2 2 -- -- 1 1 -- -- -- 1 -- --
Long John Silver's...... -- -- -- -- -- -- -- -- -- 2 -- 9 8 9 9 6 -- --
Perkins................. -- -- 1 -- -- -- -- 1 2 3 -- -- -- -- -- -- -- --
Pizza Hut............... 2 5 4 5 1 -- -- -- -- 6 -- -- -- -- -- -- -- --
Popeyes................. 1 4 1 -- -- 4 5 1 -- -- -- -- -- -- -- -- 1 --
Shoney's................ -- -- -- 6 -- 1 2 5 6 4 -- 2 -- -- -- 1 -- --
Taco Bell............... -- -- 2 1 2 1 1 -- -- -- -- -- -- 2 1 -- 1 --
Wendy's................. 5 2 -- 4 1 -- -- 1 -- -- -- -- 1 -- 1 1 2 1
Other(2)................ 2 6 4 7 8 10 3 11 2 -- 3 2 1 3 3 -- 3 4
</TABLE>
- --------
(1) The number of properties for each Fund includes wholly-owned properties and
properties held in joint ventures and as tenants in common with a third
party or another Fund.
(2) This category encompasses all restaurant chains that comprise less than 1%
of the total of all restaurant properties of all of the Funds.
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 Funds with
regard to a restaurant property may vary from those described below. The
Advisor in all cases used its best efforts to obtain terms at least as
favorable as those described below. If we determined, based on the
recommendation of the Advisor, that the terms of an acquisition and lease of a
restaurant property, taken as a whole, were favorable to the Fund, we may have,
in our sole discretion, caused a Fund to enter into a lease with terms which
are substantially different than the terms described below. In making such
determination, we considered such factors as the type and location of the
restaurant, the creditworthiness of the lessee, the purchase price of the
restaurant property, the prior performance of the lessee, and the prior
business experience of the principals of the Advisor or its affiliates, with a
restaurant chain or restaurant operator or our experience with such restaurant
chain or restaurant operator.
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<PAGE>
General. In general, the leases are triple-net leases, which means that the
lessees are required to pay all repairs, maintenance, property taxes, and
insurance. The lessees also are required to pay for utilities and the cost of
any renovations permitted under the leases. A 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 Fund, will be the lessor,
and all references in this section to the Fund as lessor therefore should be
read accordingly. See "--Joint Venture/Co-Tenancy Arrangements."
Term of Leases. Each 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 Fund, together with any improvements made to the
restaurant property during the term of the lease.
As of September 30, 1998, the average remaining initial lease term with
respect to the Funds' restaurant properties was approximately 13 years. Leases
accounting for approximately 65% of annualized base rent for the nine months
ended September 30, 1998, have initial lease terms extending until at least
December 31, 2009.
The following table shows the aggregate number of leases in the Funds'
restaurant property portfolio which expire each calendar year through the year
2009, as well as the number of leases which expire after December 31, 2009. 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>
1999................................................. 2 $ 99,000 0.2%
2000................................................. 4 142,000 0.3
2001................................................. 7 532,000 1.0
2002................................................. 15 1,062,000 2.0
2003................................................. 4 278,000 0.5
2004................................................. 7 980,000 1.8
2005................................................. 22 2,629,000 5.0
2006................................................. 30 3,058,000 5.8
2007................................................. 32 2,711,000 5.1
2008................................................. 35 2,729,000 5.2
2009................................................. 29 3,212,000 6.1
Thereafter........................................... 402 35,354,000 67.0
--- ----------- -----
Totals(1).......................................... 589 $52,786,000 100.0%
=== =========== =====
</TABLE>
- --------
(1) The leases for 32 properties with aggregate base rental income of
approximately $1,640,000 have expired or been terminated, including six
Boston Market restaurant properties and 16 Long John Silver restaurant
properties. We are actively marketing these properties for re-lease or
sale.
Computation of Lease Payments. During the initial term of the lease, the
lessee pays the Fund, as lessor, minimum annual rent equal to a specified
percentage of the 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 Fund's costs of purchasing the
restaurant property included the purchase price of the land, including all
fees, costs, and expenses paid by the Fund in connection with its
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<PAGE>
purchase of the land, and all fees, costs, and expenses disbursed by the Fund
for construction of restaurant improvements.
In addition to minimum annual rent, in many cases, the lessee pays the 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 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 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 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 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 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 Fund's consent but must provide
the 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 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 (i) the restaurant
property's appraised value at the time of the lessee's purchase, or (ii) a
specified amount, generally equal to the 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 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 Fund the opportunity to exchange the restaurant property for another
restaurant property (the "Substituted 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.
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<PAGE>
Generally, if the Fund approves the substitution, a closing shall take place
within 60 days following the 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 Fund does not approve a proposed substitution, the
tenant has the right to submit alternate restaurant properties to the Fund for
the Fund's approval. If no restaurant properties are accepted by the 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 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 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
Fund and terminate the lease.
Joint Venture/Co-Tenancy Arrangements
Certain Funds have entered into joint ventures or co-tenancy arrangements to
own and operate a restaurant property with unaffiliated persons or entities,
either alone or together with another Fund, provided that the Fund, alone or
together with another Fund, acquires a controlling equity interest in such
joint venture or co-tenancy property and possesses the power to direct or cause
the direction of the management and policies of such joint venture or co-
tenancy property.
Under the terms of each joint venture agreement, the 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 the Fund. Joint ventures entered into to purchase
and hold a restaurant property for investment generally have an initial term of
15 to 20 years (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 Fund, in the event that one party
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<PAGE>
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.
Financing
No Fund nor any general partnership or joint venture in which a Fund is a
partner or joint venturer has acquired restaurant properties by incurring
indebtedness. Generally, the partnership agreements governing each Fund do not
permit the Fund to borrow to make investments. Subject to certain restrictions,
however, the Funds may borrow funds but are not permitted to encumber any of
the restaurant properties in connection with any such borrowing. The Funds do
not borrow for the purpose of returning capital to you or under arrangements
that would make you liable to creditors of a Fund. We have limited each 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, a 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 a Fund.
Sale of Restaurant Properties
The Funds generally hold their restaurant properties until we determine
either that their sale or other disposition is advantageous in view of each
Fund's investment objectives, or that such objectives will not be met.
Generally, we intend to sell each 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 considerations. The terms of certain leases, however, may require a
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 Funds--Description of Leases--Right of Lessee to
Purchase." No 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.
In connection with any sale of a restaurant property, we do not anticipate
and, in most cases, the Funds are prohibited from, making reinvestment of the
net sales proceeds in additional restaurant properties. 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 Fund's partnership agreement. If we determine, however,
that it is in the interest of a 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 Funds, purchase
money security interests may be taken by the 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
a Fund's restaurant property, the 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.
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Competition
The competitive environment in which the Funds operate is substantially
similar to that of the APF, as described above on page 107.
117
<PAGE>
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of certain investment, financing and other
policies of APF and of the 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
Funds, the policies have been set according to the investment objectives set
forth in the partnership agreement governing each Fund. The description
included here regarding the Funds is general to all the Funds.
APF
Investment Policies
Real Estate Investments. APF seeks to acquire and manage a diversified
portfolio of real estate and other assets. In its real estate activities, APF
seeks to structure triple-net leases and to acquire properties subject to
leases that generally provide: (i) that the tenant is responsible for all
operating and capital expenses, except for certain environmental and other
contingent liabilities, (ii) for contractual rent increases over the term of
the lease and (iii) 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 discussion of the evaluation of 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. The Company 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.
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.
Lending. APF provides mortgages to operators of national and regional
restaurant chains, or their affiliates, to enable them to acquire the
restaurant property. APF also securitizes the mortgage loans by
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<PAGE>
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. APF
also provides, on a limited basis, secured equipment leasing to operators of
national and regional restaurant chains.
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 Amended and
Restated 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 .
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.
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The Funds
Investment Policies
Real Estate Investments. The Funds' primary investment activity is to
acquire and manage a diversified portfolio of real estate assets. In their real
estate activities, the Funds seek to structure triple-net leases and to acquire
properties subject to leases that generally provide: (i) that the tenant is
responsible for all operating and capital expenses, except for certain
environmental and other contingent liabilities, (ii) for contractual rent
increases over the term of the lease and (iii) for primary lease terms of 15 to
20 years, with two to five renewal options of five years each. While the Funds
generally hold their restaurant properties for long-term investment, a 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 Fund according to the terms of the
partnership agreements governing such Fund. The Funds are finite term entities
which are structured to dissolve when the assets of the Funds are liquidated,
or after approximately 35 years. For a discussion of the evaluation and
selection of restaurant properties, see "Business of the Funds--Site Selection
and Acquisition of Restaurant Properties."
Joint Ventures/Co-Tenancy Arrangements. Certain of the Funds may enter into
joint venture or co-tenancy arrangements and other participations with others
for the purpose of obtaining an equity interest in a particular property or
properties in accordance with the 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 Fund's
portfolio.
Financing
The Funds are generally prohibited from or restricted in the amount and
nature of borrowings. Additionally, none of the 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......... 51 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 since
1995. Mr. Seneff also served as Chief Executive Officer of APF from May 1994 to
1999. Mr. Seneff has served as Chairman of the Board, Chief Executive
Officer and a director of CNL Hospitality Properties, Inc. since 1996 and of
CNL Hospitality Advisors, Inc. since January 1997. Mr. Seneff has also served
as Chairman of the Board and Chief Executive Officer and a director of CNL
Health Care Properties, Inc. and CNL Health Care Advisors, Inc. since 1997. 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 and Chief
Executive Officer since its formation in 1980. Mr. Seneff has been Chairman of
the Board of Directors and Chief Executive Officer of CNL Securities Corp.
since its formation in 1979. Mr. Seneff also has held the position of Chairman
of the Board of Directors, Chief Executive Officer, President and director of
CNL Management Company, a registered investment advisor, since its formation in
1976, has served as Chief Executive Officer, Chairman of the Board and a
director of CNL Investment Company, Chief Executive Officer and Chairman of the
Board of Directors of Commercial Net Lease Realty, Inc., a publicly-traded
REIT, listed on the NYSE, since 1992, Chief Executive Officer and Chairman of
the Board of Directors of CNL Realty Advisors, Inc. from its inception in 1991
through 1997, at which time such company merged with Commercial Net Lease
Realty, Inc., and has held the position of Chief Executive Officer, Chairman of
the Board and a director of CNL Institutional Advisors, Inc., a registered
investment advisor, since its inception in 1990. Mr. Seneff previously served
on the Florida State Commission on Ethics and is a former member and past
Chairman of the State of Florida Investment Advisory Council, which advises the
Florida Board of Administration investments for various Florida employee
retirement funds. The Florida Board of Administration, Florida's principal
investment advisory and money management agency, oversees the investment of
more than $60 billion of retirement funds. Since 1971, Mr. Seneff has been
active in the acquisition, development, and management of real estate projects
and, directly or through an affiliated entity, has served as a general partner
or joint venturer in over 100 real estate ventures involved in the financing,
acquisition, construction, and rental of restaurants, office buildings,
apartment complexes, hotels, and other real estate. Included in these real
estate ventures are approximately 65 privately offered real estate limited
partnerships with investment objectives similar to one or more of APF's
investment objectives, in which Mr. Seneff, directly or through an affiliated
entity, serves or has served as a general partner. Mr. Seneff is also a member
of the board of directors of First Union Bank of Florida, N.A. 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 as President of APF from May 1994 to
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February 1999. Mr. Bourne served as President of the Advisor from March 1994
through 1999. Mr. Bourne also has served as President and a director of
CNL Hospitality Properties, Inc. since June 1996 and of CNL Hospitality
Advisors, Inc. since January 1997. Mr. Bourne has also served as President and
director of CNL Health Care Properties, Inc. since December 1997 and CNL Health
Care Advisors, Inc. since July 1997. Mr. Bourne is President and Treasurer of
CNL Group, Inc., President, Treasurer, a director, and a registered principal
of CNL Securities Corp., President, Treasurer, a director and a registered
principal of CNL Investment Company, and Chief Investment Officer, a director
and Treasurer of CNL Institutional Advisors, Inc., a registered investment
advisor. Mr. Bourne served as President of CNL Institutional Advisors, Inc.
from the date of its inception through June 30, 1997. Mr. Bourne served as
President and a director from July 1992 to February 1996, served as Secretary
and Treasurer from February 1996 through December 1997, and has served as Vice
Chairman of the Board of Directors since February 1996, of Commercial Net Lease
Realty, Inc. In addition, Mr. Bourne served as President of CNL Realty
Advisors, Inc. from May 1992 to February 1996, and served as a director of CNL
Realty Advisors, Inc. 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. Upon graduation from
Florida State University in 1970, where he received a Bachelor of Science
degree in Accounting, with honors, Mr. Bourne worked as a certified public
accountant and, from September 1971 through December 1978 was employed by
Coopers & Lybrand, Certified Public Accountants, where he held the position of
tax manager beginning in 1975. From January 1979 until June 1982, Mr. Bourne
was a partner in the accounting firm of Cross & Bourne and from July 1982
through January 1987 he was a partner in the accounting firm of Bourne & Rose,
P.A., Certified Public Accountants. Mr. Bourne, who joined CNL Securities Corp.
in 1979, has participated as a general partner or joint venturer in over 100
real estate ventures involved in the financing, acquisition, construction, and
rental of restaurants, office buildings, apartment complexes, hotels, and other
real estate. Included in these real estate ventures are approximately 64
privately offered real estate limited partnerships with investment objectives
similar to one or more of APF's investment objectives, in which Mr. Bourne,
directly or through an affiliated entity, serves or has served as a general
partner. Mr. Bourne oversaw the acquisition and the management of over 1,500
properties located across 47 states with a total value in excess of $2 billion.
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.
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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., mostly
recently as Chairman of Merrill Lynch's Private Advisory Services until March
1997. 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 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.
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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., 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.
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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 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 paid by APF to the Chief Executive Officer for services rendered
in all capacities to APF during the years ended December 31, 1998, 1997 and
1996. No executive officer of APF received a total annual salary and bonus in
excess of $100,000 from APF during the year ended December 31, 1998. During
this three year period, APF's employees and executive officers were also
employees and executive officers of the Advisor and received compensation from
the Advisor in part for services in such capacities.
<TABLE>
<CAPTION>
Annual
Compensation
------------
Name and Principal Position Year Salary Bonus
--------------------------- ---- ------ -----
<S> <C> <C> <C>
James M. Seneff, Jr...................................... 1998 $ 0 $ 0
Chief Executive Officer and 1997 $0 $0
Chairman of the Board 1996 $0 $0
</TABLE>
- --------
(1) Mr. Seneff served as Chief Executive Officer until , 1999 when APF
acquired the CNL Restaurant Businesses.
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To date, the Company 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, Michael I. Wood, Timothy J. Neville 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.
Option and Restricted Share Plans
At its 1999 Annual Meeting scheduled for May 13, 1999, APF's Board of
Directors has submitted the 1999 Performance Incentive Plan (the "Plan") to the
stockholders for approval. The board believes that the Plan is in the best
interest of APF and will enable it to attract and retain highly qualified
executive officers, directors and employees.
The Plan is qualified under Rule 16b-3 under the Exchange Act. The Plan will
be administered by the Compensation Committee and provides for the granting of
options, stock appreciation rights or restricted stock. Under the Plan,
4,500,000 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 Plan
requires that the price per APF Share must be equal to or greater than the fair
market value of the APF Shares on the grant date.
The Plan also provides for the issuance of stock appreciation rights (which
generally entitle 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), 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.
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 December 31, 1998 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 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...... 7,443,343 8.6% 7,580,092 5.1
Robert A. Bourne......... 1,976,216 2.3% 2,112,965 1.4
G. Richard Hostetter
(3)..................... 5,479 * 5,479 *
J. Joseph Kruse.......... -- -- -- --
Richard C. Huseman....... -- -- -- --
All executive officers
and directors as a group
(13 persons)............ 10,459,110 12.0% 10,752,608 7.3
</TABLE>
- --------
* Less than 1%.
(1) The percentage ownership prior to the Acquisition is based on 86,996,927
shares of APF Shares outstanding as of January 31, 1999 as adjusted to
reflect the acquisition of the CNL Restaurant Businesses by APF. The
percentage ownership after the Acquisition is based on 147,279,427 APF
Shares outstanding upon completion of the Acquisition assuming the
Acquisition of 100% of the Funds and adjusted for the payment by the Funds
of certain expenses of the Acquisition to be paid by the Funds in the form
of a reduction in the number of APF Shares paid to each 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 December 31, 1998 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 Amended and Restated 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 Amended and Restated
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 Funds
Under Florida partnership law, we are accountable to the Funds as
fiduciaries and owe each 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
Fund's affairs. Each Fund's partnership agreement generally provides that
neither we, as general partners, nor any of our affiliates performing services
on behalf of the Fund will be liable to the 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 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 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 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 Fund and provided further that the course of
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<PAGE>
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 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) 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, (b) a court of competent jurisdiction has dismissed such
claims with prejudice on the merits, and the court approves indemnification of
the litigation costs, or (c) 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 Fund, and no Limited Partner has any personal liability to
satisfy an indemnification claim made against the Fund.
Each 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 (a) the legal action relates to the performance
of duties or services by such person on behalf of the Fund, (b) the legal
action is initiated by a party other than a Limited Partner, and (c) such
person undertakes to repay the advanced funds to the 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 Fund
provides that the Fund may pay the attorneys fees of a person indemnified under
the partnership agreement as they are incurred. No 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 Fund if there is no additional cost to such
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 Amended and Restated 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 356,000,000 shares of capital stock, consisting of 275,000,000
shares of common stock, $.01 par value per share, 3,000,000 shares of preferred
stock ("Preferred Stock"), and 78,000,000 additional shares of excess stock
("Excess Shares"), $.01 par value per share. See "--Ownership Limits and
Restrictions on Transfer." As of January 31, 1999, APF had 86,996,927 shares of
Common Stock outstanding and no Preferred Stock or Excess Shares 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 Amended and Restated 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 Shares, which differ
from Common Stock 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 the Code (i) not more than
50% in value of outstanding equity securities of all classes ("Equity Shares")
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; (ii) the Equity Shares 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 (iii) APF must satisfy
certain complex requirements with respect to the nature of its income and
assets.
To ensure that five or fewer individuals do not own more than 50% in value
of the outstanding Equity Shares, APF's Amended and Restated Articles of
Incorporation provide generally that no holder may own, or be deemed to own by
virtue of certain attribution provisions of the Code, more than 9.8% of the
issued and outstanding Equity Shares of the issued and outstanding APF Shares
(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
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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 Shares 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 provides that if an issuance,
transfer or acquisition of Equity Shares (i) would result in a holder exceeding
the Ownership Limit, (ii) would cause APF to be beneficially owned by less than
100 persons, (iii) would result in APF being "closely held" within the meaning
of Section 856(h) of the Code or (iv) 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 Shares 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 Shares.
A holder of Excess Shares 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 Shares pursuant to APF's Articles of Incorporation will be required to
be repaid to APF upon demand. Excess Shares will be subject to repurchase by
APF at its election. The purchase price of any Excess Shares will be equal to
the lesser of (i) the price in such proposed transaction or (ii) either (a) 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; (b) 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; (c) if the shares are not then listed
on a national securities exchange, the latest quoted price for the shares; (d)
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; (e)
if such system is no longer in use, the principal automated quotation system
then in use; (f) 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 (g) 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
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Incorporation also established certain restrictions relating to transfers of
any Excess Shares 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 Shares to have acted as an agent on behalf of APF in acquiring such
Excess Shares and to hold such Excess Shares on behalf of APF.
Under the Amended and Restated Articles of Incorporation, APF has the
authority at any time to waive the requirement that Excess Shares 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 Shares or that such Excess Shares 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 Shares will bear a legend
referring to the restrictions described above.
The Amended and Restated 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 Shares (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 (the "Indenture 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 "Trust Indenture Act"). 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. 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. 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
A separate series of Notes will be issued pursuant to the Indenture to
Limited Partners of each 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, senior unsecured and
unsubordinated obligations of APF and will rank pari passu with each other and
with all other unsecured and unsubordinated indebtedness of APF from time to
time outstanding. The Notes will be recourse obligations of APF, but the
holders thereof will not have recourse against any stockholder of APF. The
Notes will be effectively 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
September 30, 1998, on a pro forma basis assuming APF had acquired all of the
Funds, APF would have had aggregate consolidated debt of approximately $
million, to which the Notes were effectively subordinated or which ranked equal
with such Notes.
The Notes will mature on , 2006 (the "Maturity Date"), which is
approximately seven years following the currently expected date that the
Acquisition will be completed. The Notes are not subject to any sinking fund
provisions, although APF is required to make mandatory prepayments of principal
in certain events. See "--Principal and Interest."
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:
. a highly leveraged or similar transaction involving APF or the management
of APF (for example, a leveraged buy-out);
. a change of control of APF; or
. 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.
Principal and Interest
The principal amount of the Notes with respect to each Fund will be equal to
90% of the liquidation value, as determined by Valuation Associates, that you
would receive in the event that your Fund was liquidated and you received
liquidation proceeds in accordance with the terms of your Fund's partnership
agreement.
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The Notes will bear interest at a fixed rate of interest equal to % per
annum, which was determined based on 120% of the applicable federal rate as of
, 1999. Interest will accrue from the closing of the Acquisition or from
the immediately preceding Interest Payment Date (as defined below) to which
interest has been paid, payable semi-annually in arrears on each June 15 and
December 15, commencing June 15, 2000 (each, an "Interest Payment Date"), and
on the Maturity Date, to the persons in whose names the Notes are registered in
the security register for the Notes at the close of business on the date 14
calendar days prior to such payment day regardless of whether such day is a
Business Day, as defined in the Indenture. Interest on the Notes will be
computed on the basis of a 360-day year of twelve 30-day months.
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 maintained by
APF in New York City (the "Paying Agent") in United States dollars. Initially,
the Indenture Trustee will act as Paying Agent.
Redemption
The Notes of any series may be redeemed at any time at the option of APF, in
whole or from time to time 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 (the "Redemption Price").
In the event that, following the closing of the Acquisition, APF (i) sells
or otherwise disposes of any restaurant property owned by a Fund immediately
prior to the Acquisition and realizes net cash proceeds in excess of (a) 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 (b) the costs
incurred by APF in connection with such sale or other disposition or (ii)
refinances (whether at maturity or otherwise) any indebtedness secured by any
restaurant property owned by the Fund immediately prior to the Acquisition and
realizes net cash proceeds in excess of (a) 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 (b) the costs incurred by APF in connection with such
refinancing (in either case, "Net Cash Proceeds"), 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
Fund prior to the Acquisition equal to 80% of such Net Cash Proceeds.
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, in such manner as it shall deem fair and appropriate, the
Notes to be redeemed in whole or in part.
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 acquired
indebtedness) other than intercompany indebtedness (representing indebtedness
to which the only parties are APF and/or any of its Subsidiaries, but only so
long as such indebtedness is held solely by any of such parties) 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.
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As used in the Indenture and the description thereof herein:
"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 (it being understood that the accounts of
Subsidiaries shall be consolidated with those of APF only to the extent of
APF's proportionate interest therein).
"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 (it being understood that 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, Fund, 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;
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. default in the performance of any other covenant or agreement of APF
contained in the Indenture, such default having continued for 30 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 rescind and annul such
declaration and its consequences if (i) 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 (ii) 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 (x) in the payment of the
principal of or interest on any Note or (y) 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; provided, however, that 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 specified Responsible
Officers (as defined in the Indenture) of the Indenture Trustee determine 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 is 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 shall
have offered to the Indenture Trustee thereunder reasonable security or
indemnity. The holders of not less than 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. However,
the Indenture Trustee may refuse to follow any direction which is in conflict
with any law or the Indenture, which may involve the Indenture Trustee if the
Indenture Trustee in good faith determines that the proceeding will involve the
Indenture Trustee in personal liability or which may be unduly prejudicial to
the holders of Notes of such series not joining therein. 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.
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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: (i) to cure any ambiguity, defect or
inconsistency in the Indenture; (ii) to evidence the succession of another
Person to APF as obligor under the Indenture; (iii) to permit or facilitate the
issuance of the Notes in uncertificated form; (iv) to make any change that does
not adversely affect the rights of any holder of Notes; (v) 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; (vi) 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; (vii) 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; (viii) to provide for guarantors or collateral for the Notes of any
series; or (xi) to comply with requirements of the SEC in order to effect or
maintain the qualification of the Indenture under the Trust Indenture Act.
Modifications and amendments of the Indenture, other than those described
above, will be permitted to be made only with the consent of the holders of not
less than a majority in principal amount of all outstanding Notes which are
affected by such modification or amendment; provided, however, that no such
modification or amendment may, without the consent of each holder of such Note
affected thereby, (i) change the stated maturity of the principal of, or any
installment of interest on, any such Note; (ii) reduce the principal amount of
or interest on any such Note; (iii) change the place of payment, or the coin or
currency, for the payment of principal of or interest on any such Note; (iv)
impair the right to institute suit for the enforcement of any payment on or
with respect to any such Note; (v) waive a default in the payment of principal
of or interest on the Notes (other than a recission of acceleration of the
Notes of any series and a waiver of the payment default that resulted from such
acceleration, as provided in the Indenture); or (vi) reduce the percentages of
outstanding Notes of any series necessary to modify or amend the Indenture or
to waive compliance with certain provisions thereof or certain defaults and
consequences.
The Indenture provides that the holders of not less than a majority in
principal amount of outstanding Notes have the right to waive compliance by APF
with certain covenants in the Indenture.
Satisfaction and Discharge
APF may discharge certain obligations to holders of Notes that have not
already been delivered to the Indenture Trustee for cancellation and that
either have become due and payable or will become due and payable within one
year (or scheduled for redemption within one year) by irrevocably depositing
with the Indenture Trustee, in trust, funds in an amount sufficient to pay the
entire indebtedness on such Notes in respect of principal and interest to the
date of such deposit (if such Notes have become due and payable) or to the
stated maturity or redemption date, as the case may be, and delivering to the
Indenture Trustee an officers' certificate and a legal opinion stating that the
conditions precedent to such discharge have been complied with.
No Conversion Rights
The Notes will not be convertible into or exchangeable for any capital stock
of APF.
Governing Law
The Indenture will be governed by and shall be construed in accordance with
the laws of the State of New York.
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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 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 Fund. The
partnership agreements also provide that we are to be reimbursed for our
expenses for services performed for each 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 Funds will share in the overall cost of managing the consolidated
portfolio of properties owned by APF. As stockholders of APF, you and the other
former Limited Partners of the 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, 1995, 1996 and 1997 and the nine months
ended September 30, 1998, the aggregate amounts accrued or actually paid by the
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 years presented, are shown below under "Pro Forma":
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended
-------------------------------- September 30,
1995 1996 1997 1998
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Historical:
General Partner
Distributions................ $ -- $ -- $ -- $ --
Broker/Dealer Commissions
(1).......................... 2,594,433 2,781,616 2,186,535 72,610
Due Diligence and Marketing
Support Fees (1)............. 152,614 163,624 128,629 4,271
Acquisition Fees.............. 1,621,782 1,472,621 1,157,577 38,441
Asset Management Fees......... 210,908 236,823 266,644 210,557
Real Estate Disposition Fees
(2).......................... 21,000 75,750 15,150 230,013
---------- ---------- ---------- --------
Total historical............ $4,600,737 $4,730,434 $3,754,535 $555,892
========== ========== ========== ========
Pro Forma:
Cash Distributions on APF
Shares....................... $ 179,698 $ 171,923 $ 158,859 $125,752
Salary Compensation........... -- -- -- --
---------- ---------- ---------- --------
Total pro forma............. $ 179,698 $ 171,923 $ 158,859 $125,752
========== ========== ========== ========
</TABLE>
- --------
(1) A majority of the fees paid as broker-dealer commissions and due diligence
and marketing support fees were reallowed to other broker-dealers
participating in the offering of each Fund's Units.
(2) 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 Fund, please read
the Supplement for your Fund under the heading "Compensation, Reimbursements
and Distributions to the General Partner."
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REPORTS, OPINIONS AND APPRAISALS
General
The proposed number of APF Shares to be paid to your Fund was determined by
APF in accordance with its own valuation methodologies regarding each Fund. We,
as the general partners of each Fund, determined the fairness of the value of
the APF Shares to be paid to your Fund based in part on the appraisal of the
restaurant properties of your 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 Fund, individually, is fair from a
financial point of view to each Fund. The fairness opinions rendered to each
Fund by Legg Mason are attached as Appendix A to each 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 Fund, upon your written request or that of your representative,
who has been designated in writing, that is submitted to your Fund, Attention:
James M. Seneff, Jr. 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 Funds or their assets, a valuation of APF or any other report
with respect to the Acquisition.
Fairness Opinions
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 Funds and their limited partners is fair from a financial
point of view;
. the aggregate APF Share consideration offered with respect to all of the
Funds is fair from a financial point of view; and
. the method of allocating the APF consideration among the Funds in the
Acquisition pursuant to the merger agreements is fair from a shares
financial point of view.
The full text of the Legg Mason opinion, 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 Fund's supplement that accompanies this Consent Solicitation
and is incorporated in this document by reference. The summary of 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
connection with our consideration of the transactions contemplated by the
merger agreements and the opinions do not constitute a recommendation as to how
partners should vote with respect to the transaction.
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 Funds 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 Funds
furnished by the General Partners, including a draft of the Funds' Form
10-K for the year ended December 31, 1998, cash flow projections and
operating budgets;
. internal information concerning the business and operations of the APF
furnished by management of APF; including a draft of APF's Form 10-K for
the year ended December 31, 1998, cash flow projection and operating
budgets;
. Financial data and operating statistics provided by us and the management
of APF and compared them with similar information of selected public
companies; and
. The appraisals of the properties of the Funds prepared by Valuation
Associates and dated January 6, 1999.
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Legg Mason also held meetings and discussions with our and APF's directors,
officers and employees General Partners and APF concerning the operations,
financial condition and future prospects of the Funds and APF, respectively.
In addition, Legg Mason has 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 Funds 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 (and
the 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 Funds and APF, respectively. 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 Funds or APF are as set forth in the
respective financial statements of the Funds 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
Funds has been prepared in accordance with, and complies with the terms and
conditions of the partnership agreements of the 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 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 acted as financial advisor to us and will receive a fee for
their services. It is understood that Legg Mason's fairness opinion is for our
information in our evaluation of the Acquisition and Legg Mason's opinion does
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 cash and promissory notes of APF. 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. Additionally, Legg Mason's
opinion 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.
On 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 Funds, (b) the aggregate APF Shares offered with respect to the
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 Cash/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 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 cost 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.
The following is a summary of all the material financial analyses set forth
in the transaction report provided to us on March 10, 1999 in connection with
Legg Mason rendering its opinion.
In valuing APF and the Funds, Legg Mason considered a variety of valuation
methodologies, including:
. an analysis of comparable publicly traded real estate investments trusts;
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. 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.
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 compared companies:
<TABLE>
<CAPTION>
Selected Valuation Multiples
-----------------------------
Public Comparables
-----------------------------
High Mean Low
--------- --------- ---------
<S> <C> <C> <C>
1999 Projected Funds from Operations.............. 9.0 x 8.5 x 8.0 x
2000 Projected Funds from Operations.............. 8.0 x 7.5 x 7.0 x
</TABLE>
Legg Mason applied these projected multiples to APF for the years 1999 and
2000 to establish a valuation range based on trading multiples.
Dividend Discount Analysis
Legg Mason also computed a valuation range for APF Shares using a discounted
dividend analysis. The discounted dividend analysis assumes, as a basic
premise, that the intrinsic value of an equity security is 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 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 projected dividends were discounted to the present using
discount rates ranging from 13.7% to 15.7% and terminal value multiples of
calendar year 2003 dividends ranging from 9.3x to 11.5x.
Discounted Cash Flow Analysis
Legg Mason also computed a valuation range for APF Shares using a discounted
cash flow analysis. The discounted 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 determined. The
management of APF provided Legg Mason with projections of free cash flow to
equity shareholders for the six months ending December 31, 1999 and the years
2000 through 2003. The free cash flows were discounted to the present, using
discount rates reflecting the equity cost of capital ranging from 12.05% to
16.0% and terminal value multiples of calendar year 2003 funds from operations
ranging from 8.0x to 10.0x.
Valuation of the Funds
Comparable Trading Multiples Analysis
Legg Mason compared financial and operating information and ratios for the
Funds with the corresponding information for a group of publicly traded real
estate investment trusts engaged primarily in the ownership, operation,
management and financing of commercial properties. Legg Mason deemed the
following companies as reasonably comparable to the Funds:
. Commercial Net Lease Realty, Inc.;
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. 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>
1999 Projected Funds from Operations........................ 8.0 x 7.5 x 7.0 x
2000 Projected Funds from Operations........................ 7.5 x 7.0 x 6.5 x
Trailing Twelve Months Earnings Before
Interests, Taxes, Depreciation and Amortization............ 10.5 x 10.0 x 9.5 x
</TABLE>
Legg Mason applied these projected multiples to the Funds for the years 1999
and 2000 and to the Trailing Twelve Months Earnings Before Interest, Taxes,
Depreciation and Amortization to establish a valuation range based on trading
multiples.
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, such an opinion is 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 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 we in making our determination to approve the acquisition
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 Funds from time to time, including having participated in the
offering of units by certain Funds for which Legg Mason received customary
commissions. In addition, Legg Mason has provided investment banking services
to Commercial Net Lease Realty, Inc., a former affiliate of ours, including
having participated in a number of public offerings of its securities for which
it received customary commissions. Legg Mason also provided a fairness opinion
to the special committee of the board of directors of Commercial Net Lease
Realty, Inc. in connection with its acquisition of its external advisor, also a
former affiliate of ours, for which Legg Mason received customary fees. Legg
Mason may provide investment banking services of 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.
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Pursuant to an engagement letter dated as of November 16, 1998, Legg Mason
will receive a fee of $30,000 from each Fund for its services in rendering its
fairness opinions. 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 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.
Fund Appraisals
General. Valuation Associates has prepared and delivered to each 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
Fund as of December 31, 1998. Valuation Associates is a nationally recognized
independent and fully diversified real estate 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.
The purpose of the appraisals is to establish the relative values of the
restaurant properties in each Fund's portfolio. We used the appraisals to
assist us in determining the reasonableness of the proposed consideration
payable by APF to each Fund in the Acquisition. Valuation Associates'
appraisals of the Funds' restaurant property portfolios address the market
value of each Fund's leased and ownership interest in each restaurant property
and the liquidation value of each Fund's restaurant properties, based on
certain specified assumptions.
Market Value/Going Concern--Valuation Methodology. Valuation Associates'
appraisals of the market value of the 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 current rent; but Valuation
Associates did not find this approach to be applicable to the Funds. The uses
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 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 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 (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 certain assumptions in determining its cash flow analysis with
respect to its market value analysis of each Fund. These assumptions included
(i) a ten-year holding period for each property, (ii) 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, (iii), a 1% annual allowance for a management fee and (iv) a flat
amount of $200 per restaurant property, per year for miscellaneous expenses
such as bookkeeping, legal fees and other pro rata 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.
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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 individual 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 Fund would be sold in an orderly
manner. For purposes of such sale, Valuation Associates assumed that the 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 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--corporate in bankruptcy/no rent
5. Closed store--private operator paying partial rent
6. Closed store--franchisee paying no rent
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 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.
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. 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 Fund that are under a joint venture agreement, Valuation Associates
allocated the respective proportionate value of the restaurant property
in question to each 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.
. 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 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 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 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 values reported.
Valuation Associates has previously rendered appraisals of the value of the
leased and ownership interest of the Funds with respect to certain restaurant
properties in connection with the acquisition of such properties by the Funds
from third parties. In connection with the Acquisition, we paid or will pay on
behalf of the Funds, Valuation Associates approximately $114,000 in the
aggregate for its real estate appraisal services. 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.
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Liquidation Valuation. We also requested that Valuation Associates provide
us with a liquidation value for the restaurant properties of each of the 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 Fund. These assumption 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 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 discounted present value would be necessary.
. Marketing of Restaurant Properties. Each 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 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 present value of the restaurant properties in
each of the Funds.
. Bankruptcies. In connection with the bankruptcy filings made by Long John
Silver's and Boston Market, Valuation Associates reviewed the restaurant
properties of these two restaurant chains and increased their discount
rates and capitalization rates to reflect the increased risk and the
increased yield that an investor would expect.
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FEDERAL INCOME TAX CONSIDERATIONS
The following summary of the material federal income tax issues associated
with the Acquisition was prepared by Shaw Pittman Potts & Trowbridge, 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 IRS) 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 (if you are eligible for and choose the
Cash/Notes Option), the tax treatment of a REIT, and potential changes in
applicable tax laws.
Certain Tax Differences between the Ownership of Units and APF Shares
Instead, as a Limited Partner, you are required to take into account your
share of the income or loss of your Fund, regardless of whether any cash is
distributed to you. If your 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 Fund is acquired by APF, you may elect the Cash/Notes
Option, in which case you will receive cash and Notes.
If your 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 Fund is a partnership for federal income tax
purposes, it is not subject to taxation. 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 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 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 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 the 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 Funds. As a result, APF's tax depreciation
from the acquired restaurant properties will differ from the Funds' tax
depreciation. Accordingly, under certain circumstances, even if APF were to
make the same level of distributions as your 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 Fund's Transfer of Assets to APF. If your Fund is
acquired by APF, your Fund will be merged with and into the Operating
Partnership. For federal income tax purposes, the merger of your Fund and the
Operating Partnership will be treated as though your Fund transferred all of
its assets and liabilities to APF in exchange for APF Shares and, if you or any
other Limited Partners in your Fund elect the Cash/Notes Option, cash and
Notes. Your Fund will then be treated as though it liquidated and distributed
the cash and Notes to the Limited Partners electing the Cash/Notes Option and
the APF Shares to the remaining Limited Partners.
Under section 351(a) of the Code, no gain or loss is recognized if (i)
property is transferred to a corporation by one or more individuals or entities
in exchange for the stock of that corporation, and (ii) 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 that, following the Acquisition, the Limited Partners of the
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 Fund is acquired by APF and no Limited Partners elect the Cash/Notes
Option, your Fund will receive solely APF Shares in exchange for your Fund's
assets. As a result, your Fund will recognize an amount of gain equal to the
difference between (1) the sum of (a) the fair market value of the APF Shares
received by your Fund and (b) the amount of your Fund's liabilities, if any,
assumed by the Operating Partnership, and (2) the adjusted tax basis of the
assets transferred by your Fund to the Operating Partnership.
If your Fund is acquired by APF and you or any other Limited Partners in
your Fund elect the Cash/Notes Option, your Fund will receive APF Shares, cash
and Notes in exchange for your Fund's assets. Because the principal portion of
the Notes will not be due until , 2006, the acquisition of your Fund's
assets, in part, in exchange for Notes will be reported under the installment
sales method and a portion of your 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 Fund in the year of the Acquisition will
be equal to value of the APF Shares and cash received by your fund multiplied
by the ratio that the gross profit realized by your Fund in the Acquisition
bears to the total contract price for your Fund's assets. To the extent your
Fund realizes depreciation recapture income under section 1245 or section 1250
of the Code, the recapture income will also be recognized by your Fund in the
year of the Acquisition.
The gross profit that your Fund realizes from the Acquisition will generally
equal the excess, if any, of the selling price (without reduction for any
selling expenses) for your 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 Fund's assets, if any, that are assumed
or taken subject to by the Operating Partnership. The exact amount of the gain
to be recognized by your Fund in the year of the Acquisition will also vary
depending upon the decisions of the Limited Partners to receive APF Shares,
cash 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" (i.e., real property and
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 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
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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 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 Fund recognizes will be allocated to you and the other Limited
Partners in accordance with the terms of your 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 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 Fund recognizes, the electing Limited Partner still will be required
to take into account his, her or its share of the Fund's gain as determined
under the partnership agreement. Therefore, Limited Partners who elect the
Cash/Notes Option may recognize gain in the year of the Acquisition despite the
fact that they will receive only a small amount of cash and no publicly-traded
instruments 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 the Cash/Notes Option. See "Liquidation
and Termination of Your Fund."
Tax Consequences of the Liquidation and Termination of Your Fund. If your
Fund is acquired by APF, your Fund will be deemed to have liquidated and
distributed the APF Shares or the cash and Notes, as the case may be, to you.
The taxable year of your 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 Fund through the date of the
Acquisition (including your 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
Fund's income attributable to more than one of its taxable years.
The APF Shares or cash and Notes will be distributed among you and the other
Limited Partners in a manner that we, as the general partners of the Funds,
determine to be pro rata 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 (determined on the closing date of the Acquisition) and your
adjusted tax basis in your Units (adjusted by your distributive share of
income, gain, loss, deduction and credit for the final taxable year of your
Fund (including any such items recognized by your Fund as a result of the
Acquisition) as well as any distributions you receive in such final taxable
year (other than the distribution of the APF Shares)). 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 cash and Notes in the Acquisition, you will recognize gain to
the extent that the amount of cash you receive in the Acquisition exceeds your
adjusted basis in your Units (adjusted by your distributive share of income,
gain, loss, deduction and credit for the final taxable year of your Fund
(including any such items recognized by your Fund as a result of the
Acquisition) as well as any distributions you receive in such final taxable
year (other than the distributions of the cash and Notes)). Your basis in the
Notes distributed to you will equal your adjusted basis in your Units, reduced
(but not below zero) by the amount of any cash distributed to you 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 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 an organization described in section 501(c)(7)
(social clubs), section 501(c)(9) (voluntary
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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.
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 (e.g., any interest in a trade or business held as a limited partner
in which you do not materially participate) 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 (i) 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
(ii) 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. The basis of the
restaurant properties received by APF from the Funds that are acquired by APF
will equal the fair market value of the APF Shares plus the cash and the issue
price of the Notes issued in the Acquisition, plus the amount of any
liabilities of the 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 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 Funds.
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Tax Issues Relating to Foreign Limited Partners. The rules governing U.S.
federal income taxation of nonresident alien individuals and foreign entities
are complex, and we will not try here to provide more than a brief summary of
certain rules relating to the Acquisition. If you are a foreign Limited
Partner, you should consult your tax advisors to determine the impact of the
Acquisition under the tax laws applicable to you, including any reporting
requirements.
The Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA")
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 (i) United States real estate and (ii)
interests in certain entities (including partnerships) holding United States
real estate. FIRPTA also imposes withholding on such sales.
Section 702(b) of the Code determines the character of an item included in a
partner's distributive share of gain as if the item were realized directly by
the partner from the source from which the item was realized by the
partnership. 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 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 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 percent rate with
respect to noncorporate foreign partners and a 35 percent 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 Fund may retain and place in an escrow account, or similar arrangement,
the APF Shares, Notes, or cash to be received by any foreign limited partner,
pending a sale of a portion of the APF Shares or Notes sufficient to satisfy
the withholding requirement or, alternatively, 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" (imposed at the corporate level when earned
and once again at the stockholder level when distributed) that generally
results from investments in a corporation.
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Certain Corporate Level Taxation. Regardless of whether APF qualifies as a
REIT, APF will be subject to federal income tax in the following circumstances:
. APF will be taxed at regular corporate rates on any undistributed real
estate investment trust taxable income, including undistributed net
capital gains.
. Under certain circumstances, APF may be subject to the alternative
minimum tax on its items of tax preference.
. If APF has net income from foreclosure property, which is real property,
and any attached personal property acquired as a result of default on a
lease of or on a loan secured by this property, it 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 percent tax.
. If APF should fail to satisfy the 75 percent gross income test or the 95
percent gross income test (as discussed below), but has nonetheless
maintained its qualification as a REIT because certain other requirements
have been met, it will be subject to a 100 percent tax on the net income
attributable to the greater of the amount by which it fails the 75
percent or 95 percent test.
. If, during each calendar year, APF fails to distribute at least the sum
of (i) 85 percent of its real estate investment trust ordinary income for
such year, (ii) 95 percent of its real estate investment trust capital
gain net income for such year, and (iii) 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 any asset from a C corporation in a transaction in which
the basis of the asset in APF's hands is determined by reference to the
basis of the asset (or any other property) in the hands of the
corporation, and APF recognizes gain on the disposition of the asset
during the 10-year period beginning on the date on which the asset was
acquired by APF, then, assuming APF makes an election pursuant to IRS
Notice 88-19, to the extent of the property's "built-in gain" (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 (including
alternative minimum tax) as an ordinary corporation 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 stock-holders 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, certain investors would be eligible for the corporate dividends
received deduction, but we cannot guarantee that any such distribu-tions 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 sections 856 through
860 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 (as
defined in the Code) of the partnership attributed to the REIT retain the same
character as in the hands of the partnership for purposes of section 856 of the
Code, including 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 APF 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 percent of APF's gross income (excluding gross income from
prohibited transactions) 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 (including interests in real property and
in mortgages on real property) 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 percent
of APF's gross income (excluding gross income from prohibited transactions) for
each taxable year must be derived either from income qualifying under the 75
percent 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.
In addition, for each taxable year before 1998, 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 (apart from involuntary conversions and
sales of foreclosure property) must have represented less than 30 percent of
APF's gross income (including gross income from prohibited transactions) for
such taxable year.
APF believes that it satisfied all three of these income tests for 1995,
1996, 1997 and 1998 and expects to satisfy the two current tests for 1999 and
subsequent taxable years.
Much of APF's income will be derived from rent from the restaurant
properties. Rent from the restaurant properties qualifies 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 in whole or in part, directly or
indirectly, on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "rents
from real property" solely by reason of being based on a fixed percentage
or percentages of receipts or sales.
. Second, rents received from a tenant will not qualify as "rents from real
property" if APF, or a direct or indirect owner of 10 percent or more of
APF, owns, directly or constructively, 10 percent or more of the tenant.
. Third, if rent attributable to personal property leased in connection
with a lease of real property is greater than 15 percent of the total
rent received under the lease, then the portion of rent attributable to
the personal property will not qualify as "rents from real property."
. Finally, for rents to qualify as "rents from real property," APF
generally must not operate or manage the property or furnish or render
services to the tenants of such property, except that APF may directly
perform services that are "usually or customarily rendered" in connection
with the rental of space for
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occupancy, other than services that are considered to be rendered to the
occupant of the property. Beginning with its 1998 taxable year, however,
APF is permitted to earn up to one percent of its gross income from
tenants, determined on a property-by-property basis, by furnishing
services that are noncustomary or provided directly to the tenants without
causing the rental income to fail to qualify as rents from real 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--
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
percent and 95 percent income tests.
In addition, APF will be paid interest on mortgage loans. All interest
income qualifies under the 95 percent gross income test. All the interest on
each mortgage loan will also qualify under the 75 percent gross income test if
the loan is secured by both real property and other 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 percent and 95 percent
income tests.
APF will also receive payments under the terms of secured equipment leases.
Although the secured equipment leases will be structured as leases or loans,
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. See "--Characterization of the Secured
Equipment Leases" below. 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, rather than a return of capital for federal income tax purposes, will
not satisfy the 75 percent gross income test (although it will satisfy the 95
percent 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 non-qualifying income under the 75 percent 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 percent and 95 percent gross income tests if they are received in
connection with a lease of real property and the rent attributable to the
personal property does not exceed 15 percent of the total rent received from
the tenant in connection with the lease. If rents attributable to personal
property exceed 15 percent 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 percent or 95 percent gross income tests.
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
would not be qualifying income under the 75 percent and 95 percent 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
percent 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
percent gross income test) will equal or exceed 25 percent of APF's annual
gross income.
If APF fails to satisfy one or both of the 75 percent or 95 percent tests
for any taxable year, it may still qualify as a REIT if (i) APF's failure is
due to reasonable cause and not willful neglect; (ii) it reports the nature
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and amount of each item of its income on a schedule attached to its tax return
for such year; and (iii) 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 percent or 95 percent
test (whichever amount is greater).
Asset Tests. At the end of each quarter of APF's taxable year, at least 75
percent 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 percent class
of assets generally must not, with respect to any one issuer, exceed 5 percent
of the value of APF's assets or 10 percent 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 (but only if this investment is in stock or a debt
instrument and only 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 (or, in the case of a construction loan, 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 as discussed below in "--Characterization of
Secured Equipment Leases." 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 percent 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 5
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 (i) the value of the secured equipment leases
entered into with any particular tenant or borrower represents more than 5
percent of APF's total assets, or (ii) the value of the secured equipment
leases, together with any personal property owned by APF, exceeds 25 percent
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 percent in
value of the REIT's outstanding shares may be owned, directly or
indirectly (applying certain attribution rules), by five or fewer
individuals (or certain entities as defined in the Code); and
. there must be at least 100 stockholders (without reference to any
attribution rules) on at least 335 days of a 12-month taxable year (or a
proportionate part of a shorter taxable year).
These two requirements do not apply to the first taxable year for which an
election is made to be treated as a REIT. In keeping with these requirements,
APF's Articles of Incorporation generally prohibit any person or entity from
actually, constructively or beneficially acquiring or owning (applying certain
attribution rules) more than 7.5 percent of the issued and outstanding APF
Shares (including any Preferred Stock), except that Mr. Seneff, and certain
related persons, may hold up to 19.9%. 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
that each holder of APF Shares disclose to APF's Board of Directors in writing
such information with respect to 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.
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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 (i) its "real estate investment trust taxable income"
(computed before deduction of dividends and excluding any net capital gains)
and (ii) 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
percent distribution requirement. Under some circumstances, however, APF may
not have sufficient funds from its operations to make cash distributions to
satisfy the 95 percent 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 percent 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 percent
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 percent 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,
the applicable regulations issued under the Code ("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. Shaw Pittman's opinion does not ensure
that the actual results of APF's operations and future actions and events
(including changes in tax laws) 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.
Characterization of Leases. APF has purchased and intends to purchase in the
future 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--Description of Leases." APF's ability to claim certain tax benefits
associated with ownership of the
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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 percent
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 percent and 75 percent gross income
tests by reason of being interest on an obligation secured by a mortgage on an
interest in real property, because the legal ownership structure of such
restaurant property would have the effect of making the building serve as
collateral for a debt obligation.
The characterization of transactions as leases, conditional sales, or
financings has been addressed in numerous instances. The courts have not
identified any one determinative factor of whether the lessor or the lessee of
property is to be treated as the owner. Judicial decisions and IRS
pronouncements with respect to the characterization of transactions as either
leases, conditional sales, or financing transactions have clearly stated that
the characterization of leases for tax purposes is a question that must be
decided on the basis of a weighing of many factors, and courts have reached
different conclusions even where characteristics of two lease transactions were
substantially similar.
While certain characteristics of the leases, such as the fact that such
leases are "triple-net" leases, suggest that APF might not be the owner of the
restaurant properties, many other characteristics indicate the bona fide nature
of such leases and that APF is the owner of the restaurant properties. For
example, under the types of leases described in "APF's Business and The
Restaurant Properties--The Restaurant Properties--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 (determined by appraisal or
otherwise).
Other factors that are consistent with the ownership of the restaurant
properties by APF are (i) the tenants are liable for repairs and are required
to return the restaurant properties in reasonably good condition; (ii)
insurance proceeds generally are to be used to restore the restaurant
properties and, to the extent not so used, belong to APF; (iii) 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 (iv) based on APF's
representation that the restaurant properties can reasonably be expected to
have at the end of their lease terms (generally a maximum of 30 to 40 years) a
fair market value of at least 20 percent of APF's cost and a remaining useful
life of at least 20 percent of their useful lives at the beginning of the
leases, APF has not relinquished the restaurant properties to the tenants for
their entire useful lives, but has retained a significant residual interest in
them. 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, on the basis of the foregoing, assuming (i) 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 (ii) as is represented by APF, the residual value
of the restaurant properties remaining after the end of their lease terms
(including all renewal periods) may reasonably be expected to be at least 20
percent of
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APF's cost of such restaurant properties, and the remaining useful lives of the
restaurant properties after the end of their lease terms (including all renewal
periods) may reasonably be expected to be at least 20 percent 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.
Characterization of Secured Equipment Leases. APF will purchase equipment
and lease it to franchisees or corporate franchisors pursuant to leases of the
type described in "APF's Business and The Restaurant Properties--APF's
Business--Secured Equipment Leasing." The ability of APF to continue to qualify
as a REIT depends on a determination that the secured equipment leases are
financing arrangements, under which the lessees acquire ownership of the
equipment for federal income tax purposes. If the secured equipment leases are
instead treated as true leases, APF may be unable to satisfy the income tests
for REIT qualification discussed in "--Taxation of APF--Income Tests" above.
While certain characteristics of the secured equipment leases suggest that
APF retains ownership of the equipment, such as the fact that the secured
equipment leases are structured as leases, with APF retaining title to the
equipment, a substantial number of other characteristics indicate that the
secured equipment leases are financing arrangements and that the lessees are
the owners of the equipment for federal income tax purposes. For example, under
the types of secured equipment leases described in "APF's Business and The
Restaurant Properties--APF's Business--Secured Equipment Leasing," the lease
term will equal or exceed the useful life of the equipment, and the lessee will
have the option to purchase the equipment at the end of the lease term for a
nominal sum. Moreover, under the terms of the secured equipment leases, APF and
the lessees will each agree to treat the secured equipment leases as loans
secured by personal property, rather than leases, for tax purposes.
On the basis of the foregoing, assuming (i) the secured equipment leases are
made on substantially the same terms and conditions described in "APF's
Business and The Restaurant Properties--APF's Business--Secured Equipment
Leasing," and (ii) as represented by APF, each of the secured equipment leases
will have a term that equals or exceeds the useful life of the equipment
subject to the lease, it is the opinion of Shaw Pittman that APF will not be
treated as the owner of the equipment that is subject to the secured equipment
leases for federal income tax purposes and that APF will be able to treat the
secured equipment leases as loans secured by personal property. Shaw Pittman's
opinion that APF will be organized in conformity with the requirements for
qualification as a REIT is based, in part, on the assumption that each of the
secured equipment leases will conform with the conditions outlined in clauses
(i) and (ii) of the preceding sentence.
Securitizations. From time to time, APF intends to enter into one or more
securitization transactions. In a securitization, APF will consolidate certain
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 percent 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 (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,
without regard to the period for which you have held APF Shares, 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
percent 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 capital gain (or short-term capital gain if you
have held the APF shares for one year or less), assuming the shares are a
capital asset in your hands.
. Any distribution that is (i) 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 (ii) 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 percent with respect to
dividends paid unless you (a) are a corporation or fit within certain other
exempt categories and, when required, demonstrate this fact, or (b) provide a
taxpayer identification number, certify as to no loss of
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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" ("UBTI") 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 (i.e., any trust described in section 401(a)
of the Code and exempt from tax under section 501(a) of the Code) that
holds more than 10 percent (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 UBTI. 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 UBTI to tax-exempt
entities purchasing APF Shares, absent a waiver of the restrictions by
APF's Board of Directors, as discussed in "Description of Capital Stock--
Ownership Limits and Restrictions on Transfer."
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
nonresident alien individuals, foreign corporations, foreign participants and
other foreign stockholders (collectively, "Non-U.S. Stockholders") are complex,
and we will not try here to provide more than a summary of such rules, so if
you are a prospective Non-U.S. 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 percent of the gross amount of the dividend,
unless an applicable tax treaty reduces or eliminates that tax.
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. 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 percent. 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 Foreign Investment in Real Property Tax Act of 1980
(or FIRPTA), as amended. 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 (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 percent 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 percent 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 (i)
investment in the APF Shares is treated as "effectively connected" with your
U.S. trade or business, or (ii) 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
percent 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 (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 percent of the purchase price.
EXPERTS
The consolidated balance sheets of CNL American Properties Fund, Inc. as of
December 31, 1997 and 1996 and the consolidated statements of earnings,
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 1997, included in this Consent Solicitation and the balance
sheets of CNL Income Fund, Ltd. and CNL Income Fund II, Ltd. through CNL Income
Fund XVIII, Ltd. as of December 31, 1997 and 1996 and the related statements of
income, partners' capital, and cash flows for each of the three years in the
period ended December 31, 1997 included in this Consent Solicitation have been
included
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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 Potts & Trowbridge, Washington, D.C., a partnership
including professional corporations. Certain members of Shaw Pittman invested
in the Funds in an aggregate amount of $199,000, and, assuming all of the Funds
are acquired by APF, such members will receive an aggregate of 17,643 APF
Shares.
Certain legal matters will be passed upon for the Funds by Baker & Hostetler
LLP.
WHERE YOU CAN FIND MORE INFORMATION
APF and each 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 Fund and will be delivered to you and the other Limited Partners of your
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.
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CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Consolidated Balance Sheets--As of September 30, 1998 and
December 31, 1997....................................................... F-2
Condensed Consolidated Statements of Earnings--For the Quarters ended
September 30, 1998 and 1997 and for the Nine Months ended September 30,
1998 and 1997........................................................... F-3
Condensed Consolidated Statements of Stockholders Equity--For the Nine
Months ended September 30, 1998 and 1997................................ F-4
Condensed Consolidated Statements of Cash Flows--For the Nine Months
ended September 30, 1998 and 1997....................................... F-5
Notes to Condensed Consolidated Financial Statements--For the Quarters
and Nine Months ended September 30, 1998 and 1997....................... F-6
Report of Independent Accountants........................................ F-16
Consolidated Balance Sheets--As of December 31, 1997 and 1996............ F-17
Consolidated Statements of Earnings--For the Years ended December 31,
1997, 1996 and 1995..................................................... F-18
Consolidated Statements of Stockholders' Equity--For the Years ended
December 31, 1997, 1996 and 1995........................................ F-19
Consolidated Statements of Cash Flows--For the Years ended December 31,
1997, 1996 and 1995..................................................... F-20
Notes to Consolidated Financial Statements--For the Years ended December
31, 1997, 1996 and 1995................................................. F-21
</TABLE>
F-1
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation.......................... $298,967,972 $205,338,186
Net investment in direct financing leases.......... 117,028,760 47,613,595
Investment in joint venture........................ 631,374 --
Other investments.................................. 16,200,316 --
Mortgage notes receivable.......................... 18,503,397 17,622,010
Equipment notes receivable......................... 15,020,109 13,548,044
Cash and cash equivalents.......................... 88,666,489 47,586,777
Certificates of deposit............................ 2,007,800 2,008,224
Receivables, less allowance for doubtful accounts
of $314,406 and $99,964, respectively............. 575,104 635,796
Accrued rental income.............................. 3,071,451 1,772,261
Other assets....................................... 5,711,195 2,952,869
------------ ------------
$566,383,967 $339,077,762
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Line of credit..................................... $ 6,765,575 $ 2,459,043
Accrued construction costs payable................. 3,045,304 10,978,211
Accounts payable and accrued expenses.............. 156,916 1,060,497
Due to related parties............................. 2,552,411 1,524,294
Rents paid in advance.............................. 437,497 517,428
Deferred rental income............................. 1,015,758 557,576
Other payables..................................... 222,580 56,878
------------ ------------
Total liabilities.............................. 14,196,041 17,153,927
------------ ------------
Minority interest.................................. 282,544 285,734
------------ ------------
Commitments (Note 14)
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 125,000,000 and 75,000,000 shares,
respectively, issued and outstanding 62,118,679
and 36,192,971, respectively.................... 621,187 361,930
Capital in excess of par value................... 556,830,578 323,525,961
Accumulated distributions in excess of net
earnings........................................ (5,546,383) (2,249,790)
------------ ------------
Total stockholders' equity..................... 551,905,382 321,638,101
------------ ------------
$566,383,967 $339,077,762
============ ============
</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 Nine Months Ended
September 30, September 30,
----------------------- ------------------------
1998 1997 1998 1997
----------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from
operating leases......... $ 6,310,554 $3,819,866 $17,322,785 $ 7,826,671
Earned income from direct
financing leases......... 2,829,024 851,463 5,624,414 1,809,955
Interest income from
mortgage
notes receivable......... 437,444 437,134 1,301,493 1,252,326
Other interest income..... 1,839,871 419,384 4,775,552 1,347,188
Other income.............. 19,139 9,369 40,866 16,310
----------- ---------- ----------- -----------
11,436,032 5,537,216 29,065,110 12,252,450
----------- ---------- ----------- -----------
Expenses:
General operating and
administrative........... 471,568 183,374 1,443,295 664,585
Professional services..... 30,601 8,655 95,709 53,334
Asset management fees to
related party............ 518,533 234,665 1,248,393 493,921
State and other taxes..... 214,866 65,741 397,569 173,604
Depreciation and
amortization............. 1,044,193 526,207 2,693,020 1,105,611
----------- ---------- ----------- -----------
2,279,761 1,018,642 5,877,986 2,491,055
----------- ---------- ----------- -----------
Earnings Before Minority
Interest in Income of
Consolidated Joint Venture
and Equity in Loss of
Unconsolidated Joint
Venture.................... 9,156,271 4,518,574 23,187,124 9,761,395
Minority Interest in Income
of Consolidated
Joint Venture.............. (7,787) (7,860) (23,167) (23,586)
Equity in Loss of
Unconsolidated Joint
Venture.................... (104) -- (104) --
----------- ---------- ----------- -----------
Net Earnings................ $ 9,148,380 $4,510,714 $23,163,853 $ 9,737,809
=========== ========== =========== ===========
Earnings Per Share of Common
Stock (Basic and Diluted).. $ 0.16 $ 0.18 $ 0.49 $ 0.48
=========== ========== =========== ===========
Weighted Average Number of
Shares of Common Stock
Outstanding................ 56,421,932 25,371,886 47,633,909 20,368,867
=========== ========== =========== ===========
</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
Nine Months Ended September 30, 1998 and Year Ended December 31, 1997
<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,
1996................... 13,944,715 $139,447 $123,687,929 $ (959,949) $122,867,427
Subscriptions received
for common stock
through public
offering and
distribution
reinvestment plan..... 22,248,256 222,483 222,260,077 -- 222,482,560
Stock issuance costs... -- -- (22,422,045) -- (22,422,045)
Net earnings........... -- -- -- 15,564,456 15,564,456
Distributions declared
and paid
($0.74 per share)..... -- -- -- (16,854,297) (16,854,297)
---------- -------- ------------ ------------ ------------
Balance at December 31,
1997................... 36,192,971 361,930 323,525,961 (2,249,790) 321,638,101
Subscriptions received
for common stock
through public
offerings and
distribution
reinvestment plan..... 25,925,708 259,257 258,997,822 -- 259,257,079
Stock issuance costs... -- -- (25,693,205) -- (25,693,205)
Net earnings........... -- -- -- 23,163,853 23,163,853
Distributions declared
and paid
($0.57 per share)..... -- -- -- (26,460,446) (26,460,446)
---------- -------- ------------ ------------ ------------
Balance at September 30,
1998................... 62,118,679 $621,187 $556,830,578 $ (5,546,383) $551,905,382
========== ======== ============ ============ ============
</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>
Nine Months Ended
September 30,
----------------------------
1998 1997
------------- -------------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities....... $ 26,950,631 $ 10,800,147
------------- -------------
Cash Flows from Investing Activities:
Additions to land and buildings on operating
leases........................................ (103,003,646) (106,915,605)
Investment in direct financing leases.......... (73,492,036) (28,977,515)
Proceeds from sale of buildings and equipment
under direct financing leases................. 2,385,941 7,251,511
Investment in joint venture.................... (633,101) --
Increase in other investments.................. (16,083,055) --
Investment in mortgage notes receivable........ (1,090,000) (4,401,982)
Collection on mortgage notes receivable........ 222,879 186,135
Investment in equipment notes receivable....... (3,363,600) --
Collection on equipment notes receivable....... 1,014,484 --
Increase in restricted cash.................... -- (16,014,345)
Increase in other assets....................... (2,705,428) --
------------- -------------
Net cash used in investing activities......... (196,747,562) (148,871,801)
------------- -------------
Cash Flows from Financing Activities:
Reimbursement of acquisition and stock issuance
costs paid by related parties on behalf of the
Company........................................ (3,455,068) (2,244,153)
Proceeds from borrowing on line of credit....... 4,306,532 16,253,399
Payment on line of credit....................... -- (1,784,577)
Subscriptions received from stockholders........ 259,257,079 149,227,795
Distributions to minority interest.............. (25,429) (25,515)
Distributions to stockholders................... (26,460,446) (10,879,969)
Payment of stock issuance costs................. (22,653,996) (13,584,558)
Other........................................... (92,029) (16,101)
------------- -------------
Net cash provided by financing activities..... 210,876,643 136,946,321
------------- -------------
Net Increase (Decrease) in Cash and Cash
Equivalents..................................... 41,079,712 (1,125,333)
Cash and Cash Equivalents at Beginning of
Period.......................................... 47,586,777 42,450,088
------------- -------------
Cash and Cash Equivalents at End of Period....... $ 88,666,489 $ 41,324,755
============= =============
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Related parties paid certain acquisition and
stock issuance costs on behalf of the Company
as follows:
Acquisition costs.............................. $ 799,419 $ 428,114
Stock issuance costs........................... 2,941,149 1,794,722
------------- -------------
$ 3,740,568 $ 2,222,836
============= =============
Land and buildings under operating leases
exchanged for land and buildings under operating
leases.......................................... $ 2,754,419 $ --
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-5
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
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, 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 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 consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and note disclosures required by generally
accepted accounting principles. The financial statements reflect all
adjustments, consisting of normal recurring adjustments, which are, in the
opinion of management, necessary to a fair statement of the results for the
interim periods presented. Operating results for the quarter and nine months
ended September 30, 1998, may not be indicative of the results that may be
expected for the year ending December 31, 1998. Amounts as of December 31,
1997, 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, 1997.
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. All significant intercompany balances and
transactions have been eliminated. The Company accounts for its 44.29% interest
in CNL/Lee Vista Joint Venture using the equity method because it shares
control with the other joint venture partner.
The Company determines the appropriate classification of other investments
in certificates 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 reported as a separate component of stockholders' equity and in the
statement of comprehensive income, as applicable.
Certain items in the prior year's financial statements have been
reclassified to conform with the 1998 presentation. These reclassifications had
no effect on stockholders' equity or net earnings.
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.
F-6
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In March 1998, the Emerging Issues Task Force of the Financial Accounting
Standards Board ("FASB") reached a consensus in EITF 97-11, entitled
"Accounting for Internal Costs Relating to Real Estate Property Acquisitions."
EITF 97-11 provides that internal costs of identifying and acquiring operating
properties should be expensed as incurred. Due to the fact that the Company
does not have an internal acquisitions function and instead, contracts these
services from an external advisor, the effectiveness of EITF 97-11 had no
material effect on the Company's financial position or results of operations.
In May 1998, the Emerging Issues Task Force of the FASB reached a consensus
in EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Company's financial position or results of operations.
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.
3. Public Offerings
The Company completed its offering of up to 27,500,000 shares of common
stock ($275,000,000) (the "1997 Offering"), which included 2,500,000 shares
($25,000,000) available only to stockholders who elected to participate in the
Company's reinvestment plan, on March 2, 1998. Following the completion of the
1997 Offering, the Company commenced an offering of up to 34,500,000 shares of
common stock ($345,000,000) (the "1998 Offering"). Net proceeds from the 1998
Offering will be invested in additional Properties and Mortgage Loans.
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.
5. Land and Buildings on Operating Leases
In April 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 Boston Market Properties with three replacement Boston
Market Properties. Under the exchange agreements for each Property, each
replacement Property will continue under the terms of the leases of the
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.
F-7
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the nine months ended September 30, 1998, the Company sold three
Properties to third parties. The Company received net sales proceeds of
approximately $2,386,000 which approximated the carrying value of the
Properties at the time of sale. As a result, no gain or loss was recognized for
financial reporting purposes.
Land and buildings on operating leases consisted of the following at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land............................................ $151,703,355 $106,616,360
Buildings....................................... 146,495,502 95,518,149
------------ ------------
298,198,857 202,134,509
Less accumulated depreciation................... (5,033,392) (2,395,665)
------------ ------------
293,165,465 199,738,844
Construction in progress........................ 5,802,507 5,599,342
------------ ------------
$298,967,972 $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 nine months ended September 30, 1998 and 1997, the Company
recognized $2,315,968 and $1,259,180, respectively, of such rental income,
$910,185 and $643,153 of which was earned during the quarters ended September
30, 1998 and 1997, respectively.
The following is a schedule of future minimum lease payments to be received
on the noncancellable operating leases at September 30, 1998:
<TABLE>
<S> <C>
1998............................................................ $ 6,410,842
1999............................................................ 25,832,805
2000............................................................ 25,862,843
2001............................................................ 26,062,291
2002............................................................ 26,822,220
Thereafter...................................................... 386,335,781
------------
$497,326,782
============
</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 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 14).
F-8
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Net Investment in Direct Financing Leases
The following lists the components of the net investment in direct financing
leases at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Minimum lease payments receivable.............. $ 247,230,809 $ 98,121,853
Estimated residual values...................... 44,974,064 6,889,570
Secured Equipment Lease interest receivable.... 72,231 67,614
Less unearned income........................... (175,248,344) (57,465,442)
------------- ------------
Net investment in direct financing leases...... $ 117,028,760 $ 47,613,595
============= ============
</TABLE>
The following is a schedule of future minimum lease payments to be received
on the direct financing leases at September 30, 1998:
<TABLE>
<S> <C>
1998............................................................ $ 3,435,760
1999............................................................ 13,742,634
2000............................................................ 13,937,068
2001............................................................ 13,709,001
2002............................................................ 13,611,870
Thereafter...................................................... 188,794,476
------------
$247,230,809
============
</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. 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 September 30, 1998, the Company had contributed $631,374 to pay
for construction relating to the Property owned by the joint venture. The
Company has agreed to contribute approximately $854,140 in additional
construction costs to the joint venture. When construction 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.
The following presents the condensed financial information for the joint
venture at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land on operating lease and construction in
progress...................................... $1,870,009 $ --
Cash........................................... 899 --
Receivables.................................... 28,900 --
Liabilities.................................... 648,884 --
Partners' capital.............................. 1,250,924 --
Net loss....................................... (428) --
</TABLE>
For the quarter and nine months ended September 30, 1998, the Company
recognized a loss of $104 for this joint venture. The Property owned by the
joint venture was not operational as of September 30, 1998.
F-9
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. 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"). 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, representing an expected blended yield of 12.3%. The
Company classified the investments in these Certificates as available for sale.
At September 30, 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 September 30, 1998 includes $117,261 of
accrued interest.
The Company acquired Class F-1, Class G-1, and Class H-1 Certificates with
fixed pass through rates of 8.4% per annum. These Certificates commenced making
payments of interest monthly in September 1998 and are scheduled to make
payments of principal and interest monthly 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 (7.918%
at September 30, 1998). These Certificates commenced making payments of
interest monthly in September 1998 and are scheduled to make payments of
principal and interest monthly during the period April 2012 through March 2017.
9. Mortgage Notes Receivable
During the nine months ended September 30, 1998, the Company accepted two
promissory notes in the aggregate principal sum of $1,090,000, collateralized
by mortgages on the buildings of two Taco Bell Properties. The promissory notes
bear interest at a rate of 9.50% per annum and will be collected in consecutive
monthly installments of principal and interest totaling $11,382 beginning
October 1, 1998, with balloon payments due September 1, 2005 for the remaining
unpaid balances.
Mortgage notes receivable consisted of the following at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Outstanding principal............................ $17,529,539 $16,662,418
Accrued interest income.......................... 129,754 118,887
Deferred financing income........................ (82,181) (85,448)
Unamortized loan costs........................... 926,285 926,153
----------- -----------
$18,503,397 $17,622,010
=========== ===========
</TABLE>
Management believes that the estimated fair value of mortgage notes
receivable at September 30, 1998 and December 31, 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.
F-10
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Equipment Notes Receivable
In June 1998, the Company entered into a promissory note with a borrower for
equipment financing for $2,200,000, which is collateralized by restaurant
equipment. The promissory note bears interest at a rate of ten percent per
annum and is being collected in consecutive monthly installments of principal
and interest of $36,523 which commenced July 1, 1998, with a balloon payment
due December 15, 1998 for the remaining unpaid balance.
In September 1998, the Company entered into two promissory notes with a
borrower for equipment financing for a total of $460,000, which are
collateralized by restaurant equipment. The two promissory notes bear interest
at a rate of ten percent per annum and will be collected in consecutive monthly
installments of principal and interest totaling $7,636 beginning on October 1,
1998 for one promissory note and November 1, 1998, for the other promissory
note, with balloon payments due September 1, 2003 and October 1, 2005,
respectively, for the remaining unpaid balances.
Equipment notes receivable consisted of the following at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Outstanding principal............................. $14,870,516 $13,225,000
Accrued interest income........................... 149,593 323,044
----------- -----------
$15,020,109 $13,548,044
=========== ===========
</TABLE>
Management believes that the estimated fair value of equipment notes
receivable at September 30, 1998 and December 31, 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.
11. 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. The Advisor has agreed to pay all organizational and
offering expenses (excluding commissions and marketing support and due
diligence expense reimbursement fees) which exceed three percent of the gross
offering proceeds received from the current offering of shares of common stock
of the Company.
During the nine months ended September 30, 1998 and the year ended December
31, 1997, the Company incurred $25,693,205 and $22,422,045, respectively, in
stock issuance costs, including $20,740,566 and $17,798,605, respectively, in
commissions and marketing support and due diligence expense reimbursement fees
(see Note 13). The stock issuance costs have been charged to stockholders'
equity subject to the three percent cap described above.
12. Distributions
For the nine months ended September 30, 1998 and 1997, approximately 86 and
92 percent, respectively, of the distributions paid to stockholders were
considered ordinary income and approximately 14 and eight percent,
respectively, were considered a return of capital to stockholders for federal
income tax purposes. No amounts distributed to the stockholders for the nine
months ended September 30, 1998 and 1997 are required to be or have been
treated by the Company as a return of capital for purposes of calculating the
stockholders' return on their invested capital. The characterization for tax
purposes of distributions declared for the nine months ended September 30, 1998
may not be indicative of the results that may be expected for the year ending
December 31, 1998.
F-11
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Related Party Transactions
During the nine months ended September 30, 1998 and 1997, the Company
incurred $19,444,281 and $11,192,085, respectively, in selling commissions due
to CNL Securities Corp. for services in connection with the offering of shares.
A substantial portion of these amounts ($18,148,849 and $10,427,281) were paid
by CNL Securities Corp. as commissions to other broker-dealers, during the nine
months ended September 30, 1998 and 1997, respectively.
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 nine months ended September 30, 1998 and 1997, the
Company incurred $1,296,285 and $746,139, 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 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 the Mortgage Loans
equal to 4.5% of the total amount raised from the sale of shares. During the
nine months ended September 30, 1998 and 1997, the Company incurred $11,666,569
and $6,715,251, respectively, of such fees. Such fees are included in land and
buildings on operating leases, net investment in direct financing leases,
mortgage notes receivable, investment in joint venture and other assets.
In connection with the acquisition of Properties 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 nine months ended
September 30, 1998 and 1997, the Company incurred $166,876 and $369,570,
respectively, of such fees relating to five and six Properties, respectively.
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 nine
months ended September 30, 1998 and 1997, the Company incurred $22,426 and
$90,592, 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 nine months ended September 30, 1998 and 1997, the
Company incurred $1,289,877 and $558,319, respectively, of such fees, of which
$41,484 and $64,398, respectively, was capitalized as part of the cost of the
buildings for Properties under construction.
In August 1998, the Company acquired an investment of approximately
$16,100,000 in Certificates from CFC, as described in Note 8.
The Advisor and its affiliates provide various administrative services to
the Company, including services related to accounting; financial, tax and
regulatory compliance and reporting; lease and loan compliance; stockholder
distributions and reporting; due diligence and marketing; and investor
relations (including
F-12
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
administrative services in connection with the offering of shares), on a day-
to-day basis. The expenses incurred for these services were classified as
follows for the nine months ended September 30:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Stock issuance costs.................................. $2,069,626 $1,259,411
General operating and administrative expenses......... 773,806 389,806
---------- ----------
$2,843,432 $1,649,217
========== ==========
</TABLE>
For each of the nine months ended September 30, 1998 and 1997, the Company
acquired two Properties for approximately $3,977,000 and $1,773,300,
respectively, from affiliates of the Company. The Properties were acquired at a
cost no greater than the lesser of the cost of each Property to the affiliate,
including its carrying costs, or the Property's appraised value.
The due to related parties consisted of the following at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Due to the Advisor:
Expenditures incurred on behalf of the Company
and accounting and administrative services... $ 578,362 $ 126,205
Acquisition fees.............................. 939,339 386,972
---------- ----------
1,517,701 513,177
---------- ----------
Due to CNL Securities Corp:
Commissions................................... 968,975 940,520
Marketing support and due diligence expense
reimbursement fees........................... 65,735 63,097
---------- ----------
1,034,710 1,003,617
---------- ----------
Due to other affiliates......................... -- 7,500
---------- ----------
$2,552,411 $1,524,294
========== ==========
</TABLE>
14. 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. 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 $20,245,000, of which
approximately $13,104,000 in land and other costs had been incurred as of
September 30, 1998. The buildings currently under construction or renovation
are expected to be operational by March 1999. In connection with the purchase
of each Property, the Company, as lessor, has entered into a long-term lease
agreement.
15. Subsequent Events
On October 13, 1998, the Board of Directors elected to terminate the
Company's reinvestment plan. The Board of Directors based this decision on (i)
the fact that the Company may issue shares under the reinvestment plan only
pursuant to an effective registration statement, (ii) the likelihood that the
1998 Offering will be completed prior to the next distribution date of the
Company and (iii) a determination that it is not in
F-13
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the best interest of the Company at this time to obtain the effectiveness of a
registration statement relating solely to the issuance of shares pursuant to
the reinvestment plan.
The Board of Directors may determine to reinstate the reinvestment plan in
the future subject to obtaining the effectiveness of a registration statement
relating solely to the issuance of shares pursuant to the reinvestment plan.
The shares offered and previously reserved for issuance pursuant to the
reinvestment plan will be available for sale to the public through the 1998
Offering.
The Board of Directors also elected to implement the Company's redemption
plan. Under the redemption plan, the Company may elect to redeem shares,
subject to the conditions and limitations described in the Company's prospectus
(the "Prospectus") as modified by the description below.
At any time, including any time during which the Company is engaged in a
public offering, and prior to such time, if any, as Listing occurs, any
stockholder who purchases shares in the Company's offering or otherwise from
the Company, may present all or any portion equal to at least 25% of such
stockholder's shares to the Company for redemption, in accordance with the
procedures outlined in the Prospectus. At such time, the Company may, at its
option, use up to the full amount of proceeds, if any, from the sale of shares
under the reinvestment plan attributable to a calendar quarter to redeem shares
presented for redemption during such quarter. In addition, the Company may, at
its option, use up to $100,000 per calendar quarter of the proceeds of any
public offering of its shares to redeem shares. Any amount of offering proceeds
which is available for redemptions, but which is unused, may be carried over to
the next succeeding calendar quarter for use in addition to the amount of
offering proceeds and the full amount of proceeds from the sale of shares under
the reinvestment plan that would otherwise be available for redemptions. At no
time during a 12-month period, however, may the number of shares redeemed by
the Company exceed 5% of the number of shares of the Company's outstanding
common stock at the beginning of such 12-month period, even if the amount of
offering proceeds and proceeds from the sale of shares under the reinvestment
plan that would otherwise be available for redemptions would allow the Company
to redeem a greater number of shares.
In addition, the Board of Directors approved an amendment to the advisory
agreement 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. Under the previous
advisory agreement, the Advisor had no incentive to continue providing
acquisition services after the Offering Completion Date because acquisition
fees were limited to 4.5% of the gross proceeds raised by the Company from
equity offerings of the Company. The Advisor has not been paid an acquisition
fee for Properties acquired by the Company using funds from the line of credit,
and will not be paid an acquisition fee for Properties so acquired prior to the
Offering Completion Date, because it is expected that a portion of the proceeds
raised by the Company in the 1998 Offering (on which the Advisor will already
have received an acquisition fee) will be used to repay advances under the line
of credit used to acquire Properties prior to the Offering Completion Date.
In order to provide incentive to the Advisor to continue providing
acquisition services after the Offering Completion Date, the Board of Directors
deemed it to be in the best interests of the Company that the Company pay the
Advisor an acquisition fee, in connection with Properties acquired after the
Offering Completion Date, equal to 4.5% of the purchase price paid by the
Company. The Board of Directors believes that paying acquisition fees after the
Offering Completion Date will permit the Company to continue to benefit
F-14
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
from the Advisor's acquisition expertise and more effectively enhance
stockholder value through the continued expansion of the Company's Property
portfolio.
During the period October 1, 1998 through November 2, 1998, the Company
received subscription proceeds for an additional 5,876,665 shares ($58,766,648)
of common stock.
On October 1, 1998 and November 1, 1998, the Company declared distributions
of $4,015,395 and $4,303,336, respectively, or $0.06354 per share of common
stock, payable in December 1998 to stockholders of record on October 1, 1998
and November 1, 1998, respectively.
During the period October 1, 1998 through November 2, 1998, the Company
acquired five Properties (one of which is under construction) for cash at a
total cost of approximately $3,439,000. In connection with the purchase of each
of the five Properties, the Company, as lessor, entered into a long-term lease
agreement. The building under construction is expected to be operational by
April 1999.
F-15
<PAGE>
Report of Independent Accountants
To the Board of Directors
CNL American Properties Fund, Inc.
We have audited the accompanying consolidated balance sheets of CNL American
Properties Fund, Inc. (a Maryland corporation) and its subsidiary as of
December 31, 1997 and 1996, and the related consolidated statements of
earnings, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. 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 consolidated financial position of CNL American
Properties Fund, Inc. and its subsidiary as of December 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
January 22, 1998
F-16
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases less
accumulated depreciation.......................... $205,338,186 $ 60,243,146
Net investment in direct financing leases.......... 47,613,595 15,204,972
Cash and cash equivalents.......................... 47,586,777 42,450,088
Certificates of deposit............................ 2,008,224 --
Receivables, less allowance for doubtful accounts
of $99,964 and $2,857............................. 635,796 142,389
Notes receivable................................... 13,548,044 --
Mortgage notes receivable.......................... 17,622,010 13,389,607
Accrued rental income.............................. 1,772,261 422,076
Intangibles and other assets....................... 2,952,869 2,972,770
------------ ------------
$339,077,762 $134,825,048
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Line of credit..................................... $ 2,459,043 $ 3,521,816
Accrued construction costs payable................. 10,978,211 6,587,573
Accounts payable and other accrued expenses........ 1,060,497 79,817
Due to related parties............................. 1,524,294 997,084
Rents paid in advance.............................. 517,428 118,900
Deferred rental income............................. 557,576 335,849
Other payables..................................... 56,878 28,281
------------ ------------
Total liabilities.............................. 17,153,927 11,669,320
------------ ------------
Minority interest.................................. 285,734 288,301
------------ ------------
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 and
23,000,000 shares, respectively................. -- --
Common stock, $0.01 par value per share.
Authorized 75,000,000 and 20,000,000 shares,
respectively, issued and outstanding 36,192,971
and 13,944,715, respectively.................... 361,930 139,447
Capital in excess of par value..................... 323,525,961 123,687,929
Accumulated distributions in excess of net
earnings.......................................... (2,249,790) (959,949)
------------ ------------
Total stockholders' equity..................... 321,638,101 122,867,427
------------ ------------
$339,077,762 $134,825,048
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-17
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
----------- ---------- ---------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases..... $12,457,200 $3,731,806 $ 510,841
Earned income from direct financing
leases................................. 3,033,415 625,492 28,935
Interest income from mortgage notes
receivable............................. 1,687,456 1,069,349 --
Other interest income................... 2,254,375 773,404 118,859
Other income............................ 25,487 6,633 496
----------- ---------- ---------
19,457,933 6,206,684 659,131
----------- ---------- ---------
Expenses:
General operating and administrative.... 944,763 542,564 134,759
Professional services................... 65,962 58,976 8,119
Asset and mortgage management fees to
related party.......................... 804,879 251,200 23,078
State taxes............................. 251,358 56,184 20,189
Depreciation and amortization........... 1,795,062 521,871 104,131
----------- ---------- ---------
3,862,024 1,430,795 290,276
----------- ---------- ---------
Earnings before minority interest in
income of consolidated joint venture..... 15,595,909 4,775,889 368,855
Minority Interest in Income of
Consolidated Joint Venture............... (31,453) (29,927) (76)
----------- ---------- ---------
Net Earnings.............................. $15,564,456 $4,745,962 $ 368,779
=========== ========== =========
Earnings Per Share of Common Stock (Basic
and Diluted)............................. $ 0.66 $ 0.59 $ 0.19
=========== ========== =========
Weighted Average Number of Shares of
Common Stock Outstanding................. 23,423,868 8,071,670 1,898,350
=========== ========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-18
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Common stock
-------------------- Capital in Accumulated
Number of excess of par distributions in
shares Par value value excess of net earnings Total
---------- --------- ------------- ---------------------- ------------
<S> <C> <C> <C> <C> <C>
Balance at December 31,
1994................... 20,000 $ 200 $ 199,800 $ -- $ 200,000
Subscriptions received
for common stock
through public
offering and
distribution
reinvestment plan..... 3,845,416 38,454 38,415,704 -- 38,454,158
Stock issuance costs... -- -- (6,403,671) -- (6,403,671)
Net earnings........... -- -- -- 368,779 368,779
Distributions declared
($0.31 per share)..... -- -- -- (638,618) (638,618)
---------- -------- ------------ ------------ ------------
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
($0.71 per share)..... -- -- -- (5,436,072) (5,436,072)
---------- -------- ------------ ------------ ------------
Balance at December 31,
1996................... 13,944,715 139,447 123,687,929 (959,949) 122,867,427
Subscriptions received
for common stock
through public
offering and
distribution
reinvestment plan..... 22,248,256 222,483 222,260,077 -- 222,482,560
Stock issuance costs... -- -- (22,422,045) -- (22,422,045)
Net earnings........... -- -- -- 15,564,456 15,564,456
Distributions declared
($0.74 per share)..... -- -- -- (16,854,297) (16,854,297)
---------- -------- ------------ ------------ ------------
Balance at December 31,
1997.................. 36,192,971 $361,930 $323,525,961 $ (2,249,790) $321,638,101
========== ======== ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-19
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1997 1996 1995
------------- ------------ ------------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows From Operating
Activities:
Cash received from tenants......... $ 15,440,803 $ 4,543,506 $ 492,488
Cash paid for expenses............. (1,903,876) (928,001) (113,384)
Interest received.................. 3,539,287 1,867,035 119,355
------------- ------------ ------------
Net cash provided by operating
activities........................ 17,076,214 5,482,540 498,459
------------- ------------ ------------
Cash Flows From Investing
Activities:
Additions to land and buildings on
operating leases.................. (143,542,667) (36,104,148) (18,835,969)
Increase in net investment in
direct financing leases........... (39,155,974) (13,372,621) (1,364,960)
Proceeds from sale of buildings and
equipment under direct financing
leases............................ 7,251,510 -- --
Investment in certificates of
deposit........................... (2,000,000) -- --
Investment in notes receivable..... (12,521,401) -- --
Investment in mortgage notes
receivable........................ (4,401,982) (13,547,264) --
Collections on mortgage notes
receivable........................ 250,732 133,850 --
Increase in intangibles and other
assets............................ -- (1,103,896) (628,142)
------------- ------------ ------------
Net cash used in investing
activities........................ (194,119,782) (63,994,079) (20,829,071)
------------- ------------ ------------
Cash Flows From Financing
Activities:
Reimbursement of acquisition,
organization, deferred offering
and stock issuance costs paid by
related parties on behalf of the
Company........................... (2,857,352) (939,798) (2,500,056)
Proceeds from borrowing on line of
credit............................ 19,721,804 3,666,896 --
Payment on line of credit.......... (20,784,577) (145,080) --
Contribution from minority interest
of consolidated joint venture..... -- 97,419 200,000
Subscriptions received from
stockholders...................... 222,482,560 100,792,991 38,454,158
Distributions to minority
interest.......................... (34,020) (39,121) --
Distributions to stockholders...... (16,854,297) (5,439,404) (635,286)
Payment of stock issuance costs.... (19,542,862) (8,486,188) (3,680,704)
Other.............................. 49,001 (54,533) --
------------- ------------ ------------
Net cash provided by financing
activities........................ 182,180,257 89,453,182 31,838,112
------------- ------------ ------------
Net Increase in Cash and Cash
Equivalents........................ 5,136,689 30,941,643 11,507,500
Cash and Cash Equivalents at
Beginning of Year.................. 42,450,088 11,508,445 945
------------- ------------ ------------
Cash and Cash Equivalents at End of
Year............................... $ 47,586,777 $ 42,450,088 $ 11,508,445
============= ============ ============
Reconciliation of Net Earnings to
Net Cash Provided by Operating
Activities
Net earnings........................ $ 15,564,456 $ 4,745,962 $ 368,779
------------- ------------ ------------
Adjustments to reconcile net
earnings to net cash provided by
operating activities:
Depreciation....................... 1,784,268 511,078 100,318
Amortization....................... 10,794 69,886 3,813
Increase in receivables............ (905,339) (160,984) (44,749)
Decrease in net investment in
direct financing leases........... 1,130,095 259,740 1,078
Increase in accrued rental income.. (1,350,185) (382,934) (39,142)
Increase in intangibles and other
assets............................ (6,869) (4,293) (8,090)
Increase (decrease) in accounts
payable and other accrued
expenses.......................... 153,223 (2,896) 38,461
Increase (decrease) in due to
related parties, excluding
reimbursement of acquisition,
organization, deferred offering
and stock issuance costs paid on
behalf of the Company............. 15,466 (30,929) 42,868
Increase in rents paid in advance.. 398,528 93,549 25,351
Increase in deferred rental
income............................ 221,727 335,849 --
Increase in other payables......... 28,597 18,585 9,696
Increase in minority interest...... 31,453 29,927 76
------------- ------------ ------------
Total adjustments................. 1,511,758 736,578 129,680
------------- ------------ ------------
Net Cash Provided by Operating
Activities......................... $ 17,076,214 $ 5,482,540 $ 498,459
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Related parties paid certain
acquisition, organization, deferred
offering and stock issuance costs
on behalf of the Company as
follows:
Acquisition costs.................. $ 514,908 $ 206,103 $ 131,629
Organization costs................. -- -- 20,000
Deferred offering costs............ -- 466,405 --
Stock issuance costs............... 2,351,244 338,212 2,084,145
------------- ------------ ------------
$ 2,866,152 $ 1,010,720 $ 2,235,774
============= ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-20
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
1. Significant Accounting Policies
Organization and Nature of Business--CNL American Properties Fund, Inc. (the
"Company") was organized in Maryland on May 2, 1994, 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 certain 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 ("Secured Equipment Leases") to operators of restaurant chains.
The Company was a development stage enterprise from May 2, 1994 through June
1, 1995. Since operations had not begun, activities through June 1, 1995, were
devoted to organization of the Company.
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. All significant
intercompany accounts 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 in
accordance with accounting standards. 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. 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 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.
F-21
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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).
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. For the years ended December 31, 1997 and 1996, accumulated
amortization of $10,318 and $6,318, respectively, was recorded.
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, 1997 and 1996, the Company
had aggregate gross loan costs of $100,634 and $54,533, respectively. For
the years ended December 31, 1997 and 1996, accumulated amortization of
$61,783 and $22,034, respectively, was recorded.
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 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.
F-22
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Reclassification--Certain items in the prior years' financial statements
have been reclassified to conform with the 1997 presentation. These
reclassifications had no effect on stockholders' equity or net earnings.
New Accounting Standards--In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 128,
"Earnings Per Share". The statement, which is effective for fiscal years ending
after December 15, 1997, provides for a revised computation of earnings per
share (see Earnings Per Share). Adoption of this standard had no material
effect on the Company's financial position or results of operations.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 129, "Disclosure of Information about
Capital Structure". The statement, which is effective for fiscal years ending
after December 15, 1997, provides for disclosure of the Company's capital
structure. At this time, the Company's Board of Directors has not determined
the relative rights, preferences, and privileges of each class or series of
preferred stock authorized. Since the Company has not issued preferred shares,
the disclosures to this standard are not applicable.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 "Reporting Comprehensive Income". The
statement, which is effective for fiscal years beginning after December 15,
1997, requires the reporting of net earnings and all other changes to equity
during the period, except those resulting from investments by owners and
distributions to owners, in a separate statement that begins with net earnings.
Currently, the Company's only component of comprehensive income is its net
earnings. The Company does not believe that adoption of this standard will have
a material effect on the Company's financial position or results of operations.
2. Public Offering
The Company has a currently effective registration statement on Form S-11
with the Securities and Exchange Commission for the sale of 27,500,000 shares
($275,000,000) of common stock (the "1997 Offering"). Of the 27,500,000 shares
of common stock, the Company has registered, 2,500,000 shares ($25,000,000) are
available only to stockholders who elect to participate in the Company's
reinvestment plan. The Company has adopted a reinvestment plan pursuant to
which stockholders may elect to have the full amount of their cash
distributions from the Company reinvested in additional shares of common stock
of the Company. Prior to the 1997 Offering, the Company received proceeds from
its initial offering (the "Initial Offering"), of $150,591,765 (15,059,177
shares), including $591,765 (59,177 shares) issued pursuant to the Company's
reinvestment plan. As of December 31, 1997, the Company had received aggregate
subscription proceeds from its Initial Offering and 1997 Offering of
$361,729,709 (36,172,971 shares), including $2,464,413 (246,441 shares) issued
through the reinvestment plan.
On October 10, 1997, the Company filed a registration statement with the
Securities and Exchange Commission in connection with the proposed sale by the
Company of up to 34,500,000 shares of common stock (the "1998 Offering") in an
offering expected to commence immediately following the completion of the
Company's 1997 Offering. Of the 34,500,000 shares of common stock to be
offered, 2,000,000 will be available only to stockholders purchasing shares
through the reinvestment plan. The price per share and the other terms of the
1998 Offering, including the percentage of gross proceeds payable to the
managing dealer for selling commissions and expenses in connection with the
offering, payable to the advisor for acquisition fees and acquisition expenses
and reimbursable to the advisor for offering expenses, will be the same as
those for the Company's 1997 Offering. Net proceeds from the 1998 Offering will
be invested in additional Properties and Mortgage Loans.
F-23
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 accounted for as operating leases. Substantially all
Property leases have initial terms of 15 to 20 years (expiring between 2006 and
2017) 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, 1997 provide for minimum rentals payable monthly and 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>
1997 1996
------------ -----------
<S> <C> <C>
Land.............................................. $106,616,360 $33,850,436
Buildings......................................... 95,518,149 24,152,610
------------ -----------
202,134,509 58,003,046
Less accumulated depreciation..................... (2,395,665) (611,396)
------------ -----------
199,738,844 57,391,650
Construction in progress.......................... 5,599,342 2,851,496
------------ -----------
$205,338,186 $60,243,146
============ ===========
</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, 1997, 1996 and 1995, the Company
recognized $1,941,054, $517,067 and $39,142, respectively, of such rental
income.
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, which were equal to 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 8). The Company reinvested the proceeds from
the sale of Properties in additional Properties.
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a schedule of future minimum lease payments to be received
on the noncancellable operating leases at December 31, 1997:
<TABLE>
<S> <C>
1998............................................................ $ 18,891,310
1999............................................................ 18,931,518
2000............................................................ 18,960,643
2001............................................................ 19,187,537
2002............................................................ 19,982,822
Thereafter...................................................... 265,518,312
------------
$361,472,142
============
</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 13).
5. Net Investment in Direct Financing Leases
The following lists the components of net investment in direct financing
leases at December 31:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Minimum lease payments receivable................ $ 98,121,853 $ 30,162,465
Estimated residual values........................ 6,889,570 1,346,332
Secured equipment lease interest receivable...... 67,614 18,286
Less unearned income............................. (57,465,442) (16,322,111)
------------ ------------
Net investment in direct financing leases........ $ 47,613,595 $ 15,204,972
============ ============
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998............................................................. 6,820,081
1999............................................................. 6,820,081
2000............................................................. 6,872,134
2001............................................................. 6,644,067
2002............................................................. 6,546,936
Thereafter....................................................... 64,418,554
-----------
$98,121,853
===========
</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 4).
6. 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. The promissory notes bear interest at a
rate of ten percent per annum and will be collected in 84 equal monthly
installments totalling $219,550 beginning January 1, 1998. At December 31,
1997, the Company had advanced $12,521,400 to the
F-25
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
borrower and had a remaining balance to fund of $703,600 (included in accounts
payable and other accrued expenses at December 31, 1997). Notes receivable at
December 31, 1997, include accrued interest of $323,044.
Management believes that the estimated fair value of notes receivable at
December 31, 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. Mortgage Notes Receivable
During 1996, in connection with the acquisition of land for 35 Pizza Hut
restaurants, the Company accepted three promissory notes in the aggregate
principal sum of $12,847,000, collateralized by mortgages on the buildings on
the 35 Pizza Hut Properties. The promissory notes bear interest at a rate of
10.75% per annum and are being collected in 240 equal monthly installments
totalling $130,426.
During 1997, in connection with the acquisition of land for nine Pizza Hut
restaurants, the Company accepted a promissory note in the principal sum of
$4,200,000, collateralized by a mortgage on the buildings on the nine Pizza Hut
Properties and two additional Pizza Hut buildings. The promissory note bears
interest at a rate of 10.5% per annum and is being collected in 240 equal
monthly installments of $41,943.
Mortgage notes receivable consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Outstanding principal.............................. $16,662,418 $12,713,151
Accrued interest income............................ 118,887 35,285
Deferred financing income.......................... (85,448) (46,268)
Unamortized loan costs............................. 926,153 687,439
----------- -----------
$17,622,010 $13,389,607
=========== ===========
</TABLE>
Management believes that the estimated fair value of mortgage notes
receivable at December 31, 1997 and 1996 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.
8. Line of Credit
In March 1996, the Company entered into a 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. The line of credit provided that the Company
would be able to receive advances of up to $15,000,000 until March 4, 1998.
Generally, all advances under the line of credit bore interest at either (i) a
rate per annum equal to 215 basis points above the Reserve Adjusted LIBOR Rate
(as defined in the line of credit) or (ii) a rate per annum equal to the bank's
prime rate, whichever the Company selected at the time advances were made. As a
condition of obtaining the line of credit, the Company agreed to grant to the
bank a first security interest in the 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.
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the years ended December 31, 1997 and 1996, the Company obtained
advances totalling $19,721,804 and $3,666,896, respectively, under the Line of
Credit and made principal payments totalling $20,784,577 and $145,080,
respectively. As of December 31, 1997 and 1996, $2,459,043 and $3,521,816,
respectively, of principal was outstanding relating to the Line of Credit, plus
$14,430 and $13,164, respectively, of accrued interest. As of December 31,
1997, the interest rate on amounts outstanding under the Line of Credit was
7.373% (LIBOR plus 1.65%). As of December 31, 1996, the interest rate on
amounts outstanding under the Line of Credit ranged from 7.71% to 7.82% (215
basis points above the Reserve Adjusted LIBOR Rate). The Company believes,
based on current terms, that the carrying value of its note payable at December
31, 1997 and 1996 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, 1997.
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 long-term 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, 1997, the notional balance was
approximately $1,750,000. 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, 1997 and 1996, were $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, 1997, and 1996, the Company paid interest of
$502,680 and $91,757, respectively. No interest was paid during the year ended
December 31, 1995.
9. Stock Issuance Costs
The Company has incurred certain expenses in connection with the public
offerings of its shares, including commissions, marketing support and due
diligence expense reimbursement fees, filing fees, legal, accounting, printing
and escrow fees, which have been deducted from the gross proceeds of the
offerings. CNL Fund Advisors, Inc. (the "Advisor") has agreed to pay all
organizational and offering expenses (excluding commissions and marketing
support and due diligence expense reimbursement fees) which exceed three
percent of the gross offering proceeds received from the sale of shares of the
Company.
During the years ended December 31, 1997, 1996 and 1995, the Company
incurred $22,422,045, $9,216,102 and $6,423,671, respectively, in
organizational and offering costs, including $17,798,605, $8,063,439 and
$3,076,333, respectively, in commissions and marketing support and due
diligence expense reimbursement fees (see Note 11). Of these amounts, as of
December 31, 1997, 1996 and 1995, $38,041,818, $15,619,773 and $6,403,671,
respectively, have been treated as stock issuance costs and $20,000 has been
treated as organization costs. The stock issuance costs have been charged to
stockholders' equity subject to the three percent cap described above.
F-27
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Distributions
For the years ended December 31, 1997, 1996 and 1995, 93.33%, 90.25% and
59.82%, respectively, of the distributions received by stockholders were
considered to be ordinary income and 6.67%, 9.75% and 40.18%, respectively,
were considered a return of capital for federal income tax purposes. No amounts
distributed to stockholders for the years ended December 31, 1997, 1996 and
1995 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.
11. 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 offering 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, 1997, 1996 and 1995, the Company incurred $16,686,192, $7,559,474
and $2,884,062, respectively, of such fees, of which approximately $15,563,500,
$7,059,000 and $2,682,000, respectively, were or will be paid by CNL Securities
Corp. as commissions to other broker-dealers.
In addition, CNL Securities Corp. is entitled to receive a marketing support
and due diligence expense reimbursement fee equal to 0.5% of the total amount
raised from the sale of shares, a portion of which may be reallowed to other
broker-dealers. During the years ended December 31, 1997, 1996 and 1995, the
Company incurred $1,112,413, $503,965 and $192,271, respectively, of such fees,
the majority of which were reallowed to other broker-dealers and from which all
bona fide due diligence expenses were paid.
CNL Securities Corp. will also receive, 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 soliciting dealers whose clients purchased shares in such offering held
shares on such date. As of December 31, 1997, no such fees had been incurred.
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, 1997, 1996 and 1995, the Company incurred $10,011,715,
$4,535,685 and $1,730,437, respectively, of such fees. Such fees are included
in land and buildings on operating leases, net investment in direct financing
leases, mortgage notes receivable 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/ 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, 1997 and 1996, the Company incurred $369,570 and $159,350,
respectively, of such amounts relating to six and three Properties,
respectively. No such amounts were incurred for the year ended December 31,
1995.
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,
F-28
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1997 and 1996, the Company incurred $366,865 and $70,070, respectively, in
Secured Equipment Lease servicing fees. No such amounts were incurred for the
year ended December 31, 1995.
The Company and the Advisor have entered into an advisory agreement pursuant
to which the Advisor will receive a monthly asset and mortgage 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
proceeding 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, 1997,
1996 and 1995, the Company incurred $881,668, $278,902 and $27,950
respectively, of such fees, $76,789, $27,702 and $4,872, 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 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. No deferred, subordinated real
estate disposition fees have been incurred to date.
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 paid 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, 1997, no such
payments have 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, 1997, 1996 and
1995, expenses incurred for these services were classified as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- --------
<S> <C> <C> <C>
Stock issuance costs........................ $1,676,226 $ 769,225 $714,674
General operating and administrative
expenses................................... 556,240 334,603 68,016
---------- ---------- --------
$2,232,466 $1,103,828 $782,690
========== ========== ========
</TABLE>
During the years ended December 31, 1997, 1996 and 1995, the Company
acquired five, four and nine Properties, respectively, for approximately
$5,450,000, $2,610,000 and $6,621,000, 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.
F-29
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---------- --------
<S> <C> <C>
Due to the Advisor:
Expenditures incurred on behalf of the Company and
accounting and administrative services.............. $ 126,205 $199,068
Acquisition fee...................................... 386,972 383,210
---------- --------
513,177 582,278
---------- --------
Due to CNL Securities Corp.:
Commissions.......................................... 940,520 372,227
Marketing support and due diligence expense
reimbursement fees.................................. 63,097 42,579
---------- --------
1,003,617 414,806
---------- --------
Due to other affiliates................................ 7,500 --
---------- --------
$1,524,294 $997,084
========== ========
</TABLE>
12. Concentration of Credit Risk
The following schedule presents rental, earned and interest income from
individual lessees or borrowers, or affiliated groups of lessees or borrowers,
each representing more than ten percent of the Company's total rental, earned
income and interest income from its Properties, Mortgage Loans and Secured
Equipment Leases for at least one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- --------
<S> <C> <C> <C>
Castle Hill Holdings V, L.L.C.,
Castle Hill Holdings VI, L.L.C. and
Castle Hill Holdings VII, L.L.C............. $2,636,004 $1,699,986 $ --
Foodmaker, Inc............................... 1,980,338 346,179 66,813
Houlihan's Restaurants, Inc.................. 1,847,574 -- --
DenAmerica Corp.............................. 1,120,534 420,810 66,595
Golden Corral Corporation.................... 1,064,801 577,003 212,406
Northstar Restaurants, Inc................... 328,914 329,117 73,219
Roasters Corp................................ 47,264 187,609 82,136
</TABLE>
In addition, the following schedule presents total rental, earned, 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 and Secured Equipment Leases and financing
for at least one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- --------
<S> <C> <C> <C>
Pizza Hut................................... $2,636,004 $1,699,986 $ --
Golden Corral Family Steakhouse
Restaurants................................ 2,531,941 1,459,349 212,406
Boston Market............................... 2,338,949 547,590 73,219
Jack in the Box............................. 1,980,338 346,179 66,813
Denny's..................................... 931,752 420,810 66,595
Kenny Rogers' Roasters...................... 47,264 187,609 82,136
</TABLE>
F-30
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 income and interest income could significantly impact
the results of operations of the Company. However, management believes that the
risk of such a default is reduced due to the essential or important nature of
these Properties for the on-going operations of the lessees and borrowers.
13. 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. 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 $14,495,000, of which approximately
$10,202,000 in land and other costs had been incurred as of December 31, 1997.
The buildings currently under construction are expected to be operational by
June 1998. 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.
14. Subsequent Events
During the period January 1, 1998 through January 22, 1998, the Company
received subscription proceeds for an additional 1,231,779 shares ($12,317,791)
of common stock.
On January 1, 1998, the Company declared distributions of $2,299,701 or
$.06354 per share of common stock, payable on March 23, 1998, to stockholders
of record on January 1, 1998.
During the period January 1, 1998 through January 22, 1998, the Company
acquired two Properties (both on which restaurants are being constructed) for
cash at a total cost of approximately $1,067,000. The buildings under
construction are expected to be operational by July 1998. In connection with
the purchase of each Property, the Company as lessor, has entered into a long-
term, triple-net lease agreement.
F-31
<PAGE>
CNL FUND ADVISORS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditor's Report.............................................. F-33
Financial Statements
Consolidated Balance Sheet--As of June 30, 1998......................... F-34
Consolidated Statement of Income--For the Year Ended June 30, 1998...... F-35
Consolidated Statement of Stockholders' Equity--For the Year ended June
30, 1998............................................................... F-36
Notes to Consolidated Financial Statements--For the Year ended June 30,
1998................................................................... F-38
</TABLE>
F-32
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders
CNL Fund Advisors, Inc.
Orlando, Florida
We have audited the accompanying consolidated balance sheet of CNL Fund
Advisors, Inc. and Subsidiary as of June 30, 1998, and the related consolidated
statement of income, stockholders' equity and cash flows for the year then
ended. These 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 audit 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 audit provides 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 June 30, 1998, and the results
of its operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
/s/ McDirmit, Davis, Lauteria, Puckett,
Vogel & Company, P.A.
October 27, 1998,
except for Note 4, as to which
the date is December 31, 1998
F-33
<PAGE>
CNL FUND ADVISORS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
June 30, 1998
<TABLE>
<S> <C>
ASSETS
Current Assets:
Cash and cash equivalents......................................... $ 254,569
Accounts receivable--Related parties.............................. 6,031,010
Notes receivable.................................................. 340,000
----------
Total current assets.......................................... 6,625,579
Investments and Other Assets........................................ 227,454
Office Furnishings and Equipment.................................... 173,553
----------
$7,026,586
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................................................. $1,247,197
Dividends payable................................................. 2,220,000
Current portion of notes payable--Related party................... 67,620
----------
Total current liabilities..................................... 3,534,817
Long-Term Indebtedness:
Notes payable--Related party...................................... 145,927
Amounts Due Under Deferred Agreements............................... 27,454
----------
Total liabilities and deferred expenses....................... 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
Class B Common Stock--Authorized 5,000 shares; par value $1.00
per share; issued and outstanding 3,400 shares 3,400
Additional paid-in capital........................................ 3,308,575
Retained earnings................................................. 13
----------
Total stockholders' equity.................................... 3,318,388
----------
$7,026,586
==========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of this
statement.
F-34
<PAGE>
CNL FUND ADVISORS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF INCOME
Year Ended June 30, 1998
<TABLE>
<S> <C>
Revenues:
Fees............................................................ $19,954,188
Other income.................................................... 227,597
-----------
Total revenues................................................ 20,181,785
-----------
Expenses:
Salaries........................................................ 3,698,192
General and administrative...................................... 4,069,811
-----------
Total expenses................................................ 7,768,003
-----------
Income Before Provision for Income Taxes and Cumulative Effect of
a Change in Accounting for Start-up Costs........................ 12,413,782
Provision for Income Taxes........................................ 4,903,444
-----------
Net Income Before Cumulative Effect of a Change in Accounting for
Start-up Costs................................................... 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........................................................ $ 7,471,101
===========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of this
statement.
F-35
<PAGE>
CNL FUND ADVISORS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
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
====== ====== ========== ========== ===========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of this
statement.
F-36
<PAGE>
CNL FUND ADVISORS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended June 30, 1998
<TABLE>
<S> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Cash Flows From Operating Activities:
Cash collected from customers................................. $18,419,269
Cash paid to employees and other operating cash payments...... (6,608,547)
Income tax paid............................................... (5,826,285)
Interest paid................................................. (219,022)
-----------
Net cash provided by operating activities................... 5,419,269
-----------
Cash Flows From Investing Activities:
Purchase of office furnishings and equipment.................... (129,134)
-----------
Net cash used in investing activities....................... (129,134)
-----------
Cash Flows From Financing Activities:
Net proceeds from borrowings.................................... 84,400
Contributions to capital........................................ 1,062,460
Dividends paid to parent........................................ (6,211,566)
-----------
Net cash used in financing activities....................... (5,064,706)
-----------
Net Increase in Cash and Cash Equivalents......................... 225,429
Cash and Cash Equivalents at Beginning of Fiscal Year............. 29,140
-----------
Cash and Cash Equivalents at End of Fiscal Year................... $ 254,569
===========
Reconciliation of Net Income to Net Cash Provided by Operating
Activities:
Net income per statement of income.............................. $ 7,471,101
Add item not requiring (providing) cash:
Depreciation.................................................. 63,319
Change in accounting for start-up costs....................... 39,237
-----------
Total....................................................... 7,573,657
Adjustments to reconcile net income to net cash provided by
operating activities:
Increase in accounts receivable............................... (2,108,662)
Decrease in income tax payable................................ (922,841)
Increase in accounts payable.................................. 849,661
Increase in amount due under deferred compensation
agreements................................................... 27,454
-----------
Net cash provided by operating activities................... $ 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................................... $ 2,220,000
===========
</TABLE>
The Notes to Consolidated Financial Statements are an integral part of this
statement.
F-37
<PAGE>
CNL FUND ADVISORS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Accordingly, the Company's consolidated financial
statements have been restated to include the accounts and operations of CNL
Growth Fund Advisors, Inc. for all periods prior to the merger.
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.
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--For purposes of the statement of 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 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
F-38
<PAGE>
CNL FUND ADVISORS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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.
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 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
tax of $24,617, during the year ended June 30, 1998.
Note 4--Notes Receivable
The amount due is represented by promissory notes from employees. The notes
carry interest at 7.5% and are collateralized by class B common shares. The
notes were collected in full on December 31, 1998.
F-39
<PAGE>
CNL FUND ADVISORS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 5--Investments and Other Assets
At June 30, 1998, investments and other assets consist of the following:
<TABLE>
<S> <C>
Common stock--CNL American Properties Fund, Inc. carried at cost
which approximates fair market value............................ $200,000
Cash surrender value of life insurance........................... 27,454
--------
Total.......................................................... $227,454
========
</TABLE>
Note 6--Office Furnishings and Equipment
Office furnishings and equipment is summarized as follows:
<TABLE>
<S> <C>
Office furnishing and equipment................................... $ 355,036
Less: Accumulated depreciation.................................... (181,483)
---------
Total........................................................... $ 173,553
=========
</TABLE>
Depreciation expense amounted to $63,319 for the year ended June 30, 1998.
Note 7--Income Taxes
Income taxes are summarized as follows:
<TABLE>
<S> <C>
Balance, Beginning of Year..................................... $ 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, End of Year......................................... $ --
==========
</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 year ended June 30, 1998, the Company earned acquisition
fees in the amount of $13,888,823.
The Company also provides property management and advisory services to
certain related partnerships and APF. For the year ended June 30, 1998, the
Company earned management and advisory fees in the amount of $2,278,569.
The Company also provides development services to CNL Restaurant Services,
Inc., a related company. For the year ended June 30, 1998 the Company earned
development fees of $822,987.
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
F-40
<PAGE>
CNL FUND ADVISORS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
behalf. For the year ended June 30, 1998, the Company earned origination fees
of $1,695,452 and paid expenses of $304,190 related to credit underwriting
services.
During the year ended June 30, 1998, certain affiliated entities provided
accounting and administrative services to the Company. The Company incurred
costs of $58,943, 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 year ended June
30, 1998 amounted to $212,326.
Notes Payable--See Note 11
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.
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 June 30, 1998,
uninsured cash deposits and cash invested in money market funds totaled
$153,644.
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 year ended June 30, 1998,
the Company's contribution, including administration costs, amounted to
$54,208.
F-41
<PAGE>
CNL FUND ADVISORS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 June 30, 1998 is as follows:
<TABLE>
<S> <C>
Year Ending June 30,
1999.............................................................. $ 67,620
2000.............................................................. 57,830
2001.............................................................. 39,279
2002.............................................................. 30,075
2003.............................................................. 18,743
--------
Total........................................................... $213,547
========
</TABLE>
Interest expense amounted to $219,022 for the year ended June 30, 1998.
Note 12--Dividends
During the year ended June 30, 1998, the Company declared dividends to the
parent company of $8,431,566 of which $6,211,566 were paid. As of June 30,
1998, 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.
F-42
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants........................ F-44
Financial Statements
Consolidated Balance Sheets--As of June 30, 1997 and 1998............... F-45
Consolidated Statements of Operations--For the Years ended June 30, 1997
and 1998............................................................... F-46
Consolidated Statements of Stockholders' Equity--For the Years ended
June 30, 1997 and 1998................................................. F-47
Consolidated Statements of Cash Flows--For the Years ended June 30, 1997
and 1998............................................................... F-48
Notes to Consolidated Financial Statements--For the Years ended June 30,
1997 and 1998.......................................................... F-49
</TABLE>
F-43
<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 June 30,
1998 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years then ended, and for 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 June 30, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended, and for the period
from inception (October 9, 1995) through June 30, 1996, in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
Orlando, Florida,
September 4, 1998
F-44
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--JUNE 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS........................... $ 1,808,758 $ 567,534
RESTRICTED CASH..................................... 10,103,916 3,285,313
NOTES RECEIVABLE.................................... 374,482,298 140,781,095
LOAN COSTS, less accumulated amortization of
$699,735 and $60,122 in 1998 and 1997,
respectively....................................... 3,905,133 1,425,802
OTHER ASSETS........................................ 1,298,434 251,803
DEFERRED TAXES...................................... 233,860 --
------------ ------------
$391,832,399 $146,311,547
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable and accrued expenses............. $ 1,836,818 $ 1,122,160
Accrued interest.................................. 993,564 593,876
Deferred taxes.................................... 48,602 --
Notes payable..................................... 358,265,820 140,450,990
Notes payable to related parties.................. 24,290,775 3,854,641
Due to related party.............................. 2,600,458 132,526
Income tax payable................................ 72,009 20,583
Other liabilities................................. -- 5,000
------------ ------------
Total liabilities............................... 388,108,046 146,179,776
============ ============
COMMITMENTS (Note 8)
STOCKHOLDERS' EQUITY
Common stock, $1 par; 1,000 shares authorized, 200
and 100 shares issued and outstanding in 1998 and
1997, respectively .............................. 200 100
Additional paid-in capital........................ 3,887,497 --
Retained (deficit) earnings....................... (163,344) 131,671
------------ ------------
Total stockholders' equity...................... 3,724,353 131,771
------------ ------------
$391,832,399 $146,311,547
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-45
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Years Ended June 30, 1998 and 1997 and For The Period From Inception
(October 9, 1995) Through June 30, 1996
<TABLE>
<CAPTION>
Period from
Inception
(October 9,
1995) through
1998 1997 June 30, 1996
----------- ---------- --------------
<S> <C> <C> <C>
INTEREST INCOME......................... $20,324,223 $3,346,226 $52,063
----------- ---------- -------
EXPENSES:
Interest and loan cost amortization... 17,452,876 2,875,881 43,251
Servicing and administrative fees
(Note 6)............................. 1,089,516 205,837 3,543
Management fees (Note 6).............. 1,155,523 -- --
General and administrative............ 19,740 54,004 956
Other amortization.................... 17,891 8,641 --
Professional services................. 616,867 6,978 --
Other expenses........................ 361,249 5,130 --
----------- ---------- -------
Total expenses...................... 20,713,662 3,156,471 47,750
----------- ---------- -------
(LOSS) INCOME BEFORE INCOME TAXES....... (389,439) 189,755 4,313
(BENEFIT) PROVISION FOR INCOME TAXES.... (94,504) 61,066 1,331
----------- ---------- -------
NET (LOSS) INCOME....................... $ (294,935) $ 128,689 $ 2,982
=========== ========== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-46
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For The Years Ended June 30, 1998 and 1997 and For The Period From Inception
(October 9, 1995) Through June 30, 1996
<TABLE>
<CAPTION>
Additional Retained
Number of Par Paid-in Earnings/
Shares Value Capital (Deficit) Total
--------- ----- ---------- --------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, October 9, 1995..... -- $-- $ -- $ -- $ --
Issuance of 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 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
=== ==== ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-47
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Years Ended June 30, 1998 and 1997, and For The Period From Inception
(October 9, 1995) Through June 30, 1996
<TABLE>
<CAPTION>
Period from
Inception
(October 9,
1995) through
1998 1997 June 30, 1996
------------- ------------- --------------
<S> <C> <C> <C>
Cash Flows From Operating
Activities:
Cash received from borrowers..... $ 19,571,856 $ 2,691,198 $ 40,243
Cash paid for expenses other
than interest................... (1,776,395) (270,333) (60)
Interest paid on notes payable... (15,881,209) (2,069,137) (13,218)
Taxes paid....................... (39,327) (41,814) --
Other interest received.......... 185,794 28,606 342
Fees collected and not remitted
to related party................ 513,712 (76,623) --
------------- ------------- -----------
Net cash provided by
operating activities........ 2,574,431 261,897 27,307
------------- ------------- -----------
Cash Flows From Investing
Activities:
Investment in notes receivable... (248,861,590) (138,368,232) (6,000,000)
Collections on notes
receivable...................... 15,707,935 4,216,313 --
Increase in restricted cash...... (6,818,603) (3,285,313) --
Payment of note costs............ -- (73,483) --
Payment of organization costs.... (45,517) (60,754) (3,179)
Fee collected and not remitted
to related party................ 115,295
------------- ------------- -----------
Net cash used in investing
activities.................. (240,017,775) (137,571,469) (5,887,884)
============= ============= ===========
Cash Flows From Financing
Activities:
Proceeds from borrowing on notes
payable......................... 230,275,399 219,208,505 6,000,000
Proceeds from borrowing on note
payable to related party........ 20,021,938 3,800,000 --
Repayments on notes payable...... (12,460,567) (84,757,515) --
Payment of loan costs............ (3,134,657) (544,861) 3,179
Contributions from
stockholders.................... 3,887,517 -- 100
Proceeds from related party...... 94,938 28,275 --
Net cash provided by
financing activities........ 238,684,568 137,734,404 6,003,279
Net Increase in Cash and Cash
Equivalents...................... 1,241,224 424,832 142,702
Cash and Cash Equivalents,
beginning of period.............. 567,534 142,702 --
------------- ------------- -----------
Cash and Cash Equivalents, end of
period........................... $ 1,808,758 $ 567,534 $ 142,702
============= ============= ===========
Reconciliation of Net (Loss)
Income to Net Cash Provided by
Operating Activities:
Net (loss) income................ $ (294,935) $ 128,689 $ 2,982
------------- ------------- -----------
Adjustments to reconcile net
(loss) income to net cash
provided by
operating activities--
Amortization of note costs
included in interest income... -- 2,273 --
Amortization of loan costs
included in interest expense.. 639,613 60,019 103
Other amortization............. 17,891 5,990 284
Provision for deferred taxes... (185,258) -- --
Increase in other assets....... (96,113) (10,996) --
Increase in accrued interest
income included in notes
receivable.................... (547,551) (617,698) (11,478)
Increase in due to related
party......................... 2,117,991 44,748 690
Increase in accounts payable,
accrued expenses and income
tax payable................... 108,908 84,640 5,082
Increase in accrued interest
included in notes payable to
related parties............... 414,196 -- --
Increase in accrued interest... 399,689 564,232 29,644
------------- ------------- -----------
Total adjustments............ 2,869,366 133,208 24,325
------------- ------------- -----------
Net cash provided by
operating activities........ $ 2,574,431 $ 261,897 $ 27,307
============= ============= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-48
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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). 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., CNL Financial III, LLC (Fin III), CNL Financial
III, SPC, Inc., CNL Funding Corporation, CNL Financial LP Holding Corp., CNL
Financial IV, Inc. and CNL Financial IV, LP (Fin IV) (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 fiscal 1998, the Company sold 20 shares of common stock for
approximately $3,887,000, net of issuance costs of $112,484, to Five Arrows
Realty Securities LLC (Five Arrows).
Principles of Consolidation
The consolidated financial statements include the accounts of CFC and its
subsidiaries (collectively, the Company). 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.
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.
F-49
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Other Assets
Other assets consist primarily of securitization costs, organizational costs
and prepaid expenses.
Notes Payable
The carrying amounts of the Company's notes payable approximate fair value
at June 30, 1998 and 1997, since the interest rates approximate rates currently
available to the Company for borrowings.
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
The Company has entered into interest-rate swap agreements (the Agreements)
as a means of managing its interest-rate exposure. The Agreements have the
effect of converting certain draws of the Company's variable-rate notes payable
to fixed-rate notes payable. Net amounts paid or received are reflected as
adjustments to interest expense. The Agreements are accounted for as hedge
positions as of June 30, 1998 and 1997. 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 June 30, 1998 and 1997, the Company
estimates it would have paid $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 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.
Accounting for Derivatives
In June 1998, the Financial Accounting Standards Board 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 balance sheet and measure those instruments at fair value.
SFAS 133 is effective for all fiscal years beginning after June 15, 1999. SFAS
133 should not be applied retroactively to financial statements of prior
periods. As of June 30, 1998, the Company has not yet determined the impact of
the implementation of this standard.
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.
F-50
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Reclassifications
Certain prior-year amounts have been reclassified to conform with the
current-year presentation.
2. Other Assets
Other assets consisted of the following at June 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------- --------
<S> <C> <C>
Securitization costs................................... $ 935,626 $ --
Organizational costs................................... 109,209 76,427
Prepaid expenses....................................... 119,929 --
Other.................................................. 157,838 181,653
---------- --------
1,322,602 258,080
Less--Accumulated amortization......................... (24,168) (6,277)
---------- --------
$1,298,434 $251,803
========== ========
</TABLE>
Securitization costs consist of costs incurred related to the securitization
transaction (see Note 3) such as attorney and accounting fees. These costs will
be expensed in the period that the securitization transaction occurs.
Organizational costs consist of costs incurred in the formation of the
Company, including legal and accounting fees. These costs are amortized over
five years using the straight-line method.
3. Notes Receivable
Notes receivable consisted of the following at June 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Outstanding principal............................. $373,305,571 $140,151,919
Accrued interest income........................... 1,176,727 629,176
------------ ------------
$374,482,298 $140,781,095
============ ============
</TABLE>
During the years ended June 30, 1998 and 1997, and for the period from
inception (October 9, 1995) to June 30, 1996, the Company originated
$218,940,681, $125,123,451 and $6,000,000 in new loans, respectively. During
the years ended June 30, 1998 and 1997, the Company also funded construction
draws of $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 $191,460,014 at June
30, 1998, had interest rates ranging from 8.38 percent to 8.97 percent. The
fixed-rate notes receivable, which totaled $174,260,442 at June 30, 1998, had
interest rates ranging from 8.28 percent to 11.23 percent. The construction
notes receivable totaled $7,585,115 at June 30, 1998, with interest rates at
10.50 percent. Interest income was $20,324,223, $3,346,226 and $51,721 for the
years ended June 30, 1998 and 1997, and for the period from inception (October
9, 1995) to June 30, 1996, respectively.
F-51
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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,
net of the notes receivable that were sold in the securitization transaction
that occurred subsequent to June 30, 1998 (see below):
<TABLE>
<CAPTION>
Fiscal Year Amount
----------- ------------
<S> <C>
1999............................................................ $ 3,227,697
2000............................................................ 3,631,458
2001............................................................ 3,971,181
2002............................................................ 4,334,156
2003............................................................ 4,635,176
Thereafter...................................................... 83,028,4378
------------
$102,828,105
============
</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 June 30, 1998,
the Company estimates that the fair value is $387,543,441.
On August 14, 1998, the Company securitized some of its notes receivable
with a carrying value of approximately $269,445,000 as of June 30, 1998. The
securitization transaction involved notes receivable held by Fin I, Fin III and
Fin IV. Gross proceeds of $275,786,153 were allocated among these entities
based upon the net book value of the notes receivable that were securitized.
The Company retained certain interests and securities from the securitization
with an allocated cost basis of approximately $6,930,000 and estimated fair
value of approximately $7,268,000. Subsequent to June 30, 1998, the Company
recorded a gain, net of the securitization costs, from the securitization and
the subsequent market value adjustment of approximately $3,694,000.
4. Notes Payable
On September 25, 1997, the Company entered into a credit agreement (the
Credit Agreement) with Five Arrows, a related party, which owns 10 percent of
the common stock of the Company as of 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 CNL Financial Services, Inc., a
related party (see Note 6). The outstanding balance under the Credit Agreement
at June 30, 1998, was $20,000,000, plus accrued interest of $55,233 included in
notes payable to related parties in the accompanying consolidated balance
sheets. 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 Franchise 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 Franchise 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 secured by (a) the underlying real property or a
F-52
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 Franchise Loan provides that Fin I is
entitled to receive advances of up to $150,000,000 until September 29, 1998.
After September 29, 1998, the Company is entitled to receive advances of up to
$100,000,000 until November 12, 1999, with possible extensions through November
12, 2001. Principal repayments are based on the related notes receivable
amortization schedule. The outstanding balance under the Franchise Loan at June
30, 1998 and 1997, was $88,019,396 and $39,215,472, respectively, and accrued
interest, including interest-rate swap charges, was $543,731 and $319,799,
respectively. Fin I incurred legal fees and closing costs of $311,996 in
connection with the Franchise Loan, which are classified as loan costs on the
accompanying consolidated balance sheets. Loan costs increased by $93,455
during fiscal 1998 as a result of the renegotiations and loan amendment entered
into during the year. Advances under the Franchise Loan bear interest at the
average LIBOR rate plus 180 basis points (7.4602 percent and 7.4875 percent at
June 30, 1998 and 1997, respectively).
On April 9, 1997, Fin III entered into a loan agreement (the Magenta Loan)
with Magenta Capital Corporation (Magenta). The Loan was amended on March 27,
1998 (the Magenta Loan Amendment). Pursuant to the terms of the Magenta 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 Magenta Loan provides that Fin III is entitled to
receive advances of up to $300,000,000 until April 9, 2002. There are no set
repayment terms and the aggregate outstanding principal is due April 9, 2024.
The outstanding balance under the Magenta Loan at June 30, 1998 and 1997, was
$220,043,424 and $101,235,518, respectively, and accrued interest, including
interest-rate swap charges, was $367,771 and $274,077, respectively. Fin III
incurred legal fees and closing costs of $2,516,284 in connection with the
Magenta Loan, which are classified as loan costs on the accompanying
consolidated balance sheets. Loan costs increased by $1,301,166 during fiscal
1998 as a result of the renegotiations and the Magenta Loan Amendment entered
into during the year. Advances under the Magenta Loan bear interest at the
average rate on the commercial paper (5.76 percent and 5.88 percent at 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 CNL Financial Services, Inc. related to the Magenta Loan. The
Magenta 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 will 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 Magenta 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 may 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 fiscal 1998.
On April 6, 1998, Fin IV entered into a Franchise Loan and Wholesale
Warehouse Mortgage Agreement (the Loan) with a bank, with limited guarantees by
CNL Group, Inc., a related party. Pursuant to the terms of the 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 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 Loan, as well as each securitization transaction, and
thereafter, $200,000,000 until April 5, 1999, with a possible extension through
April 4, 2000. Fin IV, at its
F-53
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
sole discretion, may increase the facility amount to $200,000,000 during the
180 days following each securitization transaction. There are no set repayment
terms. The outstanding balance at June 30, 1998, was $50,203,000 and accrued
interest, including interest-rate swap charges, was $82,062. Fin IV incurred
legal fees and closing costs of $1,039,618 in connection with the Loan, which
are classified as loan costs on the accompanying consolidated balance sheets.
Advances under the Loan bear interest at the average rate on commercial paper
(6.02 percent at June 30, 1998) used by the bank to fund the advances.
Interest expense for the Company for the years ended June 30, 1998 and 1997,
and for the period from inception (October 9, 1995) through June 30, 1996, was
$17,452,876, $2,875,881 and $42,965, respectively, including $639,613, $60,019
and $0, respectively, of loan costs amortization. The weighted average interest
rate on the Fin I Franchise Loan during 1998 and 1997 was 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 Magenta Loan
during 1998 and 1997 was 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 Franchise Loan during 1998 was 9.94
percent, including amortization of loan and swap costs and the swap interest
charges.
The Company entered into interest-rate swap agreements with two banking
institutions to reduce the effect of changes in interest rates on its floating-
rate debt. The agreements effectively change the Company's interest-rate
exposure on certain floating-rate debt totaling approximately $316,967,000 to
fixed rates ranging from 5.90 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, which
approximate the term of the related notes receivable. 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 were as follows at June
30, 1998:
<TABLE>
<CAPTION>
earYEnding
June 30, Amount
- ----------- ------------
<S> <C>
1999........................................................... $ 1,259,873
2000........................................................... 54,384,998
2001........................................................... 3,944,446
2002........................................................... 4,315,816
2003........................................................... 4,722,255
Thereafter..................................................... 289,638,432
------------
$358,265,820
============
</TABLE>
5. Income Taxes
The (benefit) provision for income taxes consisted of the following for the
years ended June 30, 1998 and 1997, and for the period from inception (October
9, 1995) through June 30, 1996:
<TABLE>
<CAPTION>
1998 1997 1996
--------- ------- ------
<S> <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.......................................... (172,267) -- --
State............................................ (12,991) -- --
--------- ------- ------
(185,258) -- --
--------- ------- ------
Total (benefit) provision for income taxes..... $ (94,504) $61,066 $1,331
========= ======= ======
</TABLE>
F-54
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
An analysis of the difference in the Company's (benefit) provision for
income taxes and income taxes calculated at the U.S. Federal statutory codes is
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- ------- ------
<S> <C> <C> <C>
Computed income taxes at statutory rate........ $(132,407) $64,517 $1,466
State and local tax effects, net of federal
benefit....................................... 12,991 6,080 156
Personal holding company....................... 24,490 -- --
Other, net..................................... 422 (9,531) (291)
--------- ------- ------
(Benefit) provision for income taxes....... $ (94,504) $61,066 $1,331
========= ======= ======
</TABLE>
The primary difference between the provision for income taxes and the
expected amounts by applying the applicable federal income tax rate to income
before provision for income taxes is the inclusion of state income taxes, net
of the federal tax benefit, personal holding company taxes, and the difference
in tax rates used to record the deferred tax assets and liabilities.
Deferred taxes consisted of the following at June 30, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
-------- ----
<S> <C> <C>
Gross deferred tax assets.................................... $233,860 $--
Gross deferred tax liabilities............................... (48,602) --
-------- ----
$185,258 $--
======== ====
</TABLE>
Gross deferred tax assets are primarily related to the amortization of
organizational and loan origination costs. Gross deferred tax liabilities are
primarily related to the prepayment of intangible taxes.
6. Related-Party Transactions
One of the stockholders of the Company, James M. Seneff, Jr., is a principal
shareholder of CNL Group, Inc., the parent company of CNL Financial Services,
Inc. Another stockholder of the Company, Robert A. Bourne, is the president of
CNL Group, Inc., an officer of CNL Financial Services, Inc. and the sole
shareholder of CNL Restaurants II, Inc.
The Company's subsidiaries have entered into servicing and administration
agreements pursuant to which CNL Financial Services, Inc. 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 CNL Financial Services, Inc,. 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 $1,089,516, $205,837 and $3,543 in servicing
and administrative fees for the years ended June 30, 1998 and 1997, and for the
period from inception (October 9, 1995) through June 30, 1996, respectively.
During 1998, the Company entered into a management and advisory agreement,
pursuant to which the Company pays for certain services rendered to the Company
by CNL Financial Services, Inc. Under the management and advisory agreement,
the Company must pay CNL Financial Services, Inc. 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
$1,155,523 in expense related to these fees for the year ended June 30, 1998.
Of this amount, $250,000 was capitalized into loan costs and is being amortized
F-55
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
to expense over the life of the loan. The remaining $100,000 was accounted for
by the Company as a reduction of capital related to the issuance of stock in
the current year. Additionally, the agreement provides that CNL Financial
Services, Inc. be eligible for a performance bonus. The performance bonus shall
be determined at the discretion of the Company's Board of Directors. No such
bonus was approved for the year ended June 30, 1998.
At June 30, 1998 and 1997, the Company had recorded a liability to CNL
Financial Services, Inc. of $2,600,458 and $132,526, respectively, primarily
related to application, commitment and origination fees collected by the
Company on behalf of CNL Financial Services, Inc and management,
administrative, arrangement and advisory fees due to CNL Financial Services,
Inc. by the Company.
The Company entered into three promissory note agreements during fiscal
1997, and three promissory note agreements during fiscal 1998 (collectively,
Related Party Notes), with CNL Financial Services, Inc. under which the Company
had borrowed $3,821,938 and $3,800,000, as of June 30, 1998 and 1997,
respectively. The Related Party Notes bear interest at 12 percent, are
unsecured and are due upon demand. At June 30, 1998 and 1997, accrued interest
of $413,604 and $54,641, respectively, was included in notes payable to related
parties.
CNL Group, Inc. has a line of credit with a bank under which the bank has
the option to convert the line of credit to a subordinated debenture prior to
November 12, 1998. Upon the conversion to a subordinated debenture, CNL Group,
Inc. will issue warrants entitling the bank to purchase 10 percent of the
Company's outstanding stock, subject to the antidilution provision contained in
the Company's Shareholders' Agreement dated September 25, 1997. Unexercised
warrants will expire on November 12, 1999.
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 are $77,968 per month with an annual interest rate of 9.64 percent.
The loan period is for 180 months and is secured by leasehold improvements and
equipment. Interest earned from the related party was $709,533 for the year
ended June 30, 1998. 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).
7. Concentration of Credit Risk
The following schedule presents interest income by obligor, each
representing more than 10 percent of the Company's total interest income for
the years ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
Obligor 1998 1997
------- ---------- --------
<S> <C> <C>
El Rancho New York Foods, Inc. and
El Rancho New Jersey Foods, Inc........................ $2,120,490 $ --
Valenti Mid Atlantic Management, LLC
and Valenti Mid Atlantic Realty, Inc................... 2,438,435 --
Main Street & Main, Inc................................. -- 364,903
Main Street California II, Inc.......................... -- 336,116
In addition, the following schedule presents interest income of obligors by
individual restaurant chain, each representing more than 10 percent of the
Company's total interest income for the years ended June 30, 1998 and 1997:
<CAPTION>
Chain 1998 1997
----- ---------- --------
<S> <C> <C>
Burger King............................................. $2,881,011 $ --
Taco Bell............................................... 3,187,718 --
TGI Friday's............................................ 5,581,091 992,945
Wendy's................................................. 2,821,160 --
</TABLE>
F-56
<PAGE>
CNL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following schedule presents the notes receivable by obligor, each
representing more than 10 percent of the Company's total notes receivable
balances at June 30, 1998 and 1997:
<TABLE>
<CAPTION>
Obligor 1998 1997
------- ----------- -----------
<S> <C> <C>
S & A Restaurant Corp............................... $45,854,000 $ --
Main Street & Main, Inc............................. -- 21,245,008
Valenti Mid-Atlantic Realty, LLC.................... -- 25,550,000
</TABLE>
In addition, the following schedule presents the notes receivable of
obligors by individual restaurant chain, each representing more than 10 percent
of the Company's total notes receivable balances at June 30, 1998 and 1997:
<TABLE>
<CAPTION>
Chain 1998 1997
----- ----------- -----------
<S> <C> <C>
Burger King.......................................... $47,614,538 $ --
Taco Bell............................................ 40,737,846 22,378,287
TGI Friday's......................................... 71,212,110 52,478,081
Wendy's.............................................. 49,820,676 25,550,000
Applebee's........................................... -- 15,745,741
</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 note 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.
8.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 unfunded
commitment totaled approximately $13,376,000 at June 30, 1998.
9.Events Subsequent to Date of Report of Independent Certified Public
Accountants (Unaudited)
On October 2, 1998, the Company reduced the availability on the Magenta Loan
(See Note 4) from $300,000,000 to $150,000,000. In connection with reducing the
availability, the Company expensed approximately $939,000 of previously
capitalized loan costs. Concurrent with reducing the availability on the
Magenta Loan, the Company formed a wholly-owned subsidiary, CNL Financial V, LP
(Fin V) and entered into a loan agreement with Prudential Securities Credit
Corporation (the Prudential Loan). Pursuant to the terms of the Prudential
Loan, Fin V is entitled to obtain loans for making secured loans to certain
restaurant franchisees or franchisors. The Prudential Loan provides that Fin V
is entitled to receive advances of up to $300,000,000. All amounts outstanding
on the Magenta Loan were transferred to either the Franchise Loan or the
Prudential Loan. CNL Financial Services, Inc. and CNL Group are also
contingently liable under a performance guarantee on the Prudential Loan in
favor of Fin V.
On November 12, 1998, the option available to a bank to convert the CNL
Group Inc. line of credit (See Note 6) to a subordinated debenture lapsed.
F-57
<PAGE>
CNL FINANCIAL SERVICES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants........................ F-59
Financial Statements
Balance Sheets--As of June 30, 1997 and 1998............................ F-60
Statements of Operations--For the years ended June 30, 1997 and 1998 and
the Period from Inception (October 10, 1995 through June 30, 1996)..... F-61
Statements of Stockholders' Equity--For the years ended June 30, 1997
and 1998 and the Period from Inception (October 10, 1995 through June
30, 1996).............................................................. F-62
Statements of Cash Flows--For the years ended June 30, 1997 and 1998 and
the Period from Inception (October 10, 1995 through June 30, 1996)..... F-63
Notes to Financial Statements--For the years ended June 30, 1997 and
1998 and the Period from Inception (October 10, 1995 through June 30,
1996).................................................................. F-64
</TABLE>
F-58
<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 June 30, 1998 and 1997, and the related
statements of operations, stockholders' equity and cash flows for 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 June 30, 1998 and 1997, and the results of its operations and its
cash flows for 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,
September 4, 1998
F-59
<PAGE>
CNL FINANCIAL SERVICES, INC.
BALANCE SHEETS--JUNE 30, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................ $ 4,430 $ 251,498
Due from related parties (note 2)........................ 6,836,000 3,990,489
Prepaid expenses......................................... 8,304 --
Office furnishings and equipment, net of accumulated
depreciation of $88,462 and $19,996 in 1998 and 1997,
respectively............................................ 239,612 26,844
Other assets............................................. -- 265,105
---------- ----------
$7,088,346 $4,533,936
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses.................. $ 340,826 $ 58,117
Due to related party (Note 2).......................... 869,318 3,545,078
---------- ----------
Total liabilities.................................... 1,210,144 3,603,195
---------- ----------
Commitments (note 5)
Stockholders' equity
Common stock, $1 par value; 10,000 shares authorized,
2,000 and 1,800 issued and outstanding for 1998 and
1997, respectively.................................... 2,000 1,800
Additional paid-in capital............................. 5,231,827 541,614
Retained earnings...................................... 644,375 387,327
---------- ----------
Total stockholders' equity........................... 5,878,202 930,741
---------- ----------
$7,088,346 $4,533,936
========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-60
<PAGE>
CNL FINANCIAL SERVICES, INC.
STATEMENTS OF OPERATIONS
For 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
Year Ended June 30, (October 10, 1995)
---------------------- Through
1998 1997 June 30, 1996
---------- ---------- ------------------
<S> <C> <C> <C>
Fee revenues (note 2)............... $5,974,885 $1,804,357 $ --
Expenses:
Origination fees (Note 2)......... 1,695,452 -- --
Salaries.......................... 1,448,359 431,001 95,200
General and administrative........ 3,014,760 602,554 93,659
---------- ----------
Total expenses.................. 6,158,571 1,033,555 188,859
---------- ---------- ---------
Operating (loss) income............. (183,686) 770,802 (188,859)
---------- ---------- ---------
Interest income (note 2)............ 608,560 54,641 --
Income (loss) before income taxes... 424,874 825,443 (188,859)
Provision (benefit) for income taxes
(Note 3)........................... 167,826 326,050 (76,793)
---------- ---------- ---------
Net income (loss)................... $ 257,048 $ 499,393 $(112,066)
========== ========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-61
<PAGE>
CNL FINANCIAL SERVICES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For The Years Ended June 30, 1998 and 1997, and
The Period From Inception (October 10, 1995) Through June 30, 1996
<TABLE>
<CAPTION>
Number Additional Retained
of Par Paid-in (Deficit)/
Shares Value Capital Earnings Total
------ ------ ---------- ---------- ----------
<S> <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
====== ====== ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-62
<PAGE>
CNL FINANCIAL SERVICES, INC.
STATEMENTS OF CASH FLOWS
For 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
(October 10, 1995)
Year Ended June 30, Through
----------------------- June 30,
1998 1997 1996
----------- ---------- ------------------
<S> <C> <C> <C>
Cash Flows From Operating
Activities:
Cash received from customers.. $ 3,802,221 $1,685,914 $ --
Interest income............... 197,650 54,641 --
Cash paid to employees and
other operating cash payments (6,211,431) (895,804) (180,908)
Income tax (paid) refunded.... (493,876) 76,793 --
----------- ---------- ---------
Net cash (used in) provided
by operating activities... (2,705,436) 921,544 (180,908)
----------- ---------- ---------
Cash Flows From Investing
Activities:
Payment of organizational
expenses.................... -- -- (361,506)
Purchase of office
furnishings and equipment... (281,235) (35,434) --
----------- ---------- ---------
Net cash used in investing
activities................ (281,235) (35,434) (361,506)
----------- ---------- ---------
Cash Flows From Financing
Activities:
Net proceeds from borrowings
for office furnishings and
equipment................... 15,592 29,512 --
Proceeds from issuance of
common stock................ 4,690,413 -- 543,414
Net (repayments) advances
from related parties........ (1,944,466) 3,189,517 --
Net advances to related
parties..................... (21,936) (3,854,641) --
----------- ---------- ---------
Net cash provided by (used
in) financing activities.. 2,739,603 (635,612) 543,414
----------- ---------- ---------
Net (decrease) increase in cash
and cash equivalents.......... (247,068) 250,498 1,000
Cash and cash equivalents,
beginning of fiscal year...... 251,498 1,000 --
----------- ---------- ---------
Cash and cash equivalents, end
of fiscal year................ $ 4,430 $ 251,498 $ 1,000
=========== ========== =========
Reconciliation of Net Income to
Net Cash Provided by Operating
Activities:
Net income (loss)............ $ 257,048 $ 499,393 $(112,066)
----------- ---------- ---------
Adjustments to reconcile net
income (loss) to net cash
(used in) provided by
operating activities--
Amortization................ 25,105 72,301 24,100
Depreciation................ 45,830 8,590 --
(Increase) decrease in due
from related parties (2,583,575) 284,400 (94,198)
Increase in prepaid
expenses................... (8,304) -- --
Decrease in due to related
parties.................... (724,249) -- --
Increase in accounts payable
and accrued expenses....... 282,709 56,860 1,256
----------- ---------- ---------
Total adjustments.......... (2,962,484) 422,151 (68,842)
----------- ---------- ---------
Net cash (used in) provided
by operating activities... $(2,705,436) $ 921,544 $(180,908)
=========== ========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-63
<PAGE>
CNL FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998, 1997 AND 1996
1.Significant Accounting Policies
Organization and Nature of Business
CNL Financial Corporation, a Florida C corporation, was organized on October
10, 1995, and on December 15, 1995, its name was changed to CNL Financial
Services, Inc. (the Company). 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 of principal and interest on the outstanding notes
receivable balances, maintaining the accounting records and providing reports
to parties of the loan agreements.
During fiscal 1998, the Company sold 200 shares of 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.
Cash and Cash Equivalents
For purposes of the statements of cash flows, cash and cash equivalents
include cash and cash invested in liquid instruments with a maturity of three
months or less when purchased.
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.
Other Assets
As of June 30, 1997, other assets consist primarily of costs incurred in
connection with the organization and startup of CFC. During fiscal 1998, the
Company entered into an agreement with CFC whereby CFC agreed to reimburse the
Company for $240,000 of these costs. Therefore, these costs were reclassified
to due from related parties as of June 30, 1998.
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 approximately $25,105 of capitalized
costs during the year ended June 30, 1998.
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 revenue includes fees earned for accounting, loan origination and
servicing, management, advisory, and administration services. The Company
recognizes fee revenue as the services are provided.
F-64
<PAGE>
CNL FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 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, tbe president of the Parent and
officer of the Company, Robert A. Bourne, is also a stockholder of CFC.
Fees
Substantially all fees earned by the Company are for services provided to
CFC and its subsidiaries. In addition, during 1998, the Company and CFC entered
into a management agreement whereby CFC pays the Company a management fee,
advisory fee, arrangement fee, executive fee, guarantee fee and administration
fee, as defined in the agreement. Additionally, the management and advisory
agreement provides that the Company is eligible for a performance bonus, if
approved, and in such amounts as may be determined by the Board of Directors of
CFC at its discretion. No such bonus was approved for the year ended June 30,
1998.
Due From Related Parties
Due from related parties consisted of the following at June 30, 1998 and
1997:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Fees receivable........................................ $2,360,458 $ 135,848
Advances receivable.................................... 4,235,542 3,854,641
Organization costs..................................... 240,000 --
$6,836,000 $3,990,489
</TABLE>
The fees receivable are due from CFC or its subsidiaries 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 and are unsecured, bear interest at
12 percent per annum, and are due on demand. For the years ended June 30, 1998,
1997 and 1996, the Company earned interest of $608,560, $54,641 and $0,
respectively, related to these advances.
F-65
<PAGE>
CNL FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The organization costs are due from CFC for expenses incurred by the Company
on behalf of CFC (see Note 1).
CNL Group, Inc. Loan Conversion Option
The Parent has a line of credit with a bank under which the bank has the
option to convert the line of credit to a subordinated debenture prior to
November 12, 1998. Upon the conversion to a subordinated debenture, the Parent
will issue warrants entitling the bank to purchase 10 percent of the Company's
outstanding stock, subject to the antidilution provision contained in the
Company's Shareholders' Agreement dated September 25, 1997. Unexercised
warrants will expire on November 12, 1999.
Performance Guarantees
The Company is also 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 June 30, 1998, CFC had $20,000,000 outstanding
related to these agreements.
The Parent is also contingently liable under a performance guarantee in
favor of CNL Financial III, LLC, 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 CNL Financial III, LLC and Magenta Capital Corporation. As of June
30, 1998, CNL Financial III, LLC had $220,043,424 outstanding related to this
agreement.
Additionally, the Parent is contingently liable under a performance
guarantee in favor of CNL Financial IV, LP, 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
(the Magenta Loan) which it has entered into with CNL Financial IV, LP and
Variable Funding Capital Corporation. As of June 30, 1998, CNL Financial IV, LP
had $50,203,000 outstanding related to this agreement.
Loan Guarantee
The Parent is contingently liable under a Limited Recourse Agreement related
to a $150 million Warehouse Agreement between CNL Financial I, Inc., 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
criteria set forth by the lender. Such underwriting services are performed by
the Company.
Due to Related Party
During the years ended June 30, 1998, 1997 and 1996, certain affiliated
entities provided accounting and administrative services to the Company for
which the Company incurred expenses of $1,114,175, $210,628 and $19,017,
respectively. The amount due to related parties of $824,215 and $3,499,975 at
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.
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 June 30, 1998 and 1997, were $45,103 and $29,511,
respectively, and are included in due to related party in the accompanying
balance sheets.
The indebtedness bears interest at 8.75 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 June 30, 1998, were
as follows:
F-66
<PAGE>
CNL FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Year Ending June 30, Amount
-------------------- -------
<S> <C>
1999................................................................. $16,379
2000................................................................. 12,589
2001................................................................. 8,350
2002................................................................. 5,298
2003................................................................. 2,487
-------
$45,103
=======
</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 $304,190 related to
credit underwriting services and incurred expenses of $1,695,452 related to
origination fees for the year ended June 30, 1998.
3. Income Taxes
The provision (benefit) for income taxes consisted of the following
components for the years ended June 30, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal........................................ $144,458 $280,651 $(66,406)
State.......................................... 23,368 45,399 (10,387)
-------- -------- --------
$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.
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
Internal Revenue Service regulations. The Company matches 50 percent of each
employee's contribution up to a maximum of 3 percent of salary. For the years
ended June 30, 1998, 1997 and 1996, the Company's contribution, including
administration costs, amounted to $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 $119,806,000 at
June 30, 1998.
F-67
<PAGE>
CNL FINANCIAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
6. Event Subsequent to Date of Report of Independent Certified Public
Accountants (Unaudited):
On October 2, 1998, CNL Financial III, LLC, a related party, reduced the
availability on the Magenta Loan (See Note 2) from $300,000,000 to $150,000,000
and suspended the use of the line. Concurrent with the suspension of the
Magenta Loan, CFC formed a wholly-owned subsidiary, CNL Financial V, LP (Fin V)
and entered into an agreement with Prudential Securities Credit Corporation
(the Prudential Loan) which provides that Fin V is entitled to receive advances
of up to $300,000,000. All amounts outstanding on the Magenta Loan were
transferred to either the Prudential Loan or other borrowing facilities of CFC.
The Company and the Parent were also contingently liable under a performance
guarantee on the Prudential Loan in favor of Fin V.
On November 12, 1998, the option available to convert the CNL Group Inc.
line of credit (see Note 2) to a subordinated debenture lapsed.
F-68
<PAGE>
CNL INCOME FUND, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997... F-70
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997.............................................. F-71
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997.............. F-72
Condensed Statements of Cash Flows for the Nine Months Ended September 30,
1998 and 1997............................................................ F-73
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997........................................ F-74
Report of Independent Accountants......................................... F-76
Balance Sheets as of December 31, 1997 and 1996........................... F-77
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995..................................................................... F-78
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995............................................................ F-79
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995..................................................................... F-80
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and 1995................................................................. F-81
</TABLE>
F-69
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation
of $2,226,822 and $2,172,913....................... $7,624,993 $8,185,465
Investment in and due from joint ventures........... 896,601 919,476
Cash and cash equivalents........................... 285,367 184,130
Restricted cash..................................... -- 129,257
Receivables, less allowance for doubtful accounts of
$3,092 in 1997..................................... 586 21,331
Prepaid expenses.................................... 5,987 4,989
Lease costs, less accumulated amortization of
$23,750 and $21,875................................ 26,250 28,125
Accrued rental income............................... 29,628 27,305
---------- ----------
$8,869,412 $9,500,078
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable.................................... $ 811 $ 2,595
Accrued and escrowed real estate taxes payable...... 7,170 734
Distributions payable............................... 266,982 316,221
Due to related parties.............................. 131,112 115,741
Rents paid in advance and deposits.................. 24,673 35,737
---------- ----------
Total liabilities............................... 430,748 471,028
Partners' capital................................... 8,438,664 9,029,050
---------- ----------
$8,869,412 $9,500,078
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-70
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
----------------- -------------------
1998 1997 1998 1997
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating leases.... $243,612 $253,305 $774,444 $ 780,333
Interest and other income.............. 6,597 6,517 19,053 14,314
-------- -------- -------- ----------
250,209 259,822 793,497 794,647
-------- -------- -------- ----------
Expenses:
General operating and administrative... 20,145 19,477 65,647 63,833
Professional services.................. 2,404 3,227 15,006 9,136
Real estate taxes...................... 1,080 1,101 3,241 3,305
State and other taxes.................. -- -- 4,450 3,538
Depreciation and amortization.......... 51,429 50,958 157,251 156,060
-------- -------- -------- ----------
75,058 74,763 245,595 235,872
-------- -------- -------- ----------
Income Before Equity in Earnings of Joint
Ventures and Gain on Sale of Land and
Buildings............................... 175,151 185,059 547,902 558,775
Equity in Earnings of Joint Ventures..... 20,937 172,680 62,394 226,035
Gain on Sale of Land and Buildings....... -- 233,183 235,804 233,183
-------- -------- -------- ----------
Net Income............................... $196,088 $590,922 $846,100 $1,017,993
======== ======== ======== ==========
Allocation of Net Income:
General partners....................... $ 1,961 $ 4,999 $ 7,118 $ 9,270
Limited partners....................... 194,127 585,923 838,982 1,008,723
-------- -------- -------- ----------
$196,088 $590,922 $846,100 $1,017,993
======== ======== ======== ==========
Net Income Per Limited Partner Unit...... $ 6.47 $ 19.53 $ 27.97 $ 33.62
======== ======== ======== ==========
Weighted Average Number of Limited
Partner Units Outstanding............... 30,000 30,000 30,000 30,000
======== ======== ======== ==========
</TABLE>
See accompanying notes to financial statements.
F-71
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1998 1997
----------------- ------------
<S> <C> <C>
General partners:
Beginning balance............................. $ 321,759 $ 310,182
Net income.................................... 7,118 11,577
---------- ----------
328,877 321,759
---------- ----------
Limited partners:
Beginning balance............................. 8,707,291 8,734,995
Net income.................................... 838,982 1,237,180
Distributions ($47.88 and $42.16 per limited
partner unit, respectively).................. (1,436,486) (1,264,884)
---------- ----------
8,109,787 8,707,291
---------- ----------
Total partners' capital..................... $8,438,664 $9,029,050
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-72
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Increase (Decrease) in Cash
and Cash Equivalents:
Net Cash Provided by
Operating Activities..... $ 799,653 $1,009,004
---------- ----------
Cash Flows from Investing
Activities:
Proceeds from sale of land
and building............. 661,300 793,009
Return of capital from
joint venture............ -- 472,373
Decrease (increase) in
restricted cash.......... 126,009 (793,009)
---------- ----------
Net cash provided by
investing activities..... 787,309 472,373
---------- ----------
Cash Flows from Financing
Activities:
Proceeds from loan from
corporate general
partner.................. -- 81,000
Repayment of loan from
corporate general
partner.................. -- (81,000)
Distributions to limited
partners................. (1,485,725) (948,663)
---------- ----------
Net cash used in
financing activities... (1,485,725) (948,663)
---------- ----------
Net Increase in Cash and
Cash Equivalents........... 101,237 532,714
Cash and Cash Equivalents at
Beginning of Period........ 184,130 159,379
---------- ----------
Cash and Cash Equivalents at
End of Period.............. $ 285,367 $ 692,093
========== ==========
Supplemental Schedule of
Non-Cash Financing
Activities:
Distributions declared and
unpaid at end of period.. $ 266,982 $ 316,221
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-73
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, 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, 1997.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2. Land and Buildings on Operating Leases
During the nine months ended September 30, 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 4).
3. 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, noncompounded annual return on their
adjusted capital contributions (the "10% Preferred Return") on a noncumulative
basis.
Generally, net sales proceeds from the sale of properties, to the extent
distributed, will be distributed first to the limited partners in an amount
sufficient to provide them with the 10% Preferred Return on a cumulative basis,
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 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-74
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
3. Allocations and Distribution--Continued
During the nine months ended September 30, 1998 and 1997, the Partnership
declared distributions to the limited partners of $1,436,486 and $948,663,
respectively ($266,982 and $316,221 for the quarters ended September 30, 1998
and 1997, respectively). This represents distributions of $47.88 and $31.62 per
unit for the nine months ended September 30, 1998 and 1997, respectively ($8.90
and $10.54 per unit for the quarters ended September 30, 1998 and 1997,
respectively). Distributions for the nine months ended September 30, 1998,
included $586,300 as a result of the distribution of net sales proceeds from
the sale of the property in Kissimmee, Florida. Of this amount, $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 this return of capital,
the amount of the limited partners' invested capital contributions (which
generally is the limited partners' capital contributions, less distributions
from the sale of a 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. No distributions have been made to the general partners to date.
4. Related Party Transactions
An affiliate of the Partnership 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. 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 nine months ended September 30, 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 2). No deferred, subordinated, real
estate disposition fees were incurred for the nine months ended September 30,
1997.
F-75
<PAGE>
Report of Independent Accountants
To the Partners
CNL Income Fund, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund, Ltd. (a
Florida limited partnership) as of December 31, 1997 and 1996 and the related
statements of income, partners' capital and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedules based on our audits.
We conducted our audits 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 Income Fund, Ltd. as of
December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
February 1, 1998
F-76
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less accumulated
depreciation........................................... $8,185,465 $8,091,154
Investment in and due from joint ventures............... 919,476 990,307
Cash and cash equivalents............................... 184,130 159,379
Restricted cash......................................... 129,257 --
Receivables, less allowance for doubtful accounts $3,092
and of $1,413.......................................... 21,331 180,248
Prepaid expenses........................................ 4,989 4,465
Lease costs, less accumulated amortization of $21,875
and $19,375............................................ 28,125 30,625
Accrued rental income................................... 27,305 23,599
---------- ----------
$9,500,078 $9,479,777
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable........................................ $ 2,595 $ 2,131
Escrowed real estate taxes payable...................... 734 525
Distributions payable................................... 316,221 316,221
Due to related parties.................................. 115,741 95,012
Rents paid in advance and deposits...................... 35,737 20,711
---------- ----------
Total liabilities................................... 471,028 434,600
Partners' capital....................................... 9,029,050 9,045,177
---------- ----------
$9,500,078 $9,479,777
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-77
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases........ $1,038,443 $1,115,530 $1,129,406
Contingent rental income................... 22,205 56,409 35,176
Interest and other income.................. 22,210 101,293 13,011
---------- ---------- ----------
1,082,858 1,273,232 1,177,593
---------- ---------- ----------
Expenses:
General operating and administrative....... 86,780 92,462 84,700
Professional services...................... 12,772 13,262 14,465
Real estate taxes.......................... 3,929 4,009 13,746
State and other taxes...................... 5,138 5,260 5,357
Depreciation and amortization.............. 208,807 210,206 210,197
---------- ---------- ----------
317,426 325,199 328,465
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Ventures and
Gain on Sale of Land and Building........... 765,432 948,033 849,128
Equity in Earnings of Joint Ventures......... 250,142 116,076 112,974
Gain on Sale of Land and Building............ 233,183 19,000 --
---------- ---------- ----------
Net Income................................... $1,248,757 $1,083,109 $ 962,102
========== ========== ==========
Allocation of Net Income:
General partners........................... $ 11,577 $ 10,641 $ 9,621
Limited partners........................... 1,237,180 1,072,468 952,481
---------- ---------- ----------
$1,248,757 $1,083,109 $ 962,102
========== ========== ==========
Net Income Per Limited Partner Unit.......... $ 41.24 $ 35.75 $ 31.75
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding........................... 30,000 30,000 30,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-78
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<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,
1994................... $193,400 $ 96,520 $13,314,525 $(12,164,195) $ 9,752,623 $(1,663,140) $9,529,733
Distributions to limited
partners ($42.16 per
limited partner unit).. -- -- -- (1,264,883) -- -- (1,264,883)
Net income.............. -- 9,621 -- -- 952,481 -- 962,102
-------- -------- ----------- ------------ ----------- ----------- ----------
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
======== ======== =========== ============ =========== =========== ==========
</TABLE>
See accompanying notes to financial statements.
F-79
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants................ $1,227,883 $1,096,290 $1,152,159
Distributions from joint ventures......... 152,019 133,296 129,006
Cash paid for expenses.................... (84,642) (106,546) (110,488)
Interest received......................... 21,556 9,648 11,837
---------- ---------- ----------
Net cash provided by operating activi-
ties.................................... 1,316,816 1,132,688 1,182,514
---------- ---------- ----------
Cash Flows from Investing Activities:
Proceeds from sale of land and building... 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) -- --
Increase in restricted cash............... (126,009) -- --
---------- ---------- ----------
Net cash provided by (used in) investing
activities.............................. (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) --
Contributions from general partner -- -- --
Distributions to limited partners......... (1,264,884) (1,264,884) (2,164,568)
---------- ---------- ----------
Net cash used in financing activities.... (1,264,884) (1,264,884) (2,164,568)
---------- ---------- ----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................... 24,751 (112,196) (982,054)
Cash and Cash Equivalents at Beginning of
Year...................................... 159,379 271,575 1,253,629
---------- ---------- ----------
Cash and Cash Equivalents at End of Year... $ 184,130 $ 159,379 $ 271,575
========== ========== ==========
Reconciliation of Net Income to Net Cash
Provided by
Operating Activities:
Net income................................ $1,248,757 $1,083,109 $ 962,102
---------- ---------- ----------
Adjustments to reconcile net income to net
cash provided by
operating activities:
Depreciation.............................. 206,307 207,706 207,697
Amortization.............................. 2,500 2,500 2,500
Equity in earnings of joint ventures, net
of distributions......................... (98,123) 17,220 16,032
Gain on sale of land and building......... (233,183) (19,000) --
Decrease (increase) in receivables........ 158,360 (151,105) (16,414)
Increase in prepaid expenses.............. (524) (650) (1,252)
Decrease (increase) in accrued rental in-
come..................................... (3,706) 1,234 (2,081)
Increase (decrease) in accounts payable
and accrued expenses..................... 673 (11,712) 458
Increase in due to related parties........ 20,729 19,873 8,389
Increase (decrease) in rents paid in ad-
vance and deposits....................... 15,026 (16,487) 5,083
---------- ---------- ----------
Total adjustments........................ 68,059 49,579 220,412
---------- ---------- ----------
Net Cash Provided by Operating Activities.. $1,316,816 $1,132,688 $1,182,514
========== ========== ==========
Supplemental Schedule of Non-Cash Financing
Activities:
Distributions declared and unpaid at De-
cember 31................................ $ 316,221 $ 316,221 $ 316,221
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-80
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
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.
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.
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, Seventh 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.
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.
F-81
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
1. Significant Accounting Policies--Continued
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.
3. Land and Buildings on Operating Leases
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land................................................. $3,999,700 $3,973,607
Buildings............................................ 6,358,678 6,226,321
---------- ----------
10,358,378 10,199,928
Less accumulated depreciation........................ (2,172,913) (2,108,774)
---------- ----------
$8,185,465 $8,091,154
========== ==========
</TABLE>
In June 1996, the Partnership sold a small, undeveloped portion of the land
relating to its property in Mesquite, Texas. In connection therewith, the
Partnership received net sales proceeds of $20,000, and recognized a gain for
financial reporting purposes, of $19,000.
F-82
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. Land and Buildings on Operating Leases--Continued
In August 1997, the Partnership sold its property in Casa Grande, Arizona,
to a third party for $840,000 and received net sales proceeds (net of $2,691
which represents prorated rent returned to the tenant) 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.
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, 1997 and 1995, the Partnership recognized $3,706 and $2,081, 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, 1997:
<TABLE>
<S> <C>
1998.............................................................. $ 936,961
1999.............................................................. 911,652
2000.............................................................. 911,305
2001.............................................................. 887,428
2002.............................................................. 481,464
Thereafter........................................................ 3,394,672
----------
$7,523,482
==========
</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. Investment in and Due from 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 (net of $2,678 which represents prorated rent
returned to the tenant) 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, 1997, the Partnership owned a 12.17% interest in this property.
F-83
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Investment in and Due from Joint Ventures--Continued
As of December 31, 1997, 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>
1997 1996
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation........................... $3,338,774 $1,750,065
Cash................................................ 1,636 11,934
Receivables......................................... -- 18,456
Accrued rental income............................... -- 16,620
Liabilities......................................... 1,677 30,232
Partners' capital................................... 3,338,733 1,766,843
Revenues............................................ 246,236 277,652
Gain on sale of land and building................... 295,080 --
Net income.......................................... 500,285 232,152
</TABLE>
The Partnership recognized income totalling $250,142, $116,076 and $112,974
for the years ended December 31, 1997, 1996 and 1995, respectively, from these
joint ventures.
The investment in and due from joint ventures included $27,682 at December
31, 1996, which was due from Seventh Avenue Joint Venture as a result of an
underpayment of distributions to the Partnership.
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.
6. Receivables
In March 1996, the Partnership accepted a promissory note from the tenant of
the property in Mesquite, Texas, in the amount of $156,308, for past due rental
and other amounts, and real estate taxes previously paid by the Partnership 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. In
January 1997, the Partnership collected the full amount of the promissory note.
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, noncumulative, noncompounded annual
return on their adjusted capital contributions (the "10% Preferred Return").
F-84
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. Allocations and Distributions--Continued
Generally, net sales proceeds from the sale of properties, 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 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.
During each of the years ended December 31, 1997 and 1996, the Partnership
declared distributions to the limited partners of $1,264,884, and during the
year ended December 31, 1995, the Partnership declared distributions to the
limited partners of $1,264,883. Distributions for the year ended December 31,
1994, included $861,500 as a result of the distribution of net sales proceeds
from the sale of the property in Fairfield, California, which were treated as a
return of capital for purposes of calculating the limited partners' cumulative
10% Preferred Return. As a result of the return of capital, the amount of the
limited partners' adjusted 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' adjusted capital contributions
on which the 10% Preferred Return is calculated was lowered accordingly. 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>
1997 1996 1995
---------- ---------- --------
<S> <C> <C> <C>
Net income for financial reporting
purposes................................ $1,248,757 $1,083,109 $962,102
Depreciation for tax reporting purposes
in excess of depreciation for financial
reporting purposes...................... (104,279) (108,995) (109,002)
Gain on sale of land and building for
financial reporting purposes in excess
of gain for tax reporting purposes...... (233,183) -- --
Equity in earnings of joint ventures for
financial reporting purposes in excess
of equity in earnings of joint ventures
for tax reporting purposes.............. (18,410) (17,987) (14,739)
Accrued rental income.................... (3,706) 1,234 (2,081)
Rents paid in advance.................... 15,026 (16,487) 5,083
Allowance for doubtful accounts.......... 1,679 (120,724) 22,392
---------- ---------- --------
Net income for federal income tax
purposes................................ $ 905,884 $ 820,150 $863,755
========== ========== ========
</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 parent company of CNL Securities
Corp. and CNL Fund Advisors, Inc. James M. Seneff, Jr. is director and chief
executive officer of CNL Securities Corp. and 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,
F-85
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
is director and president of CNL Securities Corp., is director, vice chairman
of the board of directors and treasurer of CNL Fund Advisors, Inc. and served
as president of CNL Fund Advisors, Inc through October 1997.
9. Related Party Transactions--Continued
During the years ended December 31, 1997, 1996 and 1995, certain Affiliates
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 Affiliates 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,
1997, 1996 and 1995.
Certain Affiliates are 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 Affiliates provide 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, cumulative 10% Preferred
Return, plus their adjusted capital contributions. No deferred, subordinated
real estate disposition fees were incurred for the years ended December 31,
1997, 1996 and 1995.
During the years ended December 31, 1997, 1996 and 1995, the Affiliates
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $57,679, $67,685 and $58,543 for the years
ended December 31, 1997, 1996 and 1995, respectively, for such services.
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Due to Affiliates:
Deferred, subordinated real estate disposition fee........ $ 66,750 $66,750
Expenditures incurred on behalf of the Partnership........ 17,902 9,527
Accounting and administrative services.................... 31,089 18,735
-------- -------
$115,741 $95,012
======== =======
</TABLE>
The deferred, subordinated real estate disposition fees are the result of
the Partnership's sale of 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.
10. 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 Partner-ship's share of rental income from
F-86
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
joint ventures and the property held as tenants-in-common with an affiliate),
for at least one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Corporation........................ $452,653 $452,653 $452,653
Wendy's Inter national, Inc...................... 164,857 212,322 206,805
Restaurant Management Services, Inc.............. 128,737 129,633 124,315
</TABLE>
10. Concentration of Credit Risk--Continued
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 at least one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Family Steakhouse Restaurants..... $452,653 $452,653 $452,653
Wendy's Old Fashioned Hamburger Restaurants..... 443,335 507,642 582,315
Popeyes Famous Fried Chicken.................... 128,737 129,633 124,315
</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. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
F-87
<PAGE>
CNL INCOME FUND II, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997.. F-89
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997............................................. F-90
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997............. F-91
Condensed Statements of Cash Flows for the Nine Months Ended September
30, 1998 and 1997....................................................... F-92
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997....................................... F-93
Report of Independent Accountants........................................ F-95
Balance Sheets as of December 31, 1997 and 1996.......................... F-96
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-97
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995........................................................... F-98
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-99
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and 1995................................................................ F-100
</TABLE>
F-88
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $3,549,043 and
$3,302,095......................................... $12,917,620 $13,164,568
Investment in joint ventures........................ 4,360,442 3,568,155
Mortgage note receivable............................ 28,731 42,734
Cash and cash equivalents........................... 850,422 470,194
Restricted cash..................................... -- 2,470,175
Receivables, less allowance for doubtful accounts of
$70,868 and $83,254................................ 57,717 80,577
Prepaid expenses.................................... 7,601 5,510
Lease costs, less accumulated amortization of
$14,156 and $11,520................................ 6,407 9,043
Accrued rental income............................... 168,738 148,103
----------- -----------
$18,397,678 $19,959,059
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable.................................... $ 18,197 $ 7,170
Accrued and escrowed real estate taxes payable...... 5,417 4,656
Distributions payable............................... 515,625 594,000
Due to related parties.............................. 175,399 126,284
Rents paid in advance and deposits.................. 26,975 25,300
----------- -----------
Total liabilities............................... 741,613 757,410
Partners' capital................................... 17,656,065 19,201,649
----------- -----------
$18,397,678 $19,959,059
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-89
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
----------------- ----------------------
1998 1997 1998 1997
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases............................. $450,831 $522,972 $1,321,975 $1,567,356
Contingent rental income............ 1,445 22,393 1,445 22,393
Interest and other income........... 17,361 17,521 60,100 34,466
-------- -------- ---------- ----------
469,637 562,886 1,383,520 1,624,215
-------- -------- ---------- ----------
Expenses:
General operating and
administrative..................... 65,025 33,496 129,895 93,225
Bad debt expense.................... -- -- -- 18,033
Professional services............... 5,119 3,557 30,759 13,907
Real estate taxes................... -- -- -- 1,259
State and other taxes............... -- -- 14,732 10,403
Depreciation and amortization....... 82,960 101,486 249,584 312,034
-------- -------- ---------- ----------
153,104 138,539 424,970 448,861
-------- -------- ---------- ----------
Income Before Equity in Earnings of
Joint Ventures, Gain on Sale of Land
and Buildings and Real Estate
Disposition Fees..................... 316,533 424,347 958,550 1,175,354
Equity in Earnings of Joint Ventures.. 104,979 40,610 319,894 333,517
Gain on Sale of Land and Buildings.... -- 301,901 -- 460,152
Real Estate Disposition Fees.......... -- -- (45,150) --
-------- -------- ---------- ----------
Net Income............................ $421,512 $766,858 $1,233,294 $1,969,023
======== ======== ========== ==========
Allocation of Net Income:
General partners.................... $ 4,214 $ 5,636 $ 12,783 $ 17,583
Limited partners.................... 417,298 761,222 1,220,511 1,951,440
-------- -------- ---------- ----------
$421,512 $766,858 $1,233,294 $1,969,023
======== ======== ========== ==========
Net Income Per Limited Partner Unit... $ 8.35 $ 15.22 $ 24.41 $ 39.03
======== ======== ========== ==========
Weighted Average Number of Limited
Partner Units Outstanding............ 50,000 50,000 50,000 50,000
======== ======== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-90
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1998 1997
----------------- ------------
<S> <C> <C>
General partners:
Beginning balance........................... $ 373,111 $ 342,375
Net income.................................. 12,783 30,736
----------- -----------
385,894 373,111
----------- -----------
Limited partners:
Beginning balance........................... 18,828,538 17,595,394
Net income.................................. 1,220,511 3,609,144
Distributions ($55.58 and $47.52 per limited
partner unit, respectively)................ (2,778,878) (2,376,000)
----------- -----------
17,270,171 18,828,538
----------- -----------
Total partners' capital....................... $17,656,065 $19,201,649
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-91
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities.......... $ 1,601,005 $ 1,579,694
----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and building.......... -- 1,259,417
Additions to land and buildings on operating
leases.......................................... -- (29,526)
Return of capital from joint venture............. -- 124,440
Investment in joint ventures..................... (834,888) --
Collections on mortgage note receivable.......... 13,694 --
Decrease (increase) in restricted cash........... 2,457,670 (1,259,417)
Payment of lease costs........................... -- (4,507)
----------- -----------
Net cash provided by investing activities...... 1,636,476 90,407
----------- -----------
Cash Flows from Financing Activities:
Proceeds from loans from corporate general part-
ner............................................. -- 721,000
Repayment of loans from corporate general part-
ner............................................. -- (721,000)
Distributions to limited partners................ (2,857,253) (1,782,000)
----------- -----------
Net cash used in financing activities.......... (2,857,253) (1,782,000)
----------- -----------
Net Increase (Decrease) in Cash and Cash Equiva-
lents............................................... 380,228 (111,899)
Cash and Cash Equivalents at Beginning of Period..... 470,194 318,756
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 850,422 $ 206,857
=========== ===========
Supplemental Schedule of Non-Cash Investing and Fi-
nancing Activities:
Mortgage note accepted in exchange for 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 end of peri-
od................................................ $ 515,625 $ 594,000
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-92
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, 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, 1997.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." The adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2. Investment in Joint Ventures
In January 1998, the Partnership acquired a 39.42% 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.
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>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation...................... $8,457,326 $7,091,781
Net investment in direct financing leases...... 2,123,134 518,399
Cash........................................... 37,273 56,815
Receivables.................................... 84 4,685
Accrued rental income.......................... 183,483 102,913
Other assets................................... 1,056 418
Liabilities.................................... 38,145 31,673
Partners' capital.............................. 10,764,211 7,743,338
Revenues....................................... 938,768 399,579
Gain on sale of land and building.............. -- 360,002
Net income..................................... 780,857 687,021
</TABLE>
The Partnership recognized income totalling $319,894 and $333,517 for the
nine months ended September 30, 1998 and 1997, respectively, from these joint
ventures, $104,979 and $40,610 of which was earned for the quarters ended
September 30, 1998 and 1997, respectively.
F-93
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Nine Months Ended September 30, 1998 and 1997
3. 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, 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 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.
During the nine months ended September 30, 1998 and 1997, the Partnership
declared distributions to the limited partners of $2,778,878 and $1,782,000,
respectively ($515,625 and $594,000 for each of the quarters ended September
30, 1998 and 1997, respectively). This represents distributions of $55.58 and
$35.64 per unit for the nine months ended September 30, 1998 and 1997,
respectively ($10.31 and $11.88 per unit for each of the quarters ended
September 30, 1998 and 1997, respectively). Distributions for the nine months
ended September 30, 1998, included $1,232,003 as a result of the distribution
of net sales proceeds from the 1997 sale of the Properties in Avon Park,
Florida and Farmington Hills, Michigan. This amount was applied toward the
limited partners' 10% Preferred Return. No distributions have been made to the
general partners to date.
4. Related Party Transactions
An affiliate of the Partnership 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. 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 nine months ended September 30, 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 nine months ended September 30, 1997.
F-94
<PAGE>
Report of Independent Accountants
To the Partners
CNL Income Fund II, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund II, Ltd.
(a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. 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 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 Income Fund II, Ltd. as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
February 2, 1998
F-95
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation............................. $13,164,568 $16,803,789
Investment in joint ventures.......................... 3,568,155 1,314,386
Mortgage note receivable.............................. 42,734 --
Cash and cash equivalents............................. 470,194 318,756
Restricted cash....................................... 2,470,175 --
Receivables, less allowance for doubtful accounts of
$83,254 and $126,036................................. 80,577 99,185
Prepaid expenses...................................... 5,510 4,819
Lease costs, less accumulated amortization of $11,520
and $7,537........................................... 9,043 13,026
Accrued rental income................................. 148,103 117,357
----------- -----------
$19,959,059 $18,671,318
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 7,170 $ 12,188
Accrued construction costs payable.................... -- 29,526
Accrued and escrowed real estate taxes payable........ 4,656 6,449
Distributions payable................................. 594,000 594,000
Due to related parties................................ 126,284 45,078
Rents paid in advance and deposits.................... 25,300 46,308
----------- -----------
Total liabilities................................. 757,410 733,549
Partners' capital..................................... 19,201,649 17,937,769
----------- -----------
$19,959,059 $18,671,318
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-96
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases......... $2,024,119 $2,224,500 $2,207,971
Contingent rental income.................... 68,920 79,313 70,159
Interest and other income................... 64,900 21,075 23,947
---------- ---------- ----------
2,157,939 2,324,888 2,302,077
---------- ---------- ----------
Expenses:
General operating and administrative........ 137,924 131,628 121,317
Professional services....................... 21,576 26,634 25,161
Bad debt expense............................ 27,965 -- 4,745
Real estate taxes........................... 410 4,647 3,588
State and other taxes....................... 10,403 4,255 5,633
Depreciation and amortization............... 399,820 421,759 456,793
---------- ---------- ----------
598,098 588,923 617,237
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Ventures, Gain on Sale of Land and Buildings
and Lease Termination Income................. 1,559,841 1,735,965 1,684,840
Equity in Earnings of Joint Ventures.......... 389,915 130,996 153,677
Gain on Sale of Land and Buildings............ 1,476,124 -- --
Lease Termination Income...................... 214,000 -- --
---------- ---------- ----------
Net Income.................................... $3,639,880 $1,866,961 $1,838,517
========== ========== ==========
Allocation of Net Income:
General partners............................ $ 30,736 $ 18,670 $ 18,385
Limited partners............................ 3,609,144 1,848,291 1,820,132
---------- ---------- ----------
$3,639,880 $1,866,961 $1,838,517
========== ========== ==========
Net Income Per Limited Partner Unit........... $ 72.18 $ 36.97 $ 36.40
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding............................ 50,000 50,000 50,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-97
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<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, 1994.. $162,000 $143,320 $25,000,000 $(17,941,377) $14,310,170 $(2,689,822) $18,984,291
Distributions to limited
partners ($47.52 per
limited partner unit)..... -- -- -- (2,376,000) -- -- (2,376,000)
Net income................. -- 18,385 -- -- 1,820,132 -- 1,838,517
-------- -------- ----------- ------------ ----------- ----------- -----------
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
======== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-98
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash Equiv-
alents:
Cash Flows from Operating Activities:
Cash received from tenants............... $2,054,519 $2,295,531 $2,198,821
Distributions from joint ventures........ 147,995 164,718 181,908
Cash paid for expenses................... (80,744) (130,042) (229,879)
Interest received........................ 36,142 17,524 17,517
---------- ---------- ----------
Net cash provided by operating activi-
ties................................... 2,157,912 2,347,731 2,168,367
---------- ---------- ----------
Cash Flows from Investing Activities:
Proceeds from sale of land and build-
ings.................................... 4,659,078 -- --
Proceeds received from tenant in connec-
tion with termination of leases......... 214,000 -- --
Additions to land and buildings on oper-
ating leases............................ (29,526) (11,107) (4,323)
Investment in joint ventures............. (2,136,289) -- (121)
Return of capital from joint venture..... 124,440 -- --
Decrease (increase) in restricted cash... (2,457,670) 25,000 (25,000)
Payment of lease costs................... (4,507) (1,930) (12,426)
Other.................................... -- (25,000) 25,000
---------- ---------- ----------
Net cash provided by (used in) investing
activities............................. 369,526 (13,037) (16,870)
---------- ---------- ----------
Cash Flows from Financing Activities:
Proceeds from loans from corporate gen-
eral partner............................ 721,000 203,900 --
Repayment of loans from corporate general
partner................................. (721,000) (203,900) --
Distributions to limited partners........ (2,376,000) (2,376,000) (2,376,000)
---------- ---------- ----------
Net cash used in financing activities.... (2,376,000) (2,376,000) (2,376,000)
---------- ---------- ----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................... 151,438 (41,306) (224,503)
Cash and Cash Equivalents at Beginning of
Year...................................... 318,756 360,062 584,565
---------- ---------- ----------
Cash and Cash Equivalents at End of Year... $ 470,194 $ 318,756 $ 360,062
========== ========== ==========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income................................ $3,639,880 $1,866,961 $1,838,517
---------- ---------- ----------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation............................. 395,837 417,776 417,614
Amortization............................. 3,983 3,983 39,179
Gain on sale of land and buildings....... (1,476,124) -- --
Lease termination income................. (214,000) -- --
Equity in earnings of joint ventures, net
of distributions........................ (241,920) 33,722 28,231
Decrease (increase) in receivables....... 23,799 (8,803) (1,075)
Increase in prepaid expenses............. (691) (1,570) (2,211)
Increase in accrued rental income........ (30,746) (33,234) (34,086)
Decrease in other assets................. -- 1,750 --
Increase (decrease) in accounts payable
and accrued expenses.................... (2,304) 4,014 (21,043)
Increase (decrease) in due to related
parties................................. 81,206 35,824 (65,627)
Increase (decrease) in rents paid in ad-
vance and deposits...................... (21,008) 27,308 (31,132)
---------- ---------- ----------
Total adjustments....................... (1,481,968) 480,770 329,850
---------- ---------- ----------
Net Cash Provided by Operating Activities.. $2,157,912 $2,347,731 $2,168,367
========== ========== ==========
Supplemental Schedule of Non-Cash Investing
and Financing Activities:
Mortgage note accepted as consideration in
sale of land and building................ $ 42,000 $ -- $ --
========== ========== ==========
Distributions declared and unpaid at De-
cember 31................................ $ 594,000 $ 594,000 $ 594,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-99
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
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.
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.
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
property in Arvada, Colorado, the property in Mesa, Arizona, the property in
Smithfield, North Carolina, and the property in Vancouver, Washington, 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
F-100
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
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-101
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. Land and Buildings on Operating Leases
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Land............................................... $ 6,608,400 $ 8,052,723
Buildings.......................................... 9,858,263 12,567,157
----------- -----------
16,466,663 20,619,880
Less accumulated depreciation...................... (3,302,095) (3,816,091)
----------- -----------
$13,164,568 $16,803,789
=========== ===========
</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 12). 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, 1997, 1996 and 1995, the Partnership recognized $30,746,
$33,234 and $34,086, 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, 1997:
<TABLE>
<S> <C>
1998............................................................. $ 1,621,842
1999............................................................. 1,609,878
2000............................................................. 1,538,676
2001............................................................. 1,554,429
2002............................................................. 1,387,650
Thereafter....................................................... 6,256,157
-----------
$13,968,632
===========
</TABLE>
F-102
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 Partnership which have the same general partners. The
Partnership also has a 33.87% interest in a property in Arvada, Colorado, with
an affiliate 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 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, 1997, 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, 1997, the Partnership owned a 57.77% 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, 1997, 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, 1997, the Partnership owned a 37.01% interest in
this property.
Kirkman Road Joint Venture, Holland Joint Venture, Show Low Joint Venture
and the Partnership and affiliates, as tenants-in-common in four separate
tenancy-in-common arrangements, each own and lease one
F-103
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 four properties held as tenants-in-common with affiliates at
December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less accumu-
lated depreciation................................. $7,091,781 $2,664,752
Net investment in direct financing lease............ 518,399 --
Cash................................................ 56,815 21,905
Receivables......................................... 4,685 9,980
Accrued rental income............................... 102,913 70,782
Other assets........................................ 418 44,263
Liabilities......................................... 31,673 28,558
Partners' capital................................... 7,743,338 2,783,124
Revenues............................................ 399,579 363,338
Gain on sale of land and building................... 360,002 --
Net income.......................................... 687,021 250,026
</TABLE>
The Partnership recognized income totalling $389,915, $130,996 and $153,677
for the years ended December 31, 1997, 1996 and 1995, 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, is
collateralized by personal property and is being collected in 18 monthly
installments of interest only and thereafter, the entire principal balance
shall become due. As of December 31, 1997, the mortgage note receivable balance
was $42,734, including accrued interest of $734.
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.
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, 1997 and 1996, the balances in the
allowance for doubtful accounts of $74,590 and $92,987, respectively, including
accrued interest of $2,654 and $3,493, respectively, represents the uncollected
amounts under this promissory note.
F-104
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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, 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 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.
During each of the years ended December 31, 1997, 1996 and 1995, the
Partnership declared distributions to the limited partners of $2,376,000. No
distributions have been made to the general partners to date.
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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................... $3,639,880 $1,866,961 $1,838,517
Depreciation for financial reporting
purposes in excess of depreciation for
tax reporting purposes................. 19,440 20,922 20,840
Gain on sale of land and buildings for
financial reporting purposes in excess
of gain for tax reporting purposes..... (638,739) -- --
Equity in earnings of joint ventures for
tax reporting purposes less than equity
in earnings of joint ventures for
financial reporting purposes........... (146,161) (1,240) (7,297)
Allowance for doubtful accounts......... (42,782) 25,225 2,449
Accrued rental income................... (30,746) (33,234) (34,086)
Rents paid in advance................... (21,008) 22,508 (34,132)
---------- ---------- ----------
Net income for federal income tax
purposes............................... $2,779,884 $1,901,142 $1,786,291
========== ========== ==========
</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 parent company of CNL Securities
Corp. and CNL Fund Advisors, Inc. James M. Seneff, Jr. is director and chief
executive officer of CNL Securities Corp. and 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, is director and president
of CNL Securities Corp., is director, vice chairman of the board of directors
and treasurer of CNL Fund Advisors, Inc. and served as president of CNL Fund
Advisors, Inc. through October 1997.
F-105
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
During the years ended December 31, 1997, 1996 and 1995, certain Affiliates
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 Affiliates 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 property held as tenants-in-
common with an affiliate 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, 1997, 1996 and 1995.
Certain Affiliates are 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 Affiliates provide 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, cumulative 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, 1997, 1996 and 1995, the Affiliates
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $78,139, $79,624 and $81,023 for the years
ended December 31, 1997, 1996 and 1995, respectively, for such services.
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Due to Affiliates:
Expenditures incurred on behalf of the Partnership....... $ 59,608 $21,079
Accounting and administrative services................... 66,676 23,999
-------- -------
$126,284 $45,078
======== =======
</TABLE>
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 percent of interest
in the costs incurred by CNL BB Corp. to acquire and carry the property,
including closing costs.
F-106
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 four properties held as tenants-in-common with affiliates) for at least
one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Corporation........................ $408,333 $403,875 $410,226
Restaurant Management Services, Inc.............. 251,480 243,270 243,358
</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 four properties held as tenants-in-common with
affiliates) for at least one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Family Steakhouse Restaurants..... $408,333 $403,875 $410,226
Wendy's Old Fashioned Hamburger Restaurants..... 381,567 421,165 412,949
KFC............................................. 278,348 358,463 352,939
Popeyes Famous Fried Chicken Restaurants........ 251,480 243,270 243,358
Denny's......................................... 221,580 388,050 372,639
</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. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
12. Subsequent Events
In January 1998, the Partnership acquired a property in Overland Park,
Kansas, as tenants-in-common with affiliates of the general partners. In
connection therewith, the Partnership contributed approximately $634,100 for a
39.42% interest in such property. The Partnership will account for its
investment in this property using the equity method since the Partnership will
share control with affiliates.
In addition, in January 1998, the Partnership acquired a property in
Memphis, Tennessee, as tenants-in-common with affiliates of the general
partners. In connection therewith, the Partnership contributed $201,300 for a
13.38% interest in such property. The Partnership will account for its
investment in this property using the equity method since the Partnership will
share control with affiliates.
F-107
<PAGE>
CNL INCOME FUND III, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997.. F-109
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997............................................. F-110
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997............. F-111
Condensed Statements of Cash Flows for the Nine Months Ended September
30, 1998 and 1997....................................................... F-112
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997....................................... F-113
Report of Independent Accountants........................................ F-117
Balance Sheets as of December 31, 1997 and 1996.......................... F-118
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-119
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995........................................................... F-120
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-121
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and 1995................................................................ F-122
</TABLE>
F-108
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 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................................. $11,923,109 $14,635,583
Investment in direct financing leases............... 916,580 926,862
Investment in joint ventures........................ 2,093,452 1,179,762
Mortgage note receivable............................ -- 681,687
Cash and cash equivalents........................... 1,726,345 493,118
Restricted cash..................................... -- 251,879
Receivables, less allowance for doubtful accounts of
$152,230 and $154,469.............................. 40,088 102,420
Prepaid expenses.................................... 8,310 14,361
Lease costs, less accumulated amortization of $2,762
in 1997............................................ -- 9,238
Accrued rental income, less allowance for doubtful
accounts of $14,735 and $15,384.................... 85,729 154,738
Other assets........................................ 29,354 29,354
----------- -----------
$16,822,967 $18,479,002
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable.................................... $ 1,192 $ 5,219
Accrued and escrowed real estate taxes payable...... 11,011 11,897
Distributions payable............................... 500,000 594,000
Due to related parties.............................. 146,825 97,388
Rents paid in advance and deposits.................. 37,763 20,745
----------- -----------
Total liabilities................................. 696,791 729,249
Minority interest................................... 136,402 138,617
Partners' capital................................... 15,989,774 17,611,136
----------- -----------
$16,822,967 $18,479,002
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-109
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
------------------ ----------------------
1998 1997 1998 1997
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases......................... $351,021 $460,694 $1,175,634 $1,490,536
Adjustments to accrued rental
income......................... (29,474) -- (80,800) --
Earned income from direct fi-
nancing leases................. 33,613 34,101 101,222 102,631
Interest and other income....... 22,875 37,122 103,546 82,031
-------- -------- ---------- ----------
378,035 531,917 1,299,602 1,675,198
-------- -------- ---------- ----------
Expenses:
General operating and adminis-
trative........................ 32,218 31,361 102,940 104,699
Professional services........... 6,650 4,583 31,706 19,983
Real estate taxes............... 1,886 4,229 9,421 11,789
State and other taxes........... 530 -- 12,250 9,924
Depreciation and amortization... 72,026 90,917 236,345 278,778
-------- -------- ---------- ----------
113,310 131,090 392,662 425,173
-------- -------- ---------- ----------
Income Before Minority Interest in
Income of Consolidated Joint
Venture, Equity in Losses of
Unconsolidated Joint Ventures,
Gain on Sale of Land and
Buildings and Provision for Loss
on Land and Buildings............ 264,725 400,827 906,940 1,250,025
Minority Interest in Income of
Consolidated Joint Venture....... (4,352) (4,352) (12,933) (12,933)
Equity in Losses of Unconsolidated
Joint Ventures................... (75,617) (9,494) (34,343) (12,496)
Gain on Sale of Land and Build-
ings............................. -- -- 596,586 969,052
Provision for Loss on Land and
Buildings........................ (99,865) -- (99,865) (32,819)
-------- -------- ---------- ----------
Net Income........................ $ 84,891 $386,981 $1,356,385 $2,160,829
======== ======== ========== ==========
Allocation of Net Income:
General partners................ $ (11) $ 3,870 $ 11,479 $ 16,113
Limited partners................ 84,902 383,111 1,344,906 2,144,716
-------- -------- ---------- ----------
$ 84,891 $386,981 $1,356,385 $2,160,829
======== ======== ========== ==========
Net Income Per Limited Partner
Unit............................. $ 1.70 $ 7.66 $ 26.90 $ 42.89
======== ======== ========== ==========
Weighted Average Number of Limited
Partner Units Outstanding........ 50,000 50,000 50,000 50,000
======== ======== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-110
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1998 1997
----------------- ------------
<S> <C> <C>
General partners:
Beginning balance............................. $ 339,611 $ 321,305
Net income.................................... 11,479 18,306
----------- -----------
351,090 339,611
----------- -----------
Limited partners:
Beginning balance............................. 17,271,525 17,273,996
Net income.................................... 1,344,906 2,373,529
Distributions ($59.55 and $47.52 per limited
partner unit, respectively).................. (2,977,747) (2,376,000)
----------- -----------
15,638,684 17,271,525
----------- -----------
Total partners' capital......................... $15,989,774 $17,611,136
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-111
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities.......... $ 1,376,910 $ 1,500,218
----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and buildings......... 3,214,616 2,811,159
Additions to land and buildings on operating
leases.......................................... (150,000) (1,272,960)
Investment in joint ventures..................... (1,045,511) (511,667)
Collections on mortgage note receivable.......... 678,730 3,100
Decrease (increase) in restricted cash........... 245,377 (159,912)
----------- -----------
Net cash provided by investing activities...... 2,943,212 869,720
----------- -----------
Cash Flows from Financing Activities:
Proceeds from loans from corporate general part-
ner............................................. -- 37,000
Repayment of loans from corporate general part-
ner............................................. -- (37,000)
Distributions to limited partners................ (3,071,747) (1,782,000)
Distributions to holders of minority interest.... (15,148) (15,031)
----------- -----------
Net cash used in financing Activities.......... (3,086,895) (1,797,031)
----------- -----------
Net Increase in Cash and Cash Equivalents............ 1,233,227 572,907
Cash and Cash Equivalents at Beginning of Period..... 493,118 57,751
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 1,726,345 $ 630,658
=========== ===========
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Mortgage note accepted in exchange for sale of land
and building...................................... $ -- $ 685,000
=========== ===========
Deferred real estate disposition fees incurred and
unpaid at end of period........................... $ 53,400 $ 15,150
=========== ===========
Distributions declared and unpaid at end of peri-
od................................................ $ 500,000 $ 594,000
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-112
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, 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, 1997.
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.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
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. Land and Buildings on Operating Leases
Land and buildings on operating leases consisted of the following at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land............................................ $ 6,123,402 $ 7,325,960
Buildings....................................... 8,720,879 10,891,910
----------- -----------
14,844,281 18,217,870
Less accumulated depreciation................... (2,821,307) (3,341,624)
----------- -----------
12,022,974 14,876,246
Less allowance for loss on land and building.... (99,865) (240,663)
----------- -----------
$11,923,109 $14,635,583
=========== ===========
</TABLE>
During the nine months ended September 30, 1998, the Partnership sold its
properties in Daytona Beach, Fernandina Beach and Punta Gorda, Florida, and
Hagerstown, Maryland, for a total of approximately $3,280,000 and received net
sales proceeds of $3,214,616, resulting in a total gain of $596,586 for
financial
F-113
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Quarters and Nine Months Ended September 30, 1998 and 1997
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 6).
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.
As of December 31, 1997, the Partnership had established an allowance for
loss on land and building of $240,663 for the property in Hagerstown, Maryland.
The allowance represented the difference between the net carrying value at
December 31, 1997 and the estimate of net realizable value of the property. The
Partnership sold this property during the nine months ended September 30, 1998,
as described above.
In addition, during the nine months ended September 30, 1998, the
Partnership established an allowance for loss on land and building of $99,865,
for financial reporting purposes, relating to the property located in Hazard,
Kentucky. The allowance represents the difference between the net carrying
value of the property at September 30, 1998 and the current estimate of net
realizable value for the property.
3. Investment in Joint Ventures
In January 1998, the Partnership acquired a 25.84% interest in 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.
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 September 30, 1998, the Partnership had
contributed $629,925 to purchase land and pay for construction relating to the
joint venture. The Partnership has agreed to contribute approximately $36,100
in additional construction costs to the joint venture. When construction is
completed, the Partnership will have an approximate 47 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.
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>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation and allowance for
loss on land and building..................... $3,580,196 $3,152,962
Net investment in direct financing leases...... 3,406,017 1,003,680
Cash........................................... 18,304 16,481
Accrued rental income.......................... 48,509 11,621
Other assets................................... 3,368 1,480
Liabilities.................................... 123,346 18,722
Partners' capital.............................. 6,933,048 4,167,502
Revenues....................................... 423,873 82,837
Provision for loss on land and building........ (139,266) (147,039)
Net income (loss).............................. 222,725 (157,912)
</TABLE>
F-114
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Quarters and Nine Months Ended September 30, 1998 and 1997
The Partnership recognized losses totalling $34,343 and $12,496 for the nine
months ended September 30, 1998 and 1997, respectively, from these joint
ventures, of which losses totaling $75,617 and $9,494 were incurred during the
quarters ended September 30, 1998 and 1997, respectively.
4. 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. During the nine months
ended September 30, 1998, the Partnership collected the full amount of the
outstanding mortgage note receivable balance.
The mortgage note receivable consisted of the following at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Principal balance............................... $-- $678,730
Accrued interest receivable..................... -- 2,957
---- --------
$-- $681,687
==== ========
</TABLE>
5. 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, noncompounded annual return on their
adjusted capital contributions (the "10% Preferred Return") on a noncumulative
basis.
Generally, net sales proceeds from the sale of properties, to the extent
distributed, will be distributed first to the limited partners in an amount
sufficient to provide them with the 10% Preferred Return on a cumulative basis,
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 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.
During the nine months ended September 30, 1998 and 1997, the Partnership
declared distributions to the limited partners of $2,977,747 and $1,782,000,
respectively ($500,000 and $594,000 for the quarters ended September 30, 1998
and 1997, respectively). This represents distributions of $59.55 and $35.64 per
unit for the nine months ended September 30, 1998 and 1997, respectively
($10.00 and $11.88 per unit for the quarters ended September 30, 1998 and 1997,
respectively). Distributions for the nine months ended September 30, 1998,
included $1,477,747 as a result of the distribution 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-115
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Quarters and Nine Months Ended September 30, 1998 and 1997
6. Related Party Transactions
An affiliate of the Partnership 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. 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 nine months ended September 30, 1998 and 1997, the
Partnership incurred $53,400 and $15,150, respectively, in deferred,
subordinated, real estate disposition fees as a result of the sale of
properties in 1998 and 1997.
F-116
<PAGE>
Report of Independent Accountants
To the Partners
CNL Income Fund III, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund III, Ltd.
(a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. 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 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 Income Fund III, Ltd.
as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
January 31, 1998
F-117
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
ASSETS ----------- -----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land and building..................................... $14,635,583 $16,483,532
Net investment in direct financing leases.............. 926,862 938,918
Investment in joint ventures........................... 1,179,762 643,912
Mortgage note receivable............................... 681,687 --
Cash and cash equivalents.............................. 493,118 57,751
Restricted cash........................................ 251,879 --
Receivables, less allowance for doubtful accounts of
$154,469 and $70,142.................................. 102,420 321,831
Prepaid expenses....................................... 14,361 6,898
Lease costs, less accumulated amortization of $2,762
and $2,162............................................ 9,238 9,838
Accrued rental income, less allowance for doubtful
accounts of $15,384 in 1997........................... 154,738 114,738
Other assets........................................... 29,354 31,489
----------- -----------
$18,479,002 $18,608,907
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable....................................... $ 5,219 $ 14,183
Accrued and escrowed real estate taxes payable......... 11,897 72,827
Distributions payable.................................. 594,000 594,000
Due to related parties................................. 97,388 102,859
Rents paid in advance and deposits..................... 20,745 88,325
Total liabilities...................................... 729,249 872,194
Minority interest...................................... 138,617 141,412
Partners' capital...................................... 17,611,136 17,595,301
----------- -----------
$18,479,002 $18,608,907
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-118
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases..... $1,859,911 $2,184,460 $2,115,798
Earned income from direct Financing
leases................................. 70,575 89,390 72,202
Contingent rental income................ 157,648 157,993 143,039
Interest and other income............... 100,816 26,496 22,386
---------- ---------- ----------
2,188,950 2,458,339 2,353,425
---------- ---------- ----------
Expenses:
General operating and administrative.... 140,886 147,840 131,071
Professional services................... 27,314 50,064 28,758
Bad debt expense........................ 32,360 924 11,418
Real estate taxes....................... 47,165 1,973 50,815
State and other taxes................... 9,924 11,973 11,322
Depreciation and amortization........... 368,782 425,366 434,492
---------- ---------- ----------
626,431 638,140 667,876
---------- ---------- ----------
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............................. 1,562,519 1,820,199 1,685,549
Minority Interest in Income of Consoli-
dated Joint Ventures..................... (17,285) (17,282) (17,205)
Equity in Earnings (Loss) of Unconsoli-
dated Joint Venture...................... (148,170) 11,740 22,015
Gain on Sale of Land and Buildings........ 1,027,590 -- --
Provision for Loss on Land and Building... (32,819) -- (207,844)
---------- ---------- ----------
Net Income................................ $2,391,835 $1,814,657 $1,482,515
========== ========== ==========
Allocation of Net Income:
General partners........................ $ 18,306 $ 18,147 $ 13,906
Limited partners........................ 2,373,529 1,796,510 1,468,609
---------- ---------- ----------
$2,391,835 $1,814,657 $1,482,515
========== ========== ==========
Net Income Per Limited Partner Unit....... $ 47.47 $ 35.93 $ 29.37
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding........................ 50,000 50,000 50,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-119
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<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,
1994................... $161,500 $127,752 $25,000,000 $(16,021,640) $12,647,415 $(2,864,898) $19,050,129
Distributions to
limited partners
($47.52 per limited
partner unit)......... -- -- -- (2,376,000) -- -- (2,376,000)
Net income............. -- 13,906 -- -- 1,468,609 -- 1,482,515
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
======== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-120
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows From Operating Activities:
Cash received from tenants............. $ 2,268,568 $ 2,226,794 $ 2,340,729
Distributions from unconsolidated joint
ventures.............................. 19,647 31,670 47,499
Cash paid for expenses................. (325,067) (175,148) (198,797)
Interest received...................... 58,541 8,438 14,006
----------- ----------- -----------
Net cash provided by operating
activities........................... 2,021,689 2,091,754 2,203,437
----------- ----------- -----------
Cash Flows From Investing Activities:
Proceeds from sale of land and
buildings............................. 3,023,357 -- --
Deposit received on sale of land
parcel................................ -- 51,400 --
Additions to land and buildings........ (1,272,960) -- --
Investment in joint ventures........... (703,667) -- --
Collections on note receivable......... 6,270 -- --
Increase in restricted cash............ (245,377) -- --
Decrease (increase) in other assets.... 2,135 (2,135) --
----------- ----------- -----------
Net cash provided by investing
activities........................... 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.............................. (20,080) (20,082) (19,997)
Distributions to limited partners...... (2,376,000) (2,376,000) (2,376,000)
----------- ----------- -----------
Net cash used in Financing
activities........................... (2,396,080) (2,396,082) (2,395,997)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................ 435,367 (255,063) (192,560)
Cash and Cash Equivalents at Beginning
of Year................................ 57,751 312,814 505,374
Cash and Cash Equivalents at End of
Year................................... $ 493,118 $ 57,751 $ 312,814
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................. $ 2,391,835 $ 1,814,657 $ 1,482,515
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation........................... 368,182 424,766 433,892
Amortization........................... 600 600 600
Minority interest in income of
consolidated joint venture............ 17,285 17,282 17,205
Equity in earnings of unconsolidated
joint ventures, net of distributions.. 167,817 19,930 25,484
Gain on sale of land and buildings..... (1,027,590) -- --
Provision for loss on land and
building.............................. 32,819 -- 207,844
Decrease (increase) in receivables..... 214,793 (215,193) 9,339
Decrease in net investment in direct
financing leases...................... 12,056 7,331 5,358
Increase in prepaid expenses........... (7,463) (1,297) (1,778)
Decrease (increase) in accrued rental
income................................ (40,000) (32,667) 7,161
Decrease in accounts payable and
accrued expenses...................... (71,844) (4,732) (21,689)
Increase (decrease) in due to related
parties............................... (20,621) 48,944 51,578
Increase (decrease) in rents paid in
advance and deposits.................. (16,180) 12,133 (14,072)
----------- ----------- -----------
Total adjustments..................... (370,146) 277,097 720,922
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. $ 2,021,689 $ 2,091,754 $ 2,203,437
=========== =========== ===========
Supplemental Schedule of 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 December 31.... $ 15,150 $ -- $ --
Distributions declared and unpaid at
December 31........................... $ 594,000 $ 594,000 $ 594,000
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-121
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
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.
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. 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 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-122
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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 and a property in
each of Englewood, Colorado and Miami, Florida, held as tenants-in-common with
affiliates, is 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 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 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
F-123
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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>
1997 1996
----------- -----------
<S> <C> <C>
Land............................................ $ 7,325,960 $ 7,835,279
Buildings....................................... 10,891,910 12,467,020
----------- -----------
18,217,870 20,619,880
Less accumulated depreciation................... (3,341,624) (3,610,923)
----------- -----------
Less allowance for loss on land and building.... (240,663) (207,844)
----------- -----------
$14,635,583 $16,483,532
=========== ===========
</TABLE>
In 1995, the Partnership 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 allowance represents the difference between (i) the
property's carrying value at December 31, 1997 and 1995, and (ii) the estimated
net realizable value of the property based on the anticipated sales price
relating to this property as of such dates.
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
funds 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 (net of $4,330 which
represents real estate tax amounts due from tenant) 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 expense; therefore, the Partnership sold the property 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.
F-124
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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 (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 (net of $511 which
represents prorated rent returned to the tenant) 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.
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, 1997, 1996 and 1995, the Partnership recognized $40,000, $32,667 and
$27,669, 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, 1997:
<TABLE>
<S> <C>
1998........................................................... $ 1,534,701
1999........................................................... 1,547,630
2000........................................................... 1,547,630
2001........................................................... 1,552,155
2002........................................................... 1,529,200
Thereafter..................................................... 8,374,163
-----------
$16,085,479
===========
</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 leases 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>
1997 1996
----------- -----------
<S> <C> <C>
Minimum lease payments receivable.................. $ 2,191,519 $ 2,340,192
Estimated residual value........................... 239,432 239,432
Less unearned income............................... (1,504,089) (1,640,706)
----------- -----------
Net investment in direct financing leases.......... $ 926,682 $ 938,918
=========== ===========
</TABLE>
F-125
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998............................................................ $ 148,672
1999............................................................ 148,672
2000............................................................ 148,672
2001............................................................ 148,672
2002............................................................ 148,672
Thereafter...................................................... 1,448,159
----------
$2,191,519
==========
</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 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,
1997, the Partnership owned a 32.77% 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, 1997, the Partnership owned a 9.84% interest in this property.
Titusville 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 or family-style restaurants. The
following presents the joint venture's condensed financial information at
December 31:
<TABLE>
<CAPTION>
1997 1996
---------- --------
<S> <C> <C>
Land and building on operating leases, less accumulated
depreciation and allowance for loss on land and
building.............................................. $3,152,962 $822,072
Net investment in direct financing leases.............. 1,003,680 --
Cash................................................... 16,481 9,677
Receivables............................................ -- 11,233
Accrued rental income.................................. 11,621 17,700
Other assets........................................... 1,480 29,631
Liabilities............................................ 18,722 9,665
Partners' capital...................................... 4,167,502 880,648
Revenues............................................... 82,837 51,778
Net income (loss)...................................... (157,912) 15,995
</TABLE>
F-126
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
The Partnership recognized a loss totalling $148,170 for the year ended
December 31, 1997 and income of $11,740 and $22,015 for the years ended
December 31, 1996 and 1995, respectively, from these 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 promissory note
bears interest at a rate of nine percent per annum and is being collected in 36
monthly installments of $6,163, including interest, with a balloon payment of
$642,798 due in July 2000.
The mortgage note receivable consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
--------- ----
<S> <C> <C>
Principal balance............................................. $ 678,730 $--
Accrued interest receivable................................... 2,957 --
--------- ---
$ 681,687 $--
========= ===
</TABLE>
The general partners believe that the estimated fair value of the mortgage
note receivable at December 31, 1997, approximates 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
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
restaurant located on the Partnership'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 of ten percent
per annum and is being collected in 36 equal monthly installments of $807 and
commenced in October 1996. Receivables at December 31, 1997 and 1996, include
$16,318 and $23,240, respectively, including accrued interest of $164 and $50,
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.
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-127
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
Generally, net sales proceeds from the sale of properties, 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 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.
During each of the years ended December 31, 1997, 1996 and 1995, the
Partnership declared distributions to the limited partners of $2,376,000. No
distributions have been made to the general partners to date.
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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting purpos-
es........................................ $2,391,835 $1,814,657 $1,482,515
Depreciation for tax reporting purposes in
excess of depreciation for financial
reporting purposes........................ (21,782) (9,754) (628)
Allowance for loss on land and building.... 32,819 -- 207,844
Direct financing leases recorded as
operating leases for tax reporting
purposes.................................. 12,056 7,330 5,358
Gain on sale of land for tax reporting pur-
poses..................................... -- 20,724 --
Gain on sale of land and buildings for
financial reporting purposes in excess of
gain on sale for tax reporting
purposes.................................. (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.......... 140,707 (1,329) (1,769)
Allowance for doubtful accounts............ 84,326 (283,135) 42,770
Accrued rental income...................... (40,000) (32,667) 7,161
Rents paid in advance...................... (16,680) 12,133 (14,572)
Minority interest in timing differences of
consolidated joint venture................ (133) (162) (106)
---------- ---------- ----------
Net income for federal income tax purpos-
es........................................ $1,893,867 $1,527,797 $1,728,573
========== ========== ==========
</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 parent company of CNL Securities
Corp. and CNL Fund Advisors, Inc. James M. Seneff, Jr. is director and chief
executive officer of CNL Securities Corp. and 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, is director and president
of CNL Securities Corp., is director, vice chairman of the board of directors
and treasurer of CNL Fund Advisors, Inc. and served as president of CNL Fund
Advisors, Inc. through October 1997.
F-128
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
During the years ended December 31, 1997, 1996 and 1995, certain Affiliates
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 Affiliates 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 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 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, 1997, 1996 and 1995.
Certain Affiliates are 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-percent of the sales price if the Affiliates provide
a substantial amount of services in connection with the 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 10% Preferred Return, plus their adjusted capital contributions.
During the year ended December 31, 1997, the Partnership incurred $15,150 in
deferred, subordinated real estate disposition fees as a result of the
Partnership's sale of the Property in Chicago, Illinois. No deferred,
subordinated real estate disposition fees were incurred for the years ended
December 31, 1996 and 1995.
During the years ended December 31, 1997, 1996 and 1995, the Affiliates
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $87,056, $85,906 and $78,597 for the years
ended December 31, 1997, 1996 and 1995, respectively, for such services.
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Due to Affiliates:
Expenditures incurred on behalf of the Partnership......... $ 38,492 $ 56,942
Accounting and administrative services..................... 43,746 45,917
Deferred, subordinated real estate disposition fee......... 15,150 --
-------- --------
$ 97,388 $102,859
======== ========
</TABLE>
12. Concentration of Credit Risk
For the years ended December 31, 1997, 1996 and 1995, rental income from
Golden Corral Corporation was $474,553, $490,196 and $470,952, 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 the
joint venture and the properties held as tenants-in-common with affiliates).
F-129
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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 the joint venture and the properties
held as tenants-in-common with affiliates) for at least one of the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Family Steakhouse Restaurants... $474,553 $490,196 $470,952
KFC........................................... 261,415 254,646 279,075
Pizza Hut..................................... 255,055 292,795 289,161
Taco Bell..................................... 250,140 254,395 260,119
Denny's....................................... 229,537 355,123 254,043
Perkins....................................... 154,819 276,114 276,114
</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. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
13. Subsequent Event
In January 1998, the Partnership sold its property in Fernandina Beach,
Florida, to the tenant, for $730,000 and received net sales proceeds (net of
$3,018 which represents prorated rent collected at closing) of $724,672,
resulting in a gain of approximately $264,000 for financial reporting purposes.
In addition, in January 1998, the Partnership sold its property in Daytona
Beach, Florida to the tenant, for $1,050,000 and received net sales proceeds
(net of $1,975 which represents prorated rent returned to the tenant) of
$1,007,001, resulting in a gain of approximately $299,300 for financial
reporting purposes.
In January 1998, the Partnership used the net sales proceeds from the sale
of the property in Kissimmee, Florida, to acquire a property in Overland Park,
Kansas, as tenants-in-common with affiliates of the general partners. In
connection therewith, the Partnership contributed approximately $415,600 for a
25.84% interest in such property.
F-130
<PAGE>
CNL INCOME FUND IV, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997.. F-132
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997............................................. F-133
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997............. F-134
Condensed Statements of Cash Flows for the Nine Months Ended September
30, 1998 and 1997....................................................... F-135
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997....................................... F-136
Report of Independent Accountants........................................ F-139
Balance Sheets as of December 31, 1997 and 1996.......................... F-140
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-141
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995........................................................... F-142
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-143
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and 1995................................................................ F-144
</TABLE>
F-131
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 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.................................. $15,587,830 $18,097,997
Net investment in direct financing leases........... 1,241,326 1,269,389
Investment in joint ventures........................ 2,883,497 2,708,012
Cash and cash equivalents........................... 765,359 876,452
Restricted cash..................................... 533,019 --
Receivables, less allowance for doubtful accounts of
$258,741 and $295,580.............................. 18,718 37,669
Prepaid expenses.................................... 12,197 11,115
Lease costs, less accumulated amortization of
$20,681 and $17,956................................ 18,863 21,588
Accrued rental income............................... 270,472 287,466
Other Assets........................................ -- 200
----------- -----------
$21,331,281 $23,309,888
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable.................................... $ 6,687 $ 8,576
Accrued construction costs payable.................. -- 250,000
Accrued and escrowed real estate taxes payable...... 76,311 65,176
Distributions payable............................... 600,000 690,000
Due to related parties.............................. 138,193 93,854
Rents paid in advance and deposits.................. 81,329 49,983
----------- -----------
Total liabilities............................... 902,520 1,157,589
----------- -----------
Commitment (Note 7)
Partners' capital................................... 20,428,761 22,152,299
----------- -----------
$21,331,281 $23,309,888
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-132
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
----------------- ----------------------
1998 1997 1998 1997
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases............................ $547,853 $508,852 $1,598,854 $1,558,963
Earned income from direct financing
leases............................ 31,630 32,564 95,611 98,344
Contingent rental income........... -- 20,661 37,207 65,265
Interest and other income.......... 24,951 17,509 46,143 28,980
-------- -------- ---------- ----------
604,434 579,586 1,777,815 1,751,552
-------- -------- ---------- ----------
Expenses:
General operating and
Administrative.................... 46,096 33,940 121,811 113,606
Bad debt expense................... -- -- -- 12,794
Professional services.............. 5,999 4,110 38,644 18,200
Real estate taxes.................. 26,225 3,487 46,980 31,514
State and other taxes.............. -- 25 15,747 16,476
Depreciation and amortization...... 104,058 113,230 326,835 339,692
-------- -------- ---------- ----------
182,378 154,792 550,017 532,282
-------- -------- ---------- ----------
Income Before Equity in Earnings
(Loss) of Joint Ventures, Gain on
Sale of Land and Buildings and Real
Estate.............................. 422,056 424,794 1,227,798 1,219,270
Equity in Earnings (Loss) of Joint
Ventures............................ 5,276 52,359 (143,612) 172,340
Gain on Sale of Land and Buildings... 170,281 -- 226,024 --
-------- -------- ---------- ----------
Net Income........................... $597,613 $477,153 $1,310,210 $1,391,610
======== ======== ========== ==========
Allocation of Net Income:
General partners................... $ 5,195 $ 4,772 $ 7,612 $ 13,916
Limited partners................... 592,418 472,381 1,302,598 1,377,694
-------- -------- ---------- ----------
$597,613 $477,153 $1,310,210 $1,391,610
======== ======== ========== ==========
Net Income Per Limited Partner Unit.. $ 9.87 $ 7.87 $ 21.71 $ 22.96
======== ======== ========== ==========
Weighted Average Number of Limited
Partner Units Outstanding........... 60,000 60,000 60,000 60,000
======== ======== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-133
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1998 1997
----------------- ------------
<S> <C> <C>
General partners:
Beginning balance............................. $ 756,354 $ 446,657
Contribution.................................. -- 294,000
Net income.................................... 7,612 15,697
----------- -----------
763,966 756,354
----------- -----------
Limited partners:
Beginning balance............................. 21,395,945 22,450,974
Net income.................................... 1,302,598 1,704,971
Distributions ($50.56 and $46.00 per limited
partner unit, respectively).................. (3,033,748) (2,760,000)
----------- -----------
19,664,795 21,395,945
----------- -----------
Total partners' capital......................... $20,428,761 $22,152,299
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-134
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities.......... $ 1,794,173 $ 1,746,810
----------- -----------
Cash Flows from Investing Activities:
Additions to land and building on operating
leases.......................................... (275,000) --
Proceeds from sale of land and buildings......... 2,526,354 --
Investment in joint ventures..................... (499,274) --
Increase in restricted cash...................... (533,598) --
Other............................................ -- 7,338
----------- -----------
Net cash provided by investing Activities...... 1,218,482 7,338
----------- -----------
Cash Flows from Financing Activities:
Contributions from general partner................. -- 225,000
Distributions to limited partners.................. (3,123,748) (2,070,000)
----------- -----------
Net cash used in financing Activities.......... (3,123,748) (1,845,000)
----------- -----------
Net Decrease in Cash and Cash Equivalents............ (111,093) (90,852)
Cash and Cash Equivalents at Beginning of Period..... 876,452 554,593
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 765,359 $ 463,741
=========== ===========
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Deferred real estate disposition fees incurred and
unpaid at end of period........................... $ 45,663 $ --
=========== ===========
Distributions declared and unpaid at end of
period............................................ $ 600,000 $ 690,000
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-135
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, 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 Form 10-K of CNL Income
Fund IV, Ltd. (the "Partnership") for the year ended December 31, 1997.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2. Land and Building on Operating Leases
Land and buildings on operating leases consisted of the following at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land............................................ $ 7,244,513 $ 8,328,572
Buildings....................................... 11,986,558 13,684,194
----------- -----------
19,231,071 22,012,766
Less accumulated depreciation................... (3,643,241) (3,844,432)
----------- -----------
15,587,830 18,168,334
Less allowance for loss on land and building.... -- (70,337)
----------- -----------
$15,587,830 $18,097,997
=========== ===========
</TABLE>
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 4).
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 total loss
for financial reporting purposes of $135,509. Due to the fact that
F-136
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Nine Months Ended September 30, 1998 and 1997
at 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.
3. Investment in Joint Ventures
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 September 30, 1998, the Partnership had contributed
$498,953 to the joint venture to acquire the restaurant property. As of
September 30, 1998, the Partnership owned approximately a 36 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.
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>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation and allowance for
loss on land and building..................... $4,418,423 $3,338,372
Net investment in direct financing lease, less
allowance for loss on building................ 631,673 842,633
Cash........................................... 21,864 12,331
Receivables.................................... 20,713 40,456
Accrued rental income.......................... 162,507 177,567
Other assets................................... 2,513 2,029
Liabilities.................................... 37,488 16,283
Partners' capital.............................. 5,220,205 4,397,105
Revenues....................................... 236,627 434,177
Provision for loss on land and buildings....... (455,379) (147,039)
Net income (loss).............................. (306,969) 126,271
</TABLE>
The Partnership recognized a loss totalling $143,612 and income totalling
$172,340 for the nine months ended September 30, 1998 and 1997, respectively,
from these joint ventures, and recognized income totalling $5,276 and $52,359
during the quarters ended September 30, 1998 and 1997, respectively.
4. Restricted Cash
As of September 30, 1998, the net sales proceeds of $533,598 from the sale
of the property in Naples, Florida, plus accrued interest of $1,371, less
escrow fees of $1,950, 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-137
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Nine Months Ended September 30, 1998 and 1997
5. 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, 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 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.
During the nine months ended September 30, 1998 and 1997, the Partnership
declared distributions to the limited partners of $3,033,748 and $2,070,000,
respectively ($600,000 and $690,000 for the quarters ended September 30, 1998
and 1997, respectively). This represents distributions for the nine months
ended September 30, 1998 and 1997, of $50.56 and $34.50 per unit, respectively
($10.00 and $11.50 per unit for the quarters ended September 30, 1998 and 1997,
respectively). Distributions for the nine months ended September 30, 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.
6. Related Party Transactions
An affiliate of the Partnership 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. 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 nine months ended September 30, 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 nine months ended September 30, 1997.
7. Commitment
During August 1998, the Partnership entered into an agreement with an
unrelated third party to sell the Taco Bell property in Edgewood, Maryland. The
general partners believe that the anticipated sales price will exceed the
Partnership's cost attributable to the property; however, as of November 6,
1998, the sale had not occurred.
F-138
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners
CNL Income Fund IV, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund IV, Ltd.
(a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. 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 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 Income Fund IV, Ltd. as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
January 26, 1998
F-139
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land and building.................................... $18,097,997 $18,737,516
Net investment in direct financing leases............. 1,269,389 1,303,604
Investment in joint ventures.......................... 2,708,012 2,783,738
Cash and cash equivalents............................. 876,452 554,593
Receivables, less allowance for doubtful accounts of
$295,580 and $156,933................................ 37,669 62,561
Prepaid expenses...................................... 11,115 10,935
Lease costs, less accumulated amortization of $17,956
and $15,458.......................................... 21,588 8,486
Accrued rental income................................. 287,466 269,359
Other assets.......................................... 200 100
----------- -----------
$23,309,888 $23,730,892
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 8,576 $ 10,831
Accrued construction costs payable.................... 250,000 --
Accrued and escrowed real estate taxes payable........ 65,176 32,729
Distributions payable................................. 690,000 690,000
Due to related parties................................ 93,854 67,153
Rents paid in advance and deposits.................... 49,983 32,548
----------- -----------
Total liabilities................................... 1,157,589 833,261
----------- -----------
Partners' capital..................................... 22,152,299 22,897,631
----------- -----------
$23,309,888 $23,730,892
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-140
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases........ $2,058,703 $2,263,677 $2,373,386
Earned income from direct financing
leases.................................... 130,683 134,014 137,020
Contingent rental income................... 117,031 97,318 94,101
Interest and other income.................. 35,221 47,855 21,287
---------- ---------- ----------
2,341,638 2,542,864 2,625,794
---------- ---------- ----------
Expenses:
General operating and administrative....... 149,808 161,714 140,374
Professional services...................... 33,439 29,289 31,287
Bad debt expense........................... 12,794 -- 102,431
Real estate taxes.......................... 65,316 37,589 37,745
State and other taxes...................... 16,476 21,694 19,006
Depreciation and amortization.............. 455,895 444,232 458,937
---------- ---------- ----------
733,728 694,518 789,780
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Ventures, Gain (Loss) on Sale of Land and
Buildings and Provision for Loss on Land and
Building.................................... 1,607,910 1,848,346 1,836,014
Equity in Earnings of Joint Ventures......... 189,747 277,431 245,778
Gain (Loss) on Sale of Land and Buildings.... (6,652) 221,390 128,547
Provision for Loss on Land and Building...... (70,337) -- --
---------- ---------- ----------
Net Income................................... $1,720,668 $2,347,167 $2,210,339
========== ========== ==========
Allocation of Net Income:
General partners........................... $ 15,697 $ 22,219 $ 21,590
Limited partners........................... 1,704,971 2,324,948 2,188,749
---------- ---------- ----------
$1,720,668 $2,347,167 $2,210,339
========== ========== ==========
Net Income Per Limited Partner Unit.......... $ 28.42 $ 38.75 $ 36.48
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding........................... 60,000 60,000 60,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-141
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<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,
1994................... $241,504 $139,044 $30,000,000 $(16,927,963) $13,825,240 $(3,440,000) $23,837,825
Distributions to
limited partners ($46
per limited partner
unit)................. -- -- -- (2,760,000) -- -- (2,760,000)
Net income............. -- 21,590 -- -- 2,188,749 -- 2,210,339
-------- -------- ----------- ------------ ----------- ----------- -----------
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
======== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-142
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants........... $ 2,345,612 $ 2,588,248 $ 2,586,716
Distributions from joint ventures.... 265,473 305,866 271,006
Cash paid for expenses............... (211,213) (206,059) (205,759)
Interest received.................... 18,100 25,909 18,430
----------- ----------- -----------
Net cash provided by operating
activities........................ 2,417,972 2,713,964 2,670,393
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and
building............................ 378,149 1,049,550 518,650
Additions to land and buildings on
operating leases.................... -- (1,035,516) (1,628)
Investment in joint venture.......... -- (437,489) --
Decrease (increase) in restricted
cash................................ -- 518,150 (518,150)
Payment of lease costs............... (17,384) (2,230) (1,800)
Other................................ 9,122 -- --
----------- ----------- -----------
Net cash provided by (used in)
investing activities.............. 369,887 92,465 (2,928)
----------- ----------- -----------
Cash Flows from Financing Activities:
Reimbursement of acquisition costs
paid by related parties on behalf of
the Partnership..................... -- -- (1,175)
Contributions from General Partners.. 294,000 22,300 --
Distributions to limited partners.... (2,760,000) (2,760,000) (2,760,000)
----------- ----------- -----------
Net cash used in financing
activities........................ (2,466,000) (2,737,700) (2,761,175)
----------- ----------- -----------
Net Increase (Decrease) in Cash and
Cash Equivalents...................... 321,859 68,729 (93,710)
Cash and Cash Equivalents at Beginning
of Year............................... 554,593 485,864 579,574
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year.................................. $ 876,452 $ 554,593 $ 485,864
=========== =========== ===========
Reconciliation of Net Income to Net
Cash Provided by Operating Activities:
Net income............................. $ 1,720,668 $ 2,347,167 $ 2,210,339
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation......................... 453,397 442,065 455,543
Amortization......................... 2,498 2,167 3,394
Equity in earnings of joint ventures,
net of distributions................ 75,726 28,435 25,228
Loss (gain) on sale of land and
buildings........................... 6,652 (221,390) (128,547)
Provision for loss on land and
building............................ 70,337 -- --
Decrease in receivables.............. 18,216 41,531 93,451
Increase in prepaid expenses......... (180) (1,202) (1,747)
Decrease in net investment in direct
financing leases.................... 34,215 30,885 27,879
Increase in accrued rental income.... (39,669) (21,520) (22,921)
Increase (decrease) in accounts
payable and accrued expenses........ 31,976 11,162 (3,532)
Increase in due to related parties... 26,701 39,987 27,166
Increase (decrease) in rents paid in
advance and deposits................ 17,435 14,677 (15,860)
----------- ----------- -----------
Total adjustments.................. 697,304 366,797 460,054
----------- ----------- -----------
Net Cash Provided by Operating
Activities........................ $ 2,417,972 $ 2,713,964 $ 2,670,393
=========== =========== ===========
Supplemental Schedule of Non-Cash
Financing Activities:
Distributions declared and unpaid at
December 31......................... $ 690,000 $ 690,000 $ 690,000
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-143
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
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.
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 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-144
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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 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.
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, 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.
F-145
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
3. Land and Buildings on Operating Leases
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Land............................................... $ 8,328,572 $ 8,694,357
Buildings.......................................... 13,684,194 13,434,194
----------- -----------
22,012,766 22,128,551
Less accumulated depreciation...................... (3,844,432) (3,391,035)
----------- -----------
18,168,334 18,737,516
Less allowance for loss on land and building....... (70,337) --
----------- -----------
$18,097,997 $18,737,516
=========== ===========
</TABLE>
In September 1996, the Partnership sold its 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 Property was originally
acquired by the Partnership in December 1988 and had a cost of approximately
$832,800, excluding acquisition fees and miscellaneous acquisition expenses;
therefore, the Partnership sold the Property for approximately $216,800 in
excess of its original purchase price. In December 1996, the Partnership
reinvested approximately $1,026,200 in a Boston Market property located in
Richmond, Virginia.
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.
At December 31, 1997, the Partnership established an allowance for loss on
land and building in the amount of $70,337 for financial reporting purposes for
the property in Leesburg, Florida. The allowance represents the difference
between the property's carrying value at December 31, 1997 and the estimated
net realizable value of this property based on an anticipated sales 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, 1997, 1996 and 1995, the Partnership recognized $39,669, $21,520 and
$22,921, respectively, of such rental income.
F-146
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1997:
<TABLE>
<S> <C>
1998............................. $ 1,996,330
1999............................. 2,007,362
2000............................. 2,009,453
2001............................. 1,979,003
2002............................. 1,983,101
Thereafter....................... 12,867,319
-----------
$22,842,568
===========
</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>
1997 1996
----------- -----------
<S> <C> <C>
Minimum lease payments receivable................ $ 1,825,690 $ 1,990,589
Estimated residual values........................ 527,829 527,829
Less unearned income............................. (1,084,130) (1,214,814)
----------- -----------
Net investment in direct financing leases........ $ 1,269,389 $ 1,303,604
=========== ===========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998.............................. $ 164,899
1999.............................. 164,899
2000.............................. 164,899
2001.............................. 164,899
2002.............................. 164,899
Thereafter........................ 1,001,195
----------
$1,825,690
==========
</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 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.
F-147
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
In January 1996, the Partnership acquired a property in Clinton, North
Carolina, 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, 1997, the Partnership owned a 53.68% interest in this property.
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.
The following presents the joint ventures' combined, condensed financial
information at December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land and building.................................. $3,338,372 $3,565,440
Net investment in direct financing leases........... 842,633 859,667
Cash................................................ 12,331 11,001
Receivables......................................... 40,456 34,308
Accrued rental income............................... 177,567 168,784
Other assets........................................ 2,029 30,143
Liabilities......................................... 16,283 10,724
Partners' capital................................... 4,397,105 4,658,619
Revenues............................................ 434,177 511,606
Net income.......................................... 126,271 411,884
</TABLE>
The Partnership recognized income totalling $189,747, $277,431 and $245,778
for the years ended December 31, 1997, 1996 and 1995, respectively, from these
joint ventures.
6. 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. Receivables at December 31,
1997 included $7,106 of such amounts.
7. 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").
F-148
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
Generally, net sales proceeds from the sale of properties, 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 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.
During each of the years ended December 31, 1997, 1996 and 1995, the
Partnership declared distributions to the limited partners of $2,760,000. 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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................... $1,720,668 $2,347,167 $2,210,339
Depreciation for tax reporting purposes
in excess of depreciation financial
reporting purposes..................... (9,203) (17,764) (16,933)
Allowance for loss on land and
building............................... 70,337 -- --
Direct financing leases recorded as
operating leases for tax reporting
purposes............................... 34,215 30,885 27,879
Gain on sale of land and buildings for
financial reporting purposes less than
(in excess of) gain for tax reporting
purposes............................... 44,918 (140,228) (128,547)
Equity in earnings of joint ventures for
financial reporting purposes in excess
of equity in earnings of joint ventures
for tax reporting purposes............. 51,115 (25,853) (22,624)
Allowance for doubtful accounts......... 138,647 (9,933) 122,022
Accrued rental income................... (39,669) (21,520) (22,921)
Rents paid in advance................... 7,435 14,677 (15,860)
---------- ---------- ----------
Net income for federal income tax
purposes............................... $2,018,463 $2,177,431 $2,153,355
========== ========== ==========
</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 parent company of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, served
as president of CNL Fund Advisors, Inc. through October 1997. CNL Income Fund
Advisors, Inc. was a wholly owned subsidiary of CNL Group, Inc. until its
merger, effective January 1, 1996, with CNL Fund Advisors, Inc. During the
years ended December 31, 1997, 1996 and 1995, CNL Income Fund Advisors, Inc.
and CNL Fund Advisors, Inc. (hereinafter referred to collectively as the
"Affiliates") each performed certain services for the Partnership, as described
below.
F-149
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
During the years ended December 31, 1997, 1996 and 1995, certain 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 Affiliates 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, 1997, 1996 and 1995.
Certain Affiliates are 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 Affiliates provide 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, 1997, 1996 and 1995, the Affiliates
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $81,838, $85,899 and $79,776 for the years
ended December 31, 1997, 1996 and 1995, respectively, for such services.
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Due to Affiliates:
Expenditures incurred on behalf of the Partnership........ $48,126 $39,279
Accounting and administrative services.................... 40,728 27,874
Other..................................................... 5,000 --
------- -------
$93,854 $67,153
======= =======
</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 joint ventures), for at least one of the
years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Shoney's, Inc. ................................... $427,238 $425,390 $423,124
Tampa Foods, L.P.................................. 215,265 291,347 320,883
</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-150
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
the Partnership's share of total rental and earned income from joint ventures)
for at least one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Shoney's......................................... $557,303 $557,841 $559,710
Wendy's Old Fashioned Hamburger Restaurants...... 432,585 499,305 525,948
Denny's.......................................... 345,749 360,080 358,467
Taco Bell........................................ 262,909 251,314 251,273
</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 of these lessees or restaurant chains could
significantly impact the results of operations of the Partnership. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
See accompanying notes and management's assumptions to unaudited pro forma
financial statements.
F-151
<PAGE>
CNL INCOME FUND V, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997.. F-153
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997............................................. F-154
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997............. F-155
Condensed Statements of Cash Flows for the Nine Months Ended September
30, 1998 and 1997....................................................... F-156
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997....................................... F-157
Report of Independent Accountants........................................ F-161
Balance Sheets as of December 31, 1997 and 1996.......................... F-162
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-163
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995........................................................... F-164
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-165
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and 1995................................................................ F-166
</TABLE>
F-152
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 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................................. $10,855,678 $12,421,143
Net investment in direct financing leases........... 1,717,763 2,277,481
Investment in joint ventures........................ 2,231,902 1,558,709
Mortgage note receivable, less deferred gain of
$320,536 and $323,157.............................. 1,742,233 1,758,167
Cash and cash equivalents........................... 481,185 1,361,290
Receivables, less allowance for doubtful accounts of
$150,102 and $137,892.............................. 61,221 108,261
Prepaid expenses.................................... 8,458 9,307
Accrued rental income............................... 221,988 169,726
Other assets........................................ 54,346 54,346
----------- -----------
$17,374,774 $19,718,430
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable.................................... $ 2,315 $ 24,229
Accrued construction costs payable.................. -- 125,000
Accrued and escrowed real estate taxes payable...... 17,217 93,392
Distributions payable............................... 500,000 575,000
Due to related parties.............................. 216,395 143,867
Rents paid in advance............................... 35,485 13,479
----------- -----------
Total liabilities............................... 771,412 974,967
Minority interest................................... 209,524 222,929
Partners' capital................................... 16,393,838 18,520,534
----------- -----------
$17,374,774 $19,718,430
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-153
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
------------------- ----------------------
1998 1997 1998 1997
--------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases.......................... $ 287,742 $344,772 $ 875,920 $1,042,771
Earned income from direct
financing leases................ 50,326 33,396 152,669 117,863
Contingent rental income......... 10,084 15,404 33,412 68,056
Interest and other income........ 58,791 93,169 223,647 227,320
--------- -------- ---------- ----------
406,943 486,741 1,285,648 1,456,010
--------- -------- ---------- ----------
Expenses:
General operating and
administrative.................. 35,693 52,181 113,010 128,730
Bad debt expense................. -- -- 5,882 9,007
Professional services............ 3,235 4,866 13,314 17,695
Real estate taxes................ 10,138 10,776 26,558 32,298
State and other taxes............ -- -- 9,658 11,897
Depreciation..................... 71,743 82,425 201,720 249,225
--------- -------- ---------- ----------
120,809 150,248 370,142 448,852
--------- -------- ---------- ----------
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......................... 286,134 336,493 915,506 1,007,158
Minority Interest in Loss of
Consolidated Joint Venture........ 3,955 6,092 13,405 16,124
Equity in Earnings of
Unconsolidated Joint Ventures..... 40,315 11,144 112,418 33,549
Gain on Sale of Land and
Buildings......................... 838 267,076 443,443 369,570
Provision for Loss on Land and
Buildings......................... (120,508) -- (273,141) (142,990)
--------- -------- ---------- ----------
Net Income......................... $ 210,734 $620,805 $1,211,631 $1,283,411
--------- -------- ---------- ----------
Allocation of Net Income:
General partners................. $ 179 $ 6,060 $ 6,534 $ 10,548
Limited partners................. 210,555 614,745 1,205,097 1,272,863
--------- -------- ---------- ----------
$ 210,734 $620,805 $1,211,631 $1,283,411
========= ======== ========== ==========
Net Income Per Limited Partner
Unit.............................. $ 4.21 $ 12.29 $ 24.10 $ 25.46
========= ======== ========== ==========
Weighted Average Number of Limited
Partner Units Outstanding......... 50,000 50,000 50,000 50,000
========= ======== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-154
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1998 1997
----------------- ------------
<S> <C> <C>
General partners:
Beginning balance............................. $ 493,982 $ 376,173
Contributions................................. -- 106,000
Net income.................................... 6,534 11,809
----------- -----------
500,516 493,982
----------- -----------
Limited partners:
Beginning balance............................. 18,026,552 18,606,446
Net income.................................... 1,205,097 1,720,106
Distributions ($66.77 and $46.00 per limited
partner unit, respectively).................. (3,338,327) (2,300,000)
----------- -----------
15,893,322 18,026,552
----------- -----------
Total partners' capital......................... $16,393,838 $18,520,534
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-155
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities........... $ 1,230,725 $ 1,297,828
----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and building............ 2,125,220 4,082,166
Additions to land and buildings on operating
leases............................................ (125,000) (120,365)
Investment in joint ventures....................... (713,480) --
Collections on mortgage notes receivable........... 15,757 5,503
Increase in restricted cash........................ -- (2,487,115)
----------- -----------
Net cash provided by investing activities......... 1,302,497 1,480,189
----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners.................. (3,413,327) (1,725,000)
----------- -----------
Net cash used in financing activities............. (3,413,327) (1,725,000)
----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents......................................... (880,105) 1,053,017
Cash and Cash Equivalents at Beginning of Period..... 1,361,290 362,922
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 481,185 $ 1,415,939
=========== ===========
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Net investment in direct financing lease
reclassified to land and building on operating
lease as a result of lease termination............. $ 530,498 $ --
=========== ===========
Deferred real estate disposition fees incurred and
unpaid at end of period............................ $ 65,400 $ --
=========== ===========
Distributions declared and unpaid at end of period.. $ 500,000 $ 575,000
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-156
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, 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, 1997.
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.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2. Land and Buildings on Operating Leases
Land and buildings on operating leases consisted of the following at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land............................................ $ 5,340,524 $ 6,069,665
Buildings....................................... 7,869,209 8,546,530
----------- -----------
13,209,733 14,616,195
Less accumulated depreciation................... (1,830,220) (1,944,358)
----------- -----------
11,379,513 12,671,837
Less allowance for loss on land and buildings... (523,835) (250,694)
----------- -----------
$10,855,678 $12,421,143
=========== ===========
</TABLE>
During the nine months ended September 30, 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 of $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 6).
F-157
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Nine Months Ended September 30, 1998 and 1997
As of December 31, 1997, the Partnership had 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.
During the nine months ended September 30, 1998, the Partnership increased the
allowance by $152,633 for the property in Belding, Michigan. In addition,
during the nine months ended September 30, 1998, the Partnership established an
allowance for loss on land and building of $120,508, relating to the property
located in Daleville, Indiana. The allowances represent the difference between
the net carrying values of the properties at September 30, 1998 and current
estimates of net realizable values for these properties.
3. Net Investment in Direct Financing Leases
During the nine months ended September 30, 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.
4. Investment in Joint Ventures
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 September 30, 1998, the Partnership had
contributed $713,480 to purchase land and pay for construction relating to the
joint venture. As of September 30, 1998, the Partnership has agreed to
contribute approximately $40,900 in additional construction costs to the joint
venture. When construction is completed, the Partnership will have an
approximate 53 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.
The following presents the combined, condensed financial information for all
of the Partnership's joint ventures and properties held as tenants-in-common
at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation...................... $4,817,939 $4,277,972
Net investment in direct financing leases...... 802,097 --
Cash........................................... 14,653 24,994
Receivables.................................... 527 4,417
Prepaid expenses............................... 458 270
Accrued rental income.......................... 97,074 68,819
Liabilities.................................... 105,316 1,250
Partners' capital.............................. 5,627,432 4,375,222
Revenues....................................... 386,391 151,242
Net income..................................... 305,686 121,605
</TABLE>
The Partnership recognized income totaling $112,418 and $33,549 for the nine
months ended September 30, 1998 and 1997, respectively, from these joint
ventures, $40,315 and $11,144 of which was earned during the quarters ended
September 30, 1998 and 1997, respectively.
F-158
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Nine Months Ended September 30, 1998 and 1997
5. 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, noncompounded annual return on their
adjusted capital contributions (the "10% Preferred Return") on a cumulative
basis.
Generally, net sales proceeds from the sale of properties, to the extent
distributed, will be distributed first to the limited partners in an amount
sufficient to provide them with the 10% Preferred Return, on a cumulative
basis, 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 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.
During the nine months ended September 30, 1998 and 1997, the Partnership
declared distributions to the limited partners of $3,338,327 and $1,725,000,
respectively, ($500,000 and $575,000 for the quarters ended September 30, 1998
and 1997, respectively). This represents distributions for the nine months
ended September 30, 1998 and 1997, of $66.77 and $34.50 per unit, respectively
($10.00 and $11.50 per unit for the quarters ended September 30, 1998 and 1997,
respectively). Distributions for the nine months ended September 30, 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' cumulative 10% Preferred
Return. No distributions have been made to the general partners to date.
6. Related Party Transactions
An affiliate of the Partnership 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. 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 nine months ended September 30, 1998, the Partnership
incurred $65,400 in deferred, subordinated, real estate disposition fees as a
result of the sale of properties (see Note 2). No deferred, subordinated, real
estate disposition fees were incurred for the nine months ended September 30,
1997.
7. 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, earned and interest income (including the
Partnership's
F-159
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Nine Months Ended September 30, 1998 and 1997
share of total rental and earned income from joint ventures and the properties
held as tenants-in-common), for at least one of the nine months ended September
30:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Golden Corral Corporation................................. $146,633 $146,633
Slaymaker Group, Inc...................................... 139,005 --
DenAmerica, Inc........................................... 95,713 127,484
Shoney's, Inc............................................. 83,051 180,044
Tampa Foods, L.P.......................................... 70,219 133,923
</TABLE>
In addition, the following schedule presents total rental, earned and
interest income from individual restaurant chains, each representing more than
ten percent of the Partnership's total rental, earned income and interest
income from its properties (including the Partnership's share of total rental
and earned income from joint ventures and the properties held as tenants-in-
common) and mortgage notes for at least one of the nine months ended September
30:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Golden Corral Family Steakhouse Restaurants............... $146,633 $146,633
Tony Roma's Famous for Ribs............................... 139,005 --
Wendy's Old Fashioned Hamburger Restaurants............... 128,616 193,319
Denny's................................................... 103,736 228,498
Perkins................................................... 77,728 280,805
</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 could significantly impact the
results of operations of the Partnership. However, the general partners believe
that the risk of such a default is reduced due to the essential or important
nature of these properties for the on-going operations of the lessees.
F-160
<PAGE>
Report of Independent Accountants
To the Partners
CNL Income Fund V, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund V, Ltd.
(a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. 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 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 Income Fund V, Ltd. as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
January 29, 1998
F-161
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land and buildings.................................... $12,421,143 $15,190,278
Net investment in direct financing leases.............. 2,277,481 1,941,406
Investment in joint ventures........................... 1,558,709 465,808
Mortgage notes receivable, less deferred gain.......... 1,758,167 1,772,858
Cash and cash equivalents.............................. 1,361,290 362,922
Receivables, less allowance for doubtful accounts of
$137,892 and $37,743.................................. 108,261 57,934
Prepaid expenses....................................... 9,307 10,416
Accrued rental income.................................. 169,726 277,034
Other.................................................. 54,346 54,346
----------- -----------
$19,718,430 $20,133,002
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable....................................... $ 24,229 $ 25,366
Accrued construction costs payable..................... 125,000 --
Accrued real estate taxes payable...................... 93,392 104,764
Distributions payable.................................. 575,000 575,000
Due to related parties................................. 143,867 155,964
Rents paid in advance.................................. 13,479 11,738
----------- -----------
Total liabilities................................ 974,967 872,832
Minority interest...................................... 222,929 277,551
Partners' capital...................................... 18,520,534 18,982,619
----------- -----------
$19,718,430 $20,133,002
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-162
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases....... $1,343,833 $1,746,021 $1,878,584
Earned income from direct financing
leases................................... 157,134 185,552 189,758
Contingent rental income.................. 233,663 130,167 104,455
Interest income........................... 288,637 137,385 55,785
Other income.............................. 13,866 10,419 27,395
---------- ---------- ----------
2,037,133 2,209,544 2,255,977
---------- ---------- ----------
Expenses:
General operating and administrative...... 166,346 178,991 157,741
Professional services..................... 23,172 22,605 20,741
Bad debt expense.......................... 9,007 -- 1,541
Real estate taxes......................... 39,619 40,711 47,182
State and other taxes..................... 11,897 12,492 15,982
Depreciation and amortization............. 324,431 376,766 397,735
---------- ---------- ----------
574,472 631,565 640,922
---------- ---------- ----------
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... 1,462,661 1,577,979 1,615,055
Minority Interest in Loss of Consolidated
Joint Venture.............................. 54,622 23,884 11,823
Equity in Earnings of Unconsolidated Joint
Ventures................................... 56,015 46,452 47,018
Gain on Sale of Land and Buildings.......... 409,311 19,369 5,924
Provision for Loss on Land and Buildings.... (250,694) (239,525) --
---------- ---------- ----------
Net Income.................................. $1,731,915 $1,428,159 $1,679,820
========== ========== ==========
Allocation of Net Income:
General partners.......................... $ 11,809 $ 12,513 $ 16,754
Limited partners.......................... 1,720,106 1,415,646 1,663,066
---------- ---------- ----------
$1,731,915 $1,428,159 $1,679,820
========== ========== ==========
Net Income Per Limited Partner Unit......... $ 34.40 $ 28.31 $ 33.26
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding.......................... 50,000 50,000 50,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-163
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<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,
1994................... $ 46,000 $109,706 $25,000,000 $(12,868,240) $10,860,974 $(2,865,000) $20,283,440
Contributions from
general partner........ 31,500 -- -- -- -- -- 31,500
Distributions to limited
partners ($46 per
limited partner unit).. -- -- -- (2,300,000) -- -- (2,300,000)
Net income.............. -- 16,754 -- -- 1,663,066 -- 1,679,820
-------- -------- ----------- ------------ ----------- ----------- -----------
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
======== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-164
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants................ $1,771,467 $2,083,722 $2,216,111
Distributions from unconsolidated joint
ventures................................. 53,176 53,782 53,405
Cash paid for expenses.................... (305,341) (161,730) (173,597)
Interest received......................... 293,929 127,971 46,999
---------- ---------- ----------
Net cash provided by operating
activities.............................. 1,813,231 2,103,745 2,142,918
---------- ---------- ----------
Cash Flows from Investing Activities:
Proceeds from sale of land and buildings.. 5,271,796 100,000 --
Proceeds from sale of portion of land for
right of way purposes.................... -- -- 7,625
Collections on mortgage note receivable... 9,265 6,712 11,409
Additions to land and buildings on
operating leases......................... (1,900,790) -- --
Investment in direct financing lease...... (911,072) -- --
Investment in joint venture............... (1,090,062) -- --
Other..................................... -- (26,287) --
---------- ---------- ----------
Net cash provided by investing
activities.............................. 1,379,137 80,425 19,034
---------- ---------- ----------
Cash Flows from Financing Activities:
Contributions from general partner........ 106,000 159,700 31,500
Distributions to limited partners......... (2,300,000) (2,300,000) (2,300,000)
---------- ---------- ----------
Net cash used in financing activities.... (2,194,000) (2,140,300) (2,268,500)
---------- ---------- ----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................... 998,368 43,870 (106,548)
Cash and Cash Equivalents at Beginning of
Year...................................... 362,922 319,052 425,600
---------- ---------- ----------
Cash and Cash Equivalents at End of Year... $1,361,290 $ 362,922 $ 319,052
========== ========== ==========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income................................ $1,731,915 $1,428,159 $1,679,820
---------- ---------- ----------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation.............................. 324,431 376,766 397,735
Minority interest in loss of consolidated
joint venture............................ (54,622) (23,884) (11,823)
Equity in earnings of unconsolidated joint
ventures, net of distributions........... (2,839) 7,330 6,387
Gain on sale of land and buildings........ (409,311) (19,369) (5,924)
Provisions for loss on land and
buildings................................ 250,694 239,525 --
Decrease (increase) in accrued interest on
mortgage note receivable................. 6,788 (9,414) (8,786)
Decrease (increase) in receivables........ (33,999) 10,270 13,527
Decrease (increase) in prepaid expenses... 1,109 1,505 (534)
Decrease in net investment in direct
financing leases......................... 42,682 46,387 42,180
Increase in accrued rental income......... (19,527) (27,875) (30,484)
Increase (decrease) in accounts payable
and accrued expenses..................... (12,509) 32,032 9,730
Increase (decrease) in due to related
parties.................................. (13,322) 59,945 41,585
Increase (decrease) in rents paid in
advance.................................. 1,741 (17,632) 9,505
---------- ---------- ----------
Total adjustments........................ 81,316 675,586 463,098
---------- ---------- ----------
Net Cash Provided by Operating Activities.. $1,813,231 $2,103,745 $2,142,918
========== ========== ==========
Supplemental Schedule of Non-Cash Investing
and Financing Activities:
Mortgage note accepted in connection with
sale of land and buildings............... $ -- $1,057,299 $1,040,000
========== ========== ==========
Distributions declared and unpaid at
December 31.............................. $ 575,000 $ 575,000 $ 575,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-165
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
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.
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 are
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-166
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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 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 1997 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; 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
F-167
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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>
1997 1996
----------- -----------
<S> <C> <C>
Land............................................... $ 6,069,665 $ 7,284,070
Buildings.......................................... 8,546,530 10,431,908
----------- -----------
14,616,195 17,715,978
Less accumulated depreciation...................... (1,944,358) (2,346,374)
----------- -----------
12,671,837 15,369,604
Less allowance for loss on land and buildings...... (250,694) (179,326)
----------- -----------
$12,421,143 $15,190,278
=========== ===========
</TABLE>
In August 1995, the Partnership sold its property in Myrtle Beach, South
Carolina, to the tenant for $1,040,000 and accepted the sales proceeds in the
form of a promissory note (Note 6). The total carrying value of the property
was $896,788, including acquisition fees and miscellaneous acquisition expenses
and net of accumulated depreciation. 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 $1,024 and $924 for
the years ended December 31, 1997 and 1996, respectively, and had a deferred
gain in the amount of $139,693 and $140,717 at December 31, 1997 and 1996,
respectively (Note 6).
In October 1996, the Partnership sold its property in St. Cloud, Florida, to
the tenant for $1,150,000. In connection therewith, the Partnership received
$100,000 in cash and accepted the remaining sales proceeds in the form of a
promissory note (Note 6). The total carrying value of the property was
$894,265, including acquisition fees and miscellaneous acquisition expenses and
net of accumulated depreciation. As a result of this sale being accounted for
under the installment sales method for financial reporting purposes, as
described above, the Partnership recognized a gain of $338 and $18,445 for the
years ended December 31, 1997 and 1996, respectively, and had a deferred gain
in the amount of $183,464 and $183,802 at December 31, 1997 and 1996,
respectively (Note 6).
In 1996, the Partnership established an allowance for loss on land and
building in the amount of $109,264 and wrote off accrued rental income of
$60,199 for financial reporting purposes for the property in Franklin,
Tennessee. The allowance represented the difference between (i) the property's
carrying value at December 31, 1996, plus 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 minus (ii) the net
realizable value based on sales proceeds received in January 1997 from the sale
of this Property. The Partnership sold the property in January 1997, to the
tenant for $980,000 and received net sales proceeds of $960,741. Since the
Partnership had previously 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
F-168
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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.
In December 1997, the Partnership reinvested approximately $244,800 of the
net sales proceeds from the sale of the Property in Franklin, Tennessee, in a
property located in Sandy, Utah, as described below, and approximately $150,000
of the net sales proceeds in a property located in Vancouver, Washington, as
tenants-in-common with affiliates of the general partners (see Note 5).
In September 1997, the Partnership sold its property in Salem, New
Hampshire, to the tenant for $1,295,172 and received net sales proceeds (net of
$1,773 which represents prorated rent returned to the tenant) of $1,270,365,
resulting in a gain of $141,508 for financial reporting purposes. This property
was originally acquired by the Partnership in May 1989 and had a cost of
approximately $1,085,100, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $187,000 in excess of its original purchase price. In December
1997, the Partnership reinvested the net sales proceeds in a property located
in Sandy, Utah, as described below.
In addition, in September 1997, the Partnership sold its property in Port
St. Lucie, Florida, to the tenant for $1,220,000 and received net sales
proceeds of $1,216,750, resulting in a gain of $125,309 for financial reporting
purposes. This property was originally acquired by the Partnership in November
1989 and had a cost of approximately $1,176,100, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Partnership sold the
property for approximately $40,700 in excess of its original purchase price. In
November 1997, the Partnership reinvested the majority of the net sales
proceeds in a property located in Houston, Texas.
In 1996, the Partnership established an allowance for loss on land for the
property in Richmond, Indiana, in the amount of $70,062, which represented the
difference between the property's carrying value at December 31, 1996, and the
property manager's estimate of the net realizable value of the property based
on an anticipated sales price. In November 1997, the Partnership sold this
property 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).
Also, in December 1997, the Partnership sold its property in Tampa, Florida,
to a third party for $850,000 and received net sales proceeds (net of $724
which represents prorated rent returned to the tenant) of $804,451 resulting in
a gain of $180,704 for financial reporting purposes. This property was
originally acquired by the Partnership in February 1989 and had a cost of
approximately $673,200, excluding acquisition fees and miscellaneous
acquisition expenses; therefore the Partnership sold the property for
approximately $132,000 in excess of its original purchase price.
At December 31, 1997, the Partnership established an allowance for loss on
land and building of $151,671, for financial reporting purposes, relating to
the property in Belding, Michigan. The allowance represents the difference
between the property's carrying value at December 31, 1997 and the estimated
net realizable value for this property. In addition, at December 31, 1997, an
allowance was established for loss on land and building of $99,023, for
financial reporting purposes, relating to the property in Lebanon, New
Hampshire, owned by the Partnership's consolidated joint venture, CNL/Longacre
Joint Venture. The
F-169
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
allowance represents the difference between the property's carrying value at
December 31, 1997 and the estimated new realizable value based on an
anticipated sales price for this property.
As described above, in December 1997, the Partnership used the majority of
the net sales proceeds from the sale of the Properties in Franklin, Tennessee
and Salem, New Hampshire, in a Property located in Sandy, Utah.
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, 1997, 1996 and 1995, the Partnership recognized $19,526, $27,875 and
$30,484, 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, 1997:
<TABLE>
<S> <C>
1998............................................................. $ 1,049,074
1999............................................................. 1,052,663
2000............................................................. 1,063,699
2001............................................................. 1,028,379
2002............................................................. 939,819
Thereafter....................................................... 8,440,061
-----------
$13,573,695
===========
</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.
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>
1997 1996
----------- -----------
<S> <C> <C>
Minimum lease payments receivable.................. $ 4,213,033 $ 2,811,323
Estimated residual values.......................... 806,792 828,783
Less unearned income............................... (2,742,344) (1,698,700)
----------- -----------
Net investment in direct financing leases.......... $ 2,277,481 $ 1,941,406
=========== ===========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998.............................................................. $ 286,518
1999.............................................................. 286,518
2000.............................................................. 286,518
2001.............................................................. 286,518
2002.............................................................. 286,518
Thereafter........................................................ 2,780,443
----------
$4,213,033
==========
</TABLE>
F-170
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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, in October 1997, the Partnership reinvested approximately $460,900 of
the net sales proceeds in a property in Mesa, Arizona, as tenants-in-common
with an affiliate of the general partners. In December 1997, the Partnership
reinvested the remaining net sales proceeds in a property located in Vancouver,
Washington, as tenants-in-common with affiliates of the general partners (Note
5).
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 43 percent and a 49 percent 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.
In October 1997, the Partnership used a portion of the net sales proceeds
from the sale of the Property in Smyrna, Tennessee (see Note 4) 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, 1997, the Partnership owned a 42.23% 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; and
Richmond, Indiana (see Note 3), and Smyrna, Tennessee (see Note 4) 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, 1997, the Partnership owned a 27.78% interest in
this property.
Cocoa Joint Venture, Halls 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.
F-171
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
The following presents the combined condensed financial information for the
joint ventures and the two properties held as two separate tenants-in-common
with affiliates at December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation........................... $4,277,972 $ 946,406
Cash................................................ 24,994 561
Receivables......................................... 4,417 --
Prepaid expenses.................................... 270 251
Accrued rental income............................... 68,819 63,806
Liabilities......................................... 1,250 880
Partners' capital................................... 4,375,222 1,010,144
Revenues............................................ 151,242 123,689
Net income.......................................... 121,605 98,949
</TABLE>
The Partnership recognized income totalling $56,015, $46,452 and $47,018 for
the years ended December 31, 1997, 1996 and 1995, respectively, from these
joint ventures.
6. Mortgage Note 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
installments of $9,319, including interest, with a balloon payment of
$1,006,004 due in July 2000.
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 is being
collected in 12 monthly installments of interest only, and thereafter in 168
equal monthly installments of principal and interest.
The mortgage notes receivable consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Principal balance................................... $2,069,912 $2,079,177
Accrued interest receivable......................... 11,412 18,200
Less deferred gains on sale of land and buildings... (323,157) (324,519)
---------- ----------
$1,758,167 $1,772,858
========== ==========
</TABLE>
The general partners believe that the estimated fair values of mortgage
notes receivable at December 31, 1997 and 1996, 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.
F-172
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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, 1997,
included $37,099 of such amounts, including accrued interest of $1,802.
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, 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 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.
During each of the years ended December 31, 1997, 1996 and 1995, the
Partnership declared distributions to the limited partners of $2,300,000. No
distributions have been made to the general partners to date.
F-173
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes.............................. $1,731,915 $1,428,159 $1,679,820
Depreciation for tax reporting purposes
in excess of depreciation for
financial reporting purposes.......... (23,618) (28,058) (26,980)
Gain on disposition of land and
buildings for financial reporting
purposes in excess of gain for tax
reporting purposes.................... (354,648) (1,606) (69)
Allowance for loss on land and
buildings............................. 250,694 239,525 --
Direct financing leases recorded as
operating leases for tax reporting
purposes.............................. 42,682 46,387 42,180
Equity in earnings of unconsolidated
joint ventures for tax reporting
purposes less than equity in earnings
of unconsolidated joint ventures for
financial reporting purposes.......... (1,914) (1,900) (2,926)
Allowance for doubtful accounts........ 100,149 33,254 (150,480)
Accrued rental income.................. (19,527) (27,875) (30,484)
Rents paid in advance.................. 1,241 (17,632) 9,505
Minority interest in timing differences
of consolidated joint venture......... (41,515) (343) (370)
Disallowed real estate tax deduction... 36,721 -- --
---------- ---------- ----------
Net income for federal income tax
purposes.............................. $1,722,180 $1,669,911 $1,520,196
========== ========== ==========
</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 parent company of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, served
as president of CNL Fund Advisors, Inc. through October 1997. CNL Income Fund
Advisors, Inc. was a wholly owned subsidiary of CNL Group, Inc. until its
merger, effective January 1, 1996, with CNL Fund Advisors, Inc. During the
years ended December 31, 1997, 1996 and 1995, CNL Income Fund Advisors, Inc.
and CNL Fund Advisors, Inc. (hereinafter referred to collectively as the
"Affiliates") each performed certain services for the Partnership, as described
below.
During the years ended December 31, 1997, 1996 and 1995, certain 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 Affiliates 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 1997, 1996 and 1995.
F-174
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
Certain Affiliates are 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 Affiliates provide 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 a deferred, subordinated real estate disposition
fee of $34,500 as the result of the sale of the Property in St. Cloud, Florida.
No deferred, subordinated real estate disposition fees were incurred for the
years ended December 31, 1997 and 1995 due to the reinvestment of net sales
proceeds in additional Properties.
During the years ended December 31, 1997, 1996 and 1995, the Affiliates
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $80,145, $83,563 and $83,882 for the years
ended December 31, 1997, 1996 and 1995, respectively, for such services.
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Due to Affiliates:
Expenditures incurred on behalf of the Partnership..... $ 67,106 $ 78,407
Accounting and administrative services................. 42,261 43,057
Deferred, subordinated real estate disposition fee..... 34,500 34,500
-------- --------
$143,867 $155,964
======== ========
</TABLE>
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.
11. 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 share of total rental and earned income from unconsolidated
joint ventures and the properties held as tenants-in-common with affiliates),
for at least one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Shoney's, Inc.................................... $229,795 $241,119 $247,353
Golden Corral Corporation........................ 195,511 195,511 195,511
</TABLE>
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
F-175
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
earned income from joint ventures and the properties held as tenants-in-common
with affiliates) for at least one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Denny's.......................................... $312,510 $310,021 $314,057
Wendy's Old Fashioned Hamburger Restaurant....... 302,253 293,817 278,127
Perkins.......................................... 228,492 268,939 226,898
</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. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
12. Subsequent Events
In January 1998, the Partnership sold its property in Port Orange, Florida
to the tenant, for $1,330,000 and received net sales proceeds (net of $2,909
which represents prorated rent returned to the tenant) of $1,283,096, resulting
in a gain of approximately $350,300 for financial reporting purposes.
F-176
<PAGE>
CNL INCOME FUND VI, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997.. F-178
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997............................................. F-179
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997............. F-180
Condensed Statements of Cash Flows for the Nine Months Ended September
30, 1998 and 1997....................................................... F-181
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997....................................... F-182
Report of Independent Accountants........................................ F-185
Balance Sheets as of December 31, 1997 and 1996.......................... F-186
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-187
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995........................................................... F-188
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-189
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and 1995................................................................ F-191
</TABLE>
F-177
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $3,472,247 and
$3,327,334......................................... $18,673,683 $20,785,684
Net investment in direct financing leases........... 3,944,272 4,708,841
Investment in joint ventures........................ 4,848,127 1,130,139
Cash and cash equivalents........................... 1,353,864 1,614,759
Restricted cash..................................... -- 709,227
Receivables, less allowance for doubtful accounts of
$341,604 and $363,410.............................. 31,765 157,989
Prepaid expenses.................................... 4,463 4,235
Lease costs, less accumulated amortization of $6,768
and $5,581......................................... 10,932 12,119
Accrued rental income, less allowance for doubtful
accounts of $9,697 in 1998 and 1997................ 762,705 843,345
Other assets........................................ 26,731 26,731
----------- -----------
$29,656,542 $29,993,069
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable.................................... $ 9,130 $ 14,138
Accrued construction costs payable.................. -- 125,000
Accrued and escrowed real estate taxes payable...... 18,117 38,025
Due to related parties.............................. 5,250 32,019
Distributions payable............................... 787,500 787,500
Rents paid in advance............................... 27,598 57,663
----------- -----------
Total liabilities............................... 847,595 1,054,345
Minority interest................................... 143,546 144,475
Partners' capital................................... 28,665,401 28,794,249
----------- -----------
$29,656,542 $29,993,069
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-178
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
-------------------- ----------------------
1998 1997 1998 1997
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases......................... $601,109 $ 603,263 $1,884,112 $1,889,623
Adjustments to accrued rental
income......................... -- -- (155,528) --
Earned income from direct
financing leases............... 106,936 98,328 363,720 369,865
Contingent rental income........ 4,882 7,946 39,361 34,554
Interest and other income....... 25,316 43,483 92,998 76,748
-------- ---------- ---------- ----------
738,243 753,020 2,224,663 2,370,790
-------- ---------- ---------- ----------
Expenses:
General operating and
administrative................. 42,989 41,177 129,031 113,543
Bad debt expense................ -- -- 12,854 13,102
Professional services........... 6,494 6,030 23,285 17,569
Real estate taxes............... -- 1,790 -- 11,754
State and other taxes........... -- -- 10,392 8,968
Depreciation and amortization... 114,253 117,383 344,306 359,714
-------- ---------- ---------- ----------
163,736 166,380 519,868 524,650
-------- ---------- ---------- ----------
Income Before Minority Interest in
Loss (Income) of Consolidated
Joint Venture, Equity in Earnings
of Unconsolidated Joint Ventures
and Gain on Sale of Land and
Buildings........................ 574,507 586,640 1,704,795 1,846,140
Minority Interest in Loss (Income)
of Consolidated Joint Venture.... (4,133) 1,715 (28,673) 5,783
Equity in Earnings of
Unconsolidated Joint Ventures.... 94,509 24,723 212,408 194,079
Gain on Sale of Land and
Buildings........................ -- 626,804 345,122 547,027
-------- ---------- ---------- ----------
Net Income........................ $664,883 $1,239,882 $2,233,652 $2,593,029
======== ========== ========== ==========
Allocation of Net Income:
General partners.................. $ 6,649 $ 7,692 $ 20,455 $ 21,492
Limited partners.................. 658,234 1,232,190 2,213,197 2,571,537
-------- ---------- ---------- ----------
$664,883 $1,239,882 $2,233,652 $2,593,029
======== ========== ========== ==========
Net Income Per Limited Partner
Unit............................. $ 9.40 $ 17.60 $ 31.62 $ 36.74
======== ========== ========== ==========
Weighted Average Number of Limited
Partner Units Outstanding........ 70,000 70,000 70,000 70,000
======== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-179
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
September December
30, 1998 31, 1997
----------- -----------
<S> <C> <C>
General partners:
Beginning balance.................................. $ 229,363 $ 204,010
Net income......................................... 20,455 25,353
----------- -----------
249,818 229,363
----------- -----------
Limited partners:
Beginning balance.................................. 28,564,886 28,840,357
Net income......................................... 2,213,197 2,874,529
Distributions ($33.75 and $45.00 per limited
partner unit, respectively)....................... (2,362,500) (3,150,000)
----------- -----------
28,415,583 28,564,886
----------- -----------
Total partners' capital.............................. $28,665,401 $28,794,249
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-180
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Net Cash Provided by Operating Activities........ $ 2,445,813 $ 2,375,171
----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and buildings....... 2,832,253 4,003,985
Additions to land and buildings on operating
leases........................................ (125,000) (1,112,647)
Investment in joint ventures................... (3,716,209) --
Return of capital from joint venture........... -- 69,997
Decrease (increase) in restricted cash......... 697,650 (2,400,061)
Payment of lease costs......................... (3,300) (3,300)
----------- -----------
Net cash provided by (used in) investing
activities.................................. (314,606) 557,974
----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners.............. (2,362,500) (2,432,500)
Distributions to holder of minority interest... (29,602) (8,832)
----------- -----------
Net cash used in financing activities........ (2,392,102) (2,441,332)
----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents......................................... (260,895) 491,813
Cash and Cash Equivalents at Beginning of Period..... 1,614,759 1,127,930
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 1,353,864 $ 1,619,743
----------- -----------
Supplemental Schedule of Non-Cash Financing
Activities:
Distributions declared and unpaid at end of
period............................................ $ 787,500 $ 787,500
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-181
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, 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, 1997.
The Partnership accounts for its 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.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2. Land and Buildings
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 February 1998, the Partnership sold its property in Melbourne, Florida,
for $590,000 and received net sales proceeds of $552,910. Due to the fact that
during 1997, the Partnership recorded an allowance for loss of $158,239 for
this property, no gain or loss was recognized for financial reporting purposes
in February 1998, relating to the sale.
In February 1998, the Partnership sold its 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 Partnership recorded an allowance for loss of $181,970 for
this property, no gain or loss was recognized for financial reporting purposes
in February 1998, relating to the sale.
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 a portion
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.
F-182
<PAGE>
3. Net Investment in Direct Financing Leases
In February and June 1998, the Partnership sold its properties in Melbourne,
Florida and Bellevue, Nebraska, respectively, for which the building portions
had been classified as direct financing leases. In connection therewith, the
gross investments (minimum lease payments receivable and estimated residual
values) and unearned income relating to these properties were removed from the
accounts (see Note 2).
4. Investment in Joint Ventures
In January 1998, the Partnership contributed $558,064 and $694,806 to
acquire a 34.74% interest and a 46.2% interest, respectively, in a property in
Overland Park, Kansas, and a property in Memphis, Tennessee, respectively, as
tenants-in-common with affiliates of the general partners. In June 1998, the
Partnership contributed $1,250,350 to acquire an 85.07% interest in a property
in Fort Myers, Florida, as tenants-in-common with an affiliate 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.
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 September 30, 1998, the
Partnership had contributed $314,011 to purchase land and pay construction
costs relating to the property owned by the joint venture. The Partnership has
agreed to contribute approximately $212,300 in additional construction costs to
the joint venture. The Partnership will 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 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 September 30, 1998, the Partnership had contributed
$898,092 to the joint venture to acquire the restaurant property. As of
September 30, 1998, the Partnership owned approximately a 64 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.
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 five properties
held as tenants-in-common with affiliates at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation................... $8,793,422 $4,568,842
Net investment in direct financing leases... 3,338,134 911,559
Cash........................................ 31,598 7,991
Receivables................................. 20,370 22,230
Accrued rental income....................... 215,813 160,197
Other assets................................ 1,178 414
Liabilities................................. 181,530 7,557
Partners' capital........................... 12,218,985 5,663,676
Revenues.................................... 771,965 471,627
Gain on sale of land and building........... -- 488,372
Net income.................................. 672,525 889,883
</TABLE>
The Partnership recognized income totalling $212,048 and $194,079 for the
nine months ended September 30, 1998 and 1997, respectively, from these joint
ventures, $94,509 and $24,723 of which was earned during the quarters ended
September 30, 1998 and 1997, respectively.
F-183
<PAGE>
5. 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 at least one of the nine month
periods ended September 30:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Golden Corral Corporation.............................. $515,995 $513,408
Mid-America Corporation................................ 329,639 329,639
IHOP Properties, Inc................................... 325,863 --
Restaurant Management Services, Inc.................... 312,956 376,597
</TABLE>
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 at least one of the nine month
periods ended September 30:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Golden Corral Family Steakhouse Restaurants............. $515,995 $513,408
Burger King............................................. 341,006 382,532
IHOP.................................................... 325,863 --
</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. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
F-184
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners
CNL Income Fund VI, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund VI, Ltd.
(a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. 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 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 Income Fund VI, Ltd. as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
January 24, 1998, except as to Notes 3 and 12
for which the date is February 9, 1998.
F-185
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land and building..................................... $20,785,684 $21,105,355
Net investment in direct financing leases, less
allowance for impairment in carrying value............ 4,708,841 4,659,024
Investment in joint ventures........................... 1,130,139 997,016
Cash and cash equivalents.............................. 1,614,759 1,127,930
Restricted cash........................................ 709,227 977,756
Receivables, less allowance for doubtful accounts of
$363,410 and $115,892................................. 157,989 174,983
Prepaid expenses....................................... 4,235 1,163
Lease costs, less accumulated amortization of $5,581
and $3,691............................................ 12,119 14,009
Accrued rental income, less allowance for doubtful
accounts of $9,697 in 1997 and 1996................... 843,345 1,045,319
Other assets........................................... 26,731 26,731
----------- -----------
$29,993,069 $30,129,286
=========== ===========
</TABLE>
<TABLE>
<S> <C> <C>
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable....................................... $ 14,138 $ 18,161
Accrued construction costs payable..................... 125,000 --
Accrued and escrowed real estate taxes payable......... 38,025 11,338
Due to related parties................................. 32,019 2,633
Distributions payable.................................. 787,500 857,500
Rents paid in advance.................................. 57,663 30,705
----------- -----------
Total liabilities.................................. 1,054,345 920,337
Minority interest...................................... 144,475 164,582
Partners' capital...................................... 28,794,249 29,044,367
----------- -----------
$29,993,069 $30,129,286
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-186
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases..... $2,448,269 $2,776,239 $2,738,218
Earned income from direct financing
leases................................. 449,133 557,426 469,642
Contingent rental income................ 147,437 110,073 115,946
Interest and other income............... 119,961 49,056 51,130
---------- ---------- ----------
3,164,800 3,492,794 3,374,936
---------- ---------- ----------
Expenses:
General operating and administrative.... 156,847 159,388 147,902
Professional services................... 25,861 32,272 27,741
Bad debt expense........................ 131,184 -- --
Real estate taxes....................... 43,676 -- --
State and other taxes................... 8,969 7,930 6,789
Depreciation and amortization........... 473,828 483,573 490,386
---------- ---------- ----------
840,365 683,163 672,818
---------- ---------- ----------
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 Buildings.................... 2,324,435 2,809,631 2,702,118
Minority Interest in Income of
Consolidated Joint Venture............... 11,275 (24,682) (20,133)
Equity in Earnings of Unconsolidated Joint
Ventures................................. 280,331 97,381 83,483
Gain (Loss) on Sale of Land and Buildings
and Net Investment in Direct Financing
Leases................................... 547,027 (1,706) 95,913
Provision for Loss on Land and Building
and Impairment in Carrying Value of Net
Investment in Direct Financing Lease..... (263,186) (77,023) --
---------- ---------- ----------
Net Income................................ $2,899,882 $2,803,601 $2,861,381
========== ========== ==========
Allocation of Net Income:
General partners........................ $ 25,353 $ 28,337 $ 28,411
Limited partners........................ 2,874,529 2,775,264 2,832,970
---------- ---------- ----------
$2,899,882 $2,803,601 $2,861,381
========== ========== ==========
Net Income Per Limited Partner Unit....... $ 41.06 $ 39.65 $ 40.47
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding........................ 70,000 70,000 70,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-187
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
General Partners Limited Partners
------------------- --------------------------------------------------
Contri- Accumulated Contri- Accumulated Syndication
butions Earnings butions Distributions Earnings Costs Total
------- ----------- ----------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994................... $1,000 $146,262 $35,000,000 $(16,064,226) $14,681,349 $(4,015,000) $29,749,385
Distributions to
limited partners
($45.00 per limited
partner unit)......... -- -- -- (3,150,000) -- -- (3,150,000)
Net income............. -- 28,411 -- -- 2,832,970 -- 2,861,381
------ -------- ----------- ------------ ----------- ----------- -----------
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
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-188
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants.......... $ 3,097,751 $ 3,363,188 $ 3,264,527
Distributions from unconsolidated
joint ventures..................... 144,016 114,163 95,931
Cash paid for expenses.............. (180,530) (203,432) (181,153)
Interest received................... 94,804 36,843 43,125
----------- ----------- -----------
Net cash provided by operating
activities....................... 3,156,041 3,310,762 3,222,430
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and
buildings.......................... 4,003,985 982,980 899,503
Additions to land and buildings on
operating leases................... (2,666,258) -- (25,646)
Investment in direct financing
leases............................. (1,057,282) -- (723,237)
Investment in joint ventures........ (521,867) (146,090) --
Return of capital from joint
ventures........................... 524,975 -- --
Collections on mortgage note
receivable......................... -- 3,033 2,967
Decrease (increase) in restricted
cash............................... 279,367 (977,017) --
Payment of lease costs.............. (3,300) (3,300) (3,300)
----------- ----------- -----------
Net cash provided by (used in)
investing activities............. 559,620 (140,394) 150,287
----------- ----------- -----------
Cash Flows from Financing Activities:
Reimbursement of acquisition costs
paid by related parties on behalf
of the Partnership................. -- -- (1,375)
Distributions to limited partners... (3,220,000) (3,150,000) (3,150,000)
Distributions to holder of minority
interest........................... (8,832) (13,437) (26,824)
----------- ----------- -----------
Net cash used in financing
activities....................... (3,228,832) (3,163,437) (3,178,199)
----------- ----------- -----------
Net Increase in Cash and Cash
Equivalents............................ 486,829 6,931 194,518
Cash and Cash Equivalents at Beginning
of Year................................ 1,127,930 1,120,999 926,481
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 1,614,759 $ 1,127,930 $ 1,120,999
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-189
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS--CONTINUED
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................... $2,899,882 $2,803,601 $2,861,381
---------- ---------- ----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation........................... 471,938 481,683 489,480
Amortization........................... 1,890 1,890 906
Minority interest in income of
consolidated joint venture............ (11,275) 24,682 20,133
Equity in earnings of unconsolidated
joint ventures, net of distributions.. (136,315) 16,782 12,448
Loss (gain) on sale of land and
building.............................. (547,027) 1,706 (95,913)
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..... 25,880 (90,360) 44,096
Decrease (increase) in prepaid
expenses.............................. (3,072) 4,087 (2,042)
Decrease in net investment in direct
financing leases...................... 67,389 68,177 53,944
Decrease (increase) in accrued rental
income................................ 41,173 (103,935) (131,428)
Increase in accounts payable and
accrued expenses...................... 25,964 2,529 215
Increase (decrease) in due to related
parties............................... 29,470 (3,391) 5,909
Increase (decrease) in rents paid in
advance and deposits.................. 26,958 26,288 (36,699)
---------- ---------- ----------
Total adjustments.................... 256,159 507,161 361,049
---------- ---------- ----------
Net Cash Provided by Operating Activities.. $3,156,041 $3,310,762 $3,222,430
========== ========== ==========
Supplemental Schedule of Non-Cash Investing
and Financing Activities:
Acquisition costs paid by affiliates on
behalf of the Partnership............... $ -- $ -- $ 1,375
========== ========== ==========
Mortgage note accepted in connection with
sale of land............................ $ -- $ -- $ 6,000
========== ========== ==========
Distributions declared and unpaid at
December 31............................. $ 787,500 $ 857,500 $ 787,500
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-190
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
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.
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. 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. 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 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.
F-191
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Investment in Joint Ventures--The Partnership accounts for its 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 and Asheville Joint Venture, and a property in Yuma, Arizona, a
property in Clinton, North Carolina, and a property in Vancouver, Washington,
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.
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.
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
F-192
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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>
1997 1996
----------- -----------
<S> <C> <C>
Land........................................... $10,046,309 $10,364,275
Buildings...................................... 14,344,114 13,983,253
----------- -----------
24,390,423 24,347,528
Less accumulated depreciation.................. (3,327,334) (3,165,150)
----------- -----------
21,063,089 21,182,378
Less allowance for loss on land and building... (277,405) (77,023)
----------- -----------
$20,785,684 $21,105,355
=========== ===========
</TABLE>
In December 1996, the Partnership sold its property in Dallas, Texas, to a
third party for $1,016,000 and received net sales proceeds of $982,980. This
property was originally acquired by the Partnership in June 1994 and had a cost
of approximately $980,900, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $2,100 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 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 Partnership reinvested the net sales
proceeds from the sale of the 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 (net of $2,981 which
represents amounts due to the former tenant for prorated rent) 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 (net
of $9,945 which represents amounts due to the former tenant for prorated rent)
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.
F-193
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
In September 1997, the Partnership sold its property in Venice, Florida, to
a third party, for $1,245,000 and received net sales proceeds (net of $5,048
which represents amounts due to the former tenant for prorated rent) 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 1996 and 1997, the Partnership recorded provisions for losses on land and
building in the amounts of $77,023 and $104,947, respectively, for financial
reporting purposes for the property in Liverpool, New York. The allowance at
December 31, 1996, represented the difference between the property's carrying
value at December 31, 1996 and the estimated net realizable value for this
property based on an anticipated sales price to an interested third party. The
allowance at December 31, 1997, represents 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 received in February 1998
from the sale of the property (see Note 12).
At December 31, 1997, the Partnership established an allowance for loss on
land in the amount of $95,435 for its property in Melbourne, Florida. 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 received in February 1998 from the sale of the
property (see Note 12).
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, 1997, 1996 and 1995, the Partnership recognized $87,094, $103,935 and
$131,428, 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, 1997:
<TABLE>
<S> <C>
1998.......................................................... $ 2,393,528
1999.......................................................... 2,396,060
2000.......................................................... 2,487,704
2001.......................................................... 2,538,767
2002.......................................................... 2,541,122
Thereafter.................................................... 14,362,769
-----------
$26,719,950
===========
</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-194
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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>
1997 1996
---------- ----------
<S> <C> <C>
Minimum lease payments
receivable............. $9,313,752 $8,955,426
Estimated residual
values................. 1,655,911 1,704,299
Less unearned income.... (6,198,018) (6,000,701)
---------- ----------
4,771,645 4,659,024
Less allowance for
impairment in carrying
value.................. (62,804) --
---------- ----------
Net investment in direct
financing leases....... $4,708,841 $4,659,024
========== ==========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998........................................................... $ 622,540
1999........................................................... 622,540
2000........................................................... 624,680
2001........................................................... 637,400
2002........................................................... 637,400
Thereafter..................................................... 6,169,192
----------
$9,313,752
==========
</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).
In addition, in July 1997, the Partnership sold its property in Plattsmouth,
Nebraska, to the tenant, for $700,000 and received net sales proceeds (net of
escrow fees paid of $1,750) 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 the (i)
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 12).
5. Investment in Joint Ventures
The Partnership has a 3.9%, a 36 percent and a 14 percent interest in the
profits and losses of Auburn Joint Venture, Show Low Joint Venture and
Asheville Joint Venture, respectively. The remaining interests in these joint
ventures are held by affiliates of the Partnership which have the same general
partners.
F-195
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
In January 1996, the Partnership acquired a property in Clinton, North
Carolina, as tenants-in-common with affiliates of the general partners. In
connection therewith, the Partnership contributed $146,090 for a 17.93%
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.
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 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 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. As of December 31,
1997, the Partnership owned a 36 percent interest in the profits and losses of
the joint venture.
As of December 31, 1996, the Partnership had a 51.67% 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, 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, 1997, the Partnership owned a 23.04% interest in the Vancouver,
Washington, property owned with affiliates as tenants-in-common.
Auburn Joint Venture, Show Low Joint Venture, Asheville 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 and 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>
1997 1996
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation........................ $4,568,842 $3,463,093
Net investment in direct financing leases........ 911,559 401,650
Cash............................................. 7,991 11,177
Receivables...................................... 22,230 21,826
Accrued rental income............................ 160,197 191,594
Other assets..................................... 414 44,380
Liabilities...................................... 7,557 10,221
Partners' capital................................ 5,663,676 4,123,499
Revenues......................................... 471,627 528,092
Gain on sale of land and building................ 488,372 --
Net income....................................... 889,883 436,981
</TABLE>
F-196
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Partnership recognized income totalling $280,331, $97,381, and $83,483
for the years ended December 31, 1997, 1996 and 1995, respectively, from these
joint ventures.
6. Restricted Cash
As of December 31, 1996, net sales proceeds of $977,017 from the sale of the
property in Dallas, Texas, plus accrued interest of $739, were being held in an
interest-bearing escrow account pending the release of funds by the escrow
agent to acquire an additional property. In February 1997, the escrow agent
released these funds to acquire the property in Marietta, Georgia (see Note 3).
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.
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, 1997,
included $13,631 of such amounts, including accrued interest of $554.
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, 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 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.
During the years ended December 31, 1997, 1996 and 1995 the Partnership
declared distributions to the limited partners of $3,150,000, $3,220,000 and
$3,150,000, respectively. No distributions have been made to the general
partners to date.
F-197
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes.............................. $2,899,882 $2,803,601 $2,861,381
Depreciation for tax reporting purposes
in excess of depreciation for
financial reporting purposes.......... (92,303) (104,412) (94,987)
Allowance for loss on land and
building.............................. 263,186 77,023 --
Direct financing leases recorded as
operating leases for tax reporting
purposes.............................. 67,392 68,177 53,944
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....... (335,658) 1,706 (2,914)
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... (147,256) (49) (5,299)
Allowance for doubtful accounts........ 369,935 (78,517) 16,154
Accrued rental income.................. (81,244) (103,935) (131,428)
Rents paid in advance.................. 26,458 26,288 (36,699)
Minority interest in timing differences
of consolidated joint venture......... (30,778) 1,781 (200)
---------- ---------- ----------
Net income for federal income tax
purposes.............................. $2,939,614 $2,691,663 $2,659,952
========== ========== ==========
</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 parent company of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, served
as president of CNL Fund Advisors, Inc. through October 1997. CNL Income Fund
Advisors, Inc. was a wholly owned subsidiary of CNL Group, Inc. until its
merger, effective January 1, 1996, with CNL Fund Advisors, Inc. During the
years ended December 31, 1997, 1996 and 1995, CNL Income Fund Advisors, Inc.
and CNL Fund Advisors, Inc. (hereinafter referred to collectively as the
"Affiliates") each performed certain services for the Partnership, as described
below.
During the years ended December 31, 1997, 1996 and 1995, certain 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 Affiliates 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 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, 1997, 1996 and 1995.
Certain Affiliates are 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 Affiliates provide a substantial amount
of services in connection with
F-198
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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, 1997, 1996 and 1995, Affiliates provided
accounting and administrative services to the Partnership on a day-to-day
basis. The Partnership incurred $85,714, $95,420 and $81,847 for the years
ended December 31, 1997, 1996 and 1995, respectively, for such services.
The due to related parties at December 31, 1997 and 1996, totalled $32,019
and $2,633, 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 two properties
held as tenants-in-common with affiliates), for at least one of the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Corporation..................... $751,866 $758,348 $725,908
Restaurant Management Services, Inc........... 478,750 511,040 440,987
Mid-America Corporation....................... 439,519 439,519 439,519
</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 two
properties held as tenants-in-common with affiliates), for at least one of the
years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Family Steakhouse
Restaurants................................ $751,866 $758,348 $725,908
Burger King................................. 496,487 455,764 455,820
Denny's..................................... 317,041 336,269 276,547
Hardee's.................................... 270,129 410,951 431,465
</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. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
12. Subsequent Events
In January 1998, the Partnership used the net sales proceeds from the sale
of the property in Whitehall, Michigan, to acquire a property in Overland Park,
Kansas, as tenants-in-common with affiliates of the general partners. In
connection therewith, the Partnership contributed approximately $558,900 for a
34.74% interest in such property. The Partnership will account for its
investment in this property using the equity method since the Partnership will
share control with affiliates.
In January 1998, the Partnership used the net sales proceeds from the sale
of the property in Plattsmouth, Nebraska, to acquire a property in Memphis,
Tennessee, as tenants-in-common with affiliates of the general
F-199
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
partners. In connection therewith, the Partnership contributed approximately
$694,800 for a 46.2% interest in such property. The Partnership will account
for its investment in this property using the equity method since the
Partnership will share control with affiliates.
In addition, in January 1998, the Partnership sold its property in Deland,
Florida, to the tenant, for $1,250,000 and received net sales proceeds of
$1,234,617, resulting in a gain of approximately $345,100 for financial
reporting purposes.
In February 1998, the Partnership sold its property in Melbourne, Florida,
for $590,000 and received net sales proceeds of $542,477, resulting in a loss
of $158,239 for financial reporting purposes which the Partnership recorded in
1997 (See Notes 3 and 4).
In February 1998, the Partnership sold its property in Liverpool, New York,
for $157,500 and received net sales proceeds of approximately $150,700,
resulting in a loss of $181,970 for financial reporting purposes which the
Partnership recorded in 1996 and in 1997 (See Note 3).
F-200
<PAGE>
CNL INCOME FUND VII, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997.. F-202
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997............................................. F-203
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997............. F-204
Condensed Statements of Cash Flows for the Nine Months Ended September
30, 1998 and 1997....................................................... F-205
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997....................................... F-206
Report of Independent Accountants........................................ F-207
Balance Sheets as of December 31, 1997 and 1996.......................... F-208
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-209
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995........................................................... F-210
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-211
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and 1995................................................................ F-213
</TABLE>
F-201
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $2,397,837 and
$2,169,570......................................... $15,154,596 $15,382,863
Net investment in direct financing leases........... 3,386,764 3,447,152
Investment in joint ventures........................ 3,340,189 3,393,932
Mortgage note receivable, less deferred gain of
$125,545 and $126,303.............................. 1,243,284 1,250,597
Cash and cash equivalents........................... 828,551 761,317
Receivables, less allowance for doubtful accounts of
$28,936 and $32,959................................ 6,576 64,092
Prepaid expenses.................................... 7,291 4,755
Accrued rental income, less allowance for doubtful
accounts of $9,845 in 1998 and 1997................ 1,183,770 1,114,632
Other assets........................................ 60,422 60,422
----------- -----------
$25,211,443 $25,479,762
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable.................................... $ 2,327 $ 6,131
Escrowed real estate taxes payable.................. 4,727 7,785
Distributions payable............................... 675,000 675,000
Due to related parties.............................. 11,443 34,883
Rents paid in advance............................... 44,359 60,671
----------- -----------
Total liabilities............................... 737,856 784,470
Minority interest................................... 146,865 147,514
Partners' capital................................... 24,326,722 24,547,778
----------- -----------
$25,211,443 $25,479,762
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-202
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases..................... $ 492,759 $ 493,318 $1,483,950 $1,473,347
Earned income from direct
financing leases........... 103,164 122,508 311,318 369,268
Contingent rental income.... 4,829 2,602 17,207 5,685
Interest and other income... 42,300 46,474 127,438 131,517
---------- ---------- ---------- ----------
643,052 664,902 1,939,913 1,979,817
---------- ---------- ---------- ----------
Expenses:
General operating and
administrative............. 37,062 31,784 104,724 101,277
Bad debt expense............ -- -- -- 4,613
Professional services....... 3,973 4,277 16,567 14,683
Real estate taxes........... -- -- -- 2,979
State and other taxes....... -- -- 2,728 4,560
Depreciation and
amortization............... 76,089 76,089 228,267 228,267
---------- ---------- ---------- ----------
117,124 112,150 352,286 356,379
---------- ---------- ---------- ----------
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... 525,928 552,752 1,587,627 1,623,438
Minority Interest in Income of
Consolidated Joint Ventures.. (4,665) (4,698) (13,921) (13,998)
Equity in Earnings of
Unconsolidated Joint
Ventures..................... 78,287 55,939 229,480 151,930
Gain (Loss) on Sale of Land
and Buildings................ 259 234 758 (19,054)
---------- ---------- ---------- ----------
Net Income.................... $ 599,809 $ 604,227 $1,803,944 $1,742,316
========== ========== ========== ==========
Allocation of Net Income:
General partners............ $ 5,998 $ 6,036 $ 18,039 $ 17,495
Limited partners............ 593,811 598,191 1,785,905 1,724,821
---------- ---------- ---------- ----------
$ 599,809 $ 604,227 $1,803,944 $1,742,316
========== ========== ========== ==========
Net Income Per Limited Partner
Unit......................... $ 0.020 $ 0.020 $ 0.060 $ 0.057
========== ========== ========== ==========
Weighted Average Number of
Limited Partner Units
Outstanding.................. 30,000,000 30,000,000 30,000,000 30,000,000
========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-203
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1998 1997
----------------- ------------
<S> <C> <C>
General partners:
Beginning balance............................ $ 181,085 $ 156,785
Net income................................... 18,039 24,300
------------ ------------
199,124 181,085
------------ ------------
Limited partners:
Beginning balance............................ 24,366,693 24,484,985
Net income................................... 1,785,905 2,581,708
Distributions ($0.068 and $0.090 per limited
partner unit, respectively)................. (2,025,000) (2,700,000)
------------ ------------
24,127,598 24,366,693
------------ ------------
Total partners' capital........................ $ 24,326,722 $ 24,547,778
============ ============
</TABLE>
See accompanying notes to financial statements.
F-204
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities............ $2,085,545 $2,099,452
---------- ----------
Cash Flows from Investing Activities:
Proceeds from sale of land......................... -- 223,589
Investment in joint ventures....................... -- (616,245)
Collections on mortgage note receivable............ 8,004 7,230
Other.............................................. 13,255 --
---------- ----------
Net cash provided by (used in) investing
activities...................................... 21,259 (385,426)
---------- ----------
Cash Flows from Financing Activities:
Distributions to limited partners.................. (2,025,000) (2,025,000)
Distributions to holder of minority interest....... (14,570) (14,781)
---------- ----------
Net cash used in financing activities............ (2,039,570) (2,039,781)
---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents... 67,234 (325,755)
Cash and Cash Equivalents at Beginning of Period....... 761,317 1,305,429
---------- ----------
Cash and Cash Equivalents at End of Period............. $ 828,551 $ 979,674
---------- ----------
Supplemental Schedule of Non-Cash Financing Activities
Distributions declared and unpaid at end of
period............................................ $ 675,000 $ 675,000
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-205
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, 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, 1997.
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 partner's proportionate share of the equity in the
Partnership's consolidated joint venture. All significant intercompany accounts
and transactions have been eliminated.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
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 the unconsolidated joint ventures and
the properties held as tenants-in-common with affiliates) for at least one of
the nine month periods ended September 30:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Golden Corral Corporation.............................. $509,751 $445,267
Restaurant Management Services, Inc. .................. 327,103 327,855
Waving Leaves, Inc..................................... 225,889 112,948
Flagstar Enterprises, Inc.............................. 113,294 231,196
</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 could significantly impact the
results of operations of the Partnership. However, the general partners believe
that the risk of such a default is reduced due to the essential or important
nature of these properties for the on-going operations of the lessees.
F-206
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners
CNL Income Fund VII, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund VII, Ltd.
(a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. 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 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 Income Fund VII, Ltd.
as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand LLP
Orlando, Florida
January 15, 1998
F-207
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation............................. $15,382,863 $15,930,547
Net investment in direct financing leases............. 3,447,152 4,098,192
Investment in joint ventures.......................... 3,393,932 1,789,238
Mortgage notes receivable, less deferred gain......... 1,250,597 1,259,495
Cash and cash equivalents............................. 761,317 1,305,429
Receivables, less allowance for doubtful accounts of
$32,959 and $43,234.................................. 64,092 63,386
Prepaid expenses...................................... 4,755 4,654
Accrued rental income, less allowance for doubtful
accounts of $9,845 and $10,786....................... 1,114,632 1,012,490
Other assets.......................................... 60,422 60,422
----------- -----------
$25,479,762 $25,523,853
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 6,131 $ 6,502
Escrowed real estate taxes payable.................... 7,785 4,192
Distributions payable................................. 675,000 675,000
Due to related parties................................ 34,883 9,067
Rents paid in advance................................. 60,671 38,705
Total liabilities................................. 784,470 733,466
Minority interest..................................... 147,514 148,617
Partners' capital..................................... 24,547,778 24,641,770
$25,479,762 $25,523,853
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-208
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases..... $1,960,724 $1,954,033 $1,888,830
Earned income from direct financing
leases................................. 475,498 505,061 538,634
Contingent rental income................ 51,345 44,973 68,820
Interest and other income............... 183,579 240,079 84,390
---------- ---------- ----------
2,671,146 2,744,146 2,580,674
---------- ---------- ----------
Expenses:
General operating and administrative.... 138,560 159,001 146,747
Professional services................... 23,546 27,640 27,379
Bad debt expense........................ 4,613 -- 2,584
Real estate taxes....................... 2,979 9,010 46,512
State and other taxes................... 4,560 2,448 2,562
Depreciation and amortization........... 304,356 317,957 329,350
---------- ---------- ----------
478,614 516,056 555,134
---------- ---------- ----------
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 Loss on Demolition of
Building................................. 2,192,532 2,228,090 2,025,540
Minority Interest in Income of
Consolidated Joint Venture............... (18,663) (18,691) (18,728)
Equity in Earnings of Unconsolidated Joint
Ventures................................. 267,251 157,254 154,937
Gain (Loss) on Sale of Land and
Buildings................................ 164,888 (39,790) (5,135)
Loss on Demolition of Building............ -- -- (174,466)
---------- ---------- ----------
Net Income................................ $2,606,008 $2,326,863 $1,982,148
========== ========== ==========
Allocation of Net Income:
General partners........................ $ 24,300 $ 23,586 $ 20,784
Limited partners........................ 2,581,708 2,303,277 1,961,364
---------- ---------- ----------
$2,606,008 $2,326,863 $1,982,148
========== ========== ==========
Net Income Per Limited Partner Unit....... $ 0.086 $ 0.077 $ 0.065
========== ========== ==========
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-209
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<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,
1994................... $1,000 $111,415 $30,000,000 $(12,077,621) $11,137,967 $(3,440,000) $25,732,761
Distributions to
limited partners
($0.090 per limited
partner unit)......... -- -- -- (2,700,002) -- -- (2,700,002)
Net income............. -- 20,784 -- -- 1,961,364 -- 1,982,148
------ -------- ----------- ------------ ----------- ----------- -----------
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
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-210
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows From Operating Activities:
Cash received from tenants.......... $ 2,500,189 $ 2,549,406 $ 2,399,249
Distributions from unconsolidated
joint ventures..................... 300,696 191,174 190,398
Cash paid for expenses.............. (140,819) (248,523) (174,993)
Interest received................... 180,393 178,812 69,884
----------- ----------- -----------
Net cash provided by operating
activities....................... 2,840,459 2,670,869 2,484,538
----------- ----------- -----------
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......................... 9,766 8,821 12,725
----------- ----------- -----------
Net cash provided by (used in)
investing activities............. (664,805) 629,209 12,725
----------- ----------- -----------
Cash Flows From Financing Activities:
Distributions to limited partners... (2,700,000) (2,700,000) (2,760,002)
Distributions to holder of minority
interest........................... (19,766) (19,723) (17,240)
----------- ----------- -----------
Net cash used in financing
activities....................... (2,719,766) (2,719,723) (2,777,242)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................ (544,112) 580,355 (279,979)
Cash and Cash Equivalents at Beginning
of Year................................ 1,305,429 725,074 1,005,053
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 761,317 $ 1,305,429 $ 725,074
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-211
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS--CONTINUED
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................... $2,606,008 $2,326,863 $1,982,148
---------- ---------- ----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation........................... 304,356 317,957 328,982
Amortization........................... -- -- 368
Minority interest in income of
consolidated joint venture............ 18,663 18,691 18,728
Loss (gain) on sale of land and
buildings............................. (164,888) 39,790 5,135
Loss on demolition of building......... -- -- 174,466
Equity in earnings of unconsolidated
joint ventures, net of distributions.. 33,445 33,920 35,461
Decrease (increase) in receivables..... 17,173 (14,827) 799
Decrease (increase) in prepaid
expenses.............................. (101) 379 (3,320)
Decrease in net investment in direct
financing leases...................... 76,941 70,329 70,872
Increase in accrued rental income...... (102,142) (104,639) (169,520)
Increase (decrease) in accounts payable
and accrued expenses.................. 3,222 (40,072) 46,367
Increase (decrease) in due to related
parties............................... 25,816 (4,244) 6,111
Increase (decrease) in rents paid in
advance............................... 21,966 26,722 (12,059)
---------- ---------- ----------
Total adjustments.................... 234,451 344,006 502,390
---------- ---------- ----------
Net Cash Provided by Operating Activities.. $2,840,459 $2,670,869 $2,484,538
========== ========== ==========
Supplemental Schedule of Non-Cash Investing
and Financing Activities:
Mortgage notes accepted in exchange for
sale of land and buildings.............. $ -- $ -- $1,400,000
========== ========== ==========
Distributions declared and unpaid at
December 31............................. $ 675,000 $ 675,000 $ 675,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-212
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
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.
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 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-213
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Investment in Joint Ventures--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 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.
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.
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 13 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
F-214
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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>
1997 1996
----------- -----------
<S> <C> <C>
Land............................................ $ 8,430,465 $ 8,673,793
Buildings....................................... 9,121,968 9,121,968
17,552,433 17,795,761
Less accumulated depreciation................... (2,169,570) (1,865,214)
----------- -----------
$15,382,863 $15,930,547
=========== ===========
</TABLE>
In July 1996, the Partnership sold its 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 property
was originally acquired by the Partnership in July 1990 and had a cost of
approximately $900,900, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $144,000 in excess of its original purchase price. In October
1996, the Partnership reinvested the net sales proceeds along with additional
funds, in a Boston Market property located in Marietta, Georgia.
In addition, in October 1996, the Partnership sold its property in Hartland,
Michigan, for $625,000 and received net sales proceeds of $617,035, resulting
in a loss of approximately $235,465 for financial reporting purposes.
In 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, 1997, 1996 and 1995, the Partnership recognized $102,142, $104,639 and
$169,520, 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, 1997:
<TABLE>
<S> <C>
1998.......................................................... $ 1,879,999
1999.......................................................... 1,891,776
2000.......................................................... 1,925,741
2001.......................................................... 2,022,708
2002.......................................................... 2,034,710
Thereafter.................................................... 12,545,975
-----------
$22,300,909
===========
</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-215
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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>
1997 1996
----------- -----------
<S> <C> <C>
Minimum lease payments receivable............... $ 6,411,161 $ 7,824,101
Estimated residual values....................... 1,008,935 1,266,893
Less unearned income............................ (3,972,944) (4,992,802)
----------- -----------
Net investment in direct financing leases....... $ 3,447,152 $ 4,098,192
=========== ===========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998........................................................... $ 495,609
1999........................................................... 495,609
2000........................................................... 495,609
2001........................................................... 496,766
2002........................................................... 496,766
Thereafter..................................................... 3,930,802
----------
$6,411,161
==========
</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 percent 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, 1997, the Partnership and its co-venture partner had
contributed $616,245 and $163,964, respectively, to the joint venture to
acquire the restaurant property. As of December 31, 1997, the Partnership and
its co-venture partner owned a 79 percent and 21 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-216
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
As of December 31, 1996, 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,
1997, 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, 1997, 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 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>
1997 1996
----------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation....................... $10,892,405 $7,778,815
Cash............................................ 750 1,106
Receivables..................................... 18,819 14,495
Accrued rental income........................... 147,685 154,782
Other assets.................................... 1,079 1,115
Liabilities..................................... 8,625 1,216
Partners' capital............................... 11,052,113 7,949,097
Revenues........................................ 1,012,624 911,833
Net income...................................... 905,117 689,075
</TABLE>
The Partnership recognized income totalling $267,251, $157,254 and $154,937
for the years ended December 31, 1997, 1996 and 1995, respectively, from these
joint ventures and the two properties held as tenants-in-common with
affiliates.
6. Mortgage Notes Receivable
In connection with the sale of its property in Florence, South Carolina, 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 $1,106,657 due in
July 2000.
F-217
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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. 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>
1997 1996
---------- ----------
<S> <C> <C>
Principal balance....... $1,368,688 $1,378,454
Accrued interest
receivable............. 8,212 8,270
Less deferred gain on
sale of land and
building............... (126,303) (127,229)
---------- ----------
$1,250,597 $1,259,495
========== ==========
</TABLE>
The general partners believe that the estimated fair values of mortgage
notes receivable at December 31, 1997 and 1996, 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, 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 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.
During each of the years ended December 31, 1997 and 1996, the Partnership
declared distributions to the limited partners of $2,700,000, and during the
year ended December 31, 1995, the partnership declared distributions to the
limited partners of $2,700,002. No distributions have been made to the general
partners to date.
F-218
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................... $2,606,008 $2,326,863 $1,982,148
Depreciation for tax reporting purposes
in excess of depreciation for financial
reporting purposes..................... (25,552) (24,753) (36,960)
Gain or loss on sale of land and
buildings for financial reporting
purposes in excess of gain or loss for
tax reporting purposes................. (178,348) (163,152) 174,513
Direct financing leases recorded as
operating leases for tax reporting
purposes............................... 76,941 70,329 70,872
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............................... (55,911) 1,420 (68)
Accrued rental income................... (102,142) (104,639) (169,520)
Rents paid in advance................... 21,966 26,722 (12,059)
Minority interest in timing differences
of consolidated joint venture.......... 981 981 3,525
Other................................... (10,275) -- (20,722)
---------- ---------- ----------
Net income for federal income tax
purposes............................... $2,333,668 $2,133,771 $1,991,729
========== ========== ==========
</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 parent company of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, served
as president of CNL Fund Advisors, Inc. through October 1997. CNL Income Fund
Advisors, Inc. was a wholly owned subsidiary of CNL Group, Inc. until its
merger, effective January 1, 1996, with CNL Fund Advisors, Inc. During the
years ended December 31, 1997, 1996 and 1995, CNL Income Fund Advisors Inc. and
CNL Fund Advisors, Inc. (hereinafter referred to collectively as the
"Affiliates") each performed certain services for the Partnership, as described
below.
During the years ended December 31, 1997, 1996 and 1995, certain 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 Affiliates 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 property held as tenants-in-common with an affiliate, 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 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, 1997, 1996 and 1995.
F-219
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Certain Affiliates are 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 Affiliates provide 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,
1995, the Partnership incurred $7,200 in deferred, subordinated real estate
disposition fees as a result of the Partnership's sale of its Property in
Jacksonville, Florida. No deferred, subordinated real estate disposition fees
were incurred for the years ended December 31, 1997 and 1996.
During the years ended December 31, 1997, 1996 and 1995, Affiliates provided
accounting and administrative services to the Partnership on a day-to-day
basis. The Partnership incurred $77,078, $92,985 and $81,259 for the years
ended December 31, 1997, 1996 and 1995, respectively, for such services.
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C> <C>
Due to Affiliates:
Expenditures incurred on behalf of the Partnership..... $20,321 $ 63
Accounting and administrative services................. 7,362 1,804
Deferred, subordinated real estate Disposition fee..... 7,200 7,200
------- ------
$34,883 $9,067
======= ======
</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 at least one
of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Corporation..................... $625,724 $608,852 $618,413
Restaurant Management Services, Inc........... 444,069 446,867 446,279
Flagstar Enterprises, Inc..................... 307,738 464,042 469,374
</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
and the two properties held as tenants-in-common with affiliates) for at least
one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Family Steakhouse
Restaurants................................ $625,724 $608,852 $618,413
Hardees..................................... 447,074 524,625 548,221
Burger King................................. 466,626 478,901 486,944
</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. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
F-220
<PAGE>
CNL INCOME FUND VIII, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997.. F-222
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997............................................. F-223
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997............. F-224
Condensed Statements of Cash Flows for the Nine Months Ended September
30, 1998 and 1997....................................................... F-225
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997....................................... F-226
Report of Independent Accountants........................................ F-227
Balance Sheets as of December 31, 1997 and 1996.......................... F-228
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-229
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995........................................................... F-230
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-231
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and 1995................................................................ F-232
</TABLE>
F-221
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September December
30, 1998 31, 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $1,610,464 and
$1,438,534........................................... $15,844,324 $13,960,232
Net investment in direct financing leases............. 7,841,439 10,044,975
Investment in joint ventures.......................... 2,824,170 2,877,717
Mortgage notes receivable............................. 1,822,560 1,853,386
Cash and cash equivalents............................. 1,724,745 1,602,236
Receivables, less allowance for doubtful accounts of
$22,160 and $19,228.................................. 16,023 51,393
Prepaid expenses...................................... 7,558 4,357
Accrued rental income, less allowance for doubtful
accounts of $4,501 in 1997........................... 1,896,493 1,811,329
Other assets.......................................... 52,671 52,671
----------- -----------
$32,029,983 $32,258,296
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 7,857 $ 8,359
Escrowed real estate taxes payable.................... 23,100 24,459
Distributions payable................................. 787,501 787,501
Due to related parties................................ 60,005 59,649
Rents paid in advance................................. 73,452 53,556
----------- -----------
Total liabilities................................... 951,915 933,524
Minority interest..................................... 108,565 108,374
Partners' capital..................................... 30,969,503 31,216,398
----------- -----------
$32,029,983 $32,258,296
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-222
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases .................... $ 478,742 $ 452,867 $1,389,490 $1,354,475
Earned income from direct
financing leases .......... 258,348 302,203 855,788 910,525
Contingent rental income.... -- 2,547 21,033 34,487
Interest and other income... 66,175 60,005 201,501 181,801
---------- ---------- ---------- ----------
803,265 817,622 2,467,812 2,481,288
---------- ---------- ---------- ----------
Expenses:
General operating and
administrative ............ 40,683 33,808 116,775 103,897
Professional services....... 4,248 4,632 16,611 15,042
State and other taxes....... -- -- 5,372 5,081
Depreciation and
amortization............... 67,445 52,243 171,930 156,728
---------- ---------- ---------- ----------
112,376 90,683 310,688 280,748
---------- ---------- ---------- ----------
Income Before Minority
Interest in Income of
Consolidated Joint Venture,
Equity in Earnings of
Unconsolidated Joint Ventures
and Gain on Sale of Land..... 690,889 726,939 2,157,124 2,200,540
Minority Interest in Income of
Consolidated Joint Venture... (3,412) (3,436) (10,123) (10,266)
Equity in Earnings of
Unconsolidated Joint
Ventures..................... 71,177 74,581 210,430 214,372
Gain on Sale of Land.......... 108,176 -- 108,176 --
---------- ---------- ---------- ----------
Net Income.................... $ 866,830 $ 798,084 $2,465,607 $2,404,646
========== ========== ========== ==========
Allocation of Net Income:
General partners............ $ 7,586 $ 7,981 $ 23,574 $ 24,046
Limited partners............ 859,244 790,103 2,442,033 2,380,600
========== ========== ========== ==========
$ 866,830 $ 798,084 $2,465,607 $2,404,646
========== ========== ========== ==========
Net Income Per Limited Partner
Unit......................... $ 0.025 $ 0.023 $ 0.070 $ 0.068
========== ========== ========== ==========
Weighted Average Number of
Limited Partner Units
Outstanding.................. 35,000,000 35,000,000 35,000,000 35,000,000
========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-223
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
September December
30, 1998 31, 1997
----------- -----------
<S> <C> <C>
General partners:
Beginning balance.................................. $ 226,441 $ 194,025
Net income......................................... 23,574 32,416
----------- -----------
250,015 226,441
----------- -----------
Limited partners:
Beginning balance.................................. 30,989,957 30,930,809
Net income......................................... 2,442,033 3,209,151
Distributions ($0.078 and $0.090 per limited
partner unit, respectively)....................... (2,712,502) (3,150,003)
----------- -----------
30,719,488 30,989,957
----------- -----------
Total partners' capital.............................. $30,969,503 $31,216,398
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-224
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities........ $ 2,697,992 $ 2,694,116
----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land......................... 116,397 --
Collections on mortgage notes receivable........... 30,554 2,092
----------- -----------
Net cash provided by investing activities........ 146,951 2,092
----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners.................. (2,712,502) (2,625,001)
Distributions to holder of minority interest....... (9,932) (10,028)
----------- -----------
Net cash used in financing activities............ (2,722,434) (2,635,029)
----------- -----------
Net Increase in Cash and Cash Equivalents............ 122,509 61,179
Cash and Cash Equivalents at Beginning of Period..... 1,602,236 1,476,274
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 1,724,745 $ 1,537,453
----------- -----------
Supplemental Schedule of Non-Cash Investing and
Financing Activities
Net investment in direct financing leases
reclassified to land and building on operating
leases as a result of lease amendments............ $ 2,064,243 $ --
----------- -----------
Distributions declared and unpaid at end of
period............................................ $ 787,501 $ 787,501
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-225
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, 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 CNL Income Fund VIII, Ltd.'s
Form 10-K for the year ended December 31, 1997.
CNL Income Fund VIII, Ltd. (the "Partnership") accounts for its 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.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2. Land and Buildings on Operating Leases
In July 1998, the Partnership 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 property in Brooksville, Florida. In connection
therewith, the Partnership recognized a gain of $108,176 for financial
reporting purposes.
3. Net Investment in Direct Financing Leases
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 amount. No losses on the termination of direct financing
leases were recorded for financial reporting purposes.
F-226
<PAGE>
Report of Independent Accountants
To the Partners
CNL Income Fund VIII, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund VIII,
Ltd. (a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. 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 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 Income Fund VIII, Ltd.
as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
January 12, 1998
F-227
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation............................. $13,960,232 $14,169,203
Net investment in direct financing leases............. 10,044,975 10,223,225
Investment in joint ventures.......................... 2,877,717 2,940,826
Mortgage notes receivable............................. 1,853,386 1,862,262
Cash and cash equivalents............................. 1,602,236 1,476,274
Receivables, less allowance for doubtful accounts of
$19,228 and $4,775................................... 51,393 25,675
Prepaid expenses...................................... 4,357 4,377
Accrued rental income, less allowance for doubtful
accounts of $4,501 in 1997........................... 1,811,329 1,682,593
Other assets.......................................... 52,671 52,671
----------- -----------
$32,258,296 $32,437,106
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 8,359 $ 7,693
Escrowed real estate taxes payable.................... 24,459 15,138
Distributions payable................................. 787,501 1,050,000
Due to related parties................................ 59,649 56,880
Rents paid in advance................................. 53,556 74,502
----------- -----------
Total liabilities................................. 933,524 1,204,213
Minority interest..................................... 108,374 108,059
Partners' capital..................................... 31,216,398 31,124,834
----------- -----------
$32,258,296 $32,437,106
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-228
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases..... $1,804,273 $1,867,968 $1,951,189
Earned income from direct financing
leases................................. 1,211,369 1,314,090 1,349,627
Contingent rental income................ 85,735 31,712 59,085
Interest and other income............... 238,338 127,246 76,445
---------- ---------- ----------
3,339,715 3,341,016 3,436,346
---------- ---------- ----------
Expenses:
General operating and administrative.... 140,586 156,177 140,009
Professional services................... 23,284 27,682 25,927
State and other taxes................... 5,081 4,757 6,796
Depreciation and amortization........... 208,971 208,971 217,576
---------- ---------- ----------
377,922 397,587 390,308
---------- ---------- ----------
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................................ 2,961,793 2,943,429 3,046,038
Minority Interest in Income of
Consolidated Joint Venture............... (13,706) (13,906) (14,142)
Equity in Earnings of Unconsolidated Joint
Ventures................................. 293,480 266,500 244,933
Gain (Loss) on Sale of Land and
Buildings................................ -- (99,031) 59,926
---------- ---------- ----------
Net Income................................ $3,241,567 $3,096,992 $3,336,755
========== ========== ==========
Allocation of Net Income:
General partners........................ $ 32,416 $ 31,413 $ 32,714
Limited partners........................ 3,209,151 3,065,579 3,304,041
---------- ---------- ----------
$3,241,567 $3,096,992 $3,336,755
========== ========== ==========
Net Income Per Limited Partner Unit....... $ 0.092 $ 0.088 $ 0.094
========== ========== ==========
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-229
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<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,
1994................... $1,000 $128,898 $35,000,000 $(12,447,136) $12,760,827 $(4,015,000) $31,428,589
Distributions to
limited partners
($0.095 per limited
partner unit)......... -- -- -- (3,325,002) -- -- (3,325,002)
Net income............. -- 32,714 -- -- 3,304,041 -- 3,336,755
------ -------- ----------- ------------ ----------- ----------- -----------
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
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-230
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants............. $ 3,114,439 $ 3,222,903 $ 3,074,333
Distributions from unconsolidated joint
ventures.............................. 356,589 323,531 295,114
Cash paid for expenses................. (163,215) (194,218) (170,074)
Interest received...................... 235,243 110,452 64,312
----------- ----------- -----------
Net cash provided by operating
activities............................ 3,543,056 3,462,668 3,263,685
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and
buildings............................. -- -- 1,184,865
Additions to land and buildings on
operating leases...................... -- (1,135) (397,291)
Investment in direct financing leases.. -- (1,326) (550,911)
Investment in joint venture............ -- (234,059) --
Collections on mortgage notes
receivable............................ 8,799 2,557 --
Other.................................. -- (34,793) --
----------- ----------- -----------
Net cash provided by (used in)
investing activities.................. 8,799 (268,756) 236,663
----------- ----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners...... (3,412,502) (3,325,000) (3,307,502)
Distributions to holder of minority
interest.............................. (13,391) (13,503) (11,526)
----------- ----------- -----------
Net cash used in financing activities.. (3,425,893) (3,338,503) (3,319,028)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................ 125,962 (144,591) 181,320
Cash and Cash Equivalents at Beginning
of Year................................ 1,476,274 1,620,865 1,439,545
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 1,602,236 $ 1,476,274 $ 1,620,865
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................. $ 3,241,567 $ 3,096,992 $ 3,336,755
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation........................... 208,971 208,971 216,295
Amortization........................... -- -- 1,281
Minority interest in income of
consolidated joint venture............ 13,706 13,906 14,142
Equity in earnings of unconsolidated
joint ventures, net of distributions.. 63,109 57,031 50,181
Loss (gain) on sale of land and
buildings............................. -- 99,031 (59,926)
Decrease (increase) in receivables..... (25,641) 429 16,572
Decrease (increase) in prepaid
expenses.............................. 20 (1,465) (2,912)
Decrease in net investment in direct
financing leases...................... 178,250 157,194 122,052
Increase in accrued rental income...... (128,736) (219,757) (342,862)
Increase (decrease) in accounts payable
and accrued expenses.................. 9,987 12,203 (15,650)
Increase (decrease) in due to related
parties............................... 2,769 (4,505) 6,335
Increase (decrease) in rents paid in
advance............................... (20,946) 42,638 (78,578)
----------- ----------- -----------
Total adjustments..................... 301,489 365,676 (73,070)
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. $ 3,543,056 $ 3,462,668 $ 3,263,685
=========== =========== ===========
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Mortgage notes accepted in exchange for
sale of land and buildings............ $ -- $ 1,375,000 $ 460,000
=========== =========== ===========
Distributions declared and unpaid at
December 31........................... $ 787,501 $ 1,050,000 $ 962,500
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-231
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
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.
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 undercounted
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.
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 uncorrectable, the corresponding receivable and
the allowance for doubtful accounts are decreased accordingly.
Investment in Joint Ventures--The Partnership accounts for its 88 percent
interest in Woodway Joint Venture using the consolidation method. Minority
interest represents the minority joint venture partner's
F-232
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 partner's 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 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.
F-233
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. Land and Buildings on Operating Leases
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Land............................................... $ 9,167,336 $ 9,167,336
Buildings.......................................... 6,231,430 6,231,430
----------- -----------
15,398,766 15,398,766
Less accumulated depreciation...................... (1,438,534) (1,229,563)
----------- -----------
$13,960,232 $14,169,203
=========== ===========
</TABLE>
In October 1996, the Partnership sold its property in Orlando, Florida, to
the tenant for $1,375,000 and accepted the sales proceeds in the form of a
promissory note (Note 6). This property was originally acquired by the
Partnership in December 1990 and had a cost of approximately $1,177,000,
excluding acquisition fees and miscellaneous acquisition expenses; therefore,
the Partnership sold the property for approximately $198,000 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 $99,031 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.
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, 1997, 1996 and 1995, the Partnership recognized $128,736, $219,757 and
$342,862, 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, 1997:
<TABLE>
<S> <C>
1998............................................................. $ 1,704,859
1999............................................................. 1,704,859
2000............................................................. 1,735,498
2001............................................................. 1,825,526
2002............................................................. 1,871,537
Thereafter....................................................... 12,996,507
-----------
$21,838,786
===========
</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-234
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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>
1997 1996
------------ ------------
<S> <C> <C>
Minimum lease payments receivable................ $ 18,939,788 $ 20,329,407
Estimated residual values........................ 3,040,615 3,040,615
Less unearned income............................. (11,935,428) (13,146,797)
------------ ------------
Net investment in direct financing leases........ $ 10,044,975 $ 10,223,225
============ ============
</TABLE>
In October 1996, 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 payments receivable
and estimated residual values) and unearned income relating to this property
was removed from the accounts and the loss from the sale relating to the land
portion of the property was reflected in income (Note 3).
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998............................................................. $ 1,389,622
1999............................................................. 1,389,622
2000............................................................. 1,389,622
2001............................................................. 1,413,128
2002............................................................. 1,424,842
Thereafter....................................................... 11,932,952
-----------
$18,939,788
===========
</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 an 86 percent and a 37 percent interest in the profits
and losses of Asheville Joint Venture and CNL Restaurant Investments II,
respectively. The remaining interests in these joint ventures are held by
affiliates of the Partnership which have the same general partners.
In May 1996, the Partnership entered into a joint venture arrangement,
Middleburg Joint Venture, with an affiliate of the Partnership which has the
same general partners to hold one restaurant property. In connection therewith,
the Partnership contributed $234,059 to the joint venture and has a 12 percent
interest in the profits and losses of the joint venture.
F-235
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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>
1997 1996
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation........................... $6,487,210 $6,654,361
Net investment in direct financing lease............ 1,335,223 1,349,611
Cash................................................ 596 9,859
Receivables......................................... 14,169 13,840
Prepaid expenses.................................... 1,017 888
Accrued rental income............................... 128,993 91,074
Liabilities......................................... 864 9,992
Partners' capital................................... 7,966,344 8,109,641
Revenues............................................ 1,001,284 862,821
Net income.......................................... 824,576 688,253
</TABLE>
The Partnership recognized income totaling $293,480, $266,500 and $244,933
for the years ended December 31, 1997, 1996 and 1995, 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 totaling $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>
1997 1996
---------- ----------
<S> <C> <C>
Principal balance..................................... $1,837,212 $1,846,011
Accrued interest receivable........................... 16,174 16,251
---------- ----------
$1,853,386 $1,862,262
========== ==========
</TABLE>
The general partners believe that the estimated fair value of mortgage notes
receivable at December 31, 1997 and 1996, 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
F-236
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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, 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 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.
During the years ended December 31, 1997, 1996 and 1995, the Partnership
declared distributions to the limited partners of $3,150,003, $3,412,500 and
$3,325,002, 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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes.............................. $3,241,567 $3,096,992 $3,336,755
Depreciation for tax reporting purposes
in excess of depreciation for
financial reporting purposes.......... (204,419) (219,372) (219,653)
Direct financing leases recorded as
operating leases for tax reporting
purposes.............................. 178,250 157,197 122,052
Allowance for doubtful accounts........ 18,954 (23,716) 8,067
Accrued rental income.................. (133,237) (219,757) (342,862)
Rents paid in advance.................. (21,446) 42,637 (70,010)
Gain or loss on sale of land and
buildings for tax reporting purposes
in excess of gain or loss for
financial reporting purposes.......... 670 99,031 161,548
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.............................. (2,987) 13,320 (4,016)
Minority interest in timing differences
of consolidated joint venture......... 1,571 1,677 2,783
---------- ---------- ----------
Net income for federal income tax
purposes.............................. $3,078,923 $2,948,009 $2,994,664
========== ========== ==========
</TABLE>
F-237
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 parent company of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, served
as president of CNL Fund Advisors, Inc. through October 1997. CNL Income Fund
Advisors, Inc. was a wholly owned subsidiary of CNL Group, Inc. until its
merger, effective January 1, 1996, with CNL Fund Advisors, Inc. During the
years ended December 31, 1997, 1996 and 1995, CNL Income Fund Advisors, Inc.
and CNL Fund Advisors, Inc. (hereinafter referred to collectively as the
"Affiliates") each performed certain services for the Partnership, as described
below.
During the years ended December 31, 1997, 1996 and 1995, certain 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 Affiliates 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, 1997, 1996 and 1995.
Certain Affiliates are 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 Affiliates provide 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,
1996 and 1995, the Partnership incurred $41,250 and $13,800, respectively, in
deferred, subordinated real estate disposition fees as the result of the sales
of the property in Orlando, Florida, and two properties in Jacksonville,
Florida. No deferred, subordinated real estate disposition fees were incurred
for the year ended December 1997.
During the years ended December 31, 1997, 1996 and 1995, Affiliates provided
accounting and administrative services to the Partnership on a day-to-day
basis. The Partnership incurred $80,461, $89,317 and $73,365 for the years
ended December 31, 1997, 1996 and 1995, respectively, for such services.
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Due to Affiliates:
Accounting and administrative services...................... $ 4,599 $ 1,830
Deferred, subordinated real estate disposition fee.......... 55,050 55,050
------- -------
$59,649 $56,880
======= =======
</TABLE>
F-238
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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
at least one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Corporation....................... $706,839 $663,889 $663,943
Restaurant Management Services, Inc. ........... 531,110 533,990 525,260
Carrols Corporation............................. 523,517 526,034 532,990
Flagstar Enterprises, Inc. and Quincy's
Restaurants, Inc. .............................. 232,876 356,720 363,335
</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 at least one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- -------- --------
<S> <C> <C> <C>
Burger King.................................... $1,003,419 $989,480 $987,871
Golden Corral Family Steakhouse Restaurants.... 735,949 681,042 663,943
Shoney's....................................... 607,054 609,072 526,649
</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. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these Properties for the on-going operations
of the lessees.
F-239
<PAGE>
CNL INCOME FUND IX, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997.. F-241
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997............................................. F-242
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997............. F-243
Condensed Statements of Cash Flows for the Nine Months Ended September
30, 1998 and 1997....................................................... F-244
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997....................................... F-245
Report of Independent Accountants........................................ F-246
Balance Sheets as of December 31, 1997 and 1996.......................... F-247
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-248
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995........................................................... F-249
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-250
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and 1995................................................................ F-251
</TABLE>
F-240
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $1,694,248 and
$1,497,770......................................... $15,043,968 $14,163,111
Net investment in direct financing leases........... 6,311,643 7,482,757
Investment in joint ventures........................ 6,497,278 6,619,364
Cash and cash equivalents........................... 1,279,526 1,250,388
Receivables, less allowance for doubtful accounts of
$261,045 and $108,316.............................. 10,491 96,134
Prepaid expenses.................................... 6,854 3,924
Lease costs, less accumulated amortization of $1,202
and $77............................................ 13,798 14,923
Accrued rental income............................... 1,241,786 1,465,820
----------- -----------
$30,405,344 $31,096,421
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable.................................... $ 888 $ 4,490
Accrued and escrowed real estate taxes payable...... 28,221 45,591
Distributions payable............................... 787,501 787,501
Due to related parties.............................. 4,463 4,619
Rents paid in advance and deposits.................. 120,771 106,996
----------- -----------
Total liabilities................................. 941,844 949,197
----------- -----------
Partners' capital................................... 29,463,500 30,147,224
----------- -----------
$30,405,344 $31,096,421
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-241
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
-------------------- ----------------------
1998 1997 1998 1997
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases.......................... $ 455,811 $ 426,942 $1,308,630 $1,306,829
Adjustments to accrued rental
income.......................... (4,600) -- (272,200) --
Earned income from direct
financing leases................ 209,650 188,483 551,913 611,594
Contingent rental income......... 943 20,436 42,604 50,263
Interest and other income........ 11,871 9,045 39,539 38,638
--------- --------- ---------- ----------
673,675 644,906 1,670,486 2,007,324
Expenses:
General operating and
administrative.................. 41,132 40,746 112,211 111,993
Bad debt expense................. 4,148 -- 9,281 21,000
Professional services............ 6,141 5,359 20,883 16,490
Real estate taxes................ -- 4,063 -- 23,191
State and other taxes............ -- -- 14,337 11,127
Depreciation and amortization.... 71,113 62,870 197,603 188,612
--------- --------- ---------- ----------
122,534 113,038 354,315 372,413
Income Before Equity in Earnings of
Joint Ventures and Gain on Sale of
Land and Building................. 551,141 531,868 1,316,171 1,634,911
Equity in Earnings of Joint
Ventures.......................... 155,940 148,487 432,608 373,525
Gain on Sale of Land and Building.. -- -- -- 199,643
--------- --------- ---------- ----------
Net Income......................... $ 707,081 $ 680,355 $1,748,779 $2,208,079
========= ========= ========== ==========
Allocation of Net Income:
General partners................. $ 7,071 $ 6,803 $ 17,488 $ 20,084
Limited partners................. 700,010 673,552 1,731,291 2,187,995
--------- --------- ---------- ----------
$ 707,081 $ 680,355 $1,748,779 $2,208,079
========= ========= ========== ==========
Net Income Per Limited Partner
Unit.............................. $ 0.20 $ 0.19 $ 0.49 $ 0.63
========= ========= ========== ==========
Weighted Average Number of Limited
Partner Units Outstanding......... 3,500,000 3,500,000 3,500,000 3,500,000
========= ========= ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-242
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1998 1997
----------------- ------------
<S> <C> <C>
General partners:
Beginning balance............................. $ 190,772 $ 163,392
Net income.................................... 17,488 27,380
----------- -----------
208,260 190,772
----------- -----------
Limited partners:
Beginning balance............................. 29,956,452 30,196,204
Net income.................................... 1,731,291 2,910,252
Distributions ($0.70 and $0.90 per limited
partner unit, respectively).................. (2,432,503) (3,150,004)
----------- -----------
29,255,240 29,956,452
----------- -----------
Total partners' capital......................... $29,463,500 $30,147,224
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-243
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities.......... $ 2,461,641 $ 2,363,892
----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and building.......... -- 1,053,571
Investment in joint venture...................... -- (1,049,762)
----------- -----------
Net cash provided by investing activities...... -- 3,809
----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners................ (2,432,503) (2,397,502)
----------- -----------
Net cash used in financing activities.......... (2,432,503) (2,397,502)
----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents......................................... 29,138 (29,801)
Cash and Cash Equivalents at Beginning of Period..... 1,250,388 1,288,618
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 1,279,526 $ 1,258,817
=========== ===========
Supplemental Schedule of Non-Cash Investing and
Financing Activities
Net investment in direct financing leases
reclassified to land and building on operating
leases due to lease amendments.................... $ 1,077,335 $ --
=========== ===========
Distributions declared and unpaid at end of
period............................................ $ 787,501 $ 787,501
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-244
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, 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, 1997.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2. Net Investment in Direct Financing Leases
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.
F-245
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners
CNL Income Fund IX, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund IX, Ltd.
(a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. 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 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 pro-vide 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 Income Fund IX, Ltd. as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
January 12, 1998
F-246
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation............................. $14,163,111 $14,797,549
Net investment in direct financing leases............. 7,482,757 7,964,985
Investment in joint ventures.......................... 6,619,364 5,708,555
Cash and cash equivalents............................. 1,250,388 1,288,618
Receivables, less allowance for doubtful accounts of
$108,316 and $28,983................................. 96,134 75,256
Prepaid expenses...................................... 3,924 3,845
Lease costs, less accumulated amortization of $77 in
1997................................................. 14,923 --
Accrued rental income................................. 1,465,820 1,505,039
----------- -----------
$31,096,421 $31,343,847
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 4,490 $ 4,987
Accrued and escrowed real estate taxes payable........ 45,591 61,618
Distributions payable................................. 787,501 822,500
Due to related parties................................ 4,619 1,405
Rents paid in advance and deposits.................... 106,996 93,741
----------- -----------
Total liabilities................................... 949,197 984,251
Partners' capital..................................... 30,147,224 30,359,596
----------- -----------
$31,096,421 $31,343,847
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-247
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases........ $1,742,351 $1,854,245 $1,880,854
Earned income from direct financing
leases.................................... 830,603 917,074 926,254
Contingent rental income................... 74,867 120,999 110,036
Interest and other income.................. 44,669 51,348 57,209
---------- ---------- ----------
2,692,490 2,943,666 2,974,353
---------- ---------- ----------
Expenses:
General operating and administrative....... 153,175 152,437 130,167
Professional services...................... 24,658 26,610 20,566
Bad debt expense........................... 21,000 -- --
Real estate taxes.......................... 30,835 9,906 24,837
State and other taxes...................... 11,126 2,775 11,123
Depreciation and amortization.............. 251,560 252,039 253,483
---------- ---------- ----------
492,354 443,767 440,176
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Ventures and Gain on Sale of Land and
Building.................................... 2,200,136 2,499,899 2,534,177
Equity in Earnings of Joint Ventures......... 537,853 460,400 453,794
Gain on Sale of Land and Building............ 199,643 -- --
---------- ---------- ----------
Net Income................................... $2,937,632 $2,960,299 $2,987,971
========== ========== ==========
Allocation of Net Income:
General partners........................... $ 27,380 $ 29,603 $ 29,880
Limited partners........................... 2,910,252 2,930,696 2,958,091
---------- ---------- ----------
$2,937,632 $2,960,299 $2,987,971
========== ========== ==========
Net Income Per Limited Partner Unit.......... $ 0.83 $ 0.84 $ 0.85
========== ========== ==========
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-248
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<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,
1994................... $1,000 $102,909 $35,000,000 $(10,320,575) $10,188,000 $(4,190,000) $30,781,334
Distributions to
limited partners
($0.91 per limited
partner unit)......... -- -- -- (3,185,004) -- -- (3,185,004)
Net income............. -- 29,880 -- -- 2,958,091 -- 2,987,971
------ -------- ----------- ------------ ----------- ----------- -----------
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
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-249
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants........... $ 2,666,373 $ 2,900,048 $ 2,608,733
Distributions from joint ventures.... 676,806 603,833 602,845
Cash paid for expenses............... (229,884) (186,126) (157,127)
Interest received.................... 44,669 38,485 43,825
----------- ----------- -----------
Net cash provided by operating
activities........................ 3,157,964 3,356,240 3,098,276
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and
building............................ 1,053,571 -- --
Investment in joint venture.......... (1,049,762) -- --
Payment of lease costs............... (15,000) -- --
----------- ----------- -----------
Net cash used in investing
activities........................ (11,191) -- --
----------- ----------- -----------
Cash Flows From Financing Activities:
Distributions to limited partners.... (3,185,003) (3,185,004) (3,150,004)
----------- ----------- -----------
Net cash used in financing
activities........................ (3,185,003) (3,185,004) (3,150,004)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................ (38,230) 171,236 (51,728)
Cash and Cash Equivalents at Beginning
of Year................................ 1,288,618 1,117,382 1,169,110
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 1,250,388 $ 1,288,618 $ 1,117,382
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................ $ 2,937,632 $ 2,960,299 $ 2,987,971
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation......................... 251,483 251,483 251,483
Amortization......................... 77 556 2,000
Equity in earnings of joint ventures,
net of distributions................ 138,953 143,433 149,051
Gain on sale of land and building.... (199,643) -- --
Decrease (increase) in receivables... (20,878) 87,823 (21,714)
Increase in prepaid expenses......... (79) (2,913) (932)
Decrease in net investment in direct
financing leases.................... 121,311 89,696 73,784
Increase in accrued rental income.... (70,837) (225,434) (287,264)
Increase (decrease) in accounts
payable and accrued expenses........ (16,524) 12,111 32,889
Increase (decrease) in due to related
parties............................. 3,214 (4,639) 6,044
Increase (decrease) in rents paid in
advance and deposits................ 13,255 43,825 (95,036)
----------- ----------- -----------
Total adjustments.................. 220,332 395,941 110,305
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. $ 3,157,964 $ 3,356,240 $ 3,098,276
=========== =========== ===========
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Distributions declared and unpaid at
December 31.......................... $ 787,501 $ 822,500 $ 822,500
=========== =========== ===========
Land and building under operating
lease simultaneously exchanged for
land and building under operating
lease................................ $ -- $ 406,768 $ --
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-250
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
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.
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.
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 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.
F-251
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
1. Significant Accounting Policies--(Continued)
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.
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,
F-252
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
2. Leases--(Continued)
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>
1997 1996
----------- -----------
<S> <C> <C>
Land............................................... $ 8,207,939 $ 8,590,894
Buildings.......................................... 7,452,942 7,452,942
----------- -----------
15,660,881 16,043,836
Less accumulated depreciation...................... (1,497,770) (1,246,287)
----------- -----------
$14,163,111 $14,797,549
=========== ===========
</TABLE>
In December 1996, the tenant of the property in Woodmere, Ohio, exercised
its option under the terms of its lease agreement, to substitute the existing
property for a replacement property. In conjunction therewith, the Partnership
simultaneously exchanged the Burger King property in Woodmere, Ohio, with a
Burger King property in Carrboro, North Carolina. The lease for the property in
Woodmere, Ohio, was amended to allow the property in Carrboro, North Carolina,
to continue under the terms of the original lease. All closing costs were paid
by the tenant. The Partnership accounted for this as a non-monetary exchange of
similar assets and recorded the acquisition of the property in Carrboro, North
Carolina, at the net book value of the 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 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.
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, 1997, 1996 and 1995, the Partnership recognized $70,837, $225,434 and
$287,264, 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, 1997:
<TABLE>
<S> <C>
1998............................................................. $ 1,766,123
1999............................................................. 1,766,123
2000............................................................. 1,766,123
2001............................................................. 1,802,660
2002............................................................. 1,933,986
Thereafter....................................................... 12,647,153
-----------
$21,682,168
===========
</TABLE>
F-253
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
3. Land and Buildings on Operating Leases--(Continued)
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>
1997 1996
----------- ------------
<S> <C> <C>
Minimum lease payments receivable................. $13,764,606 $ 15,621,897
Estimated residual values......................... 2,495,379 2,590,434
Less unearned income.............................. (8,777,228) (10,247,346)
----------- ------------
Net investment in direct financing leases......... $ 7,482,757 $ 7,964,985
=========== ============
</TABLE>
The following is a schedule of future minimum lease payments to be received
on the direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998............................................................. $968,047
1999............................................................. 968,047
2000............................................................. 968,047
2001............................................................. 975,586
2002............................................................. 999,905
Thereafter....................................................... 8,884,974
-----------
$13,764,606
===========
</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 67.23% 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
F-254
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
5. Investment in Joint Ventures--(Continued)
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>
1997 1996
----------- -----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation......................... $12,582,754 $12,359,586
Net investment in direct financing lease.......... 1,003,680 --
Cash.............................................. 15,124 1,497
Receivables....................................... 35,773 13,840
Prepaid expenses.................................. 23,544 22,543
Accrued rental income............................. 11,620 --
Liabilities....................................... 14,280 1,198
Partners' capital................................. 13,658,215 12,396,268
Revenues.......................................... 1,506,380 1,362,027
Net income........................................ 1,141,755 1,000,884
</TABLE>
The Partnership recognized income totalling $537,853, $460,400 and $453,794
for the years ended December 31, 1997, 1996 and 1995, respectively, from these
joint ventures.
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, 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 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.
During the year ended December 31, 1997, the Partnership declared
distributions to the limited partners of $3,150,004 and during each of the
years ended December 31, 1996 and 1995, the Partnership declared distributions
to the limited partners of $3,185,004. No distributions have been made to the
general partners to date.
F-255
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes.................................. $2,937,632 $2,960,299 $2,987,971
Depreciation for tax reporting purposes in
excess of
depreciation for financial reporting
purposes.................................. (116,620) (123,734) (123,820)
Direct financing leases recorded as
operating leases for
tax reporting purposes.................... 121,311 89,696 73,784
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.................................. 36,745 37,469 37,469
Accrued rental income...................... (70,837) (225,434) (287,264)
Rents paid in advance...................... 13,255 43,825 (95,036)
Allowance for doubtful accounts............ 79,333 14,221 (11,173)
---------- ---------- ----------
Net income for federal income tax
purposes.................................. $2,804,999 $2,796,342 $2,581,931
========== ========== ==========
</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 parent company of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, served
as president of CNL Fund Advisors, Inc. through October 1997. CNL Income Fund
Advisors, Inc. was a wholly owned subsidiary of CNL Group, Inc. until its
merger, effective January 1, 1996, with CNL Fund Advisors, Inc. During the
years ended December 31, 1997, 1996 and 1995, CNL Income Fund Advisors, Inc.
and CNL Fund Advisors, Inc. (hereinafter referred to collectively as the
"Affiliates") each performed certain services for the Partnership, as described
below.
During the years ended December 31, 1997, 1996 and 1995, certain 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 Affiliates 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, 1997, 1996 and 1995.
Certain Affiliates are 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 Affiliates provide 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
F-256
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
8. Related Party Transactions--(Continued)
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, 1997, 1996 and 1995, Affiliates provided
accounting and administrative services to the Partnership on a day-to-day
basis. The Partnership incurred $79,234, $82,487 and $64,398 for the years
ended December 31, 1997, 1996 and 1995, respectively, for such services.
The due to related parties at December 31, 1997 and 1996, totalled $4,619
and $1,405, 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 at least one of the
years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Burger King Corporation and BK Acquisition,
Inc........................................... $649,445 $623,949 $617,694
TPI Restaurants, Inc........................... 556,700 565,351 562,259
Carrols Corporation............................ 440,057 442,286 444,866
Flagstar Enterprises, Inc...................... 436,312 460,762 486,188
Golden Corral Corporation...................... 337,337 328,975 329,997
</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 at least one
of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Burger King............................... $1,249,715 $1,310,994 $1,293,094
Shoney's.................................. 808,675 889,148 904,534
Hardees................................... 436,312 460,762 486,188
Golden Corral Family Steakhouse
Restaurants.............................. 337,337 328,975 329,997
</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. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
F-257
<PAGE>
CNL INCOME FUND X, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997.. F-259
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997............................................. F-260
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997............. F-261
Condensed Statements of Cash Flows for the Nine Months Ended September
30, 1998 and 1997....................................................... F-262
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997....................................... F-263
Report of Independent Accountants........................................ F-265
Balance Sheets as of December 31, 1997 and 1996.......................... F-266
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-267
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995........................................................... F-268
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-269
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and 1995................................................................ F-270
</TABLE>
F-258
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
ASSETS
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation of $1,300,992 and
$1,113,247.......................................... $17,037,038 $15,709,899
Net investment in direct financing leases............ 10,751,793 13,460,125
Investment in joint ventures......................... 3,437,666 3,505,326
Cash and cash equivalents............................ 1,662,186 1,583,883
Restricted cash...................................... 1,260,266 92,236
Receivables, less allowance for doubtful accounts of
$217,437 and $137,856............................... 294 123,903
Prepaid expenses..................................... 9,249 5,877
Accrued rental income, less allowance for doubtful
accounts of $257,225 and $117,593................... 1,348,423 1,775,374
Other assets......................................... 33,104 33,104
----------- -----------
$35,540,019 $36,289,727
=========== ===========
<CAPTION>
LIABILITIES AND PARTNERS' CAPITAL
<S> <C> <C>
Accounts payable..................................... $ 1,367 $ 6,033
Accrued and escrowed real estate taxes payable....... 71,478 27,784
Distributions payable................................ 900,001 900,001
Due to related parties............................... 5,500 4,946
Rents paid in advance and deposits................... 90,378 132,419
----------- -----------
Total liabilities.................................. 1,068,724 1,071,183
Minority interest.................................... 64,480 64,501
----------- -----------
Partners' capital.................................... 34,406,815 35,154,043
----------- -----------
$35,540,019 $36,289,727
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-259
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
-------------------- ----------------------
1998 1997 1998 1997
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases........................ $ 499,787 $ 477,904 $1,396,043 $1,436,157
Adjustments to accrued rental
income........................ (13,155) (6,099) (445,370) (22,714)
Earned income from direct
financing leases.............. 353,378 376,124 976,635 1,129,655
Contingent rental income....... 6,239 10,014 16,894 22,186
Interest and other income...... 27,008 14,289 85,774 74,727
--------- --------- ---------- ----------
873,257 872,232 2,029,976 2,640,011
--------- --------- ---------- ----------
Expenses:
General operating and
administrative................ 43,273 37,138 126,834 112,266
Bad debt expense............... -- -- 5,887 --
Professional services.......... 7,277 5,282 20,636 17,114
Real estate taxes.............. 14,004 -- 23,578 --
State and other taxes.......... -- -- 10,520 9,503
Depreciation and amortization.. 71,349 52,536 187,745 157,609
--------- --------- ---------- ----------
135,903 94,956 375,200 296,492
--------- --------- ---------- ----------
Income Before Minority Interest
in Income of Consolidated Joint
Venture, Equity in Earnings in
Unconsolidated Joint Ventures
and Gain on Sale of Land,
Building and Net Investment in
Direct Financing Lease.......... 737,354 777,276 1,654,776 2,343,519
Minority Interest in Income of
Consolidated Joint Venture...... (2,337) (2,271) (6,592) (6,325)
Equity in Earnings of
Unconsolidated Joint Ventures... 76,163 71,523 213,432 204,167
Gain on Sale of Land, Building
and Net Investment in Direct
Financing Lease................. -- 132,238 171,159 132,238
--------- --------- ---------- ----------
Net Income....................... $ 811,180 $ 978,766 $2,032,775 $2,673,599
========= ========= ========== ==========
Allocation of Net Income:
General partners............... $ 8,112 $ 8,466 $ 18,616 $ 25,414
Limited partners............... 803,068 970,300 2,014,159 2,648,185
--------- --------- ---------- ----------
$ 811,180 $ 978,766 $2,032,775 $2,673,599
========= ========= ========== ==========
Net Income Per Limited Partner
Unit............................ $ 0.20 $ 0.24 $ 0.50 $ 0.66
========= ========= ========== ==========
Weighted Average Number of
Limited Partner Units
Outstanding..................... 4,000,000 4,000,000 4,000,000 4,000,000
========= ========= ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-260
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
General partners:
Beginning balance................................. $ 208,709 $ 174,718
Net income........................................ 18,616 33,991
----------- -----------
227,325 208,709
----------- -----------
Limited partners:
Beginning balance................................. 34,945,334 35,047,947
Net income........................................ 2,014,159 3,497,390
Distributions ($0.70 and $0.90 per limited partner
unit, respectively).............................. (2,780,003) (3,600,003)
----------- -----------
34,179,490 34,945,334
----------- -----------
Total partners' capital............................. $34,406,815 $35,154,043
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-261
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities............ $2,774,783 $2,748,032
---------- ----------
Cash Flows from Investing Activities:
Proceeds from sale of land and building............ 1,231,106 1,363,805
Increase in restricted cash........................ (1,140,970) (1,363,805)
---------- ----------
Net cash used in investing activities............ 90,136 --
---------- ----------
Cash Flows from Financing Activities:
Distributions to limited partners.................. (2,780,003) (2,740,001)
Distributions to holder of minority interest....... (6,613) (6,198)
---------- ----------
Net cash used in financing activities............ (2,786,616) (2,746,199)
---------- ----------
Net Increase in Cash and Cash Equivalents.............. 78,303 1,833
Cash and Cash Equivalents at Beginning of Period....... 1,583,883 1,769,483
---------- ----------
Cash and Cash Equivalents at End of Period............. $1,662,186 $1,771,316
---------- ----------
Supplemental Schedule of Non-Cash Investing and
Financing Activities
Net investment in direct financing leases
reclassified to land and building on operating
leases as a result of lease amendments.............. $2,024,000 $ --
---------- ----------
Distributions declared and unpaid at end of period... $ 900,001 $ 900,001
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-262
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, 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, 1997.
The Partnership accounts for its 88.26% interest in Allegan Real Estate
Joint Venture using the consolidation method. Minority interest represents the
minority joint venture partner's proportionate share of the equity in the
Partnership's consolidated joint venture. All significant intercompany accounts
and transactions have been eliminated.
Certain items in the prior year's financial statements have been
reclassified to conform to 1998 presentation. These reclassifications had no
effect on partners' capital or net income.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2. Land and Building on Operating Leases
In January 1998, the Partnership 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 $163,349 for financial reporting purposes.
This property was originally acquired by the Partnership in December 1991 and
had a cost of approximately $969,400, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Partnership sold the
property for approximately $261,300 in excess of its original purchase price.
In addition, 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 as a
deposit in 1995), resulting in a gain of $7,810 for financial reporting
purposes.
3. Net Investment in Direct Financing Leases
In March 1998, the Partnership sold its property in Sacramento, California,
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 2).
F-263
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
In August 1998, three of the Partnership's leases were amended. As a result,
the Partnership reclassified the leases 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.
4. Restricted Cash
As of September 30, 1998, the net sales proceeds of $1,230,672 from the sale
of the property in Sacramento, California, plus accrued interest of $29,594
were being held in an interest-bearing escrow account pending the release of
funds by the escrow agent to acquire an additional property.
5. Subsequent Event
In October 1998, the Partnership sold its 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.
In November 1998, the Partnership reinvested approximately $1,020,800 of the
net sales proceeds it received from the sale of the property in Sacramento,
California in a Jack in the Box property located in San Marcos, Texas. In
connection therewith, the Partnership entered into a long term, triple-net
lease with terms substantially the same as its other leases.
F-264
<PAGE>
Report of Independent Accountants
To the Partners
CNL Income Fund X, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund X, Ltd.
(a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. 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 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 Income Fund X, Ltd. as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
January 14, 1998
F-265
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
ASSETS
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation.............................. $15,709,899 $15,224,392
Net investment in direct financing leases.............. 13,460,125 14,219,805
Investment in joint ventures........................... 3,505,326 3,449,210
Cash and cash equivalents.............................. 1,583,883 1,769,483
Restricted cash........................................ 92,236 --
Receivables, less allowance for doubtful accounts of
$137,856 and $4,428................................... 123,903 52,470
Prepaid expenses....................................... 5,877 5,503
Accrued rental income, less allowance for doubtful
accounts of $117,593 and $88,781...................... 1,775,374 1,683,593
Other assets........................................... 33,104 33,104
----------- -----------
$36,289,727 $36,437,560
=========== ===========
<CAPTION>
LIABILITIES AND PARTNERS' CAPITAL
<S> <C> <C>
Accounts payable....................................... $ 6,033 $ 2,913
Escrowed real estate taxes payable..................... 27,784 45,060
Distributions payable.................................. 900,001 940,000
Due to related parties................................. 4,946 1,609
Rents paid in advance and deposits..................... 132,419 160,928
----------- -----------
Total liabilities.................................... 1,071,183 1,150,510
Commitments and Contingencies (Note 11)
Minority interest...................................... 64,501 64,385
Partners' capital...................................... 35,154,043 35,222,665
----------- -----------
$36,289,727 $36,437,560
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-266
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases..... $1,867,795 $1,832,781 $1,783,928
Earned income from direct financing
leases................................. 1,534,525 1,648,358 1,690,299
Contingent rental income................ 51,678 45,126 53,189
Interest and other income............... 88,853 75,896 89,630
---------- ---------- ----------
3,542,851 3,602,161 3,617,046
---------- ---------- ----------
Expenses:
General operating and administrative.... 153,672 166,049 150,157
Professional services................... 26,890 33,692 23,563
Real estate taxes....................... 9,703 -- --
State and other taxes................... 9,372 2,357 15,510
Depreciation and amortization........... 214,468 207,959 201,696
---------- ---------- ----------
414,105 410,057 390,926
---------- ---------- ----------
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.... 3,128,746 3,192,104 3,226,120
Minority Interest in Income of
Consolidated Joint Venture............... (8,522) (8,663) (9,066)
Equity in Earnings of Unconsolidated Joint
Ventures................................. 278,919 278,371 267,799
Gain on Sale of Land and Building......... 132,238 -- 67,214
---------- ---------- ----------
Net Income................................ $3,531,381 $3,461,812 $3,552,067
========== ========== ==========
Allocation of Net Income:
General partners........................ $ 33,991 $ 34,618 $ 35,491
Limited partners........................ 3,497,390 3,427,194 3,516,576
---------- ---------- ----------
$3,531,381 $3,461,812 $3,552,067
========== ========== ==========
Net Income per Limited Partner Unit....... $ 0.87 $ 0.86 $ 0.88
========== ========== ==========
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-267
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<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,
1994................... $1,000 $103,609 $40,000,000 $(10,083,130) $10,257,313 $(4,790,000) $35,488,792
Distributions to limited
partners ($0.91 per
limited partner unit).. -- -- -- (3,640,003) -- -- (3,640,003)
Net income.............. -- 35,491 -- -- 3,516,576 -- 3,552,067
------ -------- ----------- ------------ ----------- ----------- -----------
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
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-268
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows From Operating Activities:
Cash received from tenants........... $ 3,380,391 $ 3,491,064 $ 3,290,242
Distributions from unconsolidated
joint ventures...................... 353,207 354,648 341,527
Cash paid for expenses............... (190,902) (211,345) (177,007)
Interest received.................... 53,721 61,435 72,600
----------- ----------- -----------
Net cash provided by operating
activities......................... 3,596,417 3,695,802 3,527,362
----------- ----------- -----------
Cash Flows From Investing Activities:
Proceeds from sale of land and
building............................ 1,363,805 -- 1,057,386
Deposit received on contract for
sale of land........................ -- -- 69,000
Additions to land and buildings on
operating leases.................... (1,277,308) (978) (359,506)
Investment in direct financing
leases.............................. -- (1,542) (566,097)
Investment in joint venture.......... (130,404) (108,952) --
Increase in restricted cash.......... (89,702) -- --
----------- ----------- -----------
Net cash provided by (used in)
investing activities............... (133,609) (111,472) 200,783
----------- ----------- -----------
Cash Flows From Financing Activities:
Distributions to limited partners.... (3,640,002) (3,640,003) (3,700,003)
Distributions to holder of minority
interest............................ (8,406) (7,697) (7,998)
----------- ----------- -----------
Net cash used in financing activities.. (3,648,408) (3,647,700) (3,708,001)
----------- ----------- -----------
Net Increase (Decrease) in Cash and
Cash Equivalents...................... (185,600) (63,370) 20,144
Cash and Cash Equivalents at Beginning
of Year............................... 1,769,483 1,832,853 1,812,709
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year.................................. $ 1,583,883 $ 1,769,483 $ 1,832,853
=========== =========== ===========
Reconciliation of Net Income to Net
Cash Provided by Operating Activities:
Net income............................ $ 3,531,381 $ 3,461,812 $ 3,552,067
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation.......................... 214,468 206,497 199,696
Amortization.......................... -- 1,462 2,000
Minority interest in income of
consolidated joint venture........... 8,522 8,663 9,066
Equity in earnings of unconsolidated
joint ventures, net of
distributions........................ 74,288 75,898 73,630
Gain on sale of land and building..... (132,238) -- (67,214)
Decrease (increase) in receivables.... (71,222) 46,834 10,222
Increase in prepaid expenses.......... (374) (3,852) (664)
Decrease in net investment in direct
financing leases..................... 211,942 160,007 141,684
Increase in accrued rental income..... (201,022) (315,028) (309,574)
Increase (decrease) in accounts
payable and accrued expenses......... (14,156) 14,317 (1,057)
Increase (decrease) in due to related
parties.............................. 3,337 (5,395) 7,004
Increase (decrease) in rents paid in
advance and deposits................. (28,509) 44,587 (89,498)
----------- ----------- -----------
Total adjustments................... 65,036 233,990 (24,705)
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................ $ 3,596,417 $ 3,695,802 $ 3,527,362
=========== =========== ===========
Supplemental Schedule of Non-Cash
Financing Activities:
Distributions declared and unpaid at
December 31.......................... $ 900,001 $ 940,000 $ 940,000
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-269
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
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.
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.
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 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
F-270
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
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.
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 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.
F-271
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
3. Land and Buildings on Operating Leases
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Land............................................ $ 9,947,295 $ 9,926,720
Buildings....................................... 6,875,851 6,196,451
----------- -----------
16,823,146 16,123,171
Less accumulated depreciation................... (1,113,247) (898,779)
----------- -----------
$15,709,899 $15,224,392
=========== ===========
</TABLE>
In September 1997, the Partnership sold its 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 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.
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, 1997, 1996 and 1995, the Partnership recognized $201,021, $315,029 and
$309,574, 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, 1997:
<TABLE>
<S> <C>
1998.......................................................... $ 1,796,664
1999.......................................................... 1,817,764
2000.......................................................... 1,830,536
2001.......................................................... 1,875,201
2002.......................................................... 2,004,123
Thereafter.................................................... 16,727,751
-----------
$26,052,039
===========
</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>
1997 1996
----------- -----------
<S> <C> <C>
Minimum lease payments receivable............... $25,273,063 $27,990,876
Estimated residual values....................... 4,225,008 4,375,790
Less unearned income............................ (16,037,946) (18,146,861)
----------- -----------
Net investment in direct financing leases....... $13,460,125 $14,219,805
=========== ===========
</TABLE>
F-272
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
In September 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).
The following is a schedule of future minimum lease payments to be received
on the direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998.......................................................... $ 1,758,896
1999.......................................................... 1,761,323
2000.......................................................... 1,762,806
2001.......................................................... 1,770,249
2002.......................................................... 1,800,446
Thereafter.................................................... 16,419,343
-----------
$25,273,063
===========
</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, 1996, one of the Partnership's leases was
amended. As a result of the lease amendment, the Partnership reclassified this
lease from a direct financing lease to an operating lease, whereby the property
was recorded at its net carrying value of $567,923.
5. Investment in Joint Ventures
The Partnership has a 50 percent, a 10.51% and a 41 percent interest in the
profits and losses of CNL Restaurant Investments III, Ashland Joint Venture and
Williston 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 1996, the Partnership acquired and leased a property in Clinton,
North Carolina, 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, 1997, the Partnership owned a 13.37% interest in this property.
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, 1997, the Partnership owned a 6.69% interest in this property.
F-273
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
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
operator of national fast-food or family-style restaurants. The following
presents the joint ventures' combined, condensed financial information at
December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less accumulated
depreciation........................................... $9,573,341 $7,822,804
Net investment in direct financing lease................ 661,991 658,422
Cash.................................................... 8,197 1,750
Receivables............................................. 26,766 8,164
Prepaid expenses........................................ 22,852 21,910
Liabilities............................................. 7,415 1,094
Partners' capital....................................... 10,285,732 8,511,956
Revenues................................................ 930,470 916,897
Net income.............................................. 695,878 686,789
</TABLE>
The Partnership recognized income totalling $278,919, $278,371 and $267,799
for the years ended December 31, 1997, 1996 and 1995, 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.
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, 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 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.
During the year ended December 31, 1997, the Partnership declared
distributions to the limited partners of $3,600,003 and during each of the
years ended December 31, 1996 and 1995, the Partnership declared distributions
to the limited partners of $3,640,003. No distributions have been made to the
general partners to date.
F-274
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes................................. $3,531,381 $3,461,812 $3,552,067
Depreciation for tax reporting purposes in
excess of depreciation for financial
reporting purposes....................... (289,098) (298,518) (304,027)
Direct financing leases recorded as
operating leases for tax reporting
purposes................................. 211,942 160,007 141,684
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............. 15,294 10,839 12,592
Gain on sale of land and building for
financial reporting purposes in excess of
gain for tax reporting purposes.......... (42,996) -- (16,395)
Allowance for doubtful accounts........... 133,428 -- --
Accrued rental income..................... (201,022) (315,029) (309,574)
Rents paid in advance..................... (22,593) 45,447 (80,403)
Minority interest in timing differences of
consolidated joint venture............... 1,461 2,184 2,062
Other..................................... -- (7,738) 9,613
---------- ---------- ----------
Net income for federal income tax
purposes................................. $3,337,797 $3,059,004 $3,007,619
========== ========== ==========
</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 parent company of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, served
as president of CNL Fund Advisors, Inc. through October 1997. CNL Income Fund
Advisors, Inc. was a wholly owned subsidiary of CNL Group, Inc. until its
merger, effective January 1, 1996, with CNL Fund Advisors, Inc. During the
years ended December 31, 1997, 1996 and 1995, CNL Income Fund Advisors, Inc.
and CNL Fund Advisors, Inc. (hereinafter referred to collectively as the
"Affiliates") each performed certain services for the Partnership, as described
below.
During the years ended December 31, 1997, 1996 and 1995, certain 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 Affiliates 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, 1997, 1996 and 1995.
Certain Affiliates are 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 Affiliates provide 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
F-275
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
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, 1997, 1996 and 1995, the Affiliates
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $87,967, $94,496 and $76,108 for the years
ended December 31, 1997, 1996 and 1995, respectively, for such services.
The due to related parties at December 31, 1997 and 1996, totalled $4,946
and $1,609, respectively.
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.
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 at least one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Foodmaker, Inc............................... $646,477 $684,277 $686,417
Flagstar Enterprises, Inc. and Denny's,
Inc......................................... 602,913 668,919 674,611
Golden Corral Corporation.................... 548,399 568,164 567,654
</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 at least one of
the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Burger King................................... $777,378 $714,792 $721,870
Jack in the Box............................... 646,477 684,277 686,417
Golden Corral Family Steakhouse Restaurants... 548,399 568,164 567,654
Shoney's...................................... 441,052 439,330 354,457
Hardees....................................... 403,882 468,037 471,507
Perkins....................................... 336,983 393,046 449,149
</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. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
F-276
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
11. Commitments and Contingencies
In October 1995, the tenant of the Partnership's 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, from the subtenant, to the Partnership.
As of December 31, 1997, the sale for the vacant parcel of land had not been
consummated and as a result, the net proceeds of $68,000 (representing the
original $69,000 received by the Partnership, less $1,000 in costs incurred in
anticipation of the sale) were recorded as a deposit at December 31, 1997. The
contract price of $69,000 exceeds the Partnership's cost attributable to the
parcel of land.
12. Subsequent Events
During 1997, the Partnership entered into a contract to sell the property in
Sacramento, California to the tenant. In January 1998, the Partnership sold
this property for $1,250,000 and received net sales proceeds of $1,234,175,
resulting in a gain of approximately $163,300 for financial reporting purposes.
The Partnership intends to reinvest the net sales proceeds in a replacement
property.
F-277
<PAGE>
CNL INCOME FUND XI, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997.. F-279
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997............................................. F-280
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997 ............ F-281
Condensed Statements of Cash Flows for the Nine Months Ended September
30, 1998 and 1997....................................................... F-282
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997 ...................................... F-283
Report of Independent Accountants........................................ F-284
Balance Sheets as of December 31, 1997 and 1996.......................... F-285
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-286
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995........................................................... F-287
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-288
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and 1995................................................................ F-289
</TABLE>
F-278
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September December 31,
30, 1998 1997
----------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $2,799,124 and
$2,455,129............................................ $23,217,022 $23,561,017
Net investment in direct financing leases.............. 6,539,506 6,611,661
Investment in joint ventures........................... 2,528,168 2,567,786
Cash and cash equivalents.............................. 1,492,088 1,272,386
Receivables, less allowance for doubtful accounts of
$20,283 in 1998 ...................................... 28,202 119,575
Prepaid expenses....................................... 14,612 13,363
Accrued rental income.................................. 1,607,969 1,517,726
Other assets........................................... 122,024 122,024
----------- -----------
$35,549,591 $35,785,538
=========== ===========
<CAPTION>
LIABILITIES AND PARTNERS' CAPITAL
<S> <C> <C>
Accounts payable....................................... $ 4,393 $ 6,508
Escrowed real estate taxes payable..................... 24,764 19,410
Distributions payable.................................. 875,006 875,006
Due to related parties................................. 5,263 6,648
Rents paid in advance and deposits..................... 69,832 68,333
----------- -----------
Total liabilities.................................... 979,258 975,905
Minority interest...................................... 501,915 501,401
Partners' capital...................................... 34,068,418 34,308,232
----------- -----------
$35,549,591 $35,785,538
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-279
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
-------------------- ----------------------
1998 1997 1998 1997
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases........................ $ 672,887 $ 675,491 $2,023,869 $2,026,676
Earned income from direct
financing leases.............. 195,141 208,391 608,546 629,142
Contingent rental income....... 50,903 46,040 113,667 115,123
Interest and other income...... 16,421 25,999 114,469 53,455
--------- --------- ---------- ----------
935,352 955,921 2,860,551 2,824,396
--------- --------- ---------- ----------
Expenses:
General operating and
administrative................ 43,130 36,804 117,587 111,662
Professional services.......... 9,699 6,046 23,892 23,451
Management fees to related
parties....................... 9,923 9,327 28,975 27,575
Real estate taxes.............. 2,179 -- 2,179 --
State and other taxes.......... -- -- 24,370 25,779
Depreciation and amortization.. 114,665 114,665 343,995 344,584
--------- --------- ---------- ----------
179,596 166,842 540,998 533,051
--------- --------- ---------- ----------
Income Before Minority Interest
in Income of Consolidated Joint
Ventures and Equity in Earnings
of Unconsolidated Joint
Ventures........................ 755,756 789,079 2,319,553 2,291,345
Minority Interest in Income of
Consolidated Joint Ventures..... (16,760) (17,628) (50,684) (52,226)
Equity in Earnings of
Unconsolidated Joint Ventures... 58,730 58,782 156,335 163,945
--------- --------- ---------- ----------
Net Income....................... $ 797,726 $ 830,233 $2,425,204 $2,403,064
========= ========= ========== ==========
Allocation of Net Income:
General partners............... $ 7,977 $ 8,303 $ 24,252 $ 24,031
Limited partners............... 789,749 821,930 2,400,952 2,379,033
--------- --------- ---------- ----------
$ 797,726 $ 830,233 $2,425,204 $2,403,064
========= ========= ========== ==========
Net Income Per Limited Partner
Unit............................ $ 0.20 $ 0.21 $ 0.60 $ 0.59
========= ========= ========== ==========
Weighted Average Number of
Limited Partner Units
Outstanding..................... 4,000,000 4,000,000 4,000,000 4,000,000
========= ========= ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-280
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
General partners:
Beginning balance................................. $ 176,232 $ 143,281
Net income........................................ 24,252 32,951
----------- -----------
200,484 176,232
----------- -----------
Limited partners:
Beginning balance................................. 34,132,000 34,369,896
Net income........................................ 2,400,952 3,262,128
Distributions ($0.67 and $0.88 limited partner
unit, respectively).............................. (2,665,018) (3,500,024)
----------- -----------
33,867,934 34,132,000
----------- -----------
Total partners' capital............................. $34,068,418 $34,308,232
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-281
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities............ $2,934,890 $2,743,042
---------- ----------
Cash Flows from Investing Activities:
Investment in joint ventures....................... -- (1,044,750)
Decrease in restricted cash........................ -- 1,044,750
---------- ----------
Net cash provided by investing activities........ -- --
---------- ----------
Cash Flows from Financing Activities:
Distributions to limited partners.................. (2,665,018) (2,665,018)
Distributions to holders of minority interests..... (50,170) (41,783)
---------- ----------
Net cash used in financing activities............ (2,715,188) (2,706,801)
---------- ----------
Net Increase in Cash and Cash Equivalents.............. 219,702 36,241
Cash and Cash Equivalents at Beginning of Period....... 1,272,386 1,225,860
---------- ----------
Cash and Cash Equivalents at End of Period............. $1,492,088 $1,262,101
========== ==========
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Land and building under operating lease exchanged for
land and building under operating lease............. $ 850,381 $ --
========== ==========
Distributions declared and unpaid at end of period... $ 875,006 $ 875,006
========== ==========
</TABLE>
See accompanying notes to financial statements
F-282
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, 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, 1997.
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.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2. Land and Building on Operating Leases
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.
3. Subsequent Event
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 $461,862 for financial reporting purposes.
F-283
<PAGE>
Report of Independent Accountants
To the Partners
CNL Income Fund XI, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund XI, Ltd.
(a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. 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 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 Income Fund XI, Ltd. as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
January 16, 1998
F-284
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
ASSETS
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation............................. $23,561,017 $24,019,677
Net investment in direct financing leases............. 6,611,661 6,686,367
Investment in joint ventures.......................... 2,567,786 1,537,430
Cash and cash equivalents............................. 1,272,386 1,225,860
Restricted cash....................................... -- 1,047,822
Receivables, less allowance for doubtful accounts
$14,746 in 1996...................................... 119,575 92,546
Prepaid expenses...................................... 13,363 13,227
Organization costs, less accumulated amortization of
$10,000 and $9,411................................... -- 589
Accrued rental income................................. 1,517,726 1,257,503
Other assets.......................................... 122,024 122,024
----------- -----------
$35,785,538 $36,003,045
=========== ===========
<CAPTION>
LIABILITIES AND PARTNERS CAPITAL
<S> <C> <C>
Accounts payable...................................... $ 6,508 $ 2,202
Escrowed real estate taxes payable.................... 19,410 21,573
Distributions payable................................. 875,006 915,006
Due to related parties................................ 6,648 2,121
Rents paid in advance and deposits.................... 68,333 61,196
----------- -----------
Total liabilities................................... 975,905 1,002,098
Commitment (Note 11)
Minority interests.................................... 501,401 487,770
Partners' capital..................................... 34,308,232 34,513,177
----------- -----------
$35,785,538 $36,003,045
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-285
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases...... $2,702,558 $2,765,327 $2,774,204
Earned income from direct financing
leases.................................. 841,426 850,650 835,181
Contingent rental income................. 225,888 251,312 200,198
Interest and other income................ 62,440 61,403 62,599
---------- ---------- ----------
3,832,312 3,928,692 3,872,182
---------- ---------- ----------
Expenses:
General operating and administrative..... 148,380 164,642 135,605
Professional services.................... 32,077 30,984 22,995
Management fees to related parties....... 37,974 37,293 36,930
State and other taxes.................... 25,779 14,650 41,596
Depreciation and amortization............ 459,249 478,198 481,226
---------- ---------- ----------
703,459 725,767 718,352
---------- ---------- ----------
Income Before Minority Interests in Income
of Consolidated Joint Ventures, Equity in
Earnings of Unconsolidated Joint Ventures
and Gain on Sale of Land and Building..... 3,128,853 3,202,925 3,153,830
Minority Interests in Income of
Consolidated Joint Ventures............... (69,877) (70,116) (70,038)
Equity in Earnings of Unconsolidated Joint
Ventures.................................. 236,103 118,211 118,384
Gain on Sale of Land and Building.......... -- 213,685 --
---------- ---------- ----------
Net Income................................. $3,295,079 $3,464,705 $3,202,176
========== ========== ==========
Allocation of Net Income:
General partners......................... $ 32,951 $ 33,356 $ 32,021
Limited partners......................... 3,262,128 3,431,349 3,170,155
---------- ---------- ----------
$3,295,079 $3,464,705 $3,202,176
========== ========== ==========
Net Income Per Limited Partner Unit........ $ 0.82 $ 0.86 $ 0.79
========== ========== ==========
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-286
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<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,
1994................... $1,000 $ 76,904 $40,000,000 $ (7,975,039) $ 7,613,478 $(4,790,000) $ 34,926,343
Distributions to
limited partners
($0.89 per limited
partner unit)......... -- -- -- (3,540,023) -- -- (3,540,023)
Net income............. -- 32,021 -- -- 3,170,155 -- 3,202,176
------ -------- ----------- ------------ ----------- ----------- ------------
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) $34,30 8,232
====== ======== =========== ============ =========== =========== ============
</TABLE>
See accompanying notes to financial statements.
F-287
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash received from tenants............. $ 3,585,979 $ 3,657,138 $ 3,693,039
Distributions from unconsolidated
joint ventures........................ 250,497 148,375 141,377
Cash paid for expenses................. (237,312) (251,408) (233,423)
Interest received...................... 43,632 47,609 51,192
----------- ----------- -----------
Net cash provided by operating
activities.......................... 3,642,796 3,601,714 3,652,185
----------- ----------- -----------
Cash Flows From Investing Activities:
Proceeds from sale of land and
building.............................. -- 1,044,750 --
Investment in joint venture............ (1,044,750) -- --
Decrease (increase) in restricted
cash.................................. 1,044,750 (1,044,750) --
----------- ----------- -----------
Net cash provided by investing
activities.......................... -- -- --
----------- ----------- -----------
Cash Flows From Financing Activities:
Distributions to limited partners...... (3,540,024) (3,540,024) (3,500,023)
Distributions to holders of minority
interests............................. (56,246) (58,718) (54,227)
----------- ----------- -----------
Net cash used in financing
activities.......................... (3,596,270) (3,598,742) (3,554,250)
----------- ----------- -----------
Net Increase in Cash and Cash
Equivalents............................ 46,526 2,972 97,935
Cash and Cash Equivalents at Beginning
of Year................................ 1,225,860 1,222,888 1,124,953
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 1,272,386 $ 1,225,860 $ 1,222,888
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................. $ 3,295,079 $ 3,464,705 $ 3,202,176
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation......................... 458,660 476,198 479,226
Amortization......................... 589 2,000 2,000
Gain on sale of land building........ -- (213,685) --
Minority interests in income of
consolidated joint ventures......... 69,877 70,116 70,038
Equity in earnings of unconsolidated
joint ventures, net of
distributions....................... 14,394 30,164 22,993
Decrease (increase) in receivables... (23,957) 25,855 58,262
Decrease (increase) in prepaid
expenses............................ (136) 151 (1,003)
Decrease in net investment in direct
financing leases.................... 74,706 62,366 55,203
Increase in accrued rental income.... (260,223) (296,439) (269,953)
Increase (decrease) in accounts
payable and accrued expenses........ 2,143 4,280 (28,847)
Increase (decrease) in due to related
parties............................. 4,527 (4,386) 5,106
Increase (decrease) in rents paid in
advance and deposits................ 7,137 (19,611) 56,984
----------- ----------- -----------
Total adjustments.................... 347,717 137,009 450,009
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. $ 3,642,796 $ 3,601,714 $ 3,652,185
=========== =========== ===========
Supplemental Schedule of Non-Cash
Financing Activities:
Distributions declared and unpaid at
December 31........................... $ 875,006 $ 915,006 $ 915,006
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-288
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
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.
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.
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 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-289
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
Organization Costs--Organization costs are 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 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 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.
F-290
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. Land and Buildings on Operating Leases
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Land............................................ $12,269,964 $12,269,964
Buildings....................................... 13,746,182 13,746,182
----------- -----------
26,016,146 26,016,146
Less accumulated depreciation................... (2,455,129) (1,996,469)
----------- -----------
$23,561,017 $24,019,677
=========== ===========
</TABLE>
In November 1996, the Partnership sold its 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 property
was originally acquired by the Partnership in September 1992, and had a cost of
approximately $877,900, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $166,900 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, 1997, 1996 and 1995, the Partnership recognized $260,223, $296,439 and
$269,953, 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, 1997:
<TABLE>
<S> <C>
1998.......................................................... $ 2,584,403
1999.......................................................... 2,592,664
2000.......................................................... 2,592,664
2001.......................................................... 2,601,669
2002.......................................................... 2,650,408
Thereafter.................................................... 19,991,002
-----------
$33,012,810
===========
</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>
1997 1996
----------- -----------
<S> <C> <C>
Minimum lease payments receivable............... $13,834,907 $14,744,153
Estimated residual values....................... 2,144,114 2,144,114
Less unearned income............................ (9,367,360) (10,201,900)
----------- -----------
Net investment in direct financing leases....... $ 6,611,661 $ 6,686,367
=========== ===========
</TABLE>
F-291
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following is a schedule of future minimum lease payments to be received
on the direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998.......................................................... $ 921,552
1999.......................................................... 921,552
2000.......................................................... 921,552
2001.......................................................... 921,552
2002.......................................................... 926,847
Thereafter.................................................... 9,221,852
-----------
$13,834,907
===========
</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 72.5% 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.
Ashland Joint Venture, Des Moines 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 restaurants. The following
presents the joint ventures' combined, condensed financial information at
December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less accumulated
depreciation........................................... $3,511,507 $2,152,524
Cash.................................................... 621 722
Receivables............................................. 21,638 --
Prepaid expenses........................................ 6,939 6,606
Accrued rental income................................... 99,429 59,917
Liabilities............................................. 466 343
Partners' capital....................................... 3,639,668 2,219,426
Revenues................................................ 430,923 239,454
Net income.............................................. 334,962 169,376
</TABLE>
The Partnership recognized income totalling $236,103, $118,211 and $118,384
for the years ended December 31, 1997, 1996 and 1995, respectively, from these
joint ventures.
6. Restricted Cash
As of December 31, 1996, the net sales proceeds of $1,044,750 from the sale
of the property in Philadelphia, Pennsylvania, 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 property. In January 1997
these proceeds were reinvested in a Black-eyed Pea property in Corpus Christi,
Texas, as tenants-in-common with an affiliate of the general partners (see Note
5).
F-292
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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, 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 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.
During the years ended December 31, 1997, 1996 and 1995, the Partnership
declared distributions to the limited partners of $3,500,024, $3,540,024 and
$3,540,023, 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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes................................. $3,295,079 $3,464,705 $3,202,176
Depreciation for tax reporting purposes in
excess of depreciation for financial
reporting purposes....................... (43,077) (39,035) (37,935)
Gain on sale of land and building for
financial reporting purposes in excess of
gain for tax reporting purposes.......... -- (213,685) --
Direct financing leases recorded as
operating leases for tax reporting
purposes................................. 74,706 62,366 55,203
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....................... (13,296) (606) (7,207)
Accrued rental income..................... (260,223) (296,439) (269,953)
Rents paid in advance..................... 22,436 (19,611) 11,087
Minority interests in timing differences
of consolidated joint ventures........... 14,430 15,933 17,613
Other..................................... (14,746) (8,114) 14,237
---------- ---------- ----------
Net income for federal income tax
purposes................................. $3,075,309 $2,965,514 $2,985,221
========== ========== ==========
</TABLE>
F-293
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 parent company of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, served
as president of CNL Fund Advisors, Inc. through October 1997. CNL Income Fund
Advisors, Inc. was a wholly owned subsidiary of CNL Group, Inc. until its
merger, effective January 1, 1996, with CNL Fund Advisors, Inc. During the
years ended December 31, 1997, 1996 and 1995, CNL Income Fund Advisors, Inc.
and CNL Fund Advisors, Inc. (hereinafter referred to collectively as the
"Affiliates") each performed certain services for the Partnership as described
below.
During the years ended December 31, 1997, 1996 and 1995, certain 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 Affiliates 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 Affiliates. The Partnership incurred management fees of
$37,974, $37,293 and $36,930 for the years ended December 31, 1997, 1996 and
1995, respectively.
Certain Affiliates are 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 Affiliates provide 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, 1997, 1996 and 1995, Affiliates provided
accounting and administrative services to the Partnership on a day-to-day
basis. The Partnership incurred $88,667, $95,845 and $69,156 for the years
ended December 31, 1997, 1996 and 1995, respectively, for such services.
The due to related parties at December 31, 1997 and 1996, totalled $6,648
and $2,121, respectively.
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.
F-294
<PAGE>
CNL INCOME FUND XI, LTD.
(A Limited Florida Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 at lease one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Flagstar Enterprises, Inc., Denny's, Inc. and
Quincy's Restaurants, Inc......................... $780,502 $774,347 $785,556
Foodmaker, Inc..................................... 768,032 768,032 768,032
Burger King Corporation and BK Acquisition, Inc.... 733,620 712,334 712,334
Golden Corral Corporation.......................... 538,871 538,355 529,854
DenAmerica Corporation............................. 489,623 381,129 --
</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
and the property held as tenants-in-common with an affiliate of the general
partners), for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Burger King................................... $1,198,027 $1,271,606 $1,237,483
Jack in the Box............................... 768,032 768,032 768,032
Denny's....................................... 854,141 747,341 821,011
Golden Corral Family Steakhouse Restaurants... 538,871 538,355 529,854
</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. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
11. Commitment
During 1996, the Partnership entered into an agreement with an unrelated
third party to sell the Burger King property in Nashua, New Hampshire. The
general partners believe that the anticipated sales price will exceed the
Partnership's cost attributable to the property; however, as of January 16,
1998, the sale had not occurred.
F-295
<PAGE>
CNL INCOME FUND XII, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31,
1997.................................................................... F-297
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997............................................. F-298
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997............. F-299
Condensed Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997............................................. F-300
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997....................................... F-301
Report of Independent Accountants....................................... F-303
Balance Sheets as of December 31, 1997 and 1996......................... F-304
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-305
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995........................................................... F-306
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-307
Notes to Financial Statements for the Years Ended December 31, 1997,
1996 and 1995........................................................... F-308
</TABLE>
F-296
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September December 31,
30, 1998 1997
----------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $1,711,620 and
$1,460,887........................................... $21,589,219 $ 20,820,279
Net investment in direct financing leases............. 12,503,960 13,656,265
Investment in joint ventures.......................... 2,532,807 2,517,421
Cash and cash equivalents............................. 1,785,128 1,706,415
Receivables, less allowance for doubtful accounts
of $225,482 and $7,482............................... 346 202,472
Prepaid expenses...................................... 12,177 7,216
Lease costs, less accumulated amortization
of $2,759 and $1,307................................. 26,794 24,746
Accrued rental income, less allowance for doubtful
accounts
of $5,182 in 1998.................................... 2,475,477 2,496,176
----------- ------------
$40,925,908 $ 41,430,990
=========== ============
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 8,312 $ 10,558
Accrued and escrowed real estate taxes payable........ 50,296 3,244
Distributions payable................................. 956,252 956,252
Due to related parties................................ 6,222 6,887
Rents paid in advance and deposits.................... 34,800 36,737
----------- ------------
Total liabilities................................... 1,055,882 1,013,678
----------- ------------
Partners' capital..................................... 39,870,026 40,417,312
----------- ------------
$40,925,908 $ 41,430,990
=========== ============
</TABLE>
See accompanying notes to financial statements.
F-297
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
------------------- ----------------------
1998 1997 1998 1997
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases........................... $ 592,290 $ 621,234 $1,877,428 $1,829,206
Adjustments to accrued rental
income........................... -- -- (224,867) --
Earned income from direct
financing leases................. 371,635 409,932 1,170,186 1,231,855
Contingent rental income.......... 6,038 11,036 19,755 36,999
Interest and other income......... 7,031 18,420 51,713 59,394
--------- --------- ---------- ----------
976,994 1,060,622 2,894,215 3,157,454
--------- --------- ---------- ----------
Expenses:
General operating and
administrative................... 46,999 38,390 113,005 119,166
Professional services............. 6,630 6,837 19,616 18,999
Bad debt expense.................. 104,323 -- 188,990 --
Management fees to related
parties.......................... 10,320 10,041 31,871 30,005
Real estate taxes................. 33,877 542 35,029 1,952
State and other taxes............. -- -- 17,653 18,496
Depreciation and amortization..... 92,113 80,459 252,185 240,010
--------- --------- ---------- ----------
294,262 136,269 658,349 428,628
--------- --------- ---------- ----------
Income Before Equity in Earnings of
Joint Ventures..................... 682,732 924,353 2,235,866 2,728,826
Equity in Earnings of Joint
Ventures........................... 63,712 71,230 85,604 212,586
--------- --------- ---------- ----------
Net Income.......................... $ 746,444 $ 995,583 $2,321,470 $2,941,412
========= ========= ========== ==========
Allocation of Net Income:
General partners.................. $ 7,465 $ 9,956 $ 23,215 $ 29,414
Limited partners.................. 738,979 985,627 2,298,255 2,911,998
--------- --------- ---------- ----------
$ 746,444 $ 995,583 $2,321,470 $2,941,412
========= ========= ========== ==========
Net Income Per Limited Partner
Unit............................... $ 0.16 $ 0.22 $ 0.51 $ 0.65
========= ========= ========== ==========
Weighted Average Number of Limited
Partner Units Outstanding.......... 4,500,000 4,500,000 4,500,000 4,500,000
========= ========= ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-298
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1998 1997
----------------- ------------
<S> <C> <C>
General partners:
Beginning balance............................. $ 192,411 $ 152,889
Net income.................................... 23,215 39,522
----------- -----------
215,626 192,411
----------- -----------
Limited partners:
Beginning balance............................. 40,224,901 40,137,217
Net income.................................... 2,298,255 3,912,692
Distributions ($0.64 and $0.85 per limited
partner
unit, respectively).......................... (2,868,756) (3,825,008)
----------- -----------
39,654,400 40,224,901
----------- -----------
Total partners' capital..................... $39,870,026 $40,417,312
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-299
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------
1998 1997
----------- ----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities........... $ 3,066,225 $2,955,295
Cash Flows from Investing Activities:
Additions to land and buildings on operating
leases........................................... -- (55,000)
Investment in joint ventures...................... (115,256) --
Collections on loan to tenant of joint Venture.... -- 4,886
Payment of lease costs............................ (3,500) (24,052)
----------- ----------
Net cash used in investing activities........... (118,756) (74,166)
----------- ----------
Cash Flows from Financing Activities:
Distributions to limited partners................. (2,868,756) (2,868,756)
----------- ----------
Net cash used in financing Activities........... (2,868,456) (2,868,756)
----------- ----------
Net Increase in Cash and Cash Equivalents............. 78,713 12,373
Cash and Cash Equivalents at Beginning of Period...... 1,706,415 1,800,601
----------- ----------
Cash and Cash Equivalents at End of Period............ $ 1,785,128 $1,812,974
----------- ----------
Supplemental Schedule of Non-Cash Investing
and Financing Activities:
Net investment in direct financing leases
reclassified to land and buildings on operating
leases as a result of lease termination............ $ 1,019,673 $ --
----------- ----------
Distributions declared and unpaid at end of Period.. $ 956,252 $ 956,252
=========== ==========
</TABLE>
See accompanying notes to financial statements.
F-300
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine months Ended September 30, 1998 and 1997
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 nine months ended September 30, 1998, may not be
indicative of the results that may be expected for the year ending December 31,
1998. Amounts as of December 31, 1997, 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, 1997.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2. Net Investment in Direct Financing Leases
During the nine months ended September 30, 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 amount. No loss on termination of direct financing leases was
recorded for financial reporting purposes.
3. 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 September 30, 1998, the Partnership had
contributed $115,256, to purchase land and pay construction costs relating to
the joint venture. The Partnership has agreed to contribute approximately
$156,763 in additional construction costs to the joint venture. The Partnership
will 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.
F-301
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
Des Moines Real Estate Joint Venture, Williston 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 and family-style restaurants. The following presents the combined,
condensed financial information for the joint ventures at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation and allowance for
loss on land.................................. $2,127,389 $1,768,636
Net investment in direct financing leases, less
allowance on impairment....................... 2,227,673 2,446,688
Cash........................................... 10,846 6,893
Receivables.................................... 21,639 13,843
Accrued rental income.......................... 156,934 157,252
Other assets................................... 284 443
Liabilities.................................... 94,941 7,673
Partners' capital.............................. 4,449,824 4,386,082
Revenues....................................... 287,596 481,085
Net income (loss).............................. (57,592) 446,047
</TABLE>
The Partnership recognized income totaling $85,604 and $212,586 for the nine
months ended September 30, 1998 and 1997, respectively, from these properties,
$63,712 and $71,230 of which was earned for the quarters ended September 30,
1998 and 1997, respectively.
F-302
<PAGE>
Report of Independent Accountants
To the Partners
CNL Income Fund XII, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund XII, Ltd.
(a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. 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 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 Income Fund XII, Ltd.
as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
January 23, 1998
F-303
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation............................. $20,820,279 $21,082,468
Net investment in direct financing leases............. 13,656,265 13,789,036
Investment in joint ventures.......................... 2,517,421 2,496,749
Cash and cash equivalents............................. 1,706,415 1,800,601
Receivables, less allowance for doubtful accounts of
$7,482 and $23,395................................... 202,472 202,908
Prepaid expenses...................................... 7,216 6,786
Organization costs, less accumulated amortization of
$10,000 and $8,465................................... -- 1,535
Lease costs, less accumulated amortization of $1,307
in 1997.............................................. 24,746 --
Accrued rental income................................. 2,496,176 1,963,055
----------- -----------
$41,430,990 $41,343,138
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 10,558 $ 9,303
Accrued and escrowed real estate taxes payable........ 3,244 14,706
Distributions payable................................. 956,252 956,252
Due to related parties................................ 6,887 2,981
Rents paid in advance................................. 36,737 69,790
----------- -----------
Total liabilities................................... 1,013,678 1,053,032
Partners' capital..................................... 40,417,312 40,290,106
----------- -----------
$41,430,990 $41,343,138
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-304
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases....... $2,455,312 $2,473,574 $2,599,899
Earned income from direct financing
leases................................... 1,647,530 1,692,066 1,730,201
Contingent rental income.................. 54,330 67,652 70,819
Interest and other income................. 87,719 119,267 88,070
---------- ---------- ----------
4,244,891 4,352,559 4,488,989
---------- ---------- ----------
Expenses:
General operating and administrative...... 162,593 173,614 141,271
Professional services..................... 28,665 39,121 27,680
Management fees to related parties........ 40,218 40,244 40,774
Real estate taxes......................... -- 7,891 --
State and other taxes..................... 18,496 18,471 18,679
Depreciation and amortization............. 320,030 315,319 327,795
---------- ---------- ----------
570,002 594,660 556,199
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Ventures and Loss on Sale of Land and
Building................................... 3,674,889 3,757,899 3,932,790
Equity in Earnings of Joint Ventures........ 277,325 200,499 81,582
Loss on Sale of Land and Building........... -- (15,3550) --
---------- ---------- ----------
Net Income.................................. $3,952,214 $3,943,043 $4,014,372
========== ========== ==========
Allocation of Net Income:
General partners.......................... $ 39,522 $ 39,533 $ 40,144
Limited partners.......................... 3,912,692 3,903,510 3,974,228
---------- ---------- ----------
$3,952,214 $3,943,043 $4,014,372
========== ========== ==========
Net Income Per Limited Partner Unit......... $ 0.87 $ 0.87 $ 0.88
========== ========== ==========
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-305
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Limited Partners General Partners
------------------------- ----------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Distributions Earnings Costs Total
------------- ----------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994................... $1,000 $ 72,212 $45,000,000 $ (6,820,012) $ 7,149,050 $(5,374,544) $40,027,706
Distributions to limited
partners ($0.86 per
limited partner unit).. -- -- -- (3,870,007) -- -- (3,870,007)
Net income.............. -- 40,144 -- -- 3,974,228 -- 4,014,372
------ -------- ----------- ------------ ----------- ----------- -----------
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
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-306
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and
Cash Equivalents:
Cash Flows From Operating Activities:
Cash received from tenants............... $3,736,731 $3,951,047 $3,878,623
Distributions from joint ventures........ 256,653 190,596 80,633
Cash paid for expenses................... (252,145) (278,240) (224,091)
Interest received........................ 65,749 88,286 84,197
---------- ---------- ----------
Net cash provided by Operating
activities............................ 3,806,988 3,951,689 3,819,362
---------- ---------- ----------
Cash Flows From Investing Activities:
Proceeds from sale of land and building.. -- 1,640,000 --
Additions to land and buildings on
operating leases........................ (55,000) -- --
Investment in joint ventures............. -- (1,645,024) --
Collections on loan to tenant of joint
venture................................. 4,886 7,741 7,008
Payment of lease costs................... (26,052) -- --
---------- ---------- ----------
Net cash provided by (used in)
investing activities.................. (76,166) 2,717 7,008
---------- ---------- ----------
Cash Flows From Financing Activities:
Distributions to limited partners........ (3,825,008) (3,870,008) (3,825,007)
---------- ---------- ----------
Net cash used in financing activities.. (3,825,008) (3,870,008) (3,825,007)
---------- ---------- ----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................... (94,186) 84,398 1,363
Cash and Cash Equivalents at Beginning of
Year...................................... 1,800,601 1,716,203 1,714,840
---------- ---------- ----------
Cash and Cash Equivalents at End of Year... $1,706,415 $1,800,601 $1,716,203
========== ========== ==========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................... $3,952,214 $3,943,043 $4,014,372
---------- ---------- ----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation............................. 317,189 313,319 325,795
Amortization............................. 2,841 2,000 2,000
Equity in earnings of joint ventures, net
of distributions........................ (20,672) (9,903) (949)
Loss on sale of land and building........ -- 15,355 --
Decrease (increase) in receivables....... (4,450) 48,671 (24,836)
Decrease in net investment in direct
financing leases........................ 132,771 121,597 111,675
Increase in prepaid expenses............. (430) (4,862) (1,924)
Increase in accrued rental income........ (533,121) (518,502) (519,365)
Increase (decrease) in accounts payable
and accrued expenses.................... (10,207) 8,745 (9,623)
Increase (decrease) in due to related
parties................................. 3,906 (4,269) 7,055
Increase (decrease) in rents paid in
advance................................. (33,053) 36,495 (84,838)
---------- ---------- ----------
Total adjustments...................... (145,226) 8,646 (195,010)
---------- ---------- ----------
Net Cash Provided by Operating Activities.. $3,806,988 $3,951,689 $3,819,362
========== ========== ==========
Supplemental Schedule of Non-Cash Financing
Activities:
Distributions declared and unpaid at
December 31............................... $ 956,252 $ 956,252 $1,001,252
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-307
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
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.
When the properties are sold, the related cost and accumulated depreciation
for operating leases and the net investment for direct financing leases, plus
any accrued rental income, are removed from the accounts and gains or losses
from sales are reflected in income. The general partners of the Partnership
review properties for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable through
operations. The general partners determine whether an impairment in value has
occurred by comparing the estimated future undiscounted cash flows, including
the residual value of the property, with the carrying cost of the individual
property. If an impairment is indicated, the assets are adjusted to their fair
values.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, 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-308
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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 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.
Organization Costs--Organization costs are amortized over five years using
the straight-line method.
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, 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-309
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
3. Land and Buildings on Operating Leases
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Land............................................... $12,837,754 $12,837,754
Buildings.......................................... 9,443,412 9,388,412
----------- -----------
22,281,166 22,226,166
Less accumulated depreciation...................... (1,460,887) (1,143,698)
----------- -----------
$20,820,279 $21,082,468
=========== ===========
</TABLE>
In April 1996, the Partnership sold its property in Houston, Texas, to an
unrelated third party for $1,640,000. As a result of this transaction, the
Partnership recognized a loss of $15,355 for financial reporting purposes
primarily due to acquisition fees and miscellaneous acquisition expenses that
the Partnership had allocated to this property.
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 during the year ended December 31, 1997. The renovations were
completed in May 1997.
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, 1997, 1996 and 1995, the Partnership recognized $533,121, $518,502 and
$519,365, respectively, of such rental income.
F-310
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1997:
<TABLE>
<S> <C>
1998............................................................. $ 2,230,885
1999............................................................. 2,281,192
2000............................................................. 2,283,628
2001............................................................. 2,293,570
2002............................................................. 2,313,592
Thereafter....................................................... 25,464,039
-----------
$36,866,906
===========
</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>
1997 1996
----------- -----------
<S> <C> <C>
Minimum lease payments receivable.................. $28,413,665 $30,188,147
Estimated residual Values.......................... 4,190,941 4,190,941
Less unearned income............................... (18,948,341) (20,590,052)
----------- -----------
Net investment in direct financing leases.......... $13,656,265 $13,789,036
=========== ===========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998............................................................. $ 1,810,632
1999............................................................. 1,818,830
2000............................................................. 1,818,830
2001............................................................. 1,818,830
2002............................................................. 1,818,830
Thereafter....................................................... 19,327,713
-----------
$28,413,665
===========
</TABLE>
F-311
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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, 1996, one of the Partnership's leases was
terminated. As a result of the lease termination, the Partnership reclassified
this lease from a direct financing lease to an operating lease, whereby the
property was recorded at its net carrying value of $742,358. Due to the fact
that the net carrying value was less than the cost of the property, no loss was
recorded for financial reporting purposes.
5. Investment in Joint Ventures
The Partnership has a 59 percent, an 18.61% and a 31.13% interest in the
profits and losses of Williston Real Estate Joint Venture, Des Moines Real
Estate Joint Venture and Kingsville 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 May 1996, the Partnership entered into a joint venture arrangement,
Middleburg Joint Venture, with an affiliate of the Partnership which has the
same general partners to hold one restaurant property. As of December 31, 1996,
the Partnership and its co-venture partner had contributed $1,645,024 and
$234,059, respectively, to the joint venture to acquire the restaurant
property. As of December 31, 1996, the Partnership and its co-venture partner
owned an 87.54% and a 12.46% 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.
Williston Real Estate Joint Venture, Des Moines Real Estate Joint Venture,
Kingsville Real Estate Joint Venture and Middleburg 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>
1997 1996
---------- ----------
<S> <C> <C>
Land and building on operating leases,
less accumulated depreciation........................ $1,768,636 $1,795,026
Net investment in direct financing leases............. 2,446,688 2,466,050
Cash.................................................. 6,893 668
Receivables........................................... 13,843 --
Accrued rental income................................. 157,252 102,435
Other assets.......................................... 443 358
Liabilities........................................... 7,673 673
Partners' capital..................................... 4,386,082 4,363,864
Revenues.............................................. 481,085 405,615
Net income............................................ 446,047 372,158
</TABLE>
F-312
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
The Partnership recognized income totalling $277,325, $200,499 and $81,582
for the years ended December 31, 1997, 1996 and 1995, 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 bears interest at a
rate of ten percent, is payable over 84 months and is collateralized by the
restaurant equipment. Receivables at December 31, 1997 and 1996, include
$188,642 and $186,040, respectively, relating to this loan including accrued
interest of $7,488 at December 31, 1997.
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, 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 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.
During each of the years ended December 31, 1997 and 1996, the Partnership
declared distributions to the limited partners of $3,825,008, and during the
year ended December 31, 1995, the Partnership declared distributions to the
limited partners of $3,870,007, respectively. No distributions have been made
to the general partners to date.
F-313
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................... $3,952,214 $3,943,043 $4,014,372
Depreciation for tax reporting purposes
in excess of depreciation for financial
reporting purposes..................... (249,366) (259,752) (264,905)
Direct financing leases recorded as
operating
leases for tax reporting purposes...... 132,771 121,597 111,675
Loss on sale of land and building for
tax reporting
purposes in excess of loss for
financial reporting purposes........... -- (26,151) --
Equity in earnings of joint ventures for
tax reporting
purposes less than equity in earnings
of joint ventures
for financial reporting purposes....... (51,481) (46,345) (15,685)
Allowance for doubtful accounts......... (15,913) (16,396) 20,792
Accrued rental income................... (533,121) (518,502) (519,365)
Rents paid in advance................... (39,303) 36,495 (84,838)
---------- ---------- ----------
Net income for federal income tax
purposes............................... $3,195,801 $3,233,989 $3,262,046
========== ========== ==========
</TABLE>
F-314
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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 parent company of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, served
as president of CNL Fund Advisors, Inc. through October 1997. CNL Income Fund
Advisors, Inc. was a wholly owned subsidiary of CNL Group, Inc. until its
merger, effective January 1, 1996, with CNL Fund Advisors, Inc. During the
years ended December 31, 1997, 1996 and 1995, CNL Income Fund Advisors, Inc.
and CNL Fund Advisors, Inc. (hereinafter referred to collectively as the
"Affiliates") each performed certain services for the Partnership, as described
below.
During the years ended December 31, 1997, 1996 and 1995, certain 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 Affiliates 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 Affiliates. The Partnership incurred management fees of
$40,218, $40,244 and $40,774 for the years ended December 31, 1997, 1996 and
1995, respectively.
Certain Affiliates are 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 Affiliates provide 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, 1997, 1996 and 1995, Affiliates provided
accounting and administrative services to the Partnership on a day-to-day
basis. The Partnership incurred $92,866, $97,722 and $68,337 for the years
ended December 31, 1997, 1996 and 1995, respectively, for such services.
The due to related parties at December 31, 1997 and 1996, totalled $6,887
and $2,981, respectively.
F-315
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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 at
least one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Flagstar Enter-prises, Inc.,
Denny's, Inc. and Quincy's Restaurants,
Inc....................................... $1,216,908 $1,224,953 $1,234,649
Foodmaker, Inc............................. 1,024,667 1,024,667 1,024,668
Long John Silver's, Inc.................... 647,829 649,992 654,384
</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 at least one of the
years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Jack in the Box............................. $1,024,667 $1,024,667 $1,024,668
Denny's..................................... 807,547 818,672 823,411
Hardee's.................................... 787,260 791,998 798,357
Long John Silver's.......................... 713,522 715,685 720,077
</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 of these lessees or restaurant chains could
significantly impact the results of operations of the Partnership. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
F-316
<PAGE>
CNL INCOME FUND XIII, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997.. F-318
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997............................................. F-319
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997............. F-320
Condensed Statements of Cash Flows for the Nine Months Ended September
30, 1998 and 1997....................................................... F-321
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997....................................... F-322
Report of Independent Accountants........................................ F-323
Balance Sheets as of December 31, 1997 and 1996.......................... F-324
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-325
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995........................................................... F-326
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-327
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and 1995................................................................ F-329
</TABLE>
F-317
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September December
30, 1998 31, 1997
----------- -----------
ASSETS
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation of $2,008,739 and
$1,697,320............................................ $23,965,359 $22,788,618
Net investment in direct financing leases.............. 6,359,594 7,910,470
Investment in joint ventures........................... 2,453,391 2,457,810
Cash and cash equivalents.............................. 817,721 907,980
Receivables, less allowance for doubtful accounts of
$25,192 in 1998....................................... 19,822 23,946
Prepaid expenses....................................... 12,251 10,368
Organization costs, less accumulated amortization of
$10,000 and $9,422.................................... -- 578
Accrued rental income.................................. 1,364,156 1,423,820
----------- -----------
$34,992,294 $35,523,590
=========== ===========
<CAPTION>
LIABILITIES AND PARTNERS' CAPITAL
<S> <C> <C>
Accounts payable....................................... $ 7,516 $ 7,671
Accrued real estate taxes payable...................... 45,195 --
Distributions payable.................................. 850,002 850,002
Due to related parties................................. 5,483 6,791
Rents paid in advance.................................. 5,571 5,570
----------- -----------
Total liabilities.................................. 913,767 870,034
Partners' capital...................................... 34,078,527 34,653,556
----------- -----------
$34,992,294 $35,523,590
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-318
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
------------------- ----------------------
1998 1997 1998 1997
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases........................ $ 583,183 $ 645,571 $1,815,609 $1,855,547
Adjustments to accrued rental
income........................ 3,713 -- (307,405) --
Earned income from direct
financing leases.............. 174,129 179,015 589,349 656,665
Contingent rental income....... 72,309 89,378 213,317 195,164
Interest and other income...... 8,081 17,913 41,267 39,198
--------- --------- ---------- ----------
841,415 931,877 2,352,137 2,746,574
--------- --------- ---------- ----------
Expenses:
General operating and
Administrative................ 44,235 35,046 114,819 116,069
Professional services.......... 5,089 4,520 19,724 16,533
Bad debt expense............... -- 123,862 -- 123,862
Management fees to related
parties....................... 8,472 8,340 26,246 25,596
Real estate taxes.............. 67,472 -- 70,360 --
State and other taxes.......... -- -- 16,184 18,301
Depreciation and amortization.. 115,760 98,418 312,173 295,683
--------- --------- ---------- ----------
241,028 270,186 559,506 596,044
--------- --------- ---------- ----------
Income Before Equity in Earnings
of Joint Ventures and Provision
for Loss on Land and Net
Investment in Direct Financing
Lease........................... 600,387 661,691 1,792,631 2,150,530
Equity in Earnings of Joint
Ventures........................ 60,864 39,217 182,346 109,720
Provision for Loss on Land and
Net Investment in Direct
Financing Lease................. -- (7,336) -- (48,538)
--------- --------- ---------- ----------
Net Income....................... $ 661,251 $ 693,572 $1,974,977 $2,211,712
========= ========= ========== ==========
Allocation of Net Income:
General partners............... $ 6,613 $ 6,977 $ 19,750 $ 22,443
Limited partners............... 654,638 686,595 1,955,227 2,189,269
--------- --------- ---------- ----------
$ 661,251 $ 693,572 $1,974,977 $2,211,712
========= ========= ========== ==========
Net Income Per Limited Partner
Unit............................ $ 0.16 $ 0.17 $ 0 .49 $ 0.55
========= ========= ========== ==========
Weighted Average Number of
Limited Partner Units
Outstanding..................... 4,000,000 4,000,000 4,000,000 4,000,000
========= ========= ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-319
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
September December
30, 1998 31, 1997
----------- -----------
<S> <C> <C>
General partners:
Beginning balance.................................. $ 137,207 $ 106,517
Net income......................................... 19,750 30,690
----------- -----------
156,957 137,207
----------- -----------
Limited partners:
Beginning balance.................................. 34,516,349 34,911,420
Net income......................................... 1,955,227 3,004,937
Distributions ($0.64 and $0.85 per limited partner
unit, respectively)............................... (2,550,006) (3,400,008)
----------- -----------
33,921,570 34,516,349
----------- -----------
Total partners' capital.............................. $34,078,527 $34,653,556
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-320
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities........... $2,459,747 $2,511,698
---------- ----------
Cash Flows from Investing Activities:
Investment in joint ventures...................... -- (550,000)
Decrease in restricted cash....................... -- 550,000
Loan to tenant.................................... -- (196,980)
---------- ----------
Net cash used in investing activities........... -- (196,980)
---------- ----------
Cash Flows from Financing Activities:
Distributions to limited partners................. (2,550,006) (2,550,006)
---------- ----------
Net cash used in financing
activities..................................... (2,550,006) (2,550,006)
---------- ----------
Net Decrease in Cash and Cash Equivalents............. (90,259) (235,288)
Cash and Cash Equivalents at Beginning of Period...... 907,980 1,103,568
---------- ----------
Cash and Cash Equivalents at End of
Period............................................... $ 817,721 $ 868,280
========== ==========
Supplemental Schedule of Non-Cash Investing and
Financing Activities
Net investment in direct financing leases
reclassified to land and buildings on
operating leases as a result of lease
termination........................................ $1,488,160 $ --
========== ==========
Distributions declared and unpaid at end of
period............................................. $ 850,002 $ 850,002
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-321
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, 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, 1997.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2. Net Investment in Direct Financing Leases
During the nine months ended September 30, 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-322
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners
CNL Income Fund XIII, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund XIII,
Ltd. (a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. 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 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 Income Fund XIII, Ltd.
as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
January 21, 1998
F-323
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation............................. $22,788,618 $23,612,639
Net investment in direct financing leases............. 7,910,470 8,543,916
Investment in joint ventures.......................... 2,457,810 976,531
Cash and cash equivalents............................. 907,980 1,103,568
Restricted cash....................................... -- 550,770
Receivables, less allowance for doubtful accounts of
$150,734 in 1996..................................... 23,946 100,955
Prepaid expenses...................................... 10,368 9,143
Organization costs, less accumulated amortization of
$9,422 and $7,422.................................... 578 2,578
Accrued rental income, less allowance for doubtful
accounts of $72,734 in 1996.......................... 1,423,820 1,044,970
----------- -----------
$35,523,590 $35,945,070
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 7,671 $ 6,340
Accrued and escrowed real estate taxes payable........ -- 14,092
Distributions payable................................. 850,002 850,002
Due to related parties................................ 6,791 2,594
Rents paid in advance................................. 5,570 54,105
----------- -----------
Total liabilities..................................... 870,034 927,133
Partners' capital..................................... 34,653,556 35,017,937
----------- -----------
$35,523,590 $35,945,070
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-324
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases...... $2,371,062 $2,477,156 $2,566,579
Earned income from direct financing
leases.................................. 976,547 899,130 943,194
Contingent rental income................. 287,751 299,495 293,749
Interest and other income................ 46,693 59,319 54,832
---------- ---------- ----------
3,682,053 3,735,100 3,858,354
---------- ---------- ----------
Expenses:
General operating and administrative..... 152,918 156,466 130,501
Bad debt expense......................... 123,071 -- --
Professional services.................... 25,595 33,746 27,703
Management fees to related parties....... 34,321 35,675 36,031
Real estate taxes........................ -- 10,680 --
State and other taxes.................... 18,301 16,793 20,470
Depreciation and amortization............ 394,099 393,434 393,435
---------- ---------- ----------
748,305 646,794 608,140
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Ventures, Gain (Loss) on Sale of Land..... 2,933,748 3,088,306 3,250,214
Equity in Earnings of Joint Ventures....... 150,417 60,654 98,520
Gain (Loss) on Sale of Land and Building... (48,538) 82,855 (29,560)
---------- ---------- ----------
Net Income................................. $3,035,627 $3,231,815 $3,319,174
========== ========== ==========
Allocation of Net Income:
General partners......................... $ 30,690 $ 31,490 $ 33,432
Limited partners......................... 3,004,937 3,200,325 3,285,742
---------- ---------- ----------
$3,035,627 $3,231,815 $3,319,174
========== ========== ==========
Net Income Per Limited Partner Unit........ $ 0.75 $ 0.80 $ 0.82
========== ========== ==========
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-325
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
General Partners Limited Partners
---------------- --------------------------------------------------
Accumu- Accumu-
Contri- lated Contri- lated Syndication
butions Earnings butions Distributions Earnings Costs Total
------- -------- ----------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994................... $1,000 $ 40,595 $40,000,000 $ (4,153,373) $ 4,018,914 $(4,665,169) $35,241,967
Distribution to
limited partners
($0.84 per limited
partner unit)........ -- -- -- (3,375,011) -- -- (3,375,011)
Net income............ -- 33,432 -- -- 3,285,742 -- 3,319,174
------ -------- ----------- ------------ ----------- ----------- -----------
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
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-326
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows From Operating Activities:
Cash received from tenants............ $ 3,329,633 $ 3,476,985 $ 3,453,186
Distributions from joint ventures..... 151,322 93,700 88,793
Cash paid for expenses................ (236,793) (251,454) (214,011)
Interest received..................... 29,395 48,350 51,410
----------- ----------- -----------
Net cash provided by operating
activities......................... 3,273,557 3,367,581 3,379,378
----------- ----------- -----------
Cash Flows From Investing Activities:
Additions to land and buildings on
operating leases..................... -- -- (336,116)
Proceeds from sale of land and
building............................. 932,849 550,000 286,411
Advances to tenant.................... (196,980) -- --
Repayment of advances................. 127,843 -- --
Investment in joint ventures.......... (1,482,849) -- (140,052)
Decrease (increase) in restricted
cash................................. 550,000 (550,000) --
Other................................. -- -- 954
----------- ----------- -----------
Net cash used in investing
activities......................... (69,137) -- (188,803)
----------- ----------- -----------
Cash Flows From Financing Activities:
Reimbursement of acquisition costs
paid by related parties on behalf of
the Partnership...................... -- -- (3,074)
Distributions to limited partners..... (3,400,008) (3,400,008) (3,350,014)
----------- ----------- -----------
Net cash used in financing
activities......................... (3,400,008) (3,400,008) (3,353,088)
----------- ----------- -----------
Net Decrease in Cash and Cash
Equivalents............................ (195,588) (32,427) (162,513)
Cash and Cash Equivalents at Beginning
of Year................................ 1,103,568 1,135,995 1,298,508
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 907,980 $ 1,103,568 $ 1,135,995
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................ $ 3,035,627 $ 3,231,815 $ 3,319,174
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation........................ 391,434 391,434 391,435
Amortization........................ 2,665 2,000 2,000
Equity in earnings of joint
ventures, net of distributions..... 905 33,046 (9,727)
Loss (gain) on sale of land and
building........................... 48,538 (82,855) 29,560
Decrease (increase) in receivables.. 77,779 (28,034) (3,833)
Decrease in net investment in direct
financing leases................... 84,646 80,214 71,410
Increase in prepaid expenses........ (1,225) (5,005) (4,138)
Increase in accrued rental income... (378,850) (313,540) (371,167)
Increase (decrease) in accounts
payable and accrued expenses....... (12,761) 12,137 922
Increase (decrease) in due to
related parties.................... 4,197 (4,773) 6,213
Increase (decrease) in rents paid in
advance............................ (48,535) 51,142 (52,471)
----------- ----------- -----------
Total adjustments................. 168,793 135,766 60,204
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. $ 3,204,420 $ 3,367,581 $ 3,379,378
=========== =========== ===========
Supplemental Schedule of Non-Cash
Financing Activities:
Distributions declared and unpaid at
December 31.......................... $ 850,002 $ 850,002 $ 850,002
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-327
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
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.
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 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.
F-328
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 are 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 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 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.
F-329
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. Land and Buildings on Operating Leases
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Land............................................ $12,742,897 $13,175,484
Buildings....................................... 11,743,041 11,743,041
----------- -----------
24,485,938 24,918,525
Less accumulated depreciation................... (1,697,320) (1,305,886)
----------- -----------
$22,788,618 $23,612,639
=========== ===========
</TABLE>
In November 1996, the Partnership sold its 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 property was originally acquired
by the Partnership in March 1994, and had a cost of approximately $415,400,
excluding acquisition fees and miscellaneous acquisition expenses; therefore,
the Partnership sold the property for approximately $134,600 in excess of its
original purchase price. In January 1997, the Partnership reinvested the net
sales proceeds in a property in Akron, Ohio, as tenants-in-common, with
affiliates of the general partners (see Note 5).
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).
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, 1997, 1996 and 1995, the Partnership recognized $378,850,
$313,541 and $371,167, 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, 1997:
<TABLE>
<S> <C>
1998.......................................................... $ 2,136,766
1999.......................................................... 2,274,706
2000.......................................................... 2,265,811
2001.......................................................... 2,277,006
2002.......................................................... 2,307,013
Thereafter.................................................... 24,312,111
-----------
$35,573,413
===========
</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-330
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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>
1997 1996
------------ ------------
<S> <C> <C>
Minimum lease payments receivable............ $ 15,747,868 $ 18,116,667
Estimated residual values.................... 2,582,058 2,723,067
Less unearned income......................... (10,419,456) (12,295,818)
------------ ------------
Net investment in direct financing leases.... $ 7,910,470 $ 8,543,916
============ ============
</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).
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998.......................................................... $ 958,686
1999.......................................................... 964,106
2000.......................................................... 964,106
2001.......................................................... 976,846
2002.......................................................... 994,681
Thereafter.................................................... 10,889,443
-----------
$15,747,868
===========
</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, 1997, 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, 1997, the Partnership owned a 63.03% 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
F-331
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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, 1997, the Partnership owned a 47.83% interest in
this property.
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>
1997 1996
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation........................ $4,256,861 $1,482,503
Net investment in direct financing leases........ 364,479 367,661
Cash............................................. 18,729 21,173
Receivables...................................... -- 6,412
Prepaid expenses................................. 380 255
Accrued rental income............................ 106,653 51,745
Liabilities...................................... 15,653 28,121
Partners' capital................................ 4,731,449 1,901,628
Revenues......................................... 347,971 216,960
Net income....................................... 285,922 145,851
</TABLE>
The Partnership recognized income totalling $150,417, $60,654 and $98,520
for the years ended December 31, 1997, 1996 and 1995, respectively, from these
joint ventures and the properties held as tenants-in-common with affiliates.
6. Restricted Cash
In 1996, the sales proceeds of $550,000 from the sale of the property in
Richmond, Virginia, plus accrued interest of $770, 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 1997, the funds were
released from escrow and the Partnership acquired a 63.03% interest in a Burger
King property in Akron, Ohio, as tenants-in-common with an affiliate of the
general partners (Note 5).
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, 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
F-332
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
five percent to the general partners. Any gain from the sale of a property 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.
During each of the years ended December 31, 1997 and 1996, the Partnership
declared distributions to the limited partners of $3,400,008 and during the
year ended December 31, 1995, the Partnership declared distributions to the
limited partners of $3,375,011. 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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................... $3,035,627 $3,231,815 $3,319,174
Depreciation for tax reporting purposes
in excess of depreciation for financial
reporting purposes..................... (100,696) (103,634) (103,634)
Direct financing leases recorded as
operating leases for tax reporting
purposes............................... 84,646 80,214 71,410
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............................... (19,727) 6,819 (17,195)
Loss (gain) on sale of property deferred
for tax reporting purposes............. -- (82,855) 29,560
Loss on sale of property for financial
reporting purposes in excess of loss
for tax reporting purposes............. 38,823 -- --
Allowance for doubtful accounts......... (150,734) 102,198 45,182
Accrued rental income................... (378,850) (313,540) (371,167)
Rents paid in advance................... (48,535) 51,142 (52,471)
---------- ---------- ----------
Net income for federal income tax
purposes............................... $2,460,554 $2,972,159 $2,920,859
========== ========== ==========
</TABLE>
9. Related Party Transactions
One of the individual partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the parent company of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, served
as president of CNL Fund Advisors, Inc. through October 1997. CNL Income Fund
Advisors, Inc. was a wholly owned subsidiary of CNL Group, Inc. until its
merger, effective January 1, 1996, with CNL Fund Advisors, Inc. During the
years ended December 31, 1997, 1996 and 1995, CNL Income Fund Advisors, Inc.
and CNL Fund Advisors, Inc. (hereinafter referred to collectively as the
"Affiliates") each performed certain services for the Partnership, as described
below.
During the years ended December 31, 1997, 1996 and 1995, certain 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 Affiliates 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-333
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 Affiliates. 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 $34,321, $35,675 and $36,031 for the years ended
December 31, 1997, 1996 and 1995, respectively.
Certain Affiliates are 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 Affiliates provide 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, 1997, 1996 and 1995, Affiliates provided
accounting and administrative services to the Partnership on a day-to-day
basis. For the years ended December 31, 1997, 1996 and 1995, the expenses
incurred for these services were $87,322, $91,272 and $67,052, respectively.
The due to related parties at December 31, 1997 and 1996, totalled $6,791
and $2,594, 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.
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 joint ventures and the properties held
as tenants-in-common with affiliates) for at least one of the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Long John Silver's, Inc...................... $759,064 $764,565 $774,281
Flagstar Enterprises, Inc. and Quincy's
Restaurants, Inc............................ 744,199 765,109 785,570
Golden Corral Corporation.................... 536,886 539,568 533,668
Foodmaker, Inc............................... 450,816 450,393 450,724
Checkers Drive-In Restaurants, Inc........... 366,187 412,422 416,746
</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-334
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Concluded)
the Partnership's share of total rental and earned income from joint ventures
and the properties held as tenants-in-common with affiliates) for at least one
of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Long John Silver's............................ $759,064 $764,565 $774,281
Hardee's...................................... 649,762 670,249 690,324
Golden Corral Family Steakhouse Restaurants... 536,886 539,568 533,668
Burger King................................... 484,111 431,280 419,740
Jack in the Box............................... 450,816 450,393 450,724
Checkers Drive-In Restaurants................. 366,187 412,422 416,746
</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. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
F-335
<PAGE>
CNL INCOME FUND XIV, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997.. F-337
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997............................................. F-338
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997............. F-339
Condensed Statements of Cash Flows for the Nine Months Ended September
30, 1998 and 1997....................................................... F-340
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997....................................... F-341
Report of Independent Accountants........................................ F-344
Balance Sheets as of December 31, 1997 and 1996.......................... F-345
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-346
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995........................................................... F-347
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-348
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and 1995................................................................ F-349
</TABLE>
F-336
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September December
30, 1998 31, 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation
of $1,571,136 and $1,295,713......................... $26,043,665 $25,217,725
Net investment in direct financing leases............. 6,392,118 9,041,485
Investment in joint ventures.......................... 3,633,822 3,271,739
Cash and cash equivalents............................. 2,293,184 1,285,777
Restricted cash....................................... 398,539 318,592
Receivables, less allowance for doubtful accounts of
$5,013 in 1998....................................... -- 19,912
Prepaid expenses...................................... 13,689 7,915
Organization costs, less accumulated amortization of
$10,000 and $8,599................................... -- 1,401
Accrued rental income, less allowance for doubtful
accounts
of $11,040 and $6,295................................ 1,795,945 1,820,078
----------- -----------
$40,570,962 $40,984,624
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 1,234 $ 10,258
Accrued and escrowed real estate taxes payable........ 42,751 19,570
Distributions payable................................. 928,130 928,130
Due to related parties................................ 5,929 7,853
Rents paid in advance................................. 35,561 29,656
----------- -----------
Total liabilities................................... 1,013,605 995,467
Partners' capital..................................... 39,557,357 39,989,157
----------- -----------
$40,570,962 $40,984,624
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-337
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases........................ $ 682,180 $ 723,524 $2,107,058 $2,170,802
Adjustment to accrued rental
income........................ (14,350) -- (277,319) --
Earned income from direct
financing leases.............. 184,522 254,117 644,797 764,122
Interest and other income...... 26,585 12,765 73,047 43,367
---------- ---------- ---------- ----------
878,937 990,406 2,547,583 2,978,291
---------- ---------- ---------- ----------
Expenses:
General operating and
administrative................ 51,444 35,386 130,375 111,792
Professional services.......... 5,632 7,006 22,509 18,590
Bad debt expense............... -- -- -- 14,000
Management fees to related
parties....................... 8,842 9,573 27,628 28,863
Real estate taxes.............. 41,562 1,384 46,288 7,192
State and other taxes.......... 1,462 -- 22,498 21,874
Loss on termination of direct
financing lease............... 21,873 -- 21,873 --
Depreciation and amortization.. 107,492 85,053 277,598 255,108
---------- ---------- ---------- ----------
238,307 138,402 548,769 457,419
---------- ---------- ---------- ----------
Income Before Equity in Earnings
of Joint Ventures
and Gain on Sale of Land and
Building........................ 640,630 852,004 1,998,814 2,520,872
Equity in Earnings of Joint
Ventures........................ 76,939 78,381 241,570 231,204
Gain on Sale of Land and
Building........................ -- -- 112,206 --
---------- ---------- ---------- ----------
Net Income....................... $ 717,569 $ 930,385 $2,352,590 $2,752,076
========== ========== ========== ==========
Allocation of Net Income:
General partners............... $ 7,175 $ 9,304 $ 22,403 $ 27,521
Limited partners............... 710,394 921,081 2,330,187 2,724,555
---------- ---------- ---------- ----------
$ 717,569 $ 930,385 $2,352,590 $2,752,076
========== ========== ========== ==========
Net Income Per Limited Partner
Unit............................ $ 0.16 $ 0.20 $ 0.52 $ 0.61
========== ========== ========== ==========
Weighted Average Number of
Limited
Partner Units Outstanding....... 4,500,000 4,500,000 4,500,000 4,500,000
========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-338
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended
1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
General partners:
Beginning balance........................ $ 146,640 $ 109,981
Net income............................... 22,403 36,659
----------- -----------
169,043 146,640
----------- -----------
Limited partners:
Beginning balance........................ 39,842,517 39,925,756
Net income............................... 2,330,187 3,629,281
Distributions ($0.62 and $0.83 per
limited partner unit, respectively)..... (2,784,390) (3,712,520)
----------- -----------
39,388,314 39,842,517
----------- -----------
Total partners' capital................ $39,557,357 $39,989,157
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-339
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
----------- ----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities........... $ 2,610,638 $2,782,288
----------- ----------
Cash Flows from Investing Activities:
Proceeds from sale of land and building........... 1,648,110 --
Investment in joint venture....................... (387,573) (77,277)
Return of capital from joint venture.............. -- 51,950
Increase in restricted cash....................... (79,378) --
----------- ----------
Net cash provided by (used in) investing
activities................................... 1,181,159 (25,327)
----------- ----------
Cash Flows from Financing Activities:
Distributions to limited partners................. (2,784,390) (2,784,390)
----------- ----------
Net cash used in financing activities......... (2,784,390) (2,784,390)
----------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents.. 1,007,407 (27,429)
Cash and Cash Equivalents at Beginning of Period...... 1,285,777 1,462,012
----------- ----------
Cash and Cash Equivalents at End of Period............ $ 2,293,184 $1,434,583
=========== ==========
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Net investment in direct financing leases
reclassified to land and buildings on operating
leases as a result of lease termination.......... $ 2,084,141 $ --
=========== ==========
Distributions declared and unpaid at end of
period........................................... $ 928,130 $ 928,130
=========== ==========
</TABLE>
See accompanying notes to financial statements.
F-340
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters Nine Months Ended September 30, 1998 and 1997
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 fair statement of the results for the interim periods presented.
Operating results for the nine months ended September 30, 1998, may not be
indicative of the results that may be expected for the year ending December 31,
1998. Amounts as of December 31, 1997, included in the financial statements,
have been derived from audited financial statements as of the 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, 1997.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2. Land and Buildings on Operating Leases
During the nine months ended September 30, 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 totaling 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 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 excess of its original purchase
price.
3. Net Investment in Direct Financing Leases
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 2).
During the nine months ended September 30, 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 #13, "Accounting for Leases," the
F-341
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters Nine Months Ended September 30, 1998 and 1997
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.
4. 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, at a total cost of $1,052,552. As
of September 30, 1998, the Partnership had contributed $314,011 to purchase
land and pay for construction costs relating to the joint venture. The
Partnership has agreed to contribute approximately $212,300 in additional
construction costs to the joint venture. The Partnership will 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 September 30, 1998, Attalla Joint Venture, Salem Joint Venture,
Kingston Joint Venture and Melbourne Joint Venture, each owned and leased one
property, and WoodRidge Real Estate Joint Venture owned and leased six
properties, to operators of fast-food or family-style restaurants. The
following presents the combined, condensed financial information for the joint
ventures at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land and buildings on operating leases,
less accumulated depreciation................ $6,673,070 $6,008,240
Net investment in direct financing lease...... 361,764 364,479
Cash.......................................... 2,783 13,842
Receivables................................... 20,884 2,571
Accrued rental income......................... 212,017 150,621
Other assets.................................. 1,153 1,257
Liabilities................................... 195,521 231,061
Partners' capital............................. 7,076,150 6,309,949
Revenues...................................... 582,901 712,004
Net income.................................... 467,698 588,835
</TABLE>
The Partnership recognized income totaling $241,570 and $231,204 for the
nine months ended September 30, 1998 and 1997, respectively, from these joint
ventures, $76,939 and $78,381 of which was earned for the quarters ended
September 30, 1998 and 1997, respectively.
5. Restricted Cash
As of September 30, 1998, $397,970 in net sales proceeds from the sale of
one of the Properties in Richmond, Virginia, plus accrued interest of $569,
were being held in an interest-bearing escrow account pending the release of
funds by an escrow agent to acquire an additional property.
F-342
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters Nine Months Ended September 30, 1998 and 1997
6. Subsequent Event
In October 1998, the Partnership reinvested approximately $1,533,100 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 Bennigan's property located in Fayetteville,
North Carolina. In connection therewith, the Partnership entered into a long
term, triple-net lease with terms substantially the same as its other leases.
The Partnership acquired the Bennigan's property from an affiliate of the
general partners. The affiliate had purchased and temporarily held title to the
property in order to facilitate the acquisition of the property by the
Partnership. The purchase price paid by the Partnership represented the costs
incurred by the affiliate to acquire the property, including closing costs.
F-343
<PAGE>
Report of Independent Accountants
To the Partners
CNL Income Fund XIV, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund XIV, Ltd.
(a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. 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 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 Income Fund XIV, Ltd.
as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
January 20, 1998
F-344
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation............................. $25,217,725 $25,852,484
Net investment in direct financing leases............. 9,041,485 9,125,272
Investment in joint ventures.......................... 3,271,739 3,201,156
Cash and cash equivalents............................. 1,285,777 1,462,012
Restricted cash....................................... 318,592 --
Receivables, less allowance for doubtful accounts of
$22,970 in 1996...................................... 19,912 23,477
Prepaid expenses...................................... 7,915 8,243
Organization costs, less accumulated amortization of
$8,599 and $6,599.................................... 1,401 3,401
Accrued rental income................................. 1,820,078 1,369,804
----------- -----------
$40,984,624 $41,045,849
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 10,258 $ 5,447
Accrued and escrowed real estate taxes payable........ 19,570 12,364
Distributions payable................................. 928,130 928,130
Due to related parties................................ 7,853 1,651
Rents paid in advance................................. 29,656 62,520
----------- -----------
Total liabilities................................... 995,467 1,010,112
Commitments (Note 11)
Partners' capital..................................... 39,989,157 40,035,737
----------- -----------
$40,984,624 $41,045,849
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-345
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases........ $2,893,900 $2,960,909 $2,980,928
Earned income from direct financing
leases.................................... 1,017,627 1,026,616 1,034,636
Interest and other income.................. 47,287 56,377 52,426
---------- ---------- ----------
3,958,814 4,043,902 4,067,990
---------- ---------- ----------
Expenses:
General operating and administrative....... 154,654 162,163 143,138
Professional services...................... 29,746 24,138 31,270
Bad debt expense........................... 10,500 -- 12,619
Management fees to related parties......... 38,626 38,785 38,832
Real estate taxes.......................... 7,192 3,426 8,116
State and other taxes...................... 21,874 18,109 14,865
Depreciation and amortization.............. 340,161 340,089 340,112
---------- ---------- ----------
602,753 586,710 588,952
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Ventures and Loss on Sale of Land.......... 3,356,061 3,457,192 3,479,038
Equity in Earnings of Joint Ventures........ 309,879 459,137 338,717
Loss on Sale of Land........................ -- -- (66,518)
---------- ---------- ----------
Net Income.................................. $3,665,940 $3,916,329 $3,751,237
========== ========== ==========
Allocation of Net Income:
General partners........................... $ 36,659 $ 39,163 $ 38,073
Limited partners........................... 3,629,281 3,877,166 3,713,164
---------- ---------- ----------
$3,665,940 $3,916,329 $3,751,237
========== ========== ==========
Net Income Per Limited Partner Unit......... $ 0.81 $ 0.86 $ 0.83
========== ========== ==========
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-346
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
General Partners Limited Partners
------------------------- ----------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Contributions Earnings Costs Total
------------- ----------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994................... $1,000 $ 31,745 $45,000,000 $ (3,082,753) $ 3,142,776 $(5,383,945) $39,708,823
Distributions to
limited partners
($0.81) per limited
partner unit)......... -- -- -- (3,628,130) -- -- (3,628,130)
Net income............. -- 38,073 -- 3,713,164 -- 3,751,237
------ -------- ----------- ------------ ----------- ----------- -----------
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
partners 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
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-347
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows From Operating Activities:
Cash received from tenants............... $3,501,064 $3,572,793 $3,626,651
Distributions from joint ventures........ 308,220 340,299 270,406
Cash paid for expenses................... (243,326) (250,885) (237,937)
Interest received........................ 40,232 44,089 50,724
---------- ---------- ----------
Net cash provided by operating
activities............................. 3,606,190 3,706,296 3,709,844
---------- ---------- ----------
Cash Flows From Investing Activities:
Proceeds from sale of land............... -- -- 696,012
Proceeds received from right of way
taking.................................. 318,592 -- --
Additions to land and buildings on
operating leases........................ -- -- (964,073)
Investment in direct financing leases.... -- -- (75,352)
Investment in joint ventures............. (121,855) (7,500) (1,087,218)
Return of capital from joint venture..... 51,950 -- --
Increase in restricted cash.............. (318,592) -- --
Other.................................... -- -- 5,530
---------- ---------- ----------
Net cash used in investing activities... (69,905) (7,500) (1,425,101)
---------- ---------- ----------
Cash Flows From Financing Activities:
Reimbursement of acquisition costs paid
by related parties on behalf of the
Partnership............................. -- -- (577)
Distributions to limited partners....... (3,712,520) (3,712,522) (3,543,751)
---------- ---------- ----------
Net cash used in financing activities... (3,712,520) (3,712,522) (3,544,328)
---------- ---------- ----------
Net Decrease in Cash and Cash
Equivalents.............................. (176,235) (13,726) (1,259,585)
Cash and Cash Equivalents at Beginning of
Year..................................... 1,462,012 1,475,738 2,735,323
---------- ---------- ----------
Cash and Cash Equivalents at End of Year.. $1,285,777 $1,462,012 $1,475,738
========== ========== ==========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................... $3,665,940 $3,916,329 $3,751,237
---------- ---------- ----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation............................ 337,180 337,181 337,393
Amortization............................ 2,981 2,908 2,719
Equity in earnings of joint ventures, net
of distributions....................... (1,659) (118,889) (68,311)
Loss on sale of land.................... -- -- 66,518
Decrease (increase) in receivables...... 3,565 (13,946) 36,872
Decrease (increase) in prepaid expenses. 328 (4,802) (3,441)
Decrease in net investment in direct
financing leases....................... 83,787 74,798 66,778
Increase in accrued rental income....... (471,287) (491,221) (497,969)
Decrease in other assets................ -- -- 3,315
Increase (decrease) in accounts payable. 12,017 (8,408) 22,223
Increase (decrease) in due to related
parties, excluding reimbursement of
acquisition costs paid on behalf of the
Partnership............................ 6,202 (5,218) 6,869
Increase (decrease) in rents paid in
advance................................ (32,864) 17,564 (14,359)
---------- ---------- ----------
Total adjustments....................... (59,750) (210,033) (41,393)
---------- ----------
Net Cash Provided by Operating
Activities............................... $3,606,190 $3,706,296 $3,709,844
========== ========== ==========
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-348
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
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. Under the terms of a registration statement filed with
the Securities and Exchange Commission, the Partnership was authorized to sell
a maximum of 4,500,000 units ($45,000,000) of limited partnership interest. A
total of 4,500,000 units ($45,000,000) of limited partnership interest were
sold.
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.
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.
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-349
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
Investment in Joint Ventures--The Partnership accounts for its interests in
Attalla Joint Venture, Wood-Ridge Real Estate Joint Venture, Salem 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 are 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 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.
F-350
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
3. Land and Buildings on Operating Leases
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Land............................................ $16,425,914 $16,723,493
Buildings....................................... 10,087,524 10,087,524
----------- -----------
26,513,438 26,811,017
Less accumulated depreciation................... (1,295,713) (958,533)
----------- -----------
$25,217,725 $25,852,484
=========== ===========
</TABLE>
In December, 1997, the Port of Palm Bay deposited $660,000 in the registry
of the court on behalf of the Partnership and the tenant in exchange for taking
possession of the property located in Riviera Beach, Florida through a total
right of way taking. The Partnership owned the land and the tenant owned the
building relating to this property. The general partners of the Partnership and
the tenant are in the process of negotiating the allocation of the $660,000.
The general partners anticipate that the Partnership will be entitled to
receive at least $330,000 but the general partners intend to pursue a larger
allocation of this amount. As of December 31, 1997, the Partnership had removed
the carrying value of the land in the amount of $318,592 from its accounts due
to the fact that the Port of Palm Bay had taken possession of the property, and
in exchange, the Partnership recorded restricted cash in the amount of $318,592
(See Note 6). The general partners anticipate that the Partnership will
recognize a gain as a result of the taking of this property and will recognize
such gain when the final proceeds are determined. As of January 20, 1998, the
final amount of proceeds to be received had not been determined.
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, 1997, 1996 and 1995, the Partnership recognized $471,287,
$491,221 and $497,969, 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, 1997:
<TABLE>
<S> <C>
1998.......................................................... $ 2,398,237
1999.......................................................... 2,560,989
2000.......................................................... 2,630,941
2001.......................................................... 2,650,138
2002.......................................................... 2,707,496
Thereafter.................................................... 31,197,883
-----------
$44,145,684
===========
</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-351
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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>
1997 1996
----------- -----------
<S> <C> <C>
Minimum lease payments receivable............... $18,621,827 $19,723,241
Estimated residual values....................... 2,842,002 2,842,002
Less unearned income............................ (12,422,344) (13,439,971)
----------- -----------
Net investment in direct financing leases....... $ 9,041,485 $ 9,125,272
=========== ===========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998.......................................................... $ 1,104,743
1999.......................................................... 1,122,218
2000.......................................................... 1,129,246
2001.......................................................... 1,132,069
2002.......................................................... 1,140,538
Thereafter.................................................... 12,993,013
-----------
$18,621,827
===========
</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 owns a 50 percent, a 72.2% and a 50% 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 September 1996, Wood-Ridge Real Estate Joint Venture sold its two
properties to the tenant of these properties 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 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 re-invested $4,404,046
of the net sales proceeds in five properties. In January 1997, Wood-Ridge Real
Estate Joint Venture reinvested $502,598 of the remaining net sales proceeds in
a Taco Bell property in Anniston, Alabama. As of 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.
In September 1997, the Partnership entered into a joint venture arrangement,
CNL Kingston Joint Venture, with an affiliate of the Partnership which has the
same general partners, to construct and hold one restaurant property. As of
December 31, 1997, the Partnership and its co-venture partner had contributed
$121,855 and
F-352
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
$183,241, respectively, to CNL Kingston Joint Venture to fund construction
costs relating to the property owned by the joint venture. The Partnership and
its co-venture partner have agreed to contribute approximately $85,600 and
$128,700, respectively, in additional construction costs to the joint venture.
When construction is completed, the Partnership and its co-venture partner
expect to have an approximate 40 and 60 percent interest, respectively, in the
profits and losses of the joint venture. As of December 31, 1997, 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.
As of December 31, 1997, Attalla Joint Venture, Salem Joint Venture and
Kingston 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>
1997 1996
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation........................ $6,008,240 $5,102,901
Net investment in direct financing lease......... 364,479 367,661
Cash............................................. 13,842 818
Restricted cash.................................. -- 595,426
Receivables...................................... 2,571 7,037
Accrued rental income............................ 150,621 62,163
Other assets..................................... 1,257 15,390
Liabilities...................................... 231,061 33,565
Partners' capital................................ 6,309,949 6,117,831
Revenues......................................... 712,004 690,225
Gain on sale of land and buildings............... -- 261,106
Net income....................................... 588,835 887,177
</TABLE>
The Partnership recognized income totaling $309,879, $459,137 and $338,717
for the years ended December 31, 1997, 1996 and 1995, respectively, from these
joint ventures.
6. Restricted Cash
In December 1997, the Port of Palm Bay deposited $660,000 in the registry of
the court on behalf of the Partnership in exchange for taking possession of the
property (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 sale of properties, 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
F-353
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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 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.
During the years ended December 31, 1997, 1996 and 1995, the Partnership
declared distributions to the limited partners of $3,712,520, $3,712,522 and
$3,628,130, 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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes.................................. $3,665,940 $3,916,329 $3,751,237
Depreciation for tax reporting purposes in
excess of depreciation for financial
reporting purposes........................ (130,766) (130,766) (130,551)
Direct financing leases recorded as
operating leases for tax reporting
purposes.................................. 83,787 74,798 66,778
Loss on sale of land for financial
reporting purposes in excess of loss for
tax reporting purposes.................... -- -- 66,518
Equity in earnings of joint ventures for
financial reporting purposes in excess of
equity in earnings of joint ventures for
tax reporting purposes.................... 3,109 (174,253) (80,207)
Accrued rental income...................... (471,287) (491,221) (497,969)
Rents paid in advance...................... (32,864) 17,564 (14,359)
Other...................................... (21,988) 23,878 718
---------- ---------- ----------
Net income for federal income tax
purposes.................................. $3,095,931 $3,236,329 $3,162,165
========== ========== ==========
</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 parent company of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, served
as president of CNL Fund Advisors, Inc. through October 1997. CNL Income Fund
Advisors, Inc. was a wholly owned subsidiary of CNL Group, Inc. until its
merger, effective January 1, 1996, with CNL Fund Advisors, Inc. During the
years ended December 31, 1997, 1996 and 1995, CNL Income Fund Advisors, Inc.
and CNL Fund Advisors, Inc. (hereinafter referred to collectively as the
"Affiliates") each performed certain services for the Partnership, as described
below.
During the years ended December 31, 1997, 1996 and 1995, certain 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 Affiliates a management fee of one percent of the sum of gross revenues
from
F-354
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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 Affiliates. 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 $38,626, $38,785 and $38,832 for the years ended
December 31, 1997, 1996 and 1995, respectively.
Certain Affiliates are 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 Affiliates provide 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, 1997, 1996 and 1995, Affiliates provided
accounting and administrative services to the Partnership on a day-to-day
basis. The Partnership incurred $89,910, $96,082 and $75,263 for the years
ended December 31, 1997, 1996 and 1995, respectively, for such services.
The due to related parties at December 31, 1997 and 1996, totaled $7,853 and
$1,651, 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 at least one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Flagstar Enterprises, Inc. and Denny's,
Inc. ...................................... $863,373 $879,594 $882,060
Long John Silver's, Inc. ................... 850,159 853,992 860,391
Checkers Drive-In Restaurants, Inc. ........ 724,612 732,941 732,196
Foodmaker, Inc. ............................ 562,725 556,100 551,800
Golden Corral Corporation................... 520,911 476,350 466,737
</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 at least one
of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Long John Silver's............................ $850,159 $853,992 $860,391
Checkers Drive-in Restaurants ................ 724,612 732,941 732,196
Denny's....................................... 618,154 615,021 592,660
Jack in the Box............................... 562,725 556,100 551,800
Golden Corral Family Steakhouse Restaurants... 520,911 476,350 466,737
Hardee's...................................... 483,606 498,655 500,235
</TABLE>
F-355
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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. However, the general partners believe that the
risk of such a default is reduced due to the essential or important nature of
these properties for the on-going operations of the lessees.
11. Commitments
During 1997, the Partnership entered into an agreement with the tenant of
the Checkers #486 property in Richmond, Virginia, to sell the property. The
general partners believe that the anticipated sales price exceeds the
Partnership's cost attributable to the property. As of January 20, 1998, the
sale had not occurred.
During 1997, the Partnership entered into an agreement with a third party to
sell the property in Marietta, Georgia. The general partners believe that the
anticipated sales price exceeds the Partnership's cost attributable to the
property. As of January 20, 1998, the sale had not occurred.
12. Subsequent Events
In January 1998, the Partnership sold its property in Madison, Alabama, to a
third party for $740,000 and received net sales proceeds of $700,950. 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 $13,314 of such accrued rental income during 1997. The
Partnership intends to reinvest the net sales proceeds in an additional
property.
During 1997, the Partnership entered into a contract to sell the property in
Richmond, Virginia (#548) to a third party. In January 1998, the Partnership
sold this property for $512,462 and received net sales proceeds in that amount,
resulting in a gain of $70,798 for financial reporting purposes. The
Partnership intends to reinvest the net sales proceeds in an additional
property.
F-356
<PAGE>
CNL INCOME FUND XV, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31,
1997................................................................... F-358
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997............................................ F-359
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997............ F-360
Condensed Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997............................................ F-361
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997...................................... F-362
Report of Independent Accountants....................................... F-364
Balance Sheets as of December 31, 1997 and 1996......................... F-365
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995................................................................... F-366
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995.......................................................... F-367
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995................................................................... F-368
Notes to Financial Statements for the Years Ended December 31, 1997,
1996 and 1995.......................................................... F-369
</TABLE>
F-357
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September December
30, 1998 31, 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $1,004,141 and $801,601.. $23,531,327 $22,145,138
Net investment in direct financing leases............. 7,609,576 9,264,307
Investment in joint ventures.......................... 2,743,255 2,561,816
Cash and cash equivalents............................. 1,222,529 1,614,708
Receivables, less allowance for doubtful accounts of
$7,434 in 1998....................................... -- 26,888
Prepaid expenses...................................... 20,315 7,633
Organization costs, less accumulated amortization of
$9,049 and $7,548.................................... 951 2,452
Accrued rental income................................. 1,474,597 1,422,781
----------- -----------
$36,602,550 $37,045,723
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND PARTNERS' CAPITAL
<S> <C> <C>
Accounts payable....................................... $ 1,078 $ 6,991
Accrued and escrowed real estate taxes payable......... 31,820 6,158
Distributions payable.................................. 800,000 800,000
Due to related parties................................. 5,049 4,311
Rents paid in advance and deposits..................... -- 4,860
----------- -----------
Total liabilities...................................... 837,947 822,320
Partners' capital...................................... 35,764,603 36,223,403
----------- -----------
$36,602,550 $37,045,723
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-358
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
------------------- ----------------------
1998 1997 1998 1997
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases.......................... $ 613,294 $ 631,816 $1,849,278 $1,894,349
Adjustments to accrued rental
income.......................... -- -- (250,631) --
Earned income from direct
financing leases................ 219,480 264,571 726,544 795,619
Interest and other income........ 12,045 15,534 51,682 45,595
--------- --------- ---------- ----------
844,819 911,921 2,376,873 2,735,563
--------- --------- ---------- ----------
Expenses:
General operating and
administrative.................. 40,231 31,490 107,194 101,281
Professional services............ 5,358 5,077 18,867 15,189
Management fees to related
parties......................... 8,180 8,847 25,475 26,312
Real estate taxes................ 28,562 -- 31,208 --
State and other taxes............ -- -- 27,763 26,009
Depreciation and amortization.... 80,468 62,099 204,668 186,248
--------- --------- ---------- ----------
162,799 107,513 415,175 355,039
--------- --------- ---------- ----------
Income Before Equity in Earnings of
Joint Ventures.................... 682,020 804,408 1,961,698 2,380,524
Equity in Earnings of Joint
Ventures.......................... 59,208 60,424 179,502 177,735
--------- --------- ---------- ----------
Net Income......................... $ 741,228 $ 864,832 $2,141,200 $2,558,259
========= ========= ========== ==========
Allocation of Net Income:
General partners................. $ 7,412 $ 8,649 $ 21,412 $ 25,583
Limited partners................. 733,816 856,183 2,119,788 2,532,676
--------- --------- ---------- ----------
$ 741,228 $ 864.832 $2,141,200 $2,558,259
========= ========= ========== ==========
Net Income Per Limited Partner
Unit.............................. $ 0.18 $ 0.21 $ 0.53 $ 0.63
========= ========= ========== ==========
Weighted Average Number of Limited
Partner Units Outstanding......... 4,000,000 4,000,000 4,000,000 4,000,000
========= ========= ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-359
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
----------------- ------------
1998 1997
----------------- ------------
<S> <C> <C>
General partners:
Beginning balance............................. $ 117,411 $ 83,062
Net income.................................... 21,412 34,349
----------- -----------
138,823 117,411
----------- -----------
Limited partners:
Beginning balance............................. 36,105,992 35,905,436
Net income.................................... 2,119,788 3,400,556
Distributions ($0.65 and $0.80 per limited
partner unit, respectively).................. (2,600,000) (3,200,000)
----------- -----------
35,625,780 36,105,992
----------- -----------
Total partners' capital......................... $35,764,603 $36,223,403
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-360
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Net Cash Provided by Operating Activities........... $ 2,415,807 $ 2,550,613
----------- -----------
Cash Flows from Investing Activities:
Investment in joint ventures...................... (207,986) --
Return of capital from joint venture.............. -- 51,950
----------- -----------
Net cash provided by (used in)
investing activities........................... (207,986) 51,950
----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners................. (2,600,000) (2,480,000)
----------- -----------
Net cash used in financing
activities..................................... (2,600,000) (2,480,000)
----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents......................................... (392,179) 122,563
Cash and Cash Equivalents at Beginning
of Period........................................... 1,614,708 1,536,163
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 1,222,529 $ 1,658,726
=========== ===========
Supplemental Schedule of Non-Cash Investing
and Financing Activities
Net investment in direct financing lease
reclassified to land and building on operating
leases as a result of lease termination............ $ 1,588,729 $ --
=========== ===========
Distributions declared and unpaid at end of
period............................................. $ 800,000 $ 800,000
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-361
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, 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, 1997.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2. Net Investment in Direct Financing Leases
During the nine months ended September 30, 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 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.
3. Investment in Joint Ventures
In June 1998, the Partnership acquired a 14.93% interest in a property in
Fort Myers, Florida, 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 investments are included in investment in joint
ventures.
F-362
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--Continued
Quarters and Nine Months Ended September 30, 1998 and 1997
Wood-Ridge Real Estate Joint Venture and the Partnership and affiliates as
tenants-in-common in two separate tenancy-in-common arrangements, own and lease
six properties and one property, respectively, to operators 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:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation.................... $6,094,108 $5,563,722
Net investment in direct financing lease..... 829,116 --
Cash......................................... 8,207 10,890
Receivables.................................. -- 5,923
Accrued rental income........................ 117,515 74,001
Other assets................................. 955 1,078
Liabilities.................................. 24,817 18,195
Partners' capital............................ 7,025,084 5,637,419
Revenues..................................... 534,294 650,354
Net income................................... 425,472 522,611
</TABLE>
The Partnership recognized income totaling $179,502 and $177,735 for the
nine months ended September 30, 1998 and 1997, respectively, from these joint
ventures, $59,208 and $60,424 of which was earned during the quarters ended
September 30, 1998 and 1997, respectively.
F-363
<PAGE>
Report of Independent Accountants
To the Partners
CNL Income Fund XV, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund XV, Ltd.
(a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. 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 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 Income Fund XV, Ltd. as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
January 19, 1998
F-364
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation............................. $22,145,138 $22,390,701
Net investment in direct financing leases............. 9,264,307 9,351,815
Investment in joint ventures.......................... 2,561,816 2,624,620
Cash and cash equivalents............................. 1,614,708 1,536,163
Receivables, less allowance for doubtful accounts of
$1,458 in 1996....................................... 26,888 30,176
Prepaid expenses...................................... 7,633 7,049
Organization costs, less accumulated amortization of
$7,548 and $5,548.................................... 2,452 4,452
Accrued rental income................................. 1,422,781 991,702
----------- -----------
$37,045,723 $36,936,678
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND PARTNERS' CAPITAL
<S> <C> <C>
Accounts payable....................................... $ 6,991 $ 3,053
Escrowed real estate taxes payable..................... 6,158 8,581
Distributions payable.................................. 800,000 880,000
Due to related parties................................. 4,311 1,355
Rents paid in advance.................................. 4,860 55,191
----------- -----------
Total liabilities...................................... 822,320 948,180
Partners' capital...................................... 36,223,403 35,988,498
----------- -----------
$37,045,723 $36,936,678
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-365
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases....... $2,527,261 $2,527,261 $2,492,250
Earned income from direct financing
leases................................... 1,059,530 1,069,205 954,495
Contingent rental income.................. 25,791 23,318 97,539
Interest and other income................. 56,183 55,964 90,095
---------- ---------- ----------
3,668,765 3,675,748 3,634,379
---------- ---------- ----------
Expenses:
General operating and administrative...... 135,714 149,388 150,586
Professional services..................... 24,526 19,881 30,960
Management fees to related parties........ 35,321 35,126 34,213
State and other taxes..................... 29,200 30,924 12,560
Depreciation and amortization............. 248,348 248,232 243,175
---------- ---------- ----------
473,109 483,551 471,494
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Ventures and Loss on Sale of Land.......... 3,195,656 3,192,197 3,162,885
Equity in Earnings of Joint Ventures........ 239,249 392,862 280,606
Loss on Sale of Land........................ -- -- (71,023)
---------- ---------- ----------
Net Income.................................. $3,434,905 $3,585,059 $3,372,468
========== ========== ==========
Allocation of Net Income:
General partners............................ $ 34,349 $ 35,851 $ 34,352
Limited partners............................ 3,400,556 3,549,208 3,338,116
---------- ---------- ----------
$3,434,905 $3,585,059 $3,372,468
========== ========== ==========
Net Income Per Limited Partner Unit......... $ 0.85 $ 0.89 $ 0.83
========== ========== ==========
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-366
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<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,
1994................... $1,000 $ 11,859 $40,000,000 $ (1,185,946) $ 1,174,059 $(4,790,000) $35,210,972
Distributions to limited
partners ($0.73 per
limited
partner unit).......... -- -- -- (2,900,001) -- -- (2,900,001)
Net income.............. -- 34,352 -- -- 3,338,116 -- 3,372,468
------ -------- ----------- ------------ ----------- ----------- -----------
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
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-367
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows From Operating Activities:
Cash received from tenants............... $3,228,741 $3,378,973 $3,136,569
Distributions from joint ventures........ 249,318 259,407 237,566
Cash paid for expenses................... (218,106) (246,748) (222,824)
Interest received........................ 46,642 43,050 88,059
---------- ---------- ----------
Net cash provided by operating
activities............................ 3,306,595 3,434,682 3,239,370
---------- ---------- ----------
Cash Flows From Investing Activities:
Proceeds from sale of land............... -- -- 811,706
Additions to land and buildings on
operating leases........................ -- -- (1,625,601)
Investment in direct financing leases.... -- -- (2,412,973)
Investment in joint ventures............. -- (129,939) (720,552)
Return of capital from joint venture..... 51,950 -- --
Other.................................... -- -- 25,150
---------- ---------- ----------
Net cash provided by (used in)investing
activities............................ 51,950 (129,939) (3,922,270)
---------- ---------- ----------
Cash Flows From Financing Activities:
Reimbursement of acquisition costs paid
by related parties on behalf of the
Partnership............................. -- -- (23,507)
Distributions to limited partners........ (3,280,000) (3,200,000) (2,650,003)
---------- ---------- ----------
Net cash used in financing activities.. (3,280,000) (3,200,000) (2,673,510)
---------- ---------- ----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................... 78,545 104,743 (3,356,410)
Cash and Cash Equivalents at Beginning of
year...................................... 1,536,163 1,431,420 4,787,830
---------- ---------- ----------
Cash and Cash Equivalents at End of Year... $1,614,708 $1,536,163 $1,431,420
========== ========== ==========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income................................. $3,434,905 $3,585,059 $3,372,468
---------- ---------- ----------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation............................... 245,563 245,563 241,175
Amortization............................... 2,785 2,669 2,000
Equity in earnings of joint ventures, net
of distributions.......................... 10,069 (133,455) (43,040)
Loss on sale of land....................... -- -- 71,023
Decrease (increase) in receivables......... 3,288 58,013 (38,005)
Decrease in net investment in direct
financing leases.......................... 87,508 77,834 65,572
Increase in prepaid expenses............... (584) (4,234) (2,815)
Increase in accrued rental income.......... (431,079) (431,654) (429,233)
Increase in accounts payable and accrued
expenses.................................. 1,515 1,972 2,586
Increase (decrease) in due to related
parties, excluding reimbursement of
acquisition costs paid in behalf of the
Partnership............................... 2,956 (6,880) 7,683
Increase (decrease) in rents paid in
advance................................... (50,331) 39,795 (10,044)
---------- ---------- ----------
Total adjustments.......................... (128,310) (150,377) (133,098)
---------- ---------- ----------
Net Cash Provided by Operating Activities.. $3,306,595 $3,434,682 $3,239,370
========== ========== ==========
Supplemental Schedule of Non-Cash Financing
Activities:
Distributions declared and unpaid at
December 31............................... $ 800,000 $ 880,000 $ 800,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-368
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
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.
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.
Investment in Joint Ventures--The Partnership accounts for its interests in
Wood-Ridge Real Estate Joint Venture and a property in Clinton, North
Carolina, 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.
F-369
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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 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 1997 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 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>
1997 1996
----------- -----------
<S> <C> <C>
Land............................................. $15,579,852 $15,579,852
Buildings........................................ 7,366,887 7,366,887
----------- -----------
22,946,739 22,946,739
Less accumulated depreciation.................... (801,601) (556,038)
----------- -----------
$22,145,138 $22,390,701
=========== ===========
</TABLE>
F-370
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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, 1997, 1996 and 1995, the Partnership recognized
$431,079, $431,654 and $429,233, 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, 1997:
<TABLE>
<S> <C>
1998........................................................... $ 2,096,763
1999........................................................... 2,171,812
2000........................................................... 2,329,693
2001........................................................... 2,333,165
2002........................................................... 2,364,378
Thereafter..................................................... 28,891,694
-----------
$40,187,505
===========
</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>
1997 1996
----------- -----------
<S> <C> <C>
Minimum lease payments receivable................ $19,905,444 $21,052,482
Estimated residual values........................ 2,873,859 2,873,859
Less unearned income............................. (13,514,996) (14,574,526)
----------- -----------
Net investment in direct financing leases........ $ 9,264,307 $ 9,351,815
=========== ===========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998........................................................... $ 1,147,038
1999........................................................... 1,147,038
2000........................................................... 1,149,782
2001........................................................... 1,155,269
2002........................................................... 1,177,626
Thereafter..................................................... 14,128,691
-----------
$19,905,444
===========
</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-371
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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.
In September 1996, Wood-Ridge Real Estate Joint Venture sold its two
properties to the tenant of these properties 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 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 and January 1997, Wood-Ridge Real Estate Joint Venture
reinvested $4,404,046 and $502,598, respectively, of the net sales proceeds
from the sale of the two properties during 1996, in five properties and one
property, respectively. As of December 31, 1997, the Partnership had received
approximately $52,000, representing its pro-rata share of the uninvested net
sales proceeds. As of December 31, 1997, the Partnership owned a 50 percent
interest in the profits and losses of the joint venture.
In January 1996, the Partnership acquired a property in Clinton, North
Carolina, with affiliates of the general partners as tenants-in-common. In
connection therewith, the Partnership contributed $122,439 for a 15.02%
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, and the Partnership and affiliates,
as tenants-in-common, own and lease six properties and one property,
respectively, to operators 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>
1997 1996
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation......................... $5,563,722 $5,178,396
Cash.............................................. 10,890 781
Restricted cash................................... -- 595,426
Receivables....................................... 5,923 15,200
Accrued rental income............................. 74,001 11,971
Other assets...................................... 1,078 15,263
Liabilities....................................... 18,195 33,238
Partners' capital................................. 5,637,419 5,783,799
Revenues.......................................... 650,354 643,646
Gain on sale of land and buildings................ -- 261,106
Net income........................................ 522,611 837,850
</TABLE>
The Partnership recognized income totaling $239,249, $392,862 and $280,606
for the years ended December 31, 1997, 1996 and 1995, respectively, from these
entities.
F-372
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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 sale of properties, 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 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.
During the years ended December 31, 1997, 1996 and 1995, the Partnership
declared distributions to the limited partners of $3,200,000, $3,280,000 and
$2,900,001, 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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................. $3,434,905 $3,585,059 $3,372,468
Depreciation for tax reporting
purposes in excess of depreciation
for financial reporting purposes..... (160,007) (160,007) (139,941)
Direct financing leases recorded as
operating leases for tax reporting
purposes............................. 87,508 77,834 65,572
Loss on sale of land for financial
reporting purposes in excess of loss
for tax reporting purposes........... -- -- 71,023
Equity in earnings of joint ventures
for financial reporting purposes in
excess of equity in earnings of joint
ventures for tax reporting purposes.. 23,823 (158,836) (67,933)
Accrued rental income................. (431,079) (431,654) (429,233)
Rents paid in advance................. (50,331) 39,795 (10,044)
Other................................. (670) 2,127 --
---------- ---------- ----------
Net income for federal income tax
purposes............................. $2,904,149 $2,954,318 $2,861,912
========== ========== ==========
</TABLE>
F-373
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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 parent company of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, served
as president of CNL Fund Advisors, Inc. through October 1997. CNL Income Fund
Advisors, Inc. was a wholly owned subsidiary of CNL Group, Inc. until its
merger, effective January 1, 1996, with CNL Fund Advisors, Inc. During the
years ended December 31, 1997, 1996 and 1995, CNL Income Fund Advisors, Inc.
and CNL Fund Advisors, Inc. (hereinafter referred to collectively as the
"Affiliates") each performed certain services for the Partnership, as described
below.
During the years ended December 31, 1997, 1996 and 1995, certain 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 Affiliates 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 Affiliates. 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 $35,321, $35,126 and $34,213 for the years ended
December 31, 1997, 1996 and 1995, respectively.
Certain Affiliates are 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 Affiliates provide 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, 1997, 1996 and 1995, Affiliates of the
general partners provided accounting and administrative services to the
Partnership on a day-to-day basis. The Partnership incurred $78,051, $87,265
and $87,894 for the years ended December 31, 1997, 1996 and 1995, respectively,
for such services.
The due to related parties at December 31, 1997 and 1996, totaled $4,311 and
$1,355, respectively.
F-374
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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
at least one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Checkers Drive-In
Restaurants, Inc.............................. $716,905 $723,558 $731,967
Long John Silver's, Inc........................ 710,325 714,804 721,162
Flagstar Enterprises, Inc.
and Quincy's Restaurants, Inc................. 635,413 638,042 639,981
Golden Corral Corporation...................... 582,600 531,775 567,697
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 at least one of the
years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Long John Silver's............................. $773,265 $777,743 $758,408
Checkers Drive-In Restaurants.................. 716,905 723,558 731,967
Golden Corral Family
Steakhouse Restaurants........................ 582,600 531,775 567,697
Hardee's....................................... 543,889 546,037 547,539
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. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
F-375
<PAGE>
CNL INCOME FUND XVI, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997.. F-377
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997............................................. F-378
Condensed Statements of Partner's Capital for the Nine Months Ended Sep-
tember 30, 1998 and for the Year Ended December 31, 1997................ F-379
Condensed Statements of Cash Flows for the Nine Months Ended September
30, 1998 and 1997....................................................... F-380
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997....................................... F-382
Report of Independent Accountants........................................ F-385
Balance Sheets as of December 31, 1997 and 1996.......................... F-386
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-387
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995........................................................... F-388
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-389
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and 1995................................................................ F-390
</TABLE>
F-376
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less accu-
mulated depreciation
and allowance for loss on land and building....... $30,418,876 $30,658,994
Net investment in direct financing leases.......... 5,373,527 5,968,812
Investment in joint ventures....................... 1,510,306 771,684
Cash and cash equivalents.......................... 1,641,160 1,673,869
Restricted cash.................................... -- 627,899
Receivables, less allowance for doubtful accounts
of $51,686 and $879............................... -- 31,946
Prepaid expenses................................... 22,089 9,293
Organization costs, less accumulated amortization
of $8,050 and $6,550.............................. 1,950 3,450
Accrued rental income.............................. 1,398,364 1,192,373
----------- -----------
$40,366,272 $40,938,320
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Construction costs payable......................... $ -- $ 53,278
Accounts payable................................... 2,927 2,707
Accrued and escrowed real estate taxes payable..... 32,363 4,353
Distributions payable.............................. 900,000 900,000
Due to related parties............................. 5,178 3,351
Rents paid in advance and deposits................. 39,871 69,705
----------- -----------
Total liabilities................................ 980,339 1,033,394
Partners' capital.................................. 39,385,933 39,904,926
----------- -----------
$40,366,272 $40,938,320
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-377
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases........................ $ 854,766 $ 888,575 $2,626,090 $2,677,179
Adjustment to accrued rental
income........................ (433) -- (119,505) --
Earned income from direct
financing leases.............. 133,949 175,648 469,325 527,794
Interest and other income...... 10,716 19,767 45,220 58,596
---------- ---------- ---------- ----------
998,998 1,083,990 3,021,130 3,263,569
---------- ---------- ---------- ----------
Expenses:
General operating and
administrative................ 47,302 33,457 121,325 114,516
Professional services.......... 8,320 5,684 26,271 18,996
Management fees to related
parties....................... 9,257 9,823 29,073 29,565
Real estate taxes.............. 29,370 -- 30,209 --
State and other taxes.......... 7 25 19,398 20,559
Loss on termination of direct
financing lease............... 4,471 -- 4,471 --
Depreciation and amortization.. 144,394 140,916 413,391 422,966
---------- ---------- ---------- ----------
243,121 189,905 644,138 606,602
========== ========== ========== ==========
Income Before Equity in Earnings
of Joint Ventures, Gain on Sale
of Land and Provision for Loss
on Land and Building............ 755,877 894,085 2,376,992 2,656,967
Equity in Earnings of Joint
Ventures........................ 33,458 18,506 98,414 55,126
Gain on Sale of Land............. -- -- -- 41,148
Provision for Loss on Land and
Building........................ (204,399) -- (204,399) --
---------- ---------- ---------- ----------
Net Income....................... $ 584,936 $ 912,591 $2,271,007 $2,753,241
========== ========== ========== ==========
Allocation of Net Income:
General partners............... $ 7,327 $ 9,125 $ 24,188 $ 27,120
Limited partners............... 577,609 903,466 2,246,819 2,726,121
---------- ---------- ---------- ----------
$ 5584,936 $ 912,591 $2,271,007 $2,753,241
========== ========== ========== ==========
Net Income Per Limited Partner
Unit............................ $ 0.13 $ 0.20 $ 0.50 $ 0.61
========== ========== ========== ==========
Weighted Average Number of
Limited Partner Units
Outstanding..................... 4,500,000 4,500,000 4,500,000 4,500,000
========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-378
<PAGE>
CNL INCOME FUND XVI LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Year Ended
Nine Months Ended December
September 30, 31,
1998 1997
----------------- -----------
<S> <C> <C>
General partners:
Beginning balance............................. $ 99,615 $ 63,423
Net income.................................... 24,188 36,192
----------- -----------
123,803 99,615
----------- -----------
Limited partners:
Beginning balance............................. 39,805,311 39,781,176
Net income.................................... 2,246,819 3,624,135
Distributions ($0.62 and $0.80 per limited
partner unit, respectively).................. (2,790,000) (3,600,000)
----------- -----------
39,262,130 39,805,311
----------- -----------
Total partners' capital..................... $39,385,933 $39,904,926
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-379
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities.......... $ 2,759,611 $ 2,923,755
----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and building............ -- 610,384
Reimbursement from developer of construction
costs............................................. 161,648 --
Additions to land and buildings on operating
leases............................................ (3,545) (23,501)
Investment in direct financing leases.............. (28,403) (29,257)
Investment in joint ventures....................... (742,404) --
Decrease in restricted cash........................ 610,384 --
----------- -----------
Net cash provided by (used in) investing
activities...................................... (2,320) 557,626
----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners.................. (2,790,000) (2,700,000)
----------- -----------
Net cash used in financing activities............ (2,790,000) (2,700,000)
----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents......................................... (32,709) 781,381
Cash and Cash Equivalents at Beginning of Period..... 1,673,869 1,546,203
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 1,641,160 $ 2,327,584
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-380
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS--CONTINUED
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------
1998 1997
-------- --------
<S> <C> <C>
Supplemental Schedule of Non-Cash Investing and Financing
Activities:
Land and building under operating lease exchanged for land
and building under operating lease........................ $827,789 $ --
======== ========
Land and building under direct financing lease exchanged
for land and building under direct financing lease........ $761,334 $ --
======== ========
Net investment in direct financing lease reclassified to
land and building on operating lease as aresult of lease
termination............................................... $534,275 $ --
======== ========
Distributions declared and unpaid at end of period......... $900,000 $900,000
======== ========
</TABLE>
See accompanying notes to financial statements.
F-381
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine months Ended September 30, 1998 and 1997
1.Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, 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, 1997.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2.Land and Building on Operating Leases
Land and buildings on operating leases consisted of the following at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land............................................ $15,378,218 $15,259,455
Buildings....................................... 17,094,391 16,836,982
----------- -----------
32,472,609 32,096,437
Less accumulated depreciation................... (1,849,334) (1,437,443)
----------- -----------
30,623,275 30,658,994
Less allowance for loss on land and building.... (204,399) --
----------- -----------
$30,418,876 $30,658,994
=========== ===========
</TABLE>
In May 1998, the tenant of the property in Madison, Tennessee exercised its
option under the terms of its lease agreement, to substitute a replacement
property for the existing, non-performing property. In conjunction therewith,
the Partnership exchanged the non-performing 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 nonmonetary
exchange of similar assets.
During the nine months ended September 30, 1998, the Partnership established
an allowance for loss on land and building of $204,399, relating to the
property located in Celina, Ohio. The allowance represents the difference
between the carrying value of the property at September 30, 1998 and the
current estimate of net realizable value for this property.
F-382
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Nine months Ended September 30, 1998 and 1997
3.Net Investment in Direct Financing Leases
In June 1998, the tenant of the property in Chattanooga, Tennessee exercised
its option under the terms of its lease agreement, to substitute a replacement
property for the existing, non-performing property. In conjunction therewith,
the Partnership exchanged the non-performing 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 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 quarter and nine months ended September 30, 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 #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.
4.Investment in Joint Ventures
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 September 30, 1998, the Partnership had
contributed $134,507, to purchase land and pay construction costs relating to
the joint venture. The Partnership has agreed to contribute approximately
$182,946 in additional construction costs to the joint venture. The Partnership
will 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 two properties held as tenants-in-common with affiliates at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation...................... $2,908,637 $941,142
Cash........................................... 9,842 8,190
Prepaid expenses............................... 197 29
Accrued rental income.......................... 47,907 20,171
Liabilities.................................... 90,656 8,163
Partners' capital.............................. 2,875,927 961,369
Revenues....................................... 211,863 112,744
Net income..................................... 175,432 91,575
</TABLE>
F-383
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Nine months Ended September 30, 1998 and 1997
The Partnership recognized income totaling $98,414 and $55,126 for the nine
months ended September 30, 1998 and 1997, respectively, from these properties,
$33,458 and $18,506 of which was earned for the quarters ended September 30,
1998 and 1997, respectively.
5.Concentration of Credit Risk
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 at least one of the nine month periods
ended September 30:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Denny's................................................... $876,194 $873,738
Golden Corral Family Steakhouse Restaurant................ 703,784 710,655
Jack in the Box........................................... 417,457 417,457
Boston Market............................................. 372,579 246,975
</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 restaurant chains could significantly
impact the results of operations of the Partnership. However, the general
partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
In October 1998, the tenant of five of the Boston Market properties
(including one property held as tenants-in-common with an affiliate of the
general partners) filed for bankruptcy. If the leases are eventually rejected,
the Partnership anticipates that rental income relating to these properties
will terminate 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. However, the general partners do not anticipate that any
decrease in rental income due to lost revenues relating to these properties
will have a material effect on the Partnership's financial position or results
of operations.
F-384
<PAGE>
Report of Independent Accountants
To the Partners
CNL Income Fund XVI, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund XVI, Ltd.
(a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. 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 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 Income Fund XVI, Ltd.
as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997,
in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
January 26, 1998
F-385
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation............................. $30,658,994 $31,766,349
Net investment in direct financing leases............. 5,968,812 6,006,496
Investment in joint venture........................... 771,684 774,389
Cash and cash equivalents............................. 1,673,869 1,546,203
Restricted cash....................................... 627,899 --
Receivables, less allowance for doubtful accounts of
$879 and $9,875...................................... 31,946 76,094
Prepaid expenses...................................... 9,293 9,174
Organization costs, less accumulated amortization of
$6,550 and $4,550.................................... 3,450 5,450
Accrued rental income................................. 1,192,373 771,487
----------- -----------
$40,938,320 $40,955,642
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Acquisition and construction costs payable............ $ 53,278 $ 106,036
Accounts payable...................................... 2,707 2,262
Escrowed real estate taxes payable.................... 4,353 3,343
Distributions payable................................. 900,000 900,000
Due to related parties................................ 3,351 2,292
Rents paid in advance and deposits.................... 69,705 97,110
----------- -----------
Total liabilities................................. 1,033,394 1,111,043
Partners' capital..................................... 39,904,926 39,844,599
----------- -----------
$40,938,320 $40,955,642
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-386
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases........ $3,562,920 $3,571,244 $2,209,434
Earned income from direct financing
leases.................................... 703,149 726,314 489,522
Contingent rental income................... 35,604 37,600 --
Interest................................... 73,634 75,160 321,137
Other income............................... 7,180 8,232 3,548
---------- ---------- ----------
4,382,487 4,418,550 3,023,641
---------- ---------- ----------
Expenses:
General operating and administrative....... 186,934 183,734 187,800
Professional services...................... 25,352 26,569 59,526
Management fees to related parties......... 40,087 39,206 24,128
State and other taxes...................... 20,559 12,369 3,141
Depreciation and amortization.............. 563,883 552,447 318,205
---------- ---------- ----------
836,815 814,325 592,800
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Venture and Gain on Sale of Land and
Buildings................................... 3,545,672 3,604,225 2,430,841
Equity in Earnings of Joint Venture.......... 73,507 19,668 --
Gain on Sale of Land and Buildings........... 41,148 124,305 --
---------- ---------- ----------
Net Income................................... $3,660,327 $3,748,198 $2,430,841
========== ========== ==========
Allocation of Net Income:
General partners........................... $ 36,192 $ 36,239 $ 24,308
Limited partners........................... 3,624,135 3,711,959 2,406,533
---------- ---------- ----------
$3,660,327 $3,748,198 $2,430,841
========== ========== ==========
Net Income Per Limited Partner Unit.......... $ 0.81 $ 0.82 $ 0.60
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding........................... 4,500,000 4,500,000 4,010,281
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-387
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<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,
1994................... $1,000 $ 1,876 $20,174,172 $ (151,434) $ 185,701 $(2,737,282) $17,474,033
Contributions from
limited partners....... -- -- 24,825,828 -- -- -- 24,825,828
Distributions to limited
partners ($0.61 per
limited partner unit).. -- -- -- (2,437,832) -- -- (2,437,832)
Syndication costs....... -- -- -- -- -- (2,652,718) (2,652,718)
Net income.............. -- 24,308 -- -- 2,406,533 -- 2,430,841
------ ------- ----------- ----------- ---------- ----------- -----------
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
====== ======= =========== =========== ========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-388
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows From Operating Activities:
Cash received from tenants.......... $ 3,881,005 $ 4,007,432 $ 2,353,106
Distributions from joint venture.... 76,212 20,279 --
Cash paid for expenses.............. (231,712) (349,145) (194,749)
Interest received................... 54,919 75,160 323,038
----------- ----------- -----------
Net cash provided by operating ac-
tivities......................... 3,780,424 3,753,726 2,481,395
----------- ----------- -----------
Cash Flows From Investing Activities:
Proceeds from sale of land and
buildings.......................... 610,384 775,000 --
Additions to land and buildings on
operating leases................... (23,501) (2,355,627) (16,012,458)
Investment in direct financing
leases............................. (29,257) (405,937) (5,595,236)
Investment in joint venture......... -- (775,000) --
Increase in restricted cash......... (610,384) -- --
Increase in other assets............ -- (58,720)
Other............................... -- -- 20,714
----------- ----------- -----------
Net cash used in investing activi-
ties............................. (52,758) (2,761,564) (21,645,700)
----------- ----------- -----------
Cash Flows From Financing Activities:
Reimbursement of acquisition and
syndication costs paid by related
parties on behalf of the
Partnership........................ -- (2,494) (405,569)
Contributions from limited part-
ners............................... -- -- 24,825,828
Distributions to limited partners... (3,600,000) (3,431,251) (1,798,921)
Payment of syndication costs........ -- -- (2,452,743)
----------- ----------- -----------
Net cash provided by (used in) fi-
nancing activities............... (3,600,000) (3,433,745) 20,168,595
----------- ----------- -----------
Net Increase (Decrease) in Cash and
Cash Equivalents...................... 127,666 (2,441,583) 1,004,290
Cash and Cash Equivalents at Beginning
of Year............................... 1,546,203 3,987,786 2,983,496
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year.................................. $ 1,673,869 $ 1,546,203 $ 3,987,786
=========== =========== ===========
Reconciliation of Net Income to Net
Cash Provided by Operating Activities:
Net income........................... $ 3,660,327 $ 3,748,198 $ 2,430,841
----------- ----------- -----------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation........................ 561,883 550,447 316,205
Amortization........................ 2,000 2,000 2,000
Equity in earnings of joint venture,
net of distributions............... 2,705 611 --
Gain on sale of land and buildings.. (41,148) (124,305) --
Decrease (increase) in receivables.. 26,633 58,396 (83,993)
Decrease in net investment in direct
financing leases................... 37,684 29,269 16,003
Increase in prepaid expenses........ (119) (8,514) (660)
Increase in accrued rental income... (444,650) (468,201) (299,090)
Increase in accounts payable and ac-
crued expenses..................... 1,455 517 4,036
Increase (decrease) in due to re-
lated parties, excluding reimburse-
ment of acquisition and syndication
costs paid on behalf of the Part-
nership............................ 1,059 (76,259) 76,682
Increase (decrease) in rents paid in
advance and deposits............... (27,405) 41,567 19,371
----------- ----------- -----------
Total adjustments................. 120,097 5,528 50,554
----------- ----------- -----------
Net Cash Provided by Operating Activi-
ties.................................. $ 3,780,424 $ 3,753,726 $ 2,481,395
=========== =========== ===========
Supplemental Schedule of Non-Cash In-
vesting and Financing Activities:
Related parties paid certain acquisi-
tion and syndication costs on behalf
of the Partnership as follows:
Acquisition costs................... $ -- $ 9,356 $ 97,589
Syndication costs................... -- -- 258,466
----------- ----------- -----------
$ -- $ 9,356 $ 356,055
=========== =========== ===========
Distributions declared and unpaid at
December 31........................... $ 900,000 $ 900,000 $ 787,500
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-389
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
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. Under the terms of a registration statement filed with
the Securities and Exchange Commission, the Partnership is authorized to sell a
maximum of 4,500,000 units ($45,000,000) of limited partnership interest. A
total of 4,500,000 units ($45,000,000) of limited partnership interest was
sold.
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.
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.
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-390
<PAGE>
CNL INCOME FUND XVI, LTD
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
1.Significant Accounting Policies--Continued
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 Venture--The Partnership accounts for its interest in a
property in Fayetteville, North Carolina, held as tenants-in-common with an
affiliate, using the equity method since the Partnership shares control with an
affiliate which has 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 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 (Note 6).
Weighted Average Number of Limited Partner Units Outstanding--Net income and
distributions per limited partner unit are calculated based upon the weighted
average number of units of limited partnership interest outstanding during the
period the Partnership was operational.
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 the interior and exterior of the building and carries insurance
coverage for public liability, property damage, fire
F-391
<PAGE>
CNL INCOME FUND XVI, LTD
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
2.Leases--Continued
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>
1997 1996
----------- -----------
<S> <C> <C>
Land............................................... $15,259,455 $15,804,927
Buildings.......................................... 16,836,982 16,836,982
----------- -----------
32,096,437 32,641,909
Less accumulated Depreciation...................... (1,437,443) (875,560)
----------- -----------
$30,658,994 $31,766,349
=========== ===========
</TABLE>
In April 1996, the Partnership sold its property in Appleton, Wisconsin, and
received net sales proceeds of $775,000, resulting in a gain of $124,305 for
financial reporting purposes. This property was originally acquired by the
Partnership in February 1995 and had a cost of approximately $595,100,
excluding acquisition fees and miscellaneous acquisition expenses; therefore,
the Partnership sold the property for approximately $179,900 in excess of its
original purchase price.
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.
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, 1997, 1996 and 1995, the Partnership recognized $444,650,
$468,201 and $299,090, 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, 1997:
<TABLE>
<S> <C>
1998............................................................. $ 3,128,262
1999............................................................. 3,177,377
2000............................................................. 3,309,707
2001............................................................. 3,378,687
2002............................................................. 3,401,533
Thereafter....................................................... 38,510,788
-----------
$54,906,354
===========
</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-392
<PAGE>
CNL INCOME FUND XVI, LTD
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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>
1997 1996
----------- -----------
<S> <C> <C>
Minimum lease payments receivable.................. $13,526,299 $14,267,132
Estimated residual Values.......................... 1,932,560 1,932,560
Less unearned income............................... (9,490,047) (10,193,196)
----------- -----------
Net investment in direct financing leases.......... $ 5,968,812 $ 6,006,496
=========== ===========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998............................................................. $ 741,451
1999............................................................. 742,074
2000............................................................. 755,382
2001............................................................. 759,526
2002............................................................. 765,536
Thereafter....................................................... 9,762,330
-----------
$13,526,299
===========
</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 Venture
In October 1996, the Partnership acquired a property in Fayetteville, North
Carolina, with an affiliate of the Partnership that has the same general
partners, as tenants-in-common. In connection therewith, the Partnership
contributed $775,000 for a 80.27% interest in such property. The Partnership
accounts for its investment in this property using the equity method since the
Partnership shares control with an affiliate. Amounts relating to this
investment are presented as an investment in joint venture.
The Partnership and an affiliate, as tenants-in-common, own and lease one
Boston Market property. The following presents the combined, condensed
financial information for the property held as tenants-in-common with an
affiliate at December 31:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Land and building on operating lease, less accumulated
depreciation........................................... $941,142 $960,732
Cash.................................................... 8,190 100
Prepaid expenses........................................ 29 --
Accrued rental income................................... 20,171 3,929
Liabilities............................................. 8,163 23
Partners' capital....................................... 961,369 964,738
Revenues................................................ 112,744 29,293
Net income.............................................. 91,575 24,502
</TABLE>
The Partnership recognized income totalling $73,507 and $19,668 for the
years ended December 31, 1997 and 1996, respectively, from this property held
as tenants-in-common with an affiliate.
F-393
<PAGE>
CNL INCOME FUND XVI, LTD
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
7.Syndication Costs
Syndication costs consisting of legal fees, commissions, the marketing
support and due diligence expense reimbursement fee, printing and other
expenses incurred in connection with the offering totalled $5,390,000. These
offering expenses were charged to the limited partners' capital accounts to
reflect the net capital proceeds of the offering.
8.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, 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 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.
During the years ended December 31, 1997, 1996 and 1995, the Partnership
declared distributions to the limited partners of $3,600,000, $3,543,751 and
$2,437,832, respectively. No distributions have been made to the general
partners to date.
F-394
<PAGE>
CNL INCOME FUND XVI, LTD
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................... $3,660,327 $3,748,198 $2,430,841
Depreciation for tax reporting purposes
less than (in excess of) depreciation
for financial reporting purposes....... 3,576 (1,943) (13,929)
Direct financing leases recorded as
operating leases for tax reporting
purposes............................... 37,684 29,269 16,003
Equity in earnings of joint venture for
financial reporting purposes in excess
of equity in earnings of joint venture
for tax reporting purposes............. (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......... (8,996) 6,913 2,962
Accrued rental income................... (444,650) (468,201) (299,090)
Rents paid in advance................... (27,405) 47,221 2,595
Other................................... -- 4,008 --
---------- ---------- ----------
Net income for federal income tax
purposes............................... $3,243,823 $3,239,830 $2,139,382
========== ========== ==========
</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 parent company of CNL
Securities, Corp. and CNL Fund Advisors, Inc. The other individual general
partner, Robert A. Bourne, is president of CNL Securities Corp. and served as
president of CNL Fund Advisors, Inc. through October 1997. CNL Income Fund
Advisors, Inc. was a wholly owned subsidiary of CNL Group, Inc. until its
merger, effective January 1, 1996, with CNL Fund Advisors, Inc. During the
years ended December 31, 1997, 1996 and 1995, CNL Income Fund Advisors, Inc.
and CNL Fund Advisors, Inc. (hereinafter referred to collectively as the
"Affiliates") and CNL Securities Corp. each performed certain services for the
Partnership, as described below.
For the year ended December 31, 1995, the Partnership incurred $2,110,195 in
syndication costs due to CNL Securities Corp. for services in connection with
selling limited partnership interests. A substantial portion of these amounts
($1,991,106) was paid as commissions to other broker-dealers.
In addition, for the year ended December 31, 1995, the Partnership incurred
$124,129 as a marketing support and due diligence expense reimbursement fee due
to CNL Securities Corp. This fee equals 0.5% of the limited partner
contributions of $24,825,828 received during the year ended December 31, 1995.
A portion of this fee has been reallowed to other broker-dealers and all due
diligence expenses were paid from such fee.
Additionally, the Partnership incurred $1,365,421 for the year ended
December 31, 1995 in acquisition fees due to the Affiliates for services in
finding, negotiating and acquiring properties on behalf of the Partnership.
These fees represent 5.5% of the limited partner capital contributions of
$24,825,828 received during the year ended December 31, 1995.
F-395
<PAGE>
CNL INCOME FUND XVI, LTD
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
10.Related Party Transactions--Continued
During the years ended December 31, 1997, 1996 and 1995, certain 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 Affiliates 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 geo-graphic area, may or may not be taken, in
whole or in part as to any year, in the sole discretion of the Affiliates. 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
$40,087, $39,206 and $24,128 for the years ended December 31, 1997, 1996 and
1995, respectively.
Certain Affiliates are 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 Affiliates provide 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, 1997, 1996 and 1995, Affiliates provided
accounting and administrative services to the Partnership (including accounting
and administrative services in connection with the offering of units) on a day-
to-day basis. The expenses incurred for these services were classified as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- -------- --------
<S> <C> <C> <C>
Syndication costs............................... $ -- $ -- $159,928
General operating and administrative expenses... 89,270 118,677 114,317
------- -------- --------
$89,270 $118,677 $274,245
======= ======== ========
</TABLE>
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
affiliates had purchased and temporarily held title to these properties in
order to facilitate the acquisition of the properties by the Partnership. The
purchase prices paid by the Partnership represented the costs incurred by the
affiliates to acquire the properties, including closing costs.
The due to related parties at December 31, 1997 and 1996 totalled $3,351 and
$2,292, 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 the property held as tenants-in-common
with an affiliate) for at least one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- --------
<S> <C> <C> <C>
DenAmerica Corp............................ $1,046,845 $1,051,328 $361,810
Golden Corral Corporation.................. 979,009 954,476 663,648
Foodmaker, Inc............................. 556,610 556,610 557,877
Checkers Drive-In Restaurants, Inc......... 237,152 290,041 290,041
</TABLE>
F-396
<PAGE>
CNL INCOME FUND XVI, LTD
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
11. Concentration of Credit Risk--Continued
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 property held as tenants-in-
common with an affiliate) for at least one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- --------
<S> <C> <C> <C>
Denny's................................... $1,164,928 $1,163,621 $461,380
Golden Corral Family Steakhouse
Restaurants.............................. 979,009 954,476 663,648
Jack in the Box........................... 556,610 556,610 557,877
Long John Silver's........................ 406,033 432,495 331,094
Checkers Drive-In Restaurants............. 237,152 290,041 290,041
</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. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
12.Subsequent Event
In January 1998, the Partnership acquired a property in Memphis, Tennessee,
as tenants-in-common with affiliates of the general partners. In connection
therewith, the Partnership contributed $607,896 for a 40.42% interest in such
property. The Partnership will account for its investment in this property
using the equity method since the Partnership will share control with
affiliates.
F-397
<PAGE>
CNL INCOME FUND XVII, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997.. F-399
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997............................................. F-400
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997............. F-401
Condensed Statements of Cash Flows for the Nine Months Ended September
30, 1998 and 1997....................................................... F-402
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997....................................... F-403
Report of Independent Accountants........................................ F-405
Balance Sheets as of December 31, 1997 and 1996.......................... F-406
Statements of Income for the Years Ended December 31, 1997, 1996 and the
Period February 10, 1995 (date of inception) through Year Ended December
31, 1995................................................................ F-407
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and the Period February 10, 1995 (date of inception) through Year
Ended December 31, 1995................................................. F-408
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
the Period February 10, 1995 (date of inception) through Year Ended
December 31, 1995....................................................... F-409
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and the Period February 10, 1995 (date of inception) through Year Ended
December 31, 1995....................................................... F-411
</TABLE>
F-398
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September December
30, 31,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $818,692 and $553,968.... $20,741,467 $21,328,869
Net investment in direct financing leases............. 2,988,761 3,056,783
Investment in joint ventures.......................... 1,448,628 1,328,067
Cash and cash equivalents............................. 1,462,427 1,238,799
Receivables, less allowance for doubtful accounts of
$14,333 in 1997...................................... 22,200 613
Prepaid expenses...................................... 7,219 20
Organization costs, less accumulated amortization of
$5,809 and $4,309.................................... 4,191 5,691
Accrued rental income................................. 573,632 357,246
Other assets.......................................... 119,765 104,391
----------- -----------
$27,368,290 $27,420,479
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 2,868 $ 2,922
Accrued construction costs payable.................... -- 38,834
Accrued real estate taxes payable..................... 20,645 --
Distributions payable................................. 600,000 600,000
Due to related parties................................ 3,362 2,875
Rents paid in advance................................. 41,300 55,762
Deferred rental income................................ 52,021 64,690
----------- -----------
Total liabilities................................... 720,196 765,083
Minority interest..................................... 429,452 419,193
Partners' capital..................................... 26,218,642 26,236,203
----------- -----------
$27,368,290 $27,420,479
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-399
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
-------------------- ------------------------
1998 1997 1998 1997
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases..................... $ 604,073 $ 620,623 $ 1,832,554 $ 1,726,684
Earned income from direct
financing leases........... 93,834 94,807 282,256 224,912
Interest and other income... 11,128 8,372 36,667 58,641
--------- --------- ----------- -----------
709,035 723,802 2,151,477 2,010,237
--------- --------- ----------- -----------
Expenses:
General operating and
administrative............. 29,293 26,636 86,909 101,337
Professional services....... 4,393 6,530 15,022 16,595
Real estate taxes........... 20,645 -- 20,645 --
Management fees to related
parties.................... 6,604 6,655 19,966 18,844
State and other taxes....... 7 -- 11,811 6,442
Depreciation and
amortization............... 96,125 100,107 273,084 288,145
--------- --------- ----------- -----------
157,067 139,928 427,437 431,363
--------- --------- ----------- -----------
Income Before Minority
Interest in Income of
Consolidated Joint Venture
and Equity in Earnings of
Unconsolidated Joint
Ventures..................... 551,968 583,874 1,724,040 1,578,874
Minority Interest in Income of
Consolidated Joint Venture... (15,703) (15,697) (46,922) (26,129)
Equity in Earnings of
Unconsolidated
Joint Ventures............... 35,536 26,437 105,321 71,795
--------- --------- ----------- -----------
Net Income.................... $ 571,801 $ 594,614 $ 1,782,439 $ 1,624,540
========= ========= =========== ===========
Allocation of Net Income:
General partners............ $ (282) $ (54) $ (176) $ (630)
Limited partners............ 572,083 594,668 1,782,615 1,625,170
--------- --------- ----------- -----------
$ 571,801 $ 594,614 $ 1,782,439 $ 1,624,540
========= ========= =========== ===========
Net Income Per Limited Partner
Unit......................... $ 0.19 $ 0.20 $ 0.59 $ 0.54
========= ========= =========== ===========
Weighted Average Number of
Limited
Partner Units Outstanding.... 3,000,000 3,000,000 3,000,000 3,000,000
========= ========= =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-400
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
September December
30, 1998 31, 1997
----------- -----------
<S> <C> <C>
General partners:
Beginning balance.................................. $ (551) $ 288
Net income......................................... (176) (839)
----------- -----------
(727) (551)
----------- -----------
Limited partners:
Beginning balance.................................. 26,236,754 26,319,858
Net income......................................... 1,782,615 2,204,396
Distributions ($0.60 and $0.76 per limited partner
unit, respectively)............................... (1,800,000) (2,287,500)
----------- -----------
26,219,369 26,236,754
----------- -----------
Total partners' capital.............................. $26,218,642 $26,236,203
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-401
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities............ $1,881,998 $1,912,554
---------- ----------
Cash Flows from Investing Activities:
Additions to land and buildings on operating
leases............................................ 306,100 (1,978,420)
Investment in direct financing leases.............. -- (1,130,497)
Investment in joint ventures....................... (127,807) (1,050,402)
---------- ----------
Net cash provided by (used in) investing
activities...................................... 178,293 (4,159,319)
---------- ----------
Cash Flows from Financing Activities:
Reimbursement of acquisition costs paid by related
parties on behalf of the Partnership -- (25,434)
Contributions from minority interest............... -- 278,170
Distributions to limited partners.................. (1,800,000) (1,577,584)
Distributions to hold of minority interest......... (36,663) (29,184)
---------- ----------
Net cash used in financing activities............ (1,836,663) (1,354,032)
---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents... 223,628 (3,600,797)
Cash and Cash Equivalents at Beginning of Period....... 1,238,799 4,716,719
---------- ----------
Cash and Cash Equivalents at End of Period............. $1,462,427 $1,115,922
========== ==========
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Related parties paid certain acquisition costs on
behalf of the Partnership as follows:............... $ -- $ 11,253
========== ==========
Land and building under operating lease exchanged for
land and building under operating lease............. $ 899,654 $ --
========== ==========
Distributions declared and unpaid at end of period... $ 600,000 $ 600,000
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-402
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, 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
XVII, Ltd. (the "Partnership") for the year ended December 31, 1997.
The Partnership accounts for its 80 percent interest in the accounts of
CNL/GC El Cajon Joint Venture using the consolidation method. Minority interest
represents the minority joint venture partner's proportionate share of the
equity in the Partnership's consolidated joint venture. All significant
intercompany accounts and transactions have been eliminated.
Certain items in the prior year's financial statements have been
reclassified to conform to 1998 presentation. These reclassifications had no
effect on partners' capital or net income.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2. Land and Buildings on Operating Leases
In June 1998, the tenant of the property in Troy, Ohio, exercised its option
under the terms of its lease agreement to substitute the existing property for
a replacement property. In conjunction therewith, the Partnership exchanged the
property in Troy, Ohio, with a property in Inglewood, California. The lease for
the property in Troy, Ohio, was amended to allow the property in Inglewood,
California 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
Inglewood, California, at the net book value of the property in Troy, Ohio. No
gain or loss was recognized due to this being accounted for as a nonmonetary
exchange of similar assets.
3. 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
and properties held as tenants-in-common), for at least one of the nine month
periods ended September 30:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Golden Corral Corporation............................ $339,073 $349,449
National Restaurant Enterprises, Inc................. 328,582 208,212
DenAmerica Corp...................................... 323,884 319,740
Foodmaker, Inc....................................... 262,135 240,487
San Diego Food Holdings, Inc......................... 237,131 133,858
</TABLE>
F-403
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Nine Months Ended September 30, 1998 and 1997
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 could significantly impact the
results of operations of the Partnership. However, the general partners believe
that the risk of such a default is reduced due to the essential or important
nature of these properties for the ongoing operations of the lessees.
F-404
<PAGE>
Report of Independent Accountants
To the Partners
CNL Income Fund XVII, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund XVII,
Ltd. (a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
years ended December 31, 1997 and 1996 and the period February 10, 1995 (date
of inception) through December 31, 1995. 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 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 provides 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 Income Fund XVII, Ltd.
as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the years ended December 31, 1997 and 1996 and the
period February 10, 1995 (date of inception) through December 31, 1995 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
February 4, 1998
F-405
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation............................. $21,328,869 $21,364,032
Net investment in direct financing leases............. 3,056,783 1,982,164
Investment in joint ventures.......................... 1,328,067 201,171
Cash and cash equivalents............................. 1,238,799 4,716,719
Receivables, less allowance for
doubtful accounts of $14,333
and $4,469............................................ 613 63,253
Organization costs, less accumulated amortization of
$4,309 and $2,309.................................... 5,691 7,691
Accrued rental income................................. 460,915 167,216
Other assets.......................................... 104,411 172,761
----------- -----------
$27,524,148 $28,675,007
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
<CAPTION>
Accounts payable...................................... $ 2,922 $ 2,985
<S> <C> <C>
Accrued construction costs payable.................... 38,834 1,560,712
Distributions payable................................. 600,000 490,084
Due to related parties................................ 2,875 17,153
Rents paid in advance................................. 55,762 52,769
Deferred rental income................................ 168,359 90,482
----------- -----------
Total liabilities..................................... 868,752 2,214,185
Minority interest..................................... 419,193 140,676
Partners' capital..................................... 26,236,203 26,320,146
----------- -----------
$27,524,148 $28,675,007
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-406
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
February 10,
1995 (Date)
of
Inception)
Year Ended December through Year
31, Ended
---------------------- December 31,
1997 1996 1995
---------- ---------- ------------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases..... $2,323,256 $1,054,534 $ --
Earned income from direct financing
leases................................. 319,487 130,745 --
Interest................................ 69,779 244,406 12,153
Other income............................ 1,128 9,984 --
---------- ---------- -------
2,713,650 1,439,669 12,153
---------- ---------- -------
Expenses:
General operating and administrative.... 128,168 144,728 3,360
Professional services................... 21,877 14,326 133
Management fee to related party......... 25,377 10,482 --
State and other taxes................... 6,443 -- --
Depreciation and amortization........... 387,292 179,208 309
---------- ---------- -------
569,157 348,744 3,802
---------- ---------- -------
Income Before Minority Interest in Income
of Consolidated Joint Venture and Equity
in Earnings of Unconsolidated Joint
Ventures................................. 2,144,493 1,090,925 8,351
Minority Interest in Income of
Consolidated Joint Venture............... (41,854) -- --
Equity in Earnings of Unconsolidated Joint
Ventures................................. 100,918 4,834 --
---------- ---------- -------
Net Income................................ $2,203,557 $1,095,759 $ 8,351
========== ========== =======
Allocation of Net Income:
General partners........................ $ (839) $ (709) $ (3)
Limited partners........................ 2,204,396 1,096,468 8,354
---------- ---------- -------
$2,203,557 $1,095,759 $ 8,351
========== ========== =======
Net Income per Limited Partner Unit....... $ 0.73 $ 0.52 $ 0.02
========== ========== =======
Weighted Average Number of Limited Partner
Units Outstanding........................ 3,000,000 2,121,253 340,780
========== ========== =======
</TABLE>
See accompanying notes to financial statements.
F-407
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997 and 1996 and the Period February 10, 1995 (Date
of Inception)
through December 31, 1995
<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 at Inception,
(February 10, 1995).... $ -- $ -- $ -- $ -- $ -- $ -- $ --
Contributions from
general partners....... 1,000 -- -- -- -- -- 1,000
Contributions from
limited partners....... -- -- 5,696,921 -- -- -- 5,696,921
Distributions to limited
partners
($0.08 per limited
partner unit).......... -- -- -- (28,275) -- -- (28,275)
Syndication costs....... -- -- -- -- -- (1,035,764) (1,035,764)
Net income.............. -- (3) -- -- 8,354 -- 8,351
----------- ----------- ----------- ----------- ---------- ----------- -----------
Balance, December 31,
1995................... 1,000 (3) 5,696,921 (28,275) 8,354 (1,035,764) 4,642,233
Contributions from
limited partners....... -- -- 24,303,079 -- -- -- 24,303,079
Distributions to limited
partners
($0.55 per limited
partner unit).......... -- -- -- (1,166,689) -- -- (1,166,689)
Syndication costs....... -- -- -- -- -- (2,554,236) (2,554,236)
Net income.............. -- (709) -- -- 1,096,468 -- 1,095,759
----------- ----------- ----------- ----------- ---------- ----------- -----------
Balance, December 31,
1996................... 1,000 (712) 30,000,000 (1,194,964) 1,104,822 (3,590,000) 26,320,146
Distributions to limited
partners
($0.76 per limited
partner unit).......... -- -- -- (2,287,500 -- -- (2,287,500)
Net income.............. -- (839) -- -- 2,204,396 -- 2,203,557
----------- ----------- ----------- ----------- ---------- ----------- -----------
Balance, December 31,
1997................... $ 1,000 $ (1,551) $30,000,000 $(3,482,464) $3,309,218 $(3,590,000) $26,236,203
=========== =========== =========== =========== ========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-408
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOW
-----------------------
<TABLE>
<CAPTION>
February 10,
1995 (Date)
Year Ended of Inception
December Year Ended through
31, December 31, December 31,
1997 1996 1995
----------- ------------ ------------
<S> <C> <C> <C>
Increase (Decrease) in Cash and
Cash Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants.......... $ 2,502,057 $ 1,149,196 --
Distributions from unconsolidated
joint ventures..................... 106,346 4,985 --
Cash paid for expenses.............. (183,068) (165,639) (3,141)
Interest received................... 69,779 244,406 12,153
----------- ------------ ----------
Net cash provided by operating
activities........................ 2,495,114 1,232,948 9,012
----------- ------------ ----------
Cash Flows From Investing Activities:
Additions to land and buildings on
operating leases................... (1,740,491) (19,735,346) (332,928)
Investment in direct financing
leases............................. (1,130,497) (1,784,925) --
Investment in joint ventures........ (1,135,681) (201,501) --
Increase in other assets............ -- -- (221,282)
Other............................... -- 410 (410)
----------- ------------ ----------
Net cash used in investing
activities........................ (4,006,669) (21,721,362) (554,620)
----------- ------------ ----------
Cash Flows From Financing Activities:
Reimbursement of acquisition,
organization and syndication costs
paid by related parties on behalf
of the Partnership................. (25,444) (326,483) (347,907)
Contributions from general
partners........................... -- -- 1,000
Contributions from limited
partners........................... -- 24,303,079 5,696,921
Contributions from holder of
minority interest.................. 278,170 140,676 --
Distributions to limited partners... (2,177,584) (703,681) (1,199)
Distributions to holder of minority
interest........................... (41,507) -- --
Payment of syndication costs........ -- (2,407,317) (604,348)
----------- ------------ ----------
Net cash provided by (used
in)financing activities........... (1,966,365) 21,006,274 4,744,467
----------- ------------ ----------
Net Increase (Decrease) in Cash and
Cash Equivalents..................... (3,477,920) 517,860 4,198,859
Cash and Cash Equivalents at Beginning
of Period............................ 4,716,719 4,198,859 --
----------- ------------ ----------
Cash and Cash Equivalents at End of
Period............................... $ 1,238,799 $ 4,716,719 $4,198,859
=========== ============ ==========
</TABLE>
See accompanying notes to financial statements.
F-409
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS--CONTINUED
<TABLE>
<CAPTION>
February 10,
1995 (Date
of
Inception)
Year Ended Year Ended through
December 31, December 31, December 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................ $2,203,557 $1,095,759 $ 8,351
---------- ---------- --------
Adjustments to reconcile net income to
net cash
provided by operating activities:
Depreciation........................ 376,973 176,995 --
Amortization........................ 10,319 2,213 309
Minority interest in income
consolidated
joint venture...................... 41,854 -- --
Equity in earnings of unconsolidated
joint
ventures, net of distributions..... 5,428 151 --
Decrease (increase) in receivables.. 39,518 (40,131) --
Decrease in net investment in direct
financing leases................... 30,454 16,345 --
Increase in accrued rental income... (293,699) (167,216) --
Increase (decrease) in accounts
payable and
accrued expenses................... (63) 2,985 --
Increase (decrease) in due to
related parties,
excluding acquisition, organization
and
syndication costs paid on behalf of
the
Partnership........................ (97) 2,596 352
Increase in rents paid in advance... 2,993 52,769 --
Increase in deferred rental income.. 77,877 90,482 --
---------- ---------- --------
Total adjustments................. 291,557 137,189 661
---------- ---------- --------
Net Cash Provided by Operating
Activities............................. $2,495,114 $1,232,948 $ 9,012
========== ========== ========
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Related parties paid certain
acquisition, organization
and syndication costs on behalf of
the Partnership
as follows:
Acquisition costs................... $ 11,262 $ 69,836 $ 30,424
Organization costs.................. -- -- 10,000
Syndication costs................... -- 231,885 346,450
---------- ---------- --------
$ 11,262 $ 301,721 $386,874
========== ========== ========
Distributions declared and unpaid at
December 31.......................... $ 600,000 $ 490,084 $ 27,076
========== ========== ========
</TABLE>
See accompanying notes to financial statements.
F-410
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997 and 1996 and the Period February 10, 1995
(Date of Inception) through December 31, 1995
1. Significant Accounting Policies
Organization and Nature of Business--CNL Income Fund XVII, 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, family-style and casual dining restaurant chains. Under
the terms of a registration statement filed with the Securities and
Exchange Commission, the Partnership was authorized to sell a maximum of
3,000,000 units ($30,000,000) of limited partnership interest. A total of
3,000,000 units ($30,000,000) of limited partnership interest were sold.
The Partnership was a development stage enterprise from February 10, 1995
through November 3, 1995. Since operations had not begun, activities
through November 3, 1995, were devoted to organization of the Partnership.
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) (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 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 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 deferred 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
F-411
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997 and 1996 and the Period February 10, 1995
(Date of Inception) through December 31, 1995
1. Significant Accounting Policies--Continued
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.
Investment in Joint Ventures--The Partnership accounts for its 80 percent
interest in CNL/GC El Cajon 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 Kingston Joint Venture and CNL
Mansfield Joint Venture, and a property in Corpus Christi, Texas, a
property in Akron, Ohio, and a property in Fayetteville, North Carolina,
for which each 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, certificates of deposit 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, certificates of deposit 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 amortized over five years using
the straight-line method upon commencement of operations.
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 (Note 6).
Weighted Average Number of Limited Partner Units Outstanding--Net income
and distributions per limited partner unit are calculated based upon the
weighted average number of units of limited partnership interest
outstanding during the period the Partnership was operational.
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
F-412
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997 and 1996 and the Period February 10, 1995
(Date of Inception) through December 31, 1995
1. Significant Accounting Policies--Continued
liabilities to prepare these financial statements in conformity with
generally accepted accounted 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 1997 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 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 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 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>
1997 1996
----------- -----------
<S> <C> <C>
Land........................................... $10,357,191 $10,148,827
Buildings...................................... 11,525,646 11,168,540
----------- -----------
21,882,837 21,317,367
Less accumulated depreciation.................. (553,968) (176,995)
----------- -----------
21,328,869 21,140,372
Construction in progress....................... -- 223,660
----------- -----------
$21,328,869 $21,364,032
=========== ===========
</TABLE>
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, 1997 and 1996, the Partnership recognized $293,699 and
$167,216, respectively, of such rental income.
F-413
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997 and 1996 and the Period February 10, 1995
(Date of Inception) through December 31, 1995
3. Land and Buildings on Operating Leases--Continued
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1997:
<TABLE>
<S> <C>
1998.......................................................... $ 2,160,765
1999.......................................................... 2,173,058
2000.......................................................... 2,185,696
2001.......................................................... 2,279,375
2002.......................................................... 2,336,127
Thereafter.................................................... 30,028,040
-----------
$41,163,061
===========
</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>
1997 1996
---------- ----------
<S> <C> <C>
Minimum lease payments receivable................ $7,636,851 $4,301,029
Estimated residual values........................ 775,896 499,627
Less unearned income............................. (5,355,964) (2,818,492)
---------- ----------
Net investment in direct financing leases........ $3,056,783 $1,982,164
========== ==========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998........................................................... $ 411,927
1999........................................................... 411,927
2000........................................................... 411,927
2001........................................................... 411,927
2002........................................................... 411,927
Thereafter..................................................... 5,577,216
----------
$7,636,851
==========
</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:
In October 1996, the Partnership acquired an approximate 20 percent
interest in a property in Fayetteville, North Carolina, as tenants-in-
common, with an affiliate of the general partners. The Partnership accounts
F-414
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997 and 1996 and the Period February 10, 1995
(Date of Inception) through December 31, 1995
5. Investment in Joint Ventures--Continued
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.
In January 1997, the Partnership acquired an approximate 27 percent
interest in a property in Corpus Christi, Texas, and an approximate 37
percent interest in a property in Akron, Ohio, each as tenants-in-common,
with affiliates of the general partners. The Partnership accounts for its
investment in these properties using the equity method since the
Partnership shares control with affiliates, and amounts relating to these
investments are included in investment in joint ventures.
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, 1997, the Partnership and its co-venture partner
had contributed $163,964 and $616,245, respectively, to the joint venture
to acquire the restaurant property. As of December 31, 1997, the
Partnership and its co-venture partner owned a 21 percent and 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.
In September 1997, the Partnership entered into a joint venture
arrangement, CNL Kingston Joint Venture, with an affiliate of the
Partnership which has the same general partners, to construct and hold one
restaurant property. As of December 31, 1997, the Partnership and its co-
venture partner had contributed $183,241 and $121,855, respectively, to CNL
Kingston Joint Venture to fund construction costs relating to the property
owned by the joint venture. The partnership and its co-venture partner have
agreed to contribute approximately $128,700 and $85,600, respectively, in
additional construction costs to the joint venture. When construction is
completed, the Partnership and its co-venture partner expect to have a
60.06 and 39.94 percent interest, respectively, in the profits and losses
of the joint venture. As of December 31, 1997, the Partnership owned a
60.06% 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.
CNL Mansfield Joint Venture and CNL Kingston 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>
1997 1996
---------- --------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation.......................... $4,495,671 $960,732
Cash............................................... 8,936 100
Accrued rental income.............................. 65,395 3,929
Other assets....................................... 1,931 --
Liabilities........................................ 228,896 23
Partners' capital.................................. 4,343,037 964,738
Revenues........................................... 453,481 29,293
Net income......................................... 375,257 24,502
</TABLE>
F-415
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997 and 1996 and the Period February 10, 1995
(Date of Inception) through December 31, 1995
5. Investment in Joint Ventures--Continued
The Partnership recognized income totaling $100,918 and $4,834 for the
years ended December 31, 1997 and 1996 from these joint ventures and the
properties held as tenants-in-common with affiliates.
6. Syndication Costs
Syndication costs consisting of legal fees, commissions, a due diligence
expense reimbursement fee, printing and other expenses incurred in
connection with the offering totaled $3,590,000. These offering expenses
were charged to the limited partners' capital accounts to reflect the net
capital proceeds of the offering.
7. Allocations and Distributions
Generally, distributions of net cash flow, as defined in the limited
partnership agreement of the Partnership, are made 95 percent to the
limited partners and five percent to the general partners; provided,
however, that for any particular year, the five percent of net cash flow to
be distributed to the general partners will be subordinated to receipt by
the limited partners in that year of an eight percent noncumulative,
noncompounded return on their aggregate invested capital contributions (the
"Limited Partners' 8% Return").
Generally, net income (determined without regard to any depreciation and
amortization deductions and gains and losses from the sale of properties)
is allocated between the limited partners and the general partners first,
in an amount not to exceed the net cash flow distributed to the partners
attributable to such year in the same proportions as such net cash flow is
distributed; and thereafter, 99 percent to the limited partners and one
percent to the general partners. All deductions for depreciation and
amortization are allocated 99 percent to the limited partners and one
percent to the general partners.
Net sales proceeds from the sale of a property generally will be
distributed first to the limited partners in an amount sufficient to
provide them with the return of their invested capital contributions, plus
their cumulative Limited Partners' 8% Return. The general partners will
then receive a return of their capital contributions and, to the extent
previously subordinated and unpaid, a five percent interest in all net cash
flow distributions. Any remaining net 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 will be, in general, allocated in the
same manner as net sales proceeds are distributable. Any loss will be
allocated first, on a pro rata basis to the partners with positive balances
in their capital accounts; and thereafter, 95 percent to the limited
partners and five percent to the general partners.
During the years ended December 31, 1997 and 1996 and during the period
February 10, 1995 (date of inception) through December 31, 1995, the
Partnership declared distributions to the limited partners of $2,287,500,
$1,166,689 and $28,275, respectively. No distributions have been made to
the general partners to date.
F-416
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997 and 1996 and the Period February 10, 1995
(Date of Inception) through December 31, 1995
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, 1997 and 1996 and the period February 10, 1995 (date of
inception) through December 31, 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- -------
<S> <C> <C> <C>
Net income for financial reporting
purposes.................................. $2,203,557 $1,095,759 $ 8,351
Depreciation for financial reporting
purposes in excess of depreciation for tax
reporting purposes........................ 25,005 13,226 --
Direct financing leases recorded as
operating leases for tax reporting
purposes.................................. 30,454 16,345 --
Equity in earnings of unconsolidated joint
venture for financial reporting purposes
in excess of equity in earnings of
unconsolidated joint ventures for tax
reporting purposes........................ (3,650) (479) --
Minority interest in timing differences of
consolidated joint venture................ 217 --
Capitalization of administrative expenses
for tax reporting purposes................ 1,557 11,940 3,493
Amortization for tax reporting purposes (in
excess of) less than amortization for
financial reporting purposes.............. 1,667 (2,025) 309
Accrued rental income...................... (293,699) (167,216) --
Deferred rental income..................... 80,635 90,482 --
Rents paid in advance...................... 2,993 52,769 --
Other...................................... 9,865 4,163 --
---------- ---------- -------
Net income for federal income tax
purposes.................................. $2,058,601 $1,114,964 $12,153
========== ========== =======
</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 parent company of CNL
Securities Corp. and CNL Fund Advisors, Inc. James M. Seneff, Jr. is
director and chief executive officer of CNL Securities Corp. and 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, is director and president of CNL Securities Corp., is director,
vice chairman of the board of directors and treasurer of CNL Fund Advisors,
Inc. and served as president of CNL Fund Advisors, Inc. through October 31,
1997.
For the year ended December 31, 1996 and the period February 10, 1995 (Date
of Inception) through December 31, 1995, the Partnership incurred
$2,065,762 and $484,238, respectively, in syndication costs due to CNL
Securities Corp. for services in connection with selling limited
partnership interests. A substantial portion of these amounts ($2,359,831)
was paid as commissions to other broker-dealers.
In addition, for the year ended December 31, 1996 and the period February
10, 1995 (Date of Inception) through December 31, 1995, the Partnership
incurred $121,515 and $28,485, respectively, as a due diligence expense
reimbursement fee due to CNL Securities Corp. This fee equals 0.5% of the
limited
F-417
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997 and 1996 and the Period February 10, 1995
(Date of Inception) through December 31, 1995
9. Related Party Transactions--Continued
partner contributions of $30,000,000. The majority of this fee was
reallowed to other broker-dealers for payment of bona fide due diligence
expenses.
Additionally, the Partnership incurred $1,093,639 and $256,361 for the year
ended December 31, 1996 and the period February 10, 1995 (Date of
Inception) through December 31, 1995, respectively, in acquisition fees due
to CNL Fund Advisors, Inc. for services in finding, negotiating and
acquiring properties on behalf of the Partnership. These fees represent
4.5% of the limited partner capital contributions of $30,000,000.
During the years ended December 31, 1997 and 1996, and the period February
10, 1995 (Date of Inception) through December 31, 1995, CNL Fund Advisors,
Inc. acted as manager of the Partnership's properties pursuant to a
management agreement with the Partnership. In connection therewith, the
Partnership agreed to pay CNL Fund Advisors, Inc. an annual, 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 CNL Fund Advisors, Inc. 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 CNL Fund Advisors, Inc. shall
determine. The Partnership incurred management fees of $25,377 and $10,482
for the years ended December 31, 1997 and 1996. No such fees were incurred
for the period February 10, 1995 (date of inception) through December 31,
1995.
During the years ended December 31, 1997 and 1996 and for the period
February 10, 1995 (date of inception) through December 31, 1995, Affiliates
provided accounting and administrative services to the Partnership
(including accounting and administrative services in connection with the
offering of units) on a day-to-day basis. The expenses incurred for these
services were classified as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- -------- --------
<S> <C> <C> <C>
Syndication costs................................. $ -- $177,683 $133,982
General operating and administrative expenses..... 90,700 96,729 2,659
------- -------- --------
$90,700 $274,412 $136,641
======= ======== ========
</TABLE>
The due to related parties at December 31, 1997 and 1996 totaled $2,875 and
$17,153, respectively.
During 1996, the Partnership acquired from affiliates of the general
partners three properties, one of which was held with another affiliate as
tenants-in-common, for an aggregate purchase price of $1,667,140. The
affiliates of the general partners had purchased and temporarily held title
to these properties in order to facilitate the acquisition of these
properties by the Partnership. The purchase prices paid by the Partnership
represented the costs incurred by the affiliates of the general partners to
acquire the properties, including closing costs.
During 1997, the Partnership and affiliates of the general partners
acquired two properties as tenants-in- common for an aggregate purchase
price of $718,932 from CNL BB Corp., an affiliate of the general partners.
CNL BB Corp. had purchased and temporarily held title to these properties
in order to facilitate
F-418
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997 and 1996 and the Period February 10, 1995
(Date of Inception) through December 31, 1995
9. Related Party Transactions--Continued
the acquisition of the properties by the Partnership and the affiliates.
The purchase price paid by the Partnership and the affiliates represented
the costs incurred by CNL BB Corp. to acquire and carry the property,
including closing costs.
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 rental and earned income from the Partnership's consolidated
joint venture, the Partnership's share of rental income from the
unconsolidated joint ventures and the three properties held as tenants-in-
common with affiliates of the general partners) for at least one of the
years ended December 31, 1997 and 1996 and the period February 10, 1995
(date of inception) through December 31, 1995:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- ----
<S> <C> <C> <C>
Golden Corral Corporation........................... $467,275 $286,307 $--
DenAmerica Corp..................................... 427,800 250,535 --
National Restaurant Enterprises, Inc................ 376,461 197,882 --
Foodmaker, Inc...................................... 326,007 116,658 --
RTM Indianapolis, Inc. and RTM Southwest, Texas,
Inc................................................ 269,010 133,200 --
</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 rental and
earned income from the Partnership's consolidated joint venture, the
Partnership's share of total rental income from the unconsolidated joint
ventures and the three properties held as tenants-in-common with affiliates
of the general partners) for at least one of the years ended December 31,
1997 and 1996 and the period February 10, 1995 (date of inception through
December 31, 1995):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- ----
<S> <C> <C> <C>
Golden Corral Family Steakhouse Restaurants......... $680,316 $286,307 $--
Burger King......................................... 410,876 197,882 --
Jack in the Box..................................... 326,007 116,659 --
Boston Market....................................... 299,744 105,682 --
Arby's.............................................. 269,010 133,200 --
Denny's............................................. 252,968 250,535 --
</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 of these lessees or restaurant chains
could significantly impact the results of operations of the Partnership.
However, the general partners believe that the risk of such a default is
reduced due to the essential or important nature of these properties for
the on-going operations of the lessees.
F-419
<PAGE>
CNL INCOME FUND XVIII, LTD.
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997.. F-421
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997............................................. F-422
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997............. F-423
Condensed Statements of Cash Flows for the Nine Months Ended September
30, 1998 and 1997....................................................... F-424
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997....................................... F-426
Report of Independent Accountants........................................ F-429
Balance Sheets as of December 31, 1997 and 1996.......................... F-430
Statements of Income for the Years Ended December 31, 1997, 1996 and the
Period February 10, 1995 (date of inception) through Year Ended December
31, 1995................................................................ F-431
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and the Period February 10, 1995 (date of inception) through Year
Ended December 31, 1995................................................. F-432
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
the Period February 10, 1995 (date of inception) through Year Ended
December 31, 1995....................................................... F-433
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and the Period February 10, 1995 (date of inception) through Year Ended
December 31, 1995....................................................... F-434
</TABLE>
F-420
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $407,185 and
$140,380.......................................... $22,157,631 $21,311,062
Net investment in direct financing leases.......... 6,817,422 6,004,878
Investment in joint venture........................ 166,224 --
Cash and cash equivalents.......................... 1,866,555 4,143,327
Receivables, less allowance for doubtful accounts
of $790 in 1998................................... -- 68,000
Prepaid expenses................................... 11,203 --
Organization costs, less accumulated amortization
of $3,911 and $2,411.............................. 6,089 7,589
Accrued rental income.............................. 189,143 111,867
Other assets....................................... 212,132 160,532
----------- -----------
$31,426,399 $31,807,255
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable................................... $ 2,365 $ 10,456
Accrued construction costs payable................. -- 1,108,627
Accrued real estate taxes payable.................. 23,500 --
Distributions payable.............................. 700,000 510,636
Due to related parties............................. 14,652 118,231
Rents paid in advance.............................. 13,008 28,277
Deferred rental income............................. 116,769 184,448
----------- -----------
Total liabilities................................ 870,294 1,960,675
=========== ===========
Partners' capital.................................. 30,556,105 29,846,580
----------- -----------
$31,426,399 $31,807,255
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-421
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
-------------------- ---------------------
1998 1997 1998 1997
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases........................ $ 611,530 $ 314,510 $1,758,037 $ 525,308
Earned income from direct
financing leases.............. 170,108 123,417 470,287 186,153
Interest and other income...... 14,189 32,728 114,967 102,034
--------- --------- ---------- ---------
795,827 470,655 2,343,291 813,495
--------- --------- ---------- ---------
Expenses:
General operating and
administrative................ 46,347 32,870 117,608 87,976
Professional services.......... 4,184 5,863 14,164 18,267
Management fees to related
parties....................... 7,651 4,707 21,180 9,232
Real estate taxes.............. 23,500 -- 23,500 --
State and other taxes.......... -- -- 8,605 424
Depreciation and amortization.. 89,370 44,405 268,305 78,584
--------- --------- ---------- ---------
171,052 87,845 453,362 194,483
--------- --------- ---------- ---------
Net Income....................... $ 624,775 $ 382,810 $1,889,929 $ 619,012
========= ========= ========== =========
Allocation of Net Income:
General partners............... $ (752) $ (444) $ (678) $ (786)
Limited partners............... 625,527 383,254 1,890,607 619,798
--------- --------- ---------- ---------
$ 624,775 $ 382,810 $1,889,929 $ 619,012
========= ========= ========== =========
Net Income Per Limited Partner
Unit............................ $ 0.18 $ 0.15 $ 0.54 $ 0.32
========= ========= ========== =========
Weighted Average Number of
Limited Partner Units
Outstanding..................... 3,500,000 2,507,828 3,496,435 1,945,482
========= ========= ========== =========
</TABLE>
See accompanying notes to financial statements.
F-422
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1998 1997
----------------- ------------
<S> <C> <C>
General partners:
Beginning balance............................. $ (428) $ 993
Net income.................................... (678) (1,421)
----------- -----------
(1,106) (428)
----------- -----------
Limited partners:
Beginning balance............................. 29,847,008 6,995,220
Contributions................................. 854,241 25,723,944
Syndication costs............................. (76,881) (2,717,452)
Net income.................................... 1,890,607 1,156,181
Distributions ($0.56 and $0.57 per weighted
average limited partner unit, respectively).. (1,957,764) (1,310,885)
----------- -----------
30,557,211 29,847,008
----------- -----------
Total partners' capital......................... $30,556,105 $29,846,580
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-423
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------
1998 1997
----------- ------------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities......... $ 2,158,678 $ 909,568
----------- ------------
Cash Flows from Investing Activities:
Additions to land and buildings on operating
leases......................................... (2,219,314) (13,810,648)
Investment in direct financing leases........... (876,076) (5,838,231)
Investment in joint venture..................... (166,025) --
Increase in other assets........................ (51,600) --
Other........................................... -- 80
----------- ------------
Net cash used in investing activities......... (3,313,015) (19,648,799)
----------- ------------
Cash Flows from Financing Activities:
Reimbursement of acquisition and syndication
costs paid by related parties on behalf of the
Partnership.................................... (37,135) (338,567)
Contributions from limited partners............. 854,241 19,964,832
Distributions to limited partners............... (1,768,400) (476,754)
Payment of syndication costs.................... (161,141) (2,037,781)
Other........................................... (10,000) (77,000)
----------- ------------
Net cash provided by (used in) financing
activities................................... (1,122,435) 17,034,730
----------- ------------
Net Decrease in Cash and Cash Equivalents........... (2,276,772) (1,704,501)
Cash and Cash Equivalents at Beginning of Period.... 4,143,327 5,371,325
----------- ------------
Cash and Cash Equivalents at End of Period.......... $ 1,866,555 $ 3,666,824
=========== ============
</TABLE>
See accompanying notes to financial statements.
F-424
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS--CONTINUED
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------
1998 1997
-------- --------
<S> <C> <C>
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Related parties paid certain acquisition and syndication
costs on behalf of the Partnership as follows:
Acquisition costs........................................ $ 35,864 $125,693
Syndication costs........................................ -- 210,866
-------- --------
$ 35,864 $336,559
======== ========
Distributions declared and unpaid at end of period......... $700,000 $379,266
======== ========
</TABLE>
See accompanying notes to financial statements.
F-425
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ended
December 31, 1998. Amounts as of December 31, 1997, 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
XVIII, Ltd. (the "Partnership") for the year ended December 31, 1997.
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.
In March 1998, the Financial Accounting Standards Board reached a consensus
in EITF 97-11, entitled "Accounting for Internal Costs Relating to Real Estate
Property Acquisitions." EITF 97-11 provides that internal costs of identifying
and acquiring operating Property should be expensed as incurred. Due to the
fact that the Partnership does not have an internal acquisitions function and
instead, contracts these services from CNL Fund Advisors, Inc., an affiliate of
the general partners, EITF 97-11 had no material effect on the Partnership's
financial position or results of operations.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2. 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 September 30, 1998, the Partnership had
contributed $166,025, to purchase land and pay construction costs relating to
the joint venture. The Partnership has agreed to contribute approximately
$225,811 in additional construction costs to the joint venture. The Partnership
will have an approximate 40 percent interest in the profits and losses of the
joint venture. 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 the joint venture at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land and construction in progress.................... $497,989 $--
Cash................................................. 8,950 --
Liabilities.......................................... 90,650 --
Partners' capital.................................... 416,289 --
</TABLE>
F-426
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Nine Months Ended September 30, 1998 and 1997
2. Investment in Joint Ventures--Continued
The Company did not recognize any income from this joint venture because the
property owned by the joint venture was not operational as of September 30,
1998.
3. Related Party Transactions
During the nine months ended September 30, 1998 and 1997, the Partnership
incurred $72,610 and $1,697,011, respectively, in syndication costs due to CNL
Securities Corp. for services in connection with selling units of limited
partnership interest. During the nine months ended September 30, 1998 and 1997,
a substantial portion of these amounts ($67,539 and $1,591,343, respectively)
was reallowed to other broker-dealers.
In addition, during the nine months ended September 30, 1998 and 1997, the
Partnership incurred $4,271 and $99,824, respectively, in due diligence expense
reimbursement fees due to CNL Securities Corp. These fees equal 0.5% of the
limited partner contributions of $854,241 and $19,964,832, received during the
nine months ended September 30, 1998 and 1997, respectively. The majority of
these fees were reallowed to other broker- dealers for payment of bona fide due
diligence expenses.
Additionally, during the nine months ended September 30, 1998 and 1997, the
Partnership incurred $38,441 and $898,417, respectively, in acquisition fees
due to CNL Fund Advisors, Inc. for services in finding, negotiating and
acquiring properties on behalf of the Partnership. These fees represent 4.5% of
the limited partner capital contributions received during the nine months ended
September 30, 1998 and 1997, and are included in land and buildings on
operating leases, net investment in direct financing leases, investment in
joint venture, and other assets.
In addition, during the nine months ended September 30, 1998 and 1997, the
Partnership incurred management fees of $21,180 and $9,232, respectively, due
to CNL Fund Advisors, Inc.
During the nine months ended September 30, 1998 and 1997, certain affiliates
of the general partners provided various administrative services to the
Partnership, including services related to accounting; financial, tax and
regulatory compliance and reporting; lease and loan compliance; limited
partners distributions and reporting; due diligence and marketing; and investor
relations (including administrative services in connection with selling units
of limited partnership interest), on a day-to-day basis. The expenses incurred
for these services were classified as follows for the nine months ended
September 30:
<TABLE>
<CAPTION>
1998 1997
------- --------
<S> <C> <C>
Syndication costs.......................................... $ -- $212,279
General operating and administrative expenses.............. 77,601 70,404
------- --------
$77,601 $282,683
======= ========
</TABLE>
F-427
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Nine Months Ended September 30, 1998 and 1997
3. Related Party Transactions--Continued
The amounts due to related parties consisted of the following at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Due to CNL Securities Corp.:
Commissions................................... $ -- $ 79,069
Due diligence expense reimbursement fee....... -- 5,191
------- --------
-- 84,260
------- --------
Due to CNL Fund Advisors, Inc.:
Expenditures incurred on behalf of the
Partnership.................................. 10,220 1,737
Acquisition fees.............................. -- 29,757
Accounting and administrative services........ 2,484 1,921
Management fees............................... 1,948 556
------- --------
14,652 33,971
------- --------
$14,652 $118,231
======= ========
</TABLE>
F-428
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners
CNL Income Fund XVIII, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund XVIII,
Ltd. (a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
years in the period ended December 31, 1997 and 1996 and the period February
10, 1995 (date of inception) through December 31, 1995. 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 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 Income Fund XVIII, Ltd.
as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for the years ended December 31, 1997 and 1996 and the period
February 10, 1995 (date of inception) through December 31, 1995, in conformity
with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
February 4, 1998
F-429
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
----------- ----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation.............................. $21,311,062 $1,530,768
Net investment in direct financing leases.............. 6,004,878 --
Cash and cash equivalents.............................. 4,143,327 5,371,325
Receivables............................................ 68,000 3,711
Organization costs, less accumulated amortization of
$2,411 and $411....................................... 7,589 9,589
Accrued rental income.................................. 128,225 146
Other assets........................................... 160,532 324,785
----------- ----------
$31,823,613 $7,240,324
=========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable....................................... $ 10,456 $ 104,514
Accrued construction costs payable..................... 1,108,627 --
Distributions payable.................................. 510,636 55,708
Due to related parties................................. 118,231 83,889
Rents paid in advance.................................. 28,277 --
Deferred rental income................................. 200,806 --
----------- ----------
Total liabilities.................................... 1,977,033 244,111
Partners' capital...................................... 29,846,580 6,996,213
----------- ----------
$31,823,613 $7,240,324
=========== ==========
</TABLE>
See accompanying notes to financial statements.
F-430
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
February 10,
1995 (Date
Year Ended of Inception)
December 31, through
------------------- December 31,
1997 1996 1995
---------- ------- -------------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases...... $ 950,316 $ 1,373 $--
Earned income from direct financing
leases.................................. 340,305 -- --
Interest and other income................ 162,621 30,241 --
---------- ------- ---
1,453,242 31,614 --
---------- ------- ---
Expenses:
General operating and administrative..... 123,708 3,980 --
Professional services.................... 20,429 -- --
Management fees to related party......... 11,842 12 --
State and other taxes.................... 424 -- --
Depreciation and amortization............ 142,079 712 --
---------- ------- ---
298,482 4,704 --
---------- ------- ---
Net Income................................. $1,154,760 $26,910 $--
========== ======= ===
Allocation of Net Income:
General partners......................... $ (1,421) $ (7) $--
Limited partners......................... 1,156,181 26,917 --
---------- ------- ---
$1,154,760 $26,910 $--
========== ======= ===
Net Income per Limited Partner Unit........ $ 0.51 $ 0.05 $--
========== ======= ===
Weighted Average Number of Limited Partner
Units Outstanding......................... 2,279,801 503,436 --
========== ======= ===
</TABLE>
See accompanying notes to financial statements.
F-431
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997 and 1996 and the Period
February 10, 1995 (Date of Inception) through December 31, 1995
<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, February 10,
1995 (Date of
Inception)............. $ -- $ -- $ -- $ -- $ -- $ -- $ --
Contributions from
general partners..... 1,000 -- -- -- -- -- 1,000
------ ------- ----------- ----------- ---------- ----------- -----------
Balance, December 31,
1995................... 1,000 -- -- -- -- -- 1,000
Contributions from
limited partners..... -- -- 8,421,815 -- -- -- 8,421,815
Distributions to
limited partners
($0.11 per limited
partner unit)........ -- -- -- (57,846) -- -- (57,846)
Syndication costs..... -- -- -- -- -- (1,395,666) (1,395,666)
Net income............ -- (7) -- -- 26,917 -- 26,910
------ ------- ----------- ----------- ---------- ----------- -----------
Balance, December 31,
1996................... 1,000 (7) 8,421,815 (57,846) 26,917 (1,395,666) 6,996,213
Contributions from
limited partners..... -- -- 25,723,944 -- -- -- 25,723,944
Distributions to
limited partners
($0.57 per limited
partner unit)........ -- -- -- (1,310,885) -- -- (1,310,885)
Syndication costs..... -- -- -- -- -- (2,717,452) (2,717,452)
Net income............ -- (1,421) -- -- 1,156,181 -- 1,154,760
------ ------- ----------- ----------- ---------- ----------- -----------
Balance, December 31,
1997................... $1,000 $(1,428) $34,145,759 $(1,368,731) $1,183,098 $(4,113,118) $29,846,580
====== ======= =========== =========== ========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-432
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
February 10,
1995 (Date
of Inception)
Year Ended December 31, through
------------------------- December 31,
1997 1996 1995
------------ ----------- -------------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows From Operating Activities:
Cash received from tenants.............. $ 1,353,968 $ -- $ --
Interest received....................... 161,826 30,241 --
Cash paid for expenses.................. (154,038) (3,095) --
------------ ----------- --------
Net cash provided by operating
activities........................... 1,361,756 27,146 --
------------ ----------- --------
Cash Flows From Investing Activities:
Additions to land and buildings on
operating leases....................... (18,581,999) (1,533,446) --
Investment in direct financing leases... (5,962,087) -- --
Increase in other assets................ -- (276,848) --
Other................................... 107 (107) (20)
------------ ----------- --------
Net cash used in investing
activities........................... (24,543,979) (1,810,401) (20)
------------ ----------- --------
Cash Flows From Financing Activities:
Reimbursement of acquisition,
organization and syndication costs paid
by related parties
on behalf of the Partnership........... (396,548) (497,420) --
Contributions from general partners..... -- -- 1,000
Contributions from limited partners..... 25,723,944 8,498,815 --
Distributions to limited partners....... (855,957) (2,138) --
Payment of syndication costs............ (2,450,214) (845,657) --
Other................................... (67,000) -- --
------------ ----------- --------
Net cash provided by financing
activities........................... 21,954,225 7,153,600 1,000
------------ ----------- --------
Net Increase (Decrease) in Cash and Cash
Equivalents................................ (1,227,998) 5,370,345 980
Cash and Cash Equivalents at Beginning of
Period..................................... 5,371,325 980 --
------------ ----------- --------
Cash and Cash Equivalents at End of Period.. $ 4,143,327 $ 5,371,325 $ 980
============ =========== ========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income................................ $ 1,154,760 $ 26,910 $ --
------------ ----------- --------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation............................ 140,079 301 --
Amortization............................ 2,000 411 --
Increase in receivables................. (66,771) (1,227) --
Decrease in net investment in direct
financing leases....................... 28,084 -- --
Increase in accrued rental income....... (128,079) (146) --
Increase in accounts payable............ 398 57 --
Increase in due to related parties,
excluding acquisition, organization and
syndication costs paid on behalf of
the Partnership........................ 2,202 820 --
Increase in rents paid in advance....... 28,277 -- --
Increase in deferred rental income...... 200,806 -- --
Other................................... -- 20 --
------------ ----------- --------
Total adjustments..................... 206,996 236 --
------------ ----------- --------
Net Cash Provided by Operating Activities... $ 1,361,756 $ 27,146 $ --
============ =========== ========
Supplemental Schedule of Non-Cash Investing
and Financing Activities:
Related parties paid certain acquisition,
organization and syndication costs on
behalf of the Partnership as follows:
Acquisition costs....................... $ 134,138 $ 18,036 $ --
Organization costs...................... -- -- 10,000
Syndication costs....................... 211,216 285,858 186,174
------------ ----------- --------
$ 345,354 $ 303,894 $196,174
============ =========== ========
Distributions declared and unpaid at
December 31............................ $ 510,636 $ 55,708 $ --
============ =========== ========
</TABLE>
See accompanying notes to financial statements.
F-433
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997 and 1996 and the Period
February 10, 1995 (Date of Inception) through December 31, 1995
1. Significant Accounting Policies
Organization and Nature of Business--CNL Income Fund XVIII, 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, family-style
and casual dining restaurant chains. Under the terms of a registration
statement filed with the Securities and Exchange Commission, the Partnership is
authorized to sell a maximum of 3,500,000 units ($35,000,000) of limited
partnership interest. A total of 3,414,576 units ($34,145,759) of limited
partnership interest had been sold as of December 31, 1997.
The Partnership was a development stage enterprise from February 10, 1995
through October 11, 1996. Since operations had not begun, activities through
October 11, 1996, were devoted to organization of the Partnership.
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 direct financing or 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) (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 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 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
F-434
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997 and 1996 and the Period
February 10, 1995 (Date of Inception) through December 31, 1995
1. Significant Accounting Policies--(Continued)
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.
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 amortized over five years using
the straight-line method upon commencement of operations.
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 (Note 5).
Rents Paid in Advance--Rents paid in advance by lessees for future periods
are deferred upon receipt and are recognized as revenues during the period in
which the rental income is earned. Rents paid in advance include "interim rent"
payments required to be paid under the terms of certain leases for construction
properties equal to a pre-determined rate times the amount funded by the
Partnership during the period commencing with the effective date of the lease
to the date minimum annual rent becomes payable. Once minimum annual rent
becomes payable, the "interim rent" payments are amortized and recorded as
income either (i) over the lease term so as to produce a constant periodic rate
of return for leases accounted for using the direct financing method, or (ii)
over the lease term using the straight-line method for leases accounted for
using the operating method, whichever is applicable.
Weighted Average Number of Limited Partner Units Outstanding--Net income and
distributions per limited partner unit are calculated based upon the weighted
average number of units of limited partnership interest outstanding during the
period the Partnership was operational.
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
F-435
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997 and 1996 and the Period
February 10, 1995 (Date of Inception) through December 31, 1995
1. Significant Accounting Policies--(Continued)
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 to 1997 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 Partnership's 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 the majority of the leases are operating
leases. The leases have initial terms of 15 to 26 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 the 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>
1997 1996
----------- ----------
<S> <C> <C>
Land................................................ $10,812,849 $ 852,578
Building............................................ 9,476,977 659,134
----------- ----------
20,289,826 1,511,712
Less accumulated depreciation....................... (140,380) (301)
----------- ----------
20,149,446 1,511,411
Construction in progress............................ 1,161,616 19,357
----------- ----------
$21,311,062 $1,530,768
=========== ==========
</TABLE>
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, 1997 and 1996, the Partnership recognized $128,079 and $146,
respectively, of such rental income.
F-436
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997 and 1996 and the Period
February 10, 1995 (Date of Inception) through December 31, 1995
3. Land and Buildings on Operating Leases--(Continued)
The following is a schedule of the future minimum lease payments to be
received on the noncancellable operating leases at December 31, 1997:
<TABLE>
<S> <C>
1998............................................................. $ 1,840,935
1999............................................................. 1,855,422
2000............................................................. 1,857,340
2001............................................................. 1,858,867
2002............................................................. 1,934,126
Thereafter....................................................... 23,592,272
-----------
$32,938,962
===========
</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 leases based on a percentage of
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>
1997 1996
----------- ----
<S> <C> <C>
Minimum lease payments receivable......................... $13,241,374 $--
Estimated residual values................................. 1,773,526 --
Less unearned income...................................... (9,010,022) --
----------- ----
Net investment in direct financing leases................. $ 6,004,878 $--
=========== ====
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998............................................................. $ 677,167
1999............................................................. 677,167
2000............................................................. 677,167
2001............................................................. 677,167
2002............................................................. 683,170
Thereafter....................................................... 9,849,536
-----------
$13,241,374
===========
</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-437
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997 and 1996 and the Period
February 10, 1995 (Date of Inception) through December 31, 1995
5. Syndication Costs
Syndication costs consisting of legal fees, commissions, the due diligence
expense reimbursement fee, printing and other expenses incurred in connection
with the offering totaled $2,717,452 and $1,395,666 for the years ended
December 31, 1997 and 1996, respectively. These offering expenses were charged
to the limited partners' capital accounts to reflect the net capital proceeds
of the offering. All organizational and offering expenses, as defined in the
Partnership's prospectus, which exceed three percent of the total gross
proceeds received from the sale of units of the Partnership will be paid or
reimbursed by the general partners and will not be the responsibility of the
Partnership.
6. Allocations and Distributions
Generally, distributions of net cash flow, as defined in the limited
partnership agreement of the Partnership, are made 95 percent to the limited
partners and five percent to the general partners; provided, however, that for
any particular year, the five percent of net cash flow to be distributed to the
general partners will be subordinated to receipt by the limited partners in
that year of an eight percent noncumulative, noncompounded return on their
aggregate invested capital contributions (the "Limited Partners' 8% Return").
Generally, net income (determined without regard to any depreciation and
amortization deductions and gains and losses from the sale of properties) is
allocated between the limited partners and the general partners first, in an
amount not to exceed the net cash flow distributed to the partners attributable
to such year in the same proportions as such net cash flow is distributed; and
thereafter, 99 percent to the limited partners and one percent to the general
partners. All deductions for depreciation and amortization are allocated 99
percent to the limited partners and one percent to the general partners.
Net sales proceeds from the sale of a property generally will be distributed
first to the limited partners in an amount sufficient to provide them with the
return of their invested capital contributions, plus their cumulative Limited
Partners' 8% Return. The general partners will then receive a return of their
capital contributions and, to the extent previously subordinated and unpaid, a
five percent interest in all net cash flow distributions. Any remaining net
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 will be, in general, allocated in the
same manner as net sales proceeds are distributable. Any loss will be allocated
first, on a pro rata basis to the partners with positive balances in their
capital accounts; and thereafter, 95 percent to the limited partners and five
percent to the general partners.
During the years ended December 31, 1997 and 1996, the Partnership declared
distributions to the limited partners of $1,310,885 and $57,846. No
distributions have been made to the general partners to date.
F-438
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997 and 1996 and the Period
February 10, 1995 (Date of Inception) through December 31, 1995
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, 1997 and 1996 and the period February 10, 1995 (date of inception)
through December 31, 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ------- ----
<S> <C> <C> <C>
Net income for financial reporting purposes....... $1,154,760 $26,910 $--
Depreciation for tax reporting purposes in excess
of depreciation for financial reporting
purposes......................................... (45,009) (386) --
Direct financing leases recorded as operating
leases for tax reporting purposes................ 28,084 -- --
Capitalization of administrative expenses for tax
reporting purposes............................... -- 3,662
Accrued rental income............................. (128,079) (146) --
Deferred rental income............................ 281,415 --
Rents paid in advance............................. 28,277 -- --
Amortization for financial reporting purposes
(less than) in excess of amortization for tax
reporting purposes............................... (732) 183 --
Other............................................. 34 -- --
---------- ------- ----
Net income for federal income tax purposes........ $1,318,750 $30,223 $--
========== ======= ====
</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 parent company of CNL Securities
Corp. and CNL Fund Advisors, Inc. James M. Seneff, Jr. is director and chief
executive officer of CNL Securities Corp. and 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, is director and president
of CNL Securities Corp., is director, vice chairman of the board of directors
and treasurer of CNL Fund Advisors, Inc. and served as president of CNL Fund
Advisors, Inc through October 1997.
CNL Securities Corp. is entitled to receive selling commissions amounting to
8.5% of the total amount raised from the sale of units of limited partnership
interest for services in connection with the formation of the Partnership and
the offering of units, a substantial portion of which is paid as commissions to
other broker-dealers. For the years ended December 31, 1997 and 1996, the
Partnership incurred $2,186,535 and $715,854, respectively, as syndication
costs for such fees, of which $2,050,986 and $673,534, respectively, was or
will be reallowed to other broker-dealers.
In addition, CNL Securities Corp. is entitled to receive a due diligence
expense reimbursement fee equal to 0.5% of the total amount raised from the
sale of units of limited partnership interest, a portion of which may be
reallowed to other broker-dealers and from which all due diligence expenses
will be paid. For the years ended December 31, 1997 and 1996, the Partnership
incurred $128,620 and $42,109, respectively, of such fees. The majority of
these fees were reallowed to other broker-dealers for payment of bona fide due
diligence expenses.
F-439
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997 and 1996 and the Period
February 10, 1995 (Date of Inception) through December 31, 1995
8. Related Party Transactions--(Continued)
CNL Fund Advisors, Inc. is entitled to receive acquisition fees for services
in finding, negotiating and acquiring properties on behalf of the Partnership
equal to 4.5% of the total amount raised from the sale of units of limited
partnership interest. For the years ended December 31, 1997 and 1996, the
Partnership incurred $1,157,577 and $378,982, respectively, of such fees. Such
fees are included in land and buildings, net investment in direct financing
leases and other assets.
The Partnership and CNL Fund Advisors, Inc. have entered into a management
agreement pursuant to which CNL Fund Advisors, Inc. receives annual management
fees 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 CNL Fund
Advisors, Inc. 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 CNL Fund Advisors, Inc. shall determine. For the years ended
December 31, 1997 and 1996, the Partnership incurred $11,842 and $12,
respectively, for such management fees.
During the years ended December 31, 1997 and 1996, and the period February
10, 1995 (date of inception) through December 31, 1995, CNL Fund Advisors, Inc.
and its affiliates provided accounting and administrative services to the
Partnership (including accounting and administrative services in connection
with the offering of units) on a day-to-day basis. For the years ended December
31, 1997 and 1996, and the period February 10, 1995 (date of inception) through
December 31, 1995, the expenses incurred for these services were classified as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Syndication costs................................. $212,279 $106,887 $37,586
General operating and administrative expenses..... 98,207 2,980 --
-------- -------- -------
$310,486 $109,867 $37,586
======== ======== =======
</TABLE>
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Due to CNL Securities Corp.:
Commissions.............................................. $79,069 $44,186
Marketing support and due diligence expense reimbursement
fee..................................................... 5,191 2,599
-------- -------
84,260 46,785
-------- -------
Due to CNL Fund Advisors, Inc. and its affiliates:
Expenditures incurred on behalf of the Partnership....... 1,737 2,788
Acquisition fees......................................... 29,757 23,392
Accounting and administrative services................... 1,921 10,912
Management fees.......................................... 556 12
-------- -------
33,971 37,104
-------- -------
$118,231 $83,889
======== =======
</TABLE>
F-440
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997 and 1996 and the Period
February 10, 1995 (Date of Inception) through December 31, 1995
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 for at least one of the periods
ended:
<TABLE>
<CAPTION>
February 10,
1995
(Date of
Inception)
through
December 31, December 31, December 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Golden Corral Corp.................... $241,395 $ -- $--
Foodmaker, Inc........................ 240,261 -- --
Tiffany, L.L.C........................ 154,153 -- --
IHOP Properties, Inc.................. 152,343 -- --
Platinum Rotisserie, L.L.C............ 133,591 -- --
Carrols Corporation................... 100,312 1,373 --
</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 for at least one of the
periods ended:
<TABLE>
<CAPTION>
February 10,
1995
(Date of
Inception)
through
December 31, December 31, December 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Golden Corral......................... $395,548 $ -- $--
Jack in the Box....................... 240,261 -- --
Boston Market......................... 231,489 -- --
IHOP.................................. 152,343 -- --
Burger King........................... 100,312 1,373 --
</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. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the ongoing operations of
the lessees.
10. Subsequent Events
During the period January 1, 1997 through February 4, 1998, the Partnership
received capital contributions for an additional 74,408 units ($744,077) of
limited partnership interest.
F-441
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to APF
gives effect to the Acquisition, and is based on estimates and assumptions set
for the 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 Funds, the Advisor and CNL Restaurant Financial
Services Group (shown separately as CNL Financial Services, Inc. and CNL
Financial Corp.) and should be read in conjunction with the selected historical
financial data and accompanying notes of APF, CNL Income Funds, Advisor and CNL
Restaurant Financial Services Group. The pro forma balance sheet assumes that
the Acquisition occurred on September 30, 1998; the pro forma consolidated
statements of earnings assume that the restaurant property Acquisitions (as
defined on page ) and the Acquisition occurred on January 1, 1997.
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-442
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
INDEX TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
<TABLE>
<S> <C>
Unaudited Pro Forma Balance Sheet--As of September 30, 1998............. F-444
Unaudited Pro Forma Income Statement--For the Nine Months ended
September 30, 1998..................................................... F-445
Unaudited Pro Forma Income Statement--For the Year ended December 31,
1997................................................................... F-446
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements............................................................. F-447
</TABLE>
F-443
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA BALANCE SHEET
September 30, 1998
<TABLE>
<CAPTION>
Historical
-----------------------------------------------------------------------------------
CNL Financial CNL Combined
APF Income Funds Advisor Services, Inc. Financial Corp. Portfolios
------------ ------------ ---------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Land and
buildings on
operating
leases, net..... $298,967,972 $332,327,405 $ 0 $ 0 $ 0 $ 631,295,377
Net investment in
direct financing
leases.......... 117,028,760 90,696,044 0 0 0 207,724,804
Mortgages and
notes
receivable...... 33,523,506 4,836,808 0 0 173,776,981 212,137,295
Other
Investments..... 16,200,316 0 200,000 0 6,561,628 22,961,944
Investment in
joint ventures.. 631,374 50,429,925 0 0 0 51,061,299
Cash and cash
equivalents..... 90,674,289 25,730,166 283,300 599,997 5,098,033 122,385,785
Receivables...... 575,104 314,049 7,544,985 6,824,632 517,471 15,776,241
Accrued rental
income.......... 3,071,451 18,089,015 0 0 0 21,160,466
Other assets..... 5,711,195 1,018,297 401,524 295,570 3,854,477 11,281,063
------------ ------------ ---------- ---------- ------------ --------------
Total assets.... $566,383,967 $523,441,709 $8,429,809 $7,720,199 $189,808,590 $1,295,784,274
============ ============ ========== ========== ============ ==============
LIABILITIES &
EQUITY:
Accounts payable
and accrued
liabilities..... $ 379,496 $ 615,567 $ 449,751 $ 193,949 $ 1,236,138 $ 2,874,901
Accrued
construction
costs payable... 3,045,304 0 0 0 0 3,045,304
Distributions
payable......... 0 12,929,500 2,220,000 0 0 15,149,500
Due to related
parties......... 2,552,411 945,723 0 1,452,512 6,556,920 11,507,566
Income tax
payable......... 0 0 1,989,003 0 1,001,861 2,990,864
Line of credit... 6,765,575 0 0 0 0 6,765,575
Notes payable.... 0 0 390,398 28,462 175,528,203 175,947,063
Deferred income.. 1,015,758 168,790 0 0 0 1,184,548
Rents paid in
advance......... 437,497 802,726 0 0 0 1,240,223
Minority
interest........ 282,544 1,740,749 0 0 0 2,023,293
Common Stock..... 621,187 0 9,800 2,000 200 633,187
Additional paid
in capital...... 556,830,578 0 482,964 5,231,827 3,887,496 566,432,865
Accumulated
distributions in
excess of net
earnings........ (5,546,383) 0 2,887,893 811,449 1,597,772 (249,269)
Partners
capital......... 0 506,238,654 0 0 0 506,238,654
------------ ------------ ---------- ---------- ------------ --------------
Total
liabilities and
equity......... $566,383,967 $523,441,709 $8,429,809 $7,720,199 $189,808,590 $1,295,784,274
============ ============ ========== ========== ============ ==============
<CAPTION>
Pro Forma
--------------------------------
Adjustments Pro Forma
---------------- ---------------
<S> <C> <C>
ASSETS:
Land and
buildings on
operating
leases, net..... $ 92,857,763 (1)
26,052,741 (2) $ 750,205,881
Net investment in
direct financing
leases.......... 24,117,264 (1) 231,842,068
Mortgages and
notes
receivable...... 849,195 (2) 212,986,490
Other
Investments..... -- 22,961,944
Investment in
joint ventures.. 13,158,851 (1) 64,220,150
Cash and cash
equivalents..... (7,175,000)(1)
(8,933,000)(1)
(26,901,936)(2) 79,375,849
Receivables...... (8,795,102)(3) 6,981,139
Accrued rental
income.......... (18,089,015)(1) 3,071,451
Other assets..... 39,696,874)(1)
(4,673,130)(1) 46,304,807
---------------- ---------------
Total assets.... $122,165,505 $1,417,949,779
================ ===============
LIABILITIES &
EQUITY:
Accounts payable
and accrued
liabilities..... $ -- $ 2,874,901
Accrued
construction
costs payable... -- 3,045,304
Distributions
payable......... -- 15,149,500
Due to related
parties......... (8,795,102)(3) 2,712,464
Income tax
payable......... (2,990,864)(4) 0
Line of credit... -- 6,765,575
Notes payable.... -- 175,947,063
Deferred income.. (168,790)(1) 1,015,758
Rents paid in
advance......... -- 1,240,223
Minority
interest........ -- 2,023,293
Common Stock..... 713,825 (1) 1,347,012
Additional paid
in capital...... 715,496,888 (1) 1,281,929,753
Accumulated
distributions in
excess of net
earnings........ (78,842,662)(1)
2,990,864 (4) (76,101,067)
Partners
capital......... (506,238,654)(1) 0
---------------- ---------------
Total
liabilities and
equity......... $122,165,505 $1,417,949,779
================ ===============
</TABLE>
F-444
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA INCOME STATEMENT
For the nine months ended September 30, 1998
<TABLE>
<CAPTION>
Historical
----------------------------------------------------------------------------------
CNL Financial CNL Combined
APF Income Funds Advisor Services, Inc. Financial Corp. Portfolios
----------- ------------ ----------- -------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and
earned income... $22,947,199 $35,891,418 $ 0 $ 0 $ 0 $ 58,838,617
Fees............ 0 0 21,405,127 5,115,549 6,817 26,527,493
Interest and
other income.... 6,117,911 1,528,771 751 432,506 18,031,141 26,111,080
----------- ----------- ----------- ---------- ----------- ------------
Total revenue... 29,065,110 37,420,189 21,405,878 5,548,055 18,037,958 111,477,190
Expenses:
General and
administrative.. 1,539,004 3,037,610 6,701,115 4,107,311 2,597,171 17,982,211
Advisory fees... 1,248,393 210,414 0 0 1,026,231 2,485,038
Fees to
Restaurant
Financial
Services Group.. 0 0 256,456 1,569,202 0 1,825,658
Interest........ 0 0 105,668 3,534 14,230,999 14,340,201
State taxes..... 397,569 248,468 15,226 18,564 201,616 881,443
Depreciation--
other........... 0 0 75,607 55,056 0 130,663
Depreciation--
property........ 2,684,924 4,611,116 0 0 0 7,296,040
Amortization.... 8,096 35,869 55,932 138 945,299 1,045,334
----------- ----------- ----------- ---------- ----------- ------------
Total operating
expenses........ 5,877,986 8,143,477 7,210,004 5,753,805 19,001,316 45,986,588
----------- ----------- ----------- ---------- ----------- ------------
Operating
earnings
(losses)......... 23,187,124 29,276,712 14,195,874 (205,750) (963,358) 65,490,602
Equity in
earnings of
joint
ventures/minority
interest........ (23,271) 2,507,758 0 12,452 0 2,496,939
Gain /(loss) on
sale of
properties...... 0 2,239,278 0 0 0 2,239,278
Gain on
securitization.. 0 0 0 0 3,018,268 3,018,268
Provision for
loss on
properties...... 0 (577,405) 0 0 0 (577,405)
Other expenses.. 0 (45,150) 0 0 0 (45,150)
----------- ----------- ----------- ---------- ----------- ------------
Net earnings
(losses) before
federal income
taxes............ 23,163,853 33,401,193 14,195,874 (193,298) 2,054,910 72,622,532
Provision
(credit) for
federal income
taxes........... 0 0 5,607,415 (81,229) 789,895 6,316,081
----------- ----------- ----------- ---------- ----------- ------------
Net income....... $23,163,853 $33,401,193 $ 8,588,459 $ (112,069) $ 1,265,015 $ 66,306,451
=========== =========== =========== ========== =========== ============
Earnings per
share............ $ 0.49
===========
Shares
outstanding:
Weighted
average......... 47,633,909
===========
End of period... 62,118,679
===========
<CAPTION>
Pro Forma
--------------------------------
Adjustments Pro Forma
---------------- ---------------
<S> <C> <C>
Revenues:
Rental and
earned income... $ 9,747,393 (a)
836,671 (b) $ 69,422,681
Fees............ (21,920,894)(c)
(2,875,906)(d) 1,730,693
Interest and
other income.... 1,526,547 (e) 27,637,627
---------------- ---------------
Total revenue... (12,686,189) 98,791,001
Expenses:
General and
administrative.. (1,641,779)(f)
(1,415,100)(g)
(571,595)(h) 14,353,737
Advisory fees... (2,485,038)(i) 0
Fees to
Restaurant
Financial
Services Group.. (1,825,658)(n) 0
Interest........ (68,670)(m) 14,271,531
State taxes..... 601,369 (j) 1,482,812
Depreciation--
other........... -- 130,663
Depreciation--
property........ 2,870,103 (k) 10,166,143
Amortization.... 1,488,633 (l) 2,533,967
---------------- ---------------
Total operating
expenses........ (3,047,735) 42,938,853
---------------- ---------------
Operating
earnings
(losses)......... (9,638,454) 55,852,148
Equity in
earnings of
joint
ventures/minority
interest........ -- 2,496,939
Gain /(loss) on
sale of
properties...... -- 2,239,278
Gain on
securitization.. -- 3,018,268
Provision for
loss on
properties...... -- (577,405)
Other expenses.. -- (45,150)
---------------- ---------------
Net earnings
(losses) before
federal income
taxes............ (9,638,454) 62,984,078
Provision
(credit) for
federal income
taxes........... (6,316,081)(o) 0
---------------- ---------------
Net income....... $(3,322,373) $ 62,984,078
================ ===============
Earnings per
share............ $ 0.48
===============
Shares
outstanding:
Weighted
average......... 130,673,371(p)
===============
End of period... 134,701,179
===============
</TABLE>
F-445
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA INCOME STATEMENT
For the year ended December 31, 1997
<TABLE>
<CAPTION>
Historical Pro Forma
-------------------------------------------------------------------------------- ----------------------------
CNL Financial CNL Combined
APF Income Funds Advisor Services, Inc. Financial Corp. Portfolios Adjustments Pro Forma
----------- ------------ ---------- -------------- --------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and
earned income... $15,490,615 $51,340,020 $ 0 $ 0 $ 0 $66,830,635 $25,281,493 (a)
1,061,687 (b) $ 93,173,815
Fees............ 0 0 8,310,836 5,965,110 73,704 14,349,650 (10,087,047)(c)
(2,662,141)(d) 1,600,462
Interest and
other income.... 3,967,318 1,815,714 165,569 0 10,932,843 16,881,444 249,395 (e) 17,130,839
----------- ----------- ---------- ---------- ----------- ----------- ----------- ------------
Total Revenue... 19,457,933 53,155,734 8,476,405 5,965,110 11,006,547 98,061,729 13,843,387 111,905,116
Expenses:
General and
administrative.. 1,010,725 3,691,750 4,266,169 1,889,904 828,848 11,687,396 (1,038,365)(f)
(1,619,238)(g)
(714,640)(h) 8,315,153
Advisory fees... 804,879 263,766 0 0 1,802,532 2,871,177 (2,871,177)(i) 0
Fees to
Restaurant
Financial
Services Group.. 0 0 151,041 594,041 0 745,082 (745,082)(n) 0
Interest........ 0 0 162,153 183,315 8,320,000 8,665,468 (81,594)(m) 8,583,874
State taxes..... 251,358 234,022 12,084 1,294 1,600 500,358 110,893 (j) 611,251
Depreciation--
other........... 0 0 48,490 14,637 0 63,127 -- 63,127
Depreciation--
property........ 1,784,269 6,028,330 0 0 0 7,812,599 5,109,705 (k) 12,922,304
Amortization.... 10,793 37,729 18,093 61,324 916,577 1,044,516 1,984,844 (l) 3,029,360
----------- ----------- ---------- ---------- ----------- ----------- ----------- ------------
Total operating
expenses........ 3,862,024 10,255,597 4,658,030 2,744,515 11,869,557 33,389,723 135,346 33,525,069
----------- ----------- ---------- ---------- ----------- ----------- ----------- ------------
Operating
earnings
(losses)......... 15,595,909 42,900,137 3,818,375 3,220,595 (863,010) 64,672,006 13,708,041 78,380,047
Equity in
earnings of
joint
ventures/minority
interest........ (31,453) 3,678,871 0 (126,627) 0 3,520,791 -- 3,520,791
Gain on sale of
properties...... 0 4,224,500 0 0 0 4,224,500 -- 4,224,500
Provision for
loss on
properties...... 0 (665,574) 0 0 0 (665,574) -- (665,574)
Other income.... 0 214,000 0 0 0 214,000 -- 214,000
----------- ----------- ---------- ---------- ----------- ----------- ----------- ------------
Net earnings
before federal
income taxes..... 15,564,456 50,351,934 3,818,375 3,093,968 (863,010) 71,965,723 13,708,041 85,673,764
Provision
(credit) for
federal income
taxes........... 0 0 1,508,258 1,272,133 (317,785) 2,462,606 (2,462,606)(o) 0
----------- ----------- ---------- ---------- ----------- ----------- ----------- ------------
Net earnings
(losses)......... $15,564,456 $50,351,934 $2,310,117 $1,821,835 $ (545,225) $69,503,117 $16,170,647 $ 85,673,764
=========== =========== ========== ========== =========== =========== =========== ============
Earnings per
share............ $ 0.66 $ 0.65
=========== ============
Shares
outstanding:
Weighted
average......... 23,423,868 131,446,067
=========== ============
End of period... 36,192,971 131,446,067
=========== ============
</TABLE>
F-446
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of September 30, 1998 reflects the
transactions of the acquisition of the CNL Income Funds, Advisor and CNL
Restaurant Financial Services Group (the "Acquisition Proposal") as set forth
in this Consent Solicitation. The Pro Forma Statements of Earnings for the nine
months ended September 30, 1998, and for the year ended December 31, 1997, have
been prepared to reflect a) the issuance of additional shares and the property
acquisitions completed from January 1, 1997 through November 30, 1998
("Offering and Property Transactions") and b) the transactions of the
Acquisition Proposal as set forth in this Consent Solicitation. This unaudited
pro forma financial information has been prepared utilizing the historical
financial statements of APF and the historical combined financial information
of the CNL Income Funds, Advisor and CNL Restaurant Financial Services Group
and should be read in conjunction with the selected historical financial data
and accompanying notes of APF, the CNL Income Funds, Advisor and the CNL
Restaurant Financial Services Group. The Pro Forma Balance Sheet was prepared
as if the Offering and Property Transactions and the Acquisition Proposal
occurred on September 30, 1998. The Pro Forma Statements of Earnings were
prepared as if the Property Acquisitions and the Acquisition Proposal occurred
as of January 1, 1997. The pro forma information is unaudited and is not
necessarily indicative of the consolidated operating results which would have
occurred if the Offering and Acquisition Transaction and the Acquisition
Proposal 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 Acquisition Proposal have been made.
Capitalized terms have the meanings as defined in the Consent Solicitation.
2. Method of Accounting
The acquisition of the CNL Income Funds and the CNL Restaurant Financial
Services Group 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 operating
expense on APF's consolidated statements of earnings, but APF will not deduct
this expense for purposes of calculating funds from operations due to the non-
recurring and non-cash nature of the expense.
All significant intercompany balances and transactions between APF, CNL
Income Funds, Advisor and CNL Restaurant Financial Services Group have been
eliminated in the pro forma financial statements.
3. Adjustments to Pro Forma Balance Sheet
The following describes the pro forma adjustments to the Pro Forma Balance
Sheet as of September 30, 1998, as if the Acquisition was consummated on such
date. For purposes of the pro forma financial statements, it is assumed that at
an annual meeting of stockholders, the stockholders of APF approved an
amendment to increase the number of authorized shares to an amount necessary to
enable APF to issue the shares for the Acquisition.
(1) Represents the payment of $7,175,000 in cash and the issuance of
72,582,500 common shares in consideration for the purchase of the CNL
Income Funds, Advisor and CNL Restaurant Financial Services Group at
September 30, 1998 at a share price of $10 plus estimated transaction
costs. The acquisition of the CNL Income Funds and the CNL Restaurant
Financial Services Group has been accounted for under the purchase
accounting method and goodwill was recognized to the extent that the
consideration paid exceeded the fair value of the net tangible assets
acquired. As for the acquisition of the Advisor from a
F-447
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
related party, the consideration paid in excess of the fair value of the
net tangible assets received has been accounted for as costs incurred in
acquiring the Advisor from a related party because the Advisor has not been
deemed to qualify as a "business" for purposes of applying APB Opinion No.
16 "Business Combinations." Upon consummation of the Acquisition, this
expense will be recorded as an operating expense on APF's statement of
earnings. APF will not deduct this expense for purposes of calculating
funds from operations due to the nonrecurring and non-cash nature of the
expense. As of September 30, 1998, $249,403 of transaction costs had been
incurred by APF.
<TABLE>
<S> <C>
CNL Income Funds............................................. $610,000,000
Advisor...................................................... 76,000,000
CNL Restaurant Financial Services Group...................... 47,000,000
------------
Total Purchase Price (cash and shares)..................... 733,000,000
Less cash paid to CNL Income Funds........................... (7,175,000)
------------
Share consideration........................................ 725,825,000
Transaction costs of APF..................................... 8,933,000
------------
Total costs incurred....................................... $734,758,000
============
</TABLE>
In addition, APF i) used $8,933,000 in cash to pay the transaction costs
related to the Acquisition, ii) made an upward adjustment to the CNL Income
Funds carrying value of land and building on operating leases by $92,857,763,
net investment in direct financing leases by $24,117,264, investment in joint
venture by $13,158,851, made downward adjustments to the carrying value of
accrued rental income of $18,089,015, made downward adjustments to other assets
of $4,673,130 and made downward adjustments to deferred income of $168,790 to
adjust historical values to fair value, iii) recorded goodwill of $39,696,874
for the acquisition of the CNL Restaurant Financial Services Group, iv) reduced
retained earnings by $73,545,548 for the excess consideration paid over the net
assets of the Advisor and removed the historical common stock balance of
$12,000, additional paid in capital balance of $9,602,287, retained earnings
balance of $5,297,114, and partners' capital balance of $506,238,654 of the CNL
Income Funds, Advisor and CNL Restaurant Financial Services Group.
(2) Represents the use of $26,901,936 in cash and cash equivalents at
September 30, 1998 to acquire $26,052,741 in properties and issue $849,195
in mortgage notes which occurred from October 1, 1998 through November 30,
1998.
(3) Represents the elimination by the CNL Income Funds of $945,723 in
related party payables recorded as receivables by the Advisor, the
elimination by the CNL Restaurant Financial Services Group of $6,641,379 in
related party payables recorded as receivables by CNL Restaurant Financial
Services Group and the elimination by APF of $1,208,000 in related party
payables recorded as receivables by the Advisor.
(4) Represents the elimination of income taxes payable of $2,990,864
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.
F-448
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
4. Adjustments to Pro Forma Income Statements
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the nine months ended September 30, 1998, as if the
Acquisition was consummated as of January 1, 1997.
(a) Represents rental and earned income as if 1) properties that had been
previously constructed and acquired from January 1, 1998 through
November 30, 1998 had been acquired and leased on January 1, 1997 and
2) properties that were developed by APF from January 1, 1998 through
November 30, 1998 had been placed in service on May 1, 1997 (assumes a
four month development period.)
<TABLE>
<S> <C>
Rental and earned income on Property Transaction by APF......... $9,635,208
Rental and earned income on Property Transactions by CNL XVIII.. 112,185
----------
$9,747,393
==========
</TABLE>
(b) Represents $836,671 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms
for the leases acquired from the CNL Income Funds as if the leases had
been acquired on January 1, 1997.
(c) Represents the elimination of intercompany fees between APF, the CNL
Income Funds, the Advisor and the CNL Restaurant Financial Services
Group:
<TABLE>
<S> <C>
Origination fees............................................ $ (1,569,202)
Secured equipment lease fee................................. (44,424)
Advisory fees............................................... (1,932,795)
Reimbursement of administrative costs....................... (627,662)
Acquisition fees............................................ (15,757,119)
Underwriting fees........................................... (254,945)
Administrative fees......................................... (148,493)
Executive fee............................................... (310,000)
Guarantee fees.............................................. (93,750)
Servicing fee............................................... (1,014,117)
Development fees............................................ (166,876)
Consulting fee.............................................. (1,511)
------------
Total..................................................... $(21,920,894)
============
</TABLE>
(d) Represents the deferral of $2,875,906 in origination fees collected by
CNL Restaurant Financial Services Group that should be amortized over
the term of the loans originated (20 years) in accordance with the
Statement of Financial Accounting Standards #91 "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring
Loans and Initial Direct Costs of Leases."
(e) Represents interest income of $1,318,870 earned from Other Investments
acquired and mortgage notes issued from January 1, 1998 through
November 30, 1998 as if this had occurred on January 1, 1997 and the
amortization of $207,677 of deferred origination fees collected during
the year ended December 31, 1997 and during the nine months ended
September 30, 1998, which were capitalized and deferred in (d) above as
if they had been collected on January 1, 1997. These deferred fees are
being amortized and recorded as interest income.
F-449
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(f) Represents the elimination of intercompany expenses paid between APF,
the CNL Income Funds, the Advisor and the CNL Restaurant Financial
Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs........................ $ (627,662)
Servicing fee................................................ (1,014,117)
-----------
$(1,641,779)
===========
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by APF were
subject to capitalization during the entire period and 2) costs
relating to properties not developed by APF were subject to
capitalization up through the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs............................. $(1,415,100)
</TABLE>
(h) Represents savings of $571,595 in professional services and
administrative expenses resulting from reporting on one combined
Company versus 22 separate entities.
(i) Represents the elimination of advisory fees between APF, the CNL Income
Funds, the Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Advisory fees................................................. $(1,932,795)
Administrative fees........................................... (148,493)
Executive fee................................................. (310,000)
Guarantee fees................................................ (93,750)
-----------
$(2,485,038)
===========
</TABLE>
(j) Represents additional income taxes of $601,369 resulting from assuming
that acquisitions from January 1, 1998 through November 30, 1998 had
been acquired on January 1, 1997 and assuming that the CNL Income Funds
had operated under a REIT structure.
(k) Represents an increase in depreciation of the building portion of the
properties acquired from January 1, 1998 through November 30, 1998 as
if they had been acquired on January 1, 1997 and the step up in basis
referred to in footnote (2) from acquiring the CNL Income Fund
portfolios using the straight-line method over the estimated useful
lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense............................................ $2,870,103
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of the
CNL Restaurant Financial Services Group referred to in footnote (2)
<TABLE>
<S> <C>
Amortization of goodwill....................................... $1,488,633
</TABLE>
(m) Represents elimination of interest expense recorded for the
amortization of $350,000 in arrangement fees collected during the year
ended December 31, 1997 which were eliminated in II (d ) below.
<TABLE>
<S> <C>
Interest expense................................................. $(68,670)
</TABLE>
F-450
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(n) Represents the elimination of fees paid to affiliates for fees incurred
between APF, the CNL Income Funds, the Advisor and the CNL Restaurant
Financial Services Group:
<TABLE>
<S> <C>
Origination fees.............................................. $(1,569,202)
Underwriting fees............................................. (254,945)
Consulting fee................................................ (1,511)
-----------
$(1,825,658)
===========
</TABLE>
(o) Represents the elimination of $6,316,081 in the provision for income
taxes as a result of the Acquisition. APF expects to continue to
qualify as a REIT and does not expect to incur federal income taxes.
(p) Common shares issued during the period required to fund acquisitions as
if they had been acquired on January 1, 1997 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 the proposal to increase the number of authorized common
shares of APF.
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the year ended December 31, 1997, as if the
Acquisition was consummated as of January 1, 1997.
(a) Represents rental and earned income as if 1) properties that had been
previously constructed and acquired from January 1, 1998 through
November 30, 1998 had been acquired and leased on January 1, 1997 and
2) properties that were developed by APF from January 1, 1997 through
November 30, 1998 had been placed in service on May 1, 1997 (assumes a
four month development period.)
<TABLE>
<S> <C>
Rental and earned income on Property Transaction by APF...... $24,048,982
Rental and earned income on Property Transactions by CNL
XVIII....................................................... 1,232,511
-----------
$25,281,493
===========
</TABLE>
(b) Represents $1,061,687 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms
for the leases acquired from the CNL Income Funds as if the leases had
been acquired on January 1, 1997.
(c) Represents the elimination of intercompany fees between APF, the CNL
Income Funds, the Advisor and the CNL entities:
<TABLE>
<S> <C>
Origination fees............................................ $ (594,041)
Secured equipment lease fee................................. (375,219)
Advisory fees............................................... (2,039,446)
Reimbursement of administrative costs....................... (439,377)
Acquisition fees............................................ (4,337,634)
Underwriting fees........................................... (151,041)
Administrative fees......................................... (269,231)
Executive fee............................................... (250,000)
Guarantee fees.............................................. (312,500)
Arrangement fees............................................ (350,000)
Servicing fee............................................... (598,988)
Development fees............................................ (369,570)
------------
Total..................................................... $(10,087,047)
============
</TABLE>
F-451
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(d) Represents the deferral of $2,662,141 in origination fees collected by
CNL Restaurant Financial Services Group that should be amortized over
the term of the loans originated (20 years) in accordance with the
Statement of Financial Accounting Standards #91 "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring
Loans and Initial Direct Costs of Leases."
(e) Represents the elimination of interest income of $1,931,331 earned
during the year ended December 31, 1997 assuming all monies raised
during 1997 and all cash held on January 1, 1997 was used to effect the
Acquisition on January 1, 1997, represents interest income of
$2,047,619 earned from Other Investments acquired and mortgage notes
issued from January 1, 1998 through November 30, 1998 as if this had
occurred on January 1, 1997 and the recognition of $133,107 of
origination fees collected during the year ended December 31, 1997
which were deferred in (d) and are being amortized and recorded as
interest income.
(f) Represents the elimination of intercompany expenses paid between APF,
the CNL Income Funds, the Advisor and the CNL Restaurant Financial
Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs........................ $ (439,377)
Servicing fee................................................ (598,988)
-----------
$(1,038,365)
===========
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by APF were
subject to capitalization during the entire period and 2) costs
relating to properties not developed by APF were subject to
capitalization up through the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs............................. $(1,619,238)
</TABLE>
(h) Represents savings of $714,640 in professional services and
administrative expenses resulting from reporting on one combined
Company versus 22 separate entities.
(i) Represents the elimination of advisory fees between APF, the CNL Income
Funds, the Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Advisory fees................................................. $(2,039,446)
Administrative fees........................................... (269,231)
Executive fee................................................. (250,000)
Guarantee fees................................................ (312,500)
-----------
$(2,871,177)
===========
</TABLE>
(j) Represents additional income taxes of $110,893 resulting from assuming
that acquisitions from January 1, 1997 through November 30, 1998 had
been acquired on January 1, 1997 and assuming that the CNL Income Funds
had operated under a REIT structure.
F-452
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(k) Represents an increase in depreciation of the building portion of the
properties acquired from January 1, 1997 through November 30, 1998 as
if they had been acquired on January 1, 1997 and the step up in basis
referred to in footnote (2) from acquiring the CNL Income Fund
portfolios using the straight-line method over the estimated useful
lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense............................................ $5,109,705
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of the
CNL Restaurant Financial Services Group referred to in footnote (2)
<TABLE>
<S> <C>
Amortization of goodwill....................................... $1,984,844
</TABLE>
(m) Represents elimination of yearly amortization of arrangement fees of
$350,000 capitalized as deferred costs and amortized as interest
expense and the capitalization of interest expense during the period
that properties were under development.
<TABLE>
<S> <C>
Amortization of arrangement fees................................ $(24,144)
Capitalization of interest during development period............ (57,450)
--------
$(81,594)
========
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees incurred
between APF, the CNL Income Funds, the Advisor and the CNL Restaurant
Financial Services Group:
<TABLE>
<S> <C>
Origination fees................................................ $(594,041)
Underwriting fees............................................... (151,041)
---------
$(745,082)
=========
</TABLE>
(o) Represents the elimination of $2,462,606 in the provision for income
taxes as a result of the Acquisition. APF expects to continue to
qualify as a REIT and does not expect to incur federal income taxes.
(p) Common shares issued during the period were assumed to have been issued
and outstanding as of January 1, 1997. For purposes of the pro forma
financial statement, it is assumed that the stockholders approved the
proposal to increase the number of authorized common shares of APF.
F-453
<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 Prospectus/Consent Solicitation Statement.
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.
OVERVIEW
Pursuant to the Prospectus/Consent Solicitation Statement and this
Supplement, you are being asked to approve the Acquisition of your Income Fund
by APF. Your Income Fund is one of 18 limited partnerships (which we refer to
collectively as the Funds) that APF is seeking to acquire. Supplements have
also been prepared for each of the other Funds, copies of which may be obtained
without charge to 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 (or a REIT), formed in
1994, whose primary business, like that of the Funds, is the ownership of
restaurant properties leased to operators of national and regional restaurant
chains on a triple-net lease basis. As a full-service REIT, 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 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 shares of common stock (or APF Shares) will I receive if my Income
Fund is acquired by APF?
Your Income Fund will receive 1,157,759 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 $10.00 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
approximately 75 million APF Shares through three public offerings at offering
prices
S-1
<PAGE>
per APF share equal to the Exchange Value. At December 31, 1998, of the
approximately $750 million raised by APF, APF has used approximately $550
million to acquire restaurant properties and to make mortgage loans and had
approximately $120 million in uninvested proceeds which APF expects to invest
during the first quarter of 1999. The remaining proceeds were used to pay fees
and other offering expenses.
What is the required vote necessary to approve the Acquisition?
Pursuant to the terms of your Income Fund's partnership agreement, APF's
acquisition of your Income Fund may not be consummated without the approval of
greater than 50% of the outstanding 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
Fund?
Yes. Legg Mason Wood Walker, Incorporated 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 Funds, and (c) the method of allocating the APF
Shares among the Funds.
Do you, as the general partners of my Income Fund, recommend that I vote in
favor 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 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 how you want to vote, and sign
and mail it in the enclosed postage-paid return envelope as soon as possible,
so that at the Special Meeting of Limited Partners, your Units may be voted
"For" or "Against" APF's acquisition of your Income Fund. If you sign and send
in your consent form and do not indicate how you want to vote, your consent
form will be counted as a vote "For" the Acquisition. If you do not vote or you
abstain from voting, it will count as a vote "Against" the Acquisition.
In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to certain limitations. If you vote "Against" the Acquisition,
but your Income Fund is nevertheless acquired by APF, you may elect to receive
a payment (which we call the Cash/Notes Option) that is 10% in cash and 90% in
% Callable Notes due , 2006 (or Notes) based on the liquidation value
of your Income Fund, as determined by Valuation Associates, the appraisal firm
that we engaged in connection with the Acquisition. Such liquidation value will
be lower than the aggregate Exchange Value of the APF Shares offered to your
Income Fund in the Acquisition. The Notes will bear interest at a rate equal to
%, which was determined based on 120% of the applicable federal rate as of
, 1999. Please note that you may only receive the Cash/Notes Option if
you have voted "Against" the Acquisition and you elect to receive the
Cash/Notes Option on your consent form. You will receive APF Shares if your
Income Fund elects to be acquired in the Acquisition and you voted "For" the
Acquisition, or you voted "Against" the Acquisition and did not affirmatively
select the Cash/Notes Option. 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 (for example, 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 be based on the difference between the
value of the APF Shares or the tax basis of your Units. If you elect the
Cash/Notes Option, 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
S-2
<PAGE>
of the APF Shares and cash received by your Income Fund over the tax basis of
your Fund's net assets. Some of the gain may be subject to the 25% rate of tax
applicable to certain 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 $1,953. To
review the tax consequences to the Limited Partners of the Funds in greater
detail, see pages through of the Prospectus/Consent Solicitation
Statement 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 Funds acquired by APF.
Although the majority of APF's assets and the assets of the other Funds
acquired by APF are substantially similar to those of your Income Fund, the
restaurant properties owned by APF and the other 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 Funds' restaurant properties,
see "APF's Business and The Restaurant Properties--Business Objectives and
Strategies" and "--The Restaurant Properties--General" and "Business of the
Funds--Description of Restaurant Properties" in the Prospectus/Consent
Solicitation Statement.
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 Prospectus/Consent Solicitation Statement.
Investment Risks
. Uncertainty Regarding the Exchange Value and Trading Price of APF Shares
Following Listing. Your Income Fund will be receiving 1,157,759 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 is 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 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.
. Decrease in Distribution. In each of the years ended December 31, 1995, 1996
and 1997, your Income Fund made $843 in distributions per $10,000 investment
to you. Based on APF's pro forma financial information, and assuming APF
acquires only your Income Fund and that each Limited Partner of your Income
receives only APF Shares, you would have received, for the year ended
December 31, 1997, $435 in distributions per $10,000 of original investment,
which is 48.4% less than the $843 distributed to you as Limited Partner
during the same period. 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
year
S-3
<PAGE>
ended December 31, 1997 and for the nine months ended September 30, 1998 is
not necessarily indicative of the distributions you will receive as a
stockholder of APF after the Acquisition. See "Cash Distributions to
Limited Partners of Your Fund."
. Conflicts of Interest in the Acquisition; Substantial Benefits to Related
Parties. There are certain conflicts of interest inherent in the structure
of the Acquisition of your Income Fund. 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
that may or may not be aligned with your interests 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.
. Fundamental Change in Nature of 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 September
30, 1998), 374 restaurant properties. The risks inherent in investing in an
operating company such as APF include APF's ability to invest in new
restaurant properties that are not as profitable as APF anticipated, the
incurrence of substantial indebtedness to make future acquisitions of
restaurant properties which it may be unable to repay and making mortgage
loans to prospective operators of national and regional restaurant chains
which may not have the ability to repay.
As an APF stockholder, you will receive the benefits of your investment
through (i) dividend distributions on, and (ii) increases in the value of,
your APF Shares. In addition, 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 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 Cash/Notes Option). An investment in APF may not
outperform your investment in the Income Fund.
. Original Investment Timeframe. 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, 2025. 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 1993 and 2001. Because your Income Fund is in
the anticipated termination timeframe, we could elect to liquidate your
Income Fund. However, we have no current plans to dispose of your Income
Fund's restaurant properties if the Limited Partners do not approve the
Acquisition.
Real Estate/Business Risks
. Risk of Default on Mortgage Loans and Market Risks associated with
Securitizations. 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
S-4
<PAGE>
which could interfere with APF's administration of the mortgage loans and
any collections upon a borrower's default.
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,) and 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 may 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.
. Risks Associated with Leverage. 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. At the time of the consummation of the Acquisition, as a
general policy, APF's Board of Directors will 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 funds from operations and its ability to make
distributions to its stockholders.
. Acquisition and Development Risks. APF plans to pursue its growth strategy
through the acquisition and development of additional restaurant properties.
To the extent that APF does pursue this growth strategy, we do not know that
it 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.
Tax Risks
. Failure of APF to Qualify as a REIT for Tax Purposes. 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
S-5
<PAGE>
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.
. Risks Associated with Distribution Requirements. 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 Tax Law. 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 Prospectus/Consent Solicitation Statement.
CONSIDERATION PAID TO INCOME FUND
The following table sets forth, for your Income Fund (i) the aggregate
amount of original Limited Partner investments in each Fund less any
distributions of net sales proceeds paid to the Limited Partners of that Fund,
(ii) the original amount of Limited Partner investments in each Fund less any
distributions of net sales proceeds per average $10,000 investment, (iii) the
number of APF Shares to be paid to your Income Fund, (iv) the estimated value
of the APF Shares paid to your Income Fund, (v) the estimated Acquisition
expenses allocated to your Income Fund, (vi) the estimated value, based on the
Exchange Value, of APF Shares paid to your Income Fund after deducting
Acquisition expenses, and (vii) the estimated value, based on the Exchange
Value, of APF Shares you will receive for each $10,000 of your original
investment:
<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
istributionsD $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) Fund(2) Fund(3) Expenses Expenses(3) Investment(3)
- ------------- ------------- ---------- ------------ ----------- ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
$12,597,200 $8,398 1,157,759 $11,577,590 $161,000 $11,416,590 $7,611
</TABLE>
- --------
(1) The original Limited Partner investment in the Income Fund was
15,000,000.These columns reflect, as of September 30, 1998, an adjustment
to the Limited Partners' original investments based on distributions of
net sales proceeds received from sales of properties made pursuant to the
partnership agreements.
(2) The APF Shares payable to each Fund as set forth in this chart will not
change if APF acquires fewer than all of the Funds in the Acquisition.
This number assumes that none of the Limited Partners of the Fund has
elected the Cash/Notes Option.
S-6
<PAGE>
(3) 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.
Upon completion of the Acquisition of your Income Fund, the operations and
existence of your Income Fund will cease. For more detailed information, see
"The Acquisition" in the Prospectus/Consent Solicitation Statement. If your
Income Fund does not approve the Acquisition, we do not contemplate that your
Income Fund would be liquidated in the near future. The Acquisition, however,
does not result in an all-cash payment to you in the liquidation of your
investment. For example, if you are eligible for and choose the Cash/Notes
Option, you become a Noteholder of APF. You will have exchanged your Units for
unsecured debt obligations of APF which may not be retired in full until
, 2006, a date approximately seven years after the date the Acquisition
of your Income Fund occurs. On the other hand, if you exchange your Units for
APF Shares, you will receive an equity interest in APF whose marketability will
depend upon the market that may develop with respect to the APF Shares, which
will be listed on the NYSE.
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...................................................... $ 5,761
Appraisals and Valuation........................................ 2,305
Fairness Opinions............................................... 10,371
Registration, Listing and Filing Fees........................... --
Soliciting Dealer Fee........................................... 25,046
Financial Consulting Fees....................................... --
Environmental Fees.............................................. 14,404
Accounting and Other Fees....................................... 14,845
--------
Subtotal.................................................... 72,732
Closing Transaction Costs
Transfer Fees and Taxes......................................... 49,109
Legal Fees...................................................... 19,839
Recording Costs................................................. --
Other........................................................... 19,320
--------
Subtotal.................................................... 88,268
--------
Total........................................................... $161,000
========
</TABLE>
S-7
<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 668% or more in value of 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 as, in our opinion,
market conditions permit), as contemplated by the terms of the partnership
agreement.
Special Meeting to Discuss the Acquisition
We have scheduled a special meeting of the Limited Partners of your Income
Fund to discuss the solicitation materials, which include the
Prospectus/Consent Solicitation Statement, 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 (as defined below) and to explain in person our reasons
for recommending that you vote "For" the Acquisition.
VOTING PROCEDURE
The Prospectus/Consent Solicitation Statement, 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.
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 Prospectus/Consent Solicitation
Statement. A copy of the Agreement and Plan of Merger dated March 11, 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 December 31, 1999. 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
S-8
<PAGE>
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.
The consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and certain 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
(including the Acquisition), 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. The partnership agreement also provide 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
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, 1995, 1996 and 1997 and the nine months
ended September 30, 1998, the aggregate amounts accrued or paid by your Income
Fund 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 years presented, are shown below under "Pro Forma":
S-9
<PAGE>
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended
------------------------- September 30,
1995 1996 1997 1998
------- ------- ------- -------------
<S> <C> <C> <C> <C>
Historical:
General Partner Distributions........... -- -- -- --
Broker/Dealer Commissions(1)............ -- -- -- --
Due Diligence and Marketing Support
Fees................................... -- -- -- --
Acquisition Fees........................ -- -- -- --
Asset Management Fees................... -- -- -- --
Real Estate Disposition Fees(2)......... -- -- -- $20,400
------- ------- ------- -------
Total historical..................... -- -- -- $20,400
Pro Forma:
Cash Distributions on APF Shares........ -- -- -- --
Salary Compensation..................... -- -- -- --
------- ------- ------- -------
Total pro forma...................... -- -- -- --
</TABLE>
- --------
(1) A majority of the fees paid as broker-dealer commissions and due diligence
and marketing support fees were reallowed to other broker-dealers
participating in the offering of the Income Fund's Units.
(2) 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 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 the Acquisition--Prices for 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>
Nine Months Ended
September 30, 1998
--------------------
1993 1994 1995 1996 1997 Historical Pro Forma
---- ------ ---- ---- ---- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income..... $686 $ 798 $635 $715 $824 $559 $335
Distributions from Sales of
Properties................... -- 574 -- -- -- 391 --
Distributions from Return of
Capital(1)................... 259 147 208 128 19 8 12
---- ------ ---- ---- ---- ---- ----
Total......................... $945 $1,519 $843 $843 $843 $958 $347
==== ====== ==== ==== ==== ==== ====
</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 nine months ended September 30,
1998 is not necessarily indicative of the distributions you will receive as a
stockholder of APF after the Acquisition.
Assuming APF maintains its current level of debt for acquiring future
restaurant properties, the expected distribution rate per APF Share will be
8.8% (assuming a $10.00 per APF Share price based on the Exchange Value, the
annualized dividend per year is expected to be $0.88 per APF Share). Based on
the number of APF Shares that you would receive in the Acquisition per your
average $10,000 original investment and this distribution rate, you would
receive an annual distribution of approximately $670.
S-10
<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 certain 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 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 Cash/Note Option.
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, our relief 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 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 Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the Cash/Notes Option, constitutes 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 and is the best way to maximize the return on your
investment in light of the values of such consideration.
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
S-11
<PAGE>
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
of Valuation Associates and Legg Mason received fees for its services and
notwithstanding that Legg Mason has previously provided investment banking
services to the Funds and to Commercial Net Lease Realty, Inc., a former
affiliate of ours. See "Reports, Opinions and Appraisals" in the
Prospectus/Consent Solicitation Statement.
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 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 cash and promissory 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 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 Cash/Notes Option.
3. Valuation of Alternatives. Based on the appraisal of the Income Fund's
restaurant properties, we estimated the value of your Income Fund as an ongoing
concern and if liquidated. 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 Fund to 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
September 30, 1998 per $10,000 original investment. Since the calculation of
the book value was done on a GAAP basis, it is not indicative of the true fair
market value of your Income Fund. This figure was compared to the (i) value of
the Fund if it commenced an orderly
S-12
<PAGE>
liquidation of its investment portfolio on December 31, 1998, (ii) value of the
Fund if it continued to operate in accordance with its existing partnership
agreement and business plans, and (iii) estimated value of the APF Shares,
based on the Exchange Value, paid to each Fund per average $10,000 invested.
Summary of Valuations
(per $10,000 original investment)
<TABLE>
<CAPTION>
Estimated Value of
APF Shares per
Average $10,000
Original Limited
GAAP Book Liquidation Going Concern Partner
Value Value(1) Value(1) Investment(2)
--------- ----------- ------------- ------------------
<S> <C> <C> <C> <C>
CNL Income Fund, Ltd..... $5,626 $7,030 $7,589 $7,611
</TABLE>
- --------
(1) 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.
(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.
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have an independent
obligation 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 Funds). James M. Seneff, Jr. and
Robert A. Bourne act as the individual general partners of all of the 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.
Benefits to General Partners
As a result of the Acquisition (assuming only your Income Fund is acquired),
we are expected to receive certain benefits, including that we will be relieved
form certain ongoing liabilities with respect to the Funds that are acquired by
APF.
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 Funds if the Acquisition does not occur.
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
S-13
<PAGE>
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 the Cash/Notes Option, in which
case you will receive cash and 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 Prospectus/Consent Solicitation Statement.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, the
assets (and any liabilities) of your Income Fund (if your Income Fund is
acquired by APF) will be transferred to APF in return for APF Shares and/or
cash and 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. .............................. $1,953
</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-14
<PAGE>
Under section 351(a) of the Code, no gain or loss is recognized if (i)
property is transferred to a corporation by one more individuals or entities in
exchange for the stock of that corporation, and (ii) 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 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 the
Cash/Notes Option, 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 (1) 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 (2) 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 Cash/Notes Option, your Income Fund will receive APF
Shares, cash and Notes in exchange for your Income Fund's assets. Because the
principal portion of the Notes will not be due until , 2006, 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 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 (without reduction for
any selling expenses) 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 are 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, cash 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" (i.e., real property and
depreciable assets used in a trade or business and held for more than one
year). Your share of gains or losses from the sale of section 1231 assets of
your Income Fund would be combined with any other section 1231 gains and losses
that you recognize in that year. If the result is a net loss, such loss is
characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property will be taxed as ordinary income to the extent of all
prior depreciation deductions taken by your Income Fund
S-15
<PAGE>
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 Cash/Notes Option may
recognize gain in the year of the Acquisition despite the fact that they will
receive only a small amount of cash and no publicly-traded instruments 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 the Cash/Notes Option. See "--Tax Consequences of
Liquidation and Termination of Your Fund" below.
Tax Consequences of the Liquidation and Termination of Your Fund. If your
Fund is acquired by APF, your Fund will be deemed to have liquidated and
distributed APF Shares and/or cash and 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 cash and 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 pro rata 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 (determined on the closing date of the Acquisition) and your
adjusted tax basis in your Units (adjusted by your distributive share of
income, gain, loss, deduction and credit for the final taxable year of your
Income Fund (including any such items recognized by your Income Fund as a
result of the Acquisition) as well as any distributions you receive in such
final taxable year (other than the distribution of the APF Shares)). 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 cash and Notes in the Acquisition, you will recognize gain to
the extent that the amount of cash you receive in the Acquisition exceeds your
adjusted basis in your Units (adjusted by your distributive share of income,
gain, loss, deduction and credit for the final taxable year of your Income Fund
(including any such items recognized by your Income Fund as a result of the
Acquisition) as well as any distributions you receive in such final taxable
year (other than the distributions of the cash and Notes)). Your basis in the
Notes distributed to you will equal your adjusted basis in your Units, reduced
(but not below zero) by the amount of any cash distributed to you 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 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)
S-16
<PAGE>
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.
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 cash and 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 Prospectus/Consent Solicitation
Statement.
S-17
<PAGE>
SUMMARY SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
APF, FUNDS, ADVISOR AND CNL RESTAURANT FINANCIAL SERVICES GROUP
Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
Historical Pro Forma
----------------------------------------------- -------------------------------
CNL
Restaurant
Financial
CNL Income Services Combined Pro Forma Combined Pro
APF Fund, Ltd. Advisor Group Historical Adjustments Forma
------------ ---------- ---------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data Revenues:
Rental and earned
income................ $ 22,947,199 $ 774,444 $ -- $ -- $ 23,721,643 $ 9,635,208 (a)
16,606 (b) $ 33,373,457
Management fees........ -- -- 21,405,127 5,122,366 26,527,493 (21,001,116)(c)
(2,875,906)(d) 2,650,471
Interest and other
income................ 6,117,911 19,053 751 18,463,647 24,601,362 1,526,547 (e) 26,127,909
------------ ---------- ---------- ----------- ------------ ----------- ------------
Total revenue.......... 29,065,110 793,497 21,405,878 23,586,013 74,850,498 (12,698,661) 62,151,837
Expenses:
General and
administrative........ 1,539,004 83,894 6,701,115 6,704,482 15,028,495 (1,297,339)(f)
(1,415,100)(g)
(17,906)(h) 12,298,150
Advisory fees.......... 1,248,393 -- -- 1,026,231 2,274,624 (2,274,624)(i) --
State taxes............ 397,569 4,450 15,226 220,180 637,425 16,632 (j) 654,057
Depreciation and
amortization.......... 2,693,020 157,251 131,539 1,000,493 3,982,303 3,088,453 (k)(l) 7,070,756
Interest expense....... -- -- 105,668 14,234,533 14,340,201 (68,670)(m) 14,271,531
Paid to affiliates..... -- -- 256,456 1,569,202 1,825,658 (1,825,658)(n) --
------------ ---------- ---------- ----------- ------------ ----------- ------------
Total expenses......... 5,877,986 245,595 7,210,004 24,755,121 38,088,706 (3,794,212) 34,294,494
------------ ---------- ---------- ----------- ------------ ----------- ------------
Net earnings (loss)
before equity in
earnings of joint
ventures/minority
interests, gain (loss)
on sale of properties,
gain on
securitization, and
provision for federal
income taxes.......... 23,187,124 547,902 14,195,874 (1,169,108) 36,761,792 (8,904,449) 27,857,343
------------ ---------- ---------- ----------- ------------ ----------- ------------
Equity in earnings of
joint
ventures/minority
interests............. (23,271) 62,394 -- 12,452 51,575 -- 51,575
Gain (loss) on sales of
properties ........... -- 235,804 -- -- 235,804 -- 235,804
Gain on
securitization........ -- -- -- 3,018,268 3,018,268 -- 3,018,268
Provision for federal
income taxes.......... -- -- 5,607,415 708,666 6,316,081 (6,316,081)(o) --
------------ ---------- ---------- ----------- ------------ ----------- ------------
Net earnings........... $ 23,163,853 $ 846,100 $8,588,459 $ 1,152,946 $ 33,751,358 $(2,588,368) $ 31,162,990
============ ========== ========== =========== ============ =========== ============
Other Data:
Weighted average number
of shares of common
stock outstanding
during period......... 47,633,909 N/A N/A N/A N/A -- 70,848,762 (p)
Total properties owned
at end of period...... 357 17 N/A N/A N/A -- 374
Funds from operations.. $ 26,408,569 $ 767,547 N/A N/A N/A -- $ 35,534,369
Total cash
distributions
declared*............. $ 26,460,446 $1,436,486 N/A N/A N/A -- $ 35,534,369
Cash distributions
declared per $10,000
investment............ $ 572 $ 958 N/A N/A N/A -- $ 502
<CAPTION>
Historical Combined Pro Forma
September 30, 1998 Historical September 30, 1998
----------------------------------------------- ------------ -------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data
Real estate assets,
net.................... $407,663,180 $7,624,993 $ -- $ -- $415,288,173 $ 3,638,185 (q)
26,052,741 (r) $418,926,358
Mortgages/notes
receivable............. 33,523,506 -- -- 173,776,981 207,300,487 849,195 (r) 208,149,682
Accounts receivable,
net.................... 575,104 586 7,544,985 7,342,103 15,462,778 (7,980,491)(s) 7,482,287
Investment in/due from
joint ventures......... 631,374 896,601 -- -- 1,527,975 331,106 (q) 1,859,081
Total assets............ 566,383,967 8,869,412 8,429,809 197,528,789 781,211,977 25,421,960 806,633,937
Total
liabilities/minority
interest............... 14,478,585 430,748 5,049,152 185,998,045 205,956,530 (10,971,355)(s)(t) 194,985,175
Total equity............ 551,905,382 8,438,664 3,380,657 11,530,744 575,255,447 36,393,315 (q)(t) 611,648,762
</TABLE>
- -------
* Distributions for the nine months ended September 30, 1998 included $586,300
as a result of the distribution of net sales proceeds from the sales of one
property.
S-18
<PAGE>
(a) Represents rental and earned income as if 1) properties that had been
previously constructed and acquired from January 1, 1998 through November
30, 1998 had been acquired and leased on January 1, 1997 and 2) properties
that were developed by APF from January 1, 1998 through November 30, 1998
had been placed in service on May 1, 1997 (assumes a four month development
period).
<TABLE>
<S> <C>
Rental and earned income on Property Transactions by APF... $9,635,208
</TABLE>
(b) Represents $16,606 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, 1997.
(c) Represents the elimination of intercompany fees between APF, the Income
Fund, the Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees.......................................... $ (1,569,202)
Secured equipment lease fee............................... (44,426)
Advisory fees............................................. (1,722,383)
Reimbursement of administrative costs..................... (283,222)
Acquisition fees.......................................... (15,392,193)
Underwriting fees......................................... (254,945)
Administrative fees....................................... (148,491)
Executive fee............................................. (310,000)
Guarantee fees............................................ (93,750)
Servicing fee............................................. (1,014,117)
Development fees.......................................... (166,876)
Consulting fee............................................ (1,511)
------------
Total.................................................... $(21,001,116)
============
</TABLE>
(d) Represents the deferral of $2,875,906 in origination fees collected by CNL
Restaurant Financial Services Group that should be amortized over the term
of the loans originated (20 years) in accordance with the Statement of
Financial Accounting Standards #91 "Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases."
(e) Represents interest income of $1,318,870 earned from Other Investments
acquired and mortgage notes issued from January 1, 1998 through November
30, 1998 as if this had occurred on January 1, 1997 and the amortization of
$207,677 of deferred origination fees collected during the year ended
December 31, 1997 and during the nine months ended September 30, 1998,
which were capitalized and deferred in (d) above as if they had been
collected on January 1, 1997. These deferred fees are being amortized and
recorded as interest income.
(f) Represents the elimination of intercompany expenses paid between APF, the
Income Fund, the Advisor and the CNL Restaurant Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs..................... $ (283,222)
Servicing fee............................................. (1,014,117)
------------
$ (1,297,339)
============
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by APF were subject
to capitalization during the entire period and 2) costs relating to
properties not developed by APF were subject to capitalization up through
the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs........................... $ (1,415,100)
</TABLE>
(h) Represents savings of $17,906 in professional services and administrative
expenses resulting from reporting on one combined company versus 22
separate entities.
S-19
<PAGE>
(i) Represents the elimination of fees between APF, the Income Fund, the
Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Advisory fees............................................. $ (1,722,383)
Administrative fees....................................... (148,491)
Executive fee............................................. (310,000)
Guarantee fees............................................ (93,750)
-------------
$ (2,274,624)
=============
</TABLE>
(j) Represents additional state taxes of $16,632 resulting from assuming that
acquisitions from January 1, 1998 through November 30, 1998 had been
acquired on January 1, 1997 and assuming that the Income Fund had operated
under a REIT structure.
(k) Represents an increase in depreciation of the building portion of the
properties acquired from January 1, 1998 through November 30, 1998 as if
they had been acquired on January 1, 1997 and the step up in basis referred
to in footnote (q) from acquiring the Income Fund portfolio using the
straight-line method over the estimated useful lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense.......................................... $1,504,308
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of the CNL
Restaurant Financial Services Group referred to in footnote (q).
<TABLE>
<S> <C>
Amortization of goodwill................................... $ 11,584,145
</TABLE>
(m) Represents elimination of interest expense recorded for the amortization of
$350,000 in arrangement fees collected during the year ended December 31,
1997 which were eliminated in footnote (4), II (d ) in the Notes to the Pro
Forma Financial Statements attached to this Supplement.
<TABLE>
<S> <C>
Interest expense............................................... $(68,670)
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees incurred
between APF, the Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Origination fees.......................................... $ (1,569,202)
Underwriting fees......................................... (254,945)
Consulting fee............................................ (1,511)
-------------
$ (1,825,658)
=============
</TABLE>
(o) Represents the elimination of $6,316,081 in the provision for income taxes
as a result of the acquisition. APF expects to continue to qualify as a
REIT and does not expect to incur federal income taxes.
(p) APF Shares issued during the period required to fund acquisitions as if
they had been acquired on January 1, 1997 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 the
proposal to amend and restate APF's articles of incorporation to increase
the number of authorized APF Shares.
S-20
<PAGE>
(q) Represents the payment of $161,000 in cash and the issuance of 13,441,659
APF Shares in consideration for the purchase of the Income Fund, Advisor
and CNL Restaurant Financial Services Group at September 30, 1998 using the
Exchange Value $10 per APF Share plus estimated transaction costs. The
acquisitions of the Income Fund and the CNL Restaurant Financial Services
Group have been accounted for under the purchase accounting method and
goodwill was recognized to the extent the estimated value of the
consideration paid exceeded the fair value of the net tangible assets
acquired. As for the acquisition of the Advisor from a related party, the
consideration paid in excess of the fair value of the net tangible assets
received has been accounted for as costs incurred in acquiring the Advisor
from a related party because the Advisor has not been deemed to qualify as
a "business" for purposes of applying APB Opinion No. 16 "Business
Combinations." Upon consummation of the Acquisition, this expense will be
recorded as an operating expense on APF's statement of earnings. APF will
not deduct this expense for purposes of calculating funds from operations
due to the nonrecurring and non-cash nature of the expense. As of September
30, 1998, $249,403 of transaction costs had been incurred by APF.
<TABLE>
<S> <C>
Income Fund............................................... $ 11,577,592
Advisor................................................... 76,000,000
CNL Restaurant Financial Services Group................... 47,000,000
------------
Total Purchase Price (cash and shares)................... 134,577,592
Less cash paid to Income Fund............................. (161,000)
------------
Share consideration...................................... 134,416,592
Transaction costs of APF.................................. 8,933,000
------------
Total costs incurred..................................... $143,349,592
============
</TABLE>
In addition, APF i) used $8,933,000 in cash to pay the transaction costs
related to the Acquisition, ii) made an upward adjustment to the Income
Fund carrying value of land and building on operating leases by $3,638,185,
investment in joint venture by $331,106, made downward adjustments to the
carrying value of accrued rental income of $29,628 and made downward
adjustments to other assets of $3,687,070 to adjust historical values to
fair value, iii) recorded goodwill of $42,243,858 for the acquisition of
the CNL Restaurant Financial Services Group, iv) reduced retained earnings
by $77,664,076 for the excess consideration paid over the net assets of the
Advisor and removed the historical common stock balance of $12,000,
additional paid in capital balance of $9,602,287, retained earnings balance
of $5,297,114 and partners capital balance of $8,438,664 of the Income
Fund, Advisor and CNL Restaurant Financial Services Group.
(r) Represents the use of $26,901,936 in cash and cash equivalents at September
30, 1998 to acquire $26,052,741 in properties and issue $849,195 in
mortgage notes which occurred from October 1, 1998 through November 30,
1998.
(s) Represents the elimination by the Income Fund of $131,112 in related party
payables recorded as receivables by the Advisor, the elimination by the CNL
Restaurant Financial Services Group of $6,641,379 in related party payables
recorded as receivables by CNL Restaurant Financial Services Group and the
elimination by APF of $1,208,000 in related party payables recorded as
receivables by the Advisor.
(t) Represents the elimination of income taxes payable of $2,990,864 from
liabilities assumed in the acquisition of the CNL Restaurant Businesses
since the acquisition agreements require that the Advisor and CNL
Restaurant Financial Services Group have no accumulated or current earnings
and profits for federal income tax purposes at the time of the acquisition.
S-21
<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>
Nine Months Ended
September 30, Year Ended December 31,
--------------------- --------------------------------
1998 1997 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues (1)............ $ 855,891 $1,020,682 $1,333,000 $1,389,308 $1,290,567
Net income (2).......... 846,100 1,017,993 1,248,757 1,083,109 962,102
Cash distributions
declared (3)........... 1,436,486 948,663 1,264,884 1,264,884 1,264,883
Net income per Unit
(2).................... 27.97 33.62 41.24 35.75 31.75
Cash distributions
declared per Unit (3).. 47.88 31.62 42.16 42.16 42.16
Weighted average number
of Limited Partner
Units outstanding...... 30,000 30,000 30,000 30,000 30,000
<CAPTION>
September 30, December 31,
--------------------- --------------------------------
1998 1997 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Total assets............ $8,869,412 $9,573,041 $9,500,078 $9,479,777 $9,668,878
Total partners'
capital................ 8,438,664 9,114,507 9,029,050 9,045,177 9,226,952
</TABLE>
- --------
(1) Revenues include equity in earnings of joint ventures. Equity in earnings
includes $295,080 from gain on sale of land and building by Seventh Avenue
Joint Venture.
(2) Net income for the nine months ended September 30, 1998 and 1997 includes
$235,804 and $233,183, respectively, from gain on sale of land and
building. Net income for the years ended December 31, 1997 and 1996,
includes $233,183 and $19,000, respectively, from gains on sale of land and
buildings.
(3) Distributions for the nine months ended September 30, 1998 included
$586,300 as a result of the distribution of net sales proceeds from the
sales of a property.
S-22
<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 September 30, 1998, 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
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 1998 and 1997, 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 $799,653 and $1,009,004, respectively. The decrease
in cash from operations for the nine months ended September 30, 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 items during the
nine months ended September 30, 1998.
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 an
aggregate, ten percent, noncompounded annual return on their adjusted capital
contributions (the 10% Preferred Return) on a cumulative basis, 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 proceeds was retained by the Income Fund to meet the Income
Fund's working capital and other needs.
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 the partners. At September 30, 1998, the
Income Fund had $285,367 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 retaining a portion of the net sales proceeds
received from the sale of the restaurant property in Kissimmee, Florida in
April 1998. The funds remaining at September 30, 1998, will be used to pay
distributions and other liabilities.
Total liabilities of the Income Fund, including distributions payable,
decreased to $430,748 at September 30, 1998, from $471,028 at December 31,
1997, primarily as a result of a decrease in distributions payable to the
Limited Partners at September 30, 1998, as compared to December 31, 1997.
Liabilities at September 30, 1998, to the extent they exceed cash and cash
equivalents at September 30, 1998, will be paid from future cash from
operations and, in the event we elect to make additional capital contributions
or loans to the Income Fund, from future contributions or loans from us.
S-23
<PAGE>
Based on current and anticipated future cash from operations, and for the
nine months ended September 30, 1998, a portion of the proceeds received from
the sale of the restaurant property described above, the Income Fund declared
distributions to Limited Partners of $1,436,486 and $948,663 for the nine
months ended September 30, 1998 and 1997, respectively ($266,982 and $316,221
for the quarters ended September 30, 1998 and 1997, respectively). This
represents distributions of $47.88 and $31.62 per unit for the nine months
ended September 30, 1998 and 1997, respectively ($8.90 and $10.54 for the
quarters ended September 30, 1998 and 1997, respectively). The distribution for
the nine months ended September 30, 1998, included $586,300 of net sales
proceeds from the sale of the restaurant property in Kissimmee, Florida. This
special distribution was effectively a return of a portion of the Limited
Partners' investment, although, in accordance with the Income Fund 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 this return of capital,
the amount of the Limited Partners' invested capital contributions (which
generally is the Limited Partners' capital contributions, less distributions
from the sale of a restaurant property that are considered to be a return of
capital) was decreased; therefore, the amount of the Limited Partners' invested
capital contributions on which the 10% Preferred Return is calculated was
lowered accordingly. As a result of the sale of the Kissimmee restaurant
property, the Income Fund's total revenue was reduced, while the majority of
the Income Fund's operating expenses remained fixed. Therefore, distributions
of net cash flow were adjusted commencing in the quarter ended June 30, 1998.
No distributions were made to us for the quarters and nine months ended
September 30, 1998 and 1997. No amounts distributed to the Limited Partners for
the nine months ended September 30, 1998 and 1997, except for $369,939 as
described above, are required to be or have been treated by the Income Fund as
a return of capital for purposes of calculating the Limited Partners' return on
their adjusted capital contributions. The Income Fund intends to continue to
make distributions of cash available for distribution to the Limited Partners
on a quarterly basis.
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, as the general partners of the Income Fund, 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 in which event such
contributions will be returned to us from distributions of net sales proceeds
at the same time that our initial capital contributions of $1,000 are returned.
The Years Ended December 31, 1997, 1996 and 1995
The Income Fund's primary source of capital for the years ended December 31,
1997, 1996 and 1995, 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 $1,316,816, $1,132,688 and
$1,182,514 for the years ended December 31, 1997, 1996 and 1995, respectively.
The increase in cash from operations during 1997, as compared to 1996, and the
decrease during 1996, as compared to 1995, is primarily a result of changes in
the Income Fund's working capital during each of the respective years. Cash
from operations during the years ended December 31, 1997, 1996 and 1995, was
also affected by the following items.
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% 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.
S-24
<PAGE>
Other sources and uses of capital included the following items during the
years ended December 31, 1997, 1996 and 1995.
In June 1996, the Income Fund sold a small, undeveloped portion of the land
relating to its restaurant property in Mesquite, Texas. In connection with such
sale, 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 CNL Realty Corp., the corporate general partner, for loans totaling
$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 (net of
$2,691 which represents prorated rent returned to the tenant) 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 transaction, or a portion thereof, relating to the sale of
the restaurant property in Casa Grande, Arizona, and the reinvestment of the
majority of the net sales proceeds in a restaurant property in Camp Hill,
Pennsylvania, was structured to qualify as a like-kind exchange transaction for
federal income tax purposes. However, 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 addition, in August 1997, Seventh Avenue Joint Venture, in which the
Income Fund owned a 50% interest, sold its restaurant property to its tenant
for $950,000 and received net sales proceeds (net of $2,678 which represents
prorated rent returned to the tenant) 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 the return of
capital in a Ground Round restaurant property in Camp Hill, Pennsylvania, as
described below. In December 1997, the Income Fund reinvested the remaining
return of capital 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.
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. From time to time, our
affiliates incur certain operating expenses on behalf of the Income Fund for
which the Income Fund reimburses such 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
S-25
<PAGE>
Income Fund expenses or to make distributions to the partners. At December 31,
1997, the Income Fund had $184,130 invested in such short-term investments as
compared to $159,379 at December 31, 1996. The funds remaining at December 31,
1997, will be used for the payment of distributions and other liabilities.
During 1997, 1996 and 1995, certain of our affiliates incurred on behalf of
the Income Fund $33,962, $40,510 and $50,300, respectively, for certain
operating expenses. As of December 31, 1997 and 1996, the Income Fund owed
$48,991 and $28,262, respectively, to affiliates for such amounts and
accounting and administrative services. In addition, as of December 31, 1997
and 1996, the Income Fund also owed affiliates $66,750 in real estate
disposition fees due as a result of services rendered in connection with the
sale of 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, increased
to $319,550 at December 31, 1997, from $318,877 at December 31, 1996.
Liabilities at December 31, 1997, to the extent they exceed cash and cash
equivalents at December 31, 1997, will be paid from future cash from
operations, proceeds from the sale of restaurant properties as described above,
or, in the event we elect to make additional contributions or loans to the
Income Fund, from future contributions or loans from us.
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 $1,264,884 for each of the years ended
December 31, 1997 and 1996, and $1,264,883 for the year ended December 31,
1995. This represents distributions of $42.16 per Unit for each of the years
ended December 31, 1997, 1996, and 1995. No amounts distributed to the Limited
Partners for the years ended December 31, 1997, 1996 and 1995, 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.
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
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 1997, the Income Fund owned and
leased 15 wholly-owned restaurant properties (including one restaurant property
in Casa Grande, Arizona, which was sold in August 1997), and during the nine
months ended September 30, 1998, the Income Fund owned and leased 15 wholly
owned restaurant properties (including one restaurant property in Kissimmee,
Florida which was sold in April 1998), to operators of fast-food and family-
style restaurant chains. In connection therewith, during the nine months ended
September 30, 1998 and 1997, the Income Fund earned $774,444 and $780,333,
respectively, in rental income from these restaurant properties, $243,612 and
$253,305 of which was earned during the quarters ended September 30, 1998 and
1997, respectively. The decrease in rental income during the quarter and nine
months ended September 30, 1998, as compared to the quarter and nine months
ended September 30, 1997, is primarily attributable to a decrease in rental
income as a result of restaurant property sales during 1998 and
S-26
<PAGE>
1997. The decrease in rental income during the quarter and nine months ended
September 30, 1998, as compared to the quarter and nine months ended September
30, 1997, was partially offset by an increase in rental income due to the fact
that the Income Fund reinvested the majority of the net sales proceeds from the
sale of a restaurant property in August 1997, in a restaurant property in Camp
Hill, Pennsylvania in October 1997.
In addition, for the nine months ended September 30, 1997, the Income Fund
owned and leased three restaurant properties indirectly through joint venture
arrangements (including one restaurant property sold in August 1997) and for
the nine months ended September 30, 1998, the Income Fund owned and leased two
restaurant properties indirectly through joint venture arrangements and one
restaurant property with our affiliates as tenants-in-common. In connection
therewith, during the nine months ended September 30, 1998 and 1997, the Income
Fund earned $62,394 and $226,035, respectively, attributable to net income
earned by these joint ventures, $20,937 and $172,680 of which was earned during
the quarters ended September 30, 1998 and 1997, respectively. The decrease in
net income earned by joint ventures is primarily attributable to the fact that
in August 1997, Seventh Avenue Joint Venture, in which the Income Fund owned a
50 percent interest, sold its restaurant property resulting in a gain to the
joint venture of approximately $295,100 for financial reporting purposes. The
decrease is 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 located in Vancouver, Washington as tenants-in-common with
certain of our affiliates.
Operating expenses, including depreciation and amortization expense, were
$245,595 and $235,872 for the nine months ended September 30, 1998 and 1997,
respectively, of which $75,058 and $74,763 were incurred for the quarters ended
September 30, 1998 and 1997, respectively.
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 for the nine
months ended September 30, 1998. During the quarter and nine months ended
September 30, 1997, the Income Fund sold the restaurant property in Casa
Grande, Arizona and recognized a gain of $233,183 for financial reporting
purposes.
The Years Ended December 31, 1997, 1996 and 1995
During the years ended December 31, 1995 and 1996, the Income Fund owned and
leased 15 wholly owned restaurant properties and during the year ended December
31, 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). During the years ended December 31, 1997, 1996 and
1995, 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). In addition, during 1997, the Income Fund owned and leased one
restaurant property, with one of our affiliates, as tenants-in-common. As of
December 31, 1997, the Income Fund owned, either directly or through joint
venture arrangements, 18 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 terms.
During the years ended December 31, 1997, 1996 and 1995, the Income Fund
earned $1,038,443, $1,115,530 and $1,129,406, respectively, in base rental
income from the Income Fund's wholly owned restaurant properties described
above. The decrease in rental income during the years ended December 31, 1997
and 1996, each as compared to the previous year, is partially attributable to a
decrease of approximately $5,800 and $66,000, respectively, due to the fact
that effective February 1, 1996, the Income Fund ceased receiving rental
amounts from the former tenant of three restaurant properties. The rental
payments from this former tenant represented the difference between (i) the
payments due under the original leases entered into between the Income Fund and
the former tenant and (ii) the payments due under the current leases on the
S-27
<PAGE>
restaurant properties between the Income Fund and the new tenants (two of which
were re-leased to the corporate franchisor). In August 1997, the Income Fund
sold one of the three restaurant properties, a restaurant property in Casa
Grande, Arizona, and as a result of the sale, rental income decreased by
approximately $27,700 during 1997. The decrease in rental income during 1997
was partially offset by an increase in rental income of approximately $17,700
resulting from the Income Fund reinvesting the majority of these net sales
proceeds in a restaurant property in Camp Hill, Pennsylvania, in October 1997.
In addition, the decrease in rental income during 1996, as compared to 1995,
is partially attributable to a decrease of approximately $7,000 during 1996,
due to the fact that during 1996, the Income Fund wrote off as uncollectible
rental income amounts relating to the restaurant property in Oklahoma City,
Oklahoma. Effective January 1, 1997, the Income Fund entered into a lease
amendment with the tenant of this restaurant property to provide for lower base
rental income. The Income Fund does not anticipate that these reduced rents
will have a material adverse effect on operating results.
The decrease in rental income during 1997, as compared to 1996, is also
partially attributable to, and the decrease during 1996, as compared to 1995,
is partially offset by, 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."
During the years ended December 31, 1997, 1996 and 1995, the Income Fund
also earned $22,205, $56,409 and $35,176, respectively, in contingent rental
income. The decrease in contingent rental income during 1997, as compared to
1996, and the increase during 1996, as compared to 1995, 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, 1997, 1996 and 1995, the Income Fund
also earned $22,210, $101,293 and $13,011, respectively, in interest and other
income. The decrease in interest and other income during 1997, as compared to
1996, and the increase during 1996, as compared to 1995, 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, 1997, 1996 and 1995, the
Income Fund earned $250,142, $116,076 and $112,974, respectively, attributable
to net income earned by the three joint ventures in which the Income Fund is a
co-venturer (including one restaurant property owned and leased by Seventh
Avenue Joint Venture, which was sold in August 1997). The increase in net
income earned by joint ventures is primarily 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 increase in net
income earned by joint ventures during 1997, was partially offset by a decrease
of $31,300 in base rental income earned by the joint venture due to the sale of
the restaurant property in August 1997.
During at least one of the years ended December 31, 1997, 1996 and 1995,
three of the Income Fund's lessees, Golden Corral Corporation, Wendy's
International, Inc. and Restaurant Management Services, Inc., each contributed
more than 10% of the Income Fund's total rental income (including the Income
Fund's share of the rental income from three restaurant properties owned by
joint ventures and one restaurant property owned with an affiliate as tenants-
in-common). As of December 31, 1997, Golden Corral Corporation was the lessee
under leases relating to five restaurants, Wendy's International, Inc. was the
lessee under leases relating to one restaurant and Restaurant Management
Services, Inc. was the lessee under leases relating to two restaurants. It is
anticipated that Golden Corral Corporation and Restaurant Management Services,
Inc. each
S-28
<PAGE>
will continue to contribute 10% or more of the Income Fund's total rental
income during 1998 and subsequent years. In addition, during at least one of
the years ended December 31, 1997, 1996 or 1995, three restaurant chains,
Golden Corral, Wendy's and Popeyes, each accounted for more than 10% of the
Income Fund's total rental income in 1997 (including the Income Fund's share of
the rental income from three restaurant properties owned by joint ventures and
one restaurant property owned with an affiliate as tenants-in-common). In
subsequent years, it is anticipated that these three 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.
Operating expenses, including depreciation and amortization expense, were
$317,426, $325,199 and $328,465 for the years ended December 31, 1997, 1996 and
1995, respectively. 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 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. No
restaurant properties were sold during the year ended December 31, 1995.
General
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Income Fund's financial position or results of operations.
The Income Fund's leases as of September 30, 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.
The Year 2000 problem is the result of information technology systems and
embedded systems (products which are made with microprocessor (computer) chips
such as HVAC systems, physical security systems and elevators) using a two-
digit format, as opposed to four digits, to indicate the year. Such information
technology and embedded systems may be unable to properly recognize and process
date-sensitive information beginning January 1, 2000.
The Income Fund does not have any information technology systems. Certain of
our affiliates provide all services requiring the use of information technology
systems pursuant to a management agreement with the Income Fund. The
maintenance of embedded systems, if any, 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. We and our affiliates
have established a team dedicated to reviewing the internal information
technology systems used in the operation of the Income Fund, and the
information technology and embedded systems and the Year 2000 compliance plans
of the Income Fund's tenants, significant suppliers, financial institutions and
transfer agent.
The information technology infrastructure of our affiliates consists of a
network of personal computers and servers that were obtained from major
suppliers. The affiliates utilize various administrative and financial software
applications on that infrastructure to perform the business functions of the
Income Fund. Our inability and that of our affiliates to identify and timely
correct material Year 2000 deficiencies in the software and/or
S-29
<PAGE>
infrastructure could result in an interruption in, or failure of, certain of
the Income Fund's business activities or operations. Accordingly, we and our
affiliates have requested and are evaluating documentation from the suppliers
of our affiliates regarding the Year 2000 compliance of their products that are
used in the business activities or operations of the Income Fund. The costs
expected to be incurred by us and our affiliates to become Year 2000 compliant
will be incurred by us and our affiliates; therefore, these costs will have no
impact on the Income Fund's financial position or results of operations.
The Income Fund has material third party relationships with its tenants,
financial institutions and 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. If
any of these third parties are unable to meet their obligations to the Income
Fund because of the Year 2000 deficiencies, such a failure may have a material
impact on the Income Fund. Accordingly, we have requested and are evaluating
documentation from the Income Fund's tenants, financial institutions, and
transfer agent relating to their Year 2000 compliance plans. At this time, we
have not yet received sufficient certifications to be assured that the tenants,
financial institutions, and transfer agent have fully considered and mitigated
any potential material impact of the Year 2000 deficiencies. Therefore, we do
not, at this time, know of the potential costs to the Income Fund of any
adverse impact or effect of any Year 2000 deficiencies by these third parties.
We currently expect that all Year 2000 compliance testing and any necessary
remedial measures on the information technology systems used in the business
activities and operations of the Income Fund will be completed prior to June
30, 1999. Based on the progress we and our affiliates have made in identifying
and addressing the Income Fund's Year 2000 issues and the plan and timeline to
complete the compliance program, we do not foresee significant risks associated
with the Income Fund's Year 2000 compliance at this time. Because we and our
affiliates are still evaluating the status of the systems used in business
activities and operations of the Income Fund and the systems of the third
parties with which the Income Fund conducts its business, we have not yet
developed a comprehensive contingency plan and are unable to identify "the most
reasonably likely worst case scenario" at this time. As we identify significant
risks related to the Income Fund's Year 2000 compliance or if the Income Fund's
Year 2000 compliance program's progress deviates substantially from the
anticipated timeline, we will develop appropriate contingency plans.
S-30
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997... F-1
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997.............................................. F-2
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997.............. F-3
Condensed Statements of Cash Flows for the Nine Months Ended September 30,
1998 and 1997............................................................ F-4
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997........................................ F-5
Report of Independent Accountants......................................... F-7
Balance Sheets as of December 31, 1997 and 1996........................... F-8
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995..................................................................... F-9
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995............................................................ F-10
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995..................................................................... F-11
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and 1995................................................................. F-13
Unaudited Pro Forma Financial Information................................. F-19
Unaudited Pro Forma Balance Sheet as of September 30, 1998................ F-20
Unaudited Pro Forma Income Statement for the Nine Months Ended September
30, 1998................................................................. F-21
Unaudited Pro Forma Income Statement for the Year Ended December 31,
1997..................................................................... F-22
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements............................................................... F-23
</TABLE>
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation
of $2,226,822 and $2,172,913....................... $7,624,993 $8,185,465
Investment in and due from joint ventures........... 896,601 919,476
Cash and cash equivalents........................... 285,367 184,130
Restricted cash..................................... -- 129,257
Receivables, less allowance for doubtful accounts of
$3,092 in 1997..................................... 586 21,331
Prepaid expenses.................................... 5,987 4,989
Lease costs, less accumulated amortization of
$23,750 and $21,875................................ 26,250 28,125
Accrued rental income............................... 29,628 27,305
---------- ----------
$8,869,412 $9,500,078
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable.................................... $ 811 $ 2,595
Accrued and escrowed real estate taxes payable...... 7,170 734
Distributions payable............................... 266,982 316,221
Due to related parties.............................. 131,112 115,741
Rents paid in advance and deposits.................. 24,673 35,737
---------- ----------
Total liabilities............................... 430,748 471,028
Partners' capital................................... 8,438,664 9,029,050
---------- ----------
$8,869,412 $9,500,078
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-1
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
----------------- -------------------
1998 1997 1998 1997
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating leases.... $243,612 $253,305 $774,444 $ 780,333
Interest and other income.............. 6,597 6,517 19,053 14,314
-------- -------- -------- ----------
250,209 259,822 793,497 794,647
-------- -------- -------- ----------
Expenses:
General operating and administrative... 20,145 19,477 65,647 63,833
Professional services.................. 2,404 3,227 15,006 9,136
Real estate taxes...................... 1,080 1,101 3,241 3,305
State and other taxes.................. -- -- 4,450 3,538
Depreciation and amortization.......... 51,429 50,958 157,251 156,060
-------- -------- -------- ----------
75,058 74,763 245,595 235,872
-------- -------- -------- ----------
Income Before Equity in Earnings of Joint
Ventures and Gain on Sale of Land and
Buildings............................... 175,151 185,059 547,902 558,775
Equity in Earnings of Joint Ventures..... 20,937 172,680 62,394 226,035
Gain on Sale of Land and Buildings....... -- 233,183 235,804 233,183
-------- -------- -------- ----------
Net Income............................... $196,088 $590,922 $846,100 $1,017,993
======== ======== ======== ==========
Allocation of Net Income:
General partners....................... $ 1,961 $ 4,999 $ 7,118 $ 9,270
Limited partners....................... 194,127 585,923 838,982 1,008,723
-------- -------- -------- ----------
$196,088 $590,922 $846,100 $1,017,993
======== ======== ======== ==========
Net Income Per Limited Partner Unit...... $ 6.47 $ 19.53 $ 27.97 $ 33.62
======== ======== ======== ==========
Weighted Average Number of Limited
Partner Units Outstanding............... 30,000 30,000 30,000 30,000
======== ======== ======== ==========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1998 1997
----------------- ------------
<S> <C> <C>
General partners:
Beginning balance............................. $ 321,759 $ 310,182
Net income.................................... 7,118 11,577
---------- ----------
328,877 321,759
---------- ----------
Limited partners:
Beginning balance............................. 8,707,291 8,734,995
Net income.................................... 838,982 1,237,180
Distributions ($47.88 and $42.16 per limited
partner unit, respectively).................. (1,436,486) (1,264,884)
---------- ----------
8,109,787 8,707,291
---------- ----------
Total partners' capital..................... $8,438,664 $9,029,050
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Increase (Decrease) in Cash
and Cash Equivalents:
Net Cash Provided by
Operating Activities..... $ 799,653 $1,009,004
---------- ----------
Cash Flows from Investing
Activities:
Proceeds from sale of land
and building............. 661,300 793,009
Return of capital from
joint venture............ -- 472,373
Decrease (increase) in
restricted cash.......... 126,009 (793,009)
---------- ----------
Net cash provided by
investing activities..... 787,309 472,373
---------- ----------
Cash Flows from Financing
Activities:
Proceeds from loan from
corporate general
partner.................. -- 81,000
Repayment of loan from
corporate general
partner.................. -- (81,000)
Distributions to limited
partners................. (1,485,725) (948,663)
---------- ----------
Net cash used in
financing activities... (1,485,725) (948,663)
---------- ----------
Net Increase in Cash and
Cash Equivalents........... 101,237 532,714
Cash and Cash Equivalents at
Beginning of Period........ 184,130 159,379
---------- ----------
Cash and Cash Equivalents at
End of Period.............. $ 285,367 $ 692,093
========== ==========
Supplemental Schedule of
Non-Cash Financing
Activities:
Distributions declared and
unpaid at end of period.. $ 266,982 $ 316,221
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, 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, 1997.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2. Land and Buildings on Operating Leases
During the nine months ended September 30, 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 4).
3. 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, noncompounded annual return on their
adjusted capital contributions (the "10% Preferred Return") on a noncumulative
basis.
Generally, net sales proceeds from the sale of properties, to the extent
distributed, will be distributed first to the limited partners in an amount
sufficient to provide them with the 10% Preferred Return on a cumulative basis,
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 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-5
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
3. Allocations and Distributions--Continued
During the nine months ended September 30, 1998 and 1997, the Partnership
declared distributions to the limited partners of $1,436,486 and $948,663,
respectively ($266,982 and $316,221 for the quarters ended September 30, 1998
and 1997, respectively). This represents distributions of $47.88 and $31.62 per
unit for the nine months ended September 30, 1998 and 1997, respectively ($8.90
and $10.54 per unit for the quarters ended September 30, 1998 and 1997,
respectively). Distributions for the nine months ended September 30, 1998,
included $586,300 as a result of the distribution of net sales proceeds from
the sale of the property in Kissimmee, Florida. Of this amount, $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 this return of capital,
the amount of the limited partners' invested capital contributions (which
generally is the limited partners' capital contributions, less distributions
from the sale of a 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. No distributions have been made to the general partners to date.
4. Related Party Transactions
An affiliate of the Partnership 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. 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 nine months ended September 30, 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 2). No deferred, subordinated, real
estate disposition fees were incurred for the nine months ended September 30,
1997.
F-6
<PAGE>
Report of Independent Accountants
To the Partners
CNL Income Fund, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund, Ltd. (a
Florida limited partnership) as of December 31, 1997 and 1996 and the related
statements of income, partners' capital and cash flows for each of the three
years in the period ended December 31, 1997. These financial statements and 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 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 Income Fund, Ltd. as of
December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
February 1, 1998
F-7
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less accumulated
depreciation........................................... $8,185,465 $8,091,154
Investment in and due from joint ventures............... 919,476 990,307
Cash and cash equivalents............................... 184,130 159,379
Restricted cash......................................... 129,257 --
Receivables, less allowance for doubtful accounts $3,092
and of $1,413.......................................... 21,331 180,248
Prepaid expenses........................................ 4,989 4,465
Lease costs, less accumulated amortization of $21,875
and $19,375............................................ 28,125 30,625
Accrued rental income................................... 27,305 23,599
---------- ----------
$9,500,078 $9,479,777
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable........................................ $ 2,595 $ 2,131
Escrowed real estate taxes payable...................... 734 525
Distributions payable................................... 316,221 316,221
Due to related parties.................................. 115,741 95,012
Rents paid in advance and deposits...................... 35,737 20,711
---------- ----------
Total liabilities................................... 471,028 434,600
Partners' capital....................................... 9,029,050 9,045,177
---------- ----------
$9,500,078 $9,479,777
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases........ $1,038,443 $1,115,530 $1,129,406
Contingent rental income................... 22,205 56,409 35,176
Interest and other income.................. 22,210 101,293 13,011
---------- ---------- ----------
1,082,858 1,273,232 1,177,593
---------- ---------- ----------
Expenses:
General operating and administrative....... 86,780 92,462 84,700
Professional services...................... 12,772 13,262 14,465
Real estate taxes.......................... 3,929 4,009 13,746
State and other taxes...................... 5,138 5,260 5,357
Depreciation and amortization.............. 208,807 210,206 210,197
---------- ---------- ----------
317,426 325,199 328,465
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Ventures and
Gain on Sale of Land and Building........... 765,432 948,033 849,128
Equity in Earnings of Joint Ventures......... 250,142 116,076 112,974
Gain on Sale of Land and Building............ 233,183 19,000 --
---------- ---------- ----------
Net Income................................... $1,248,757 $1,083,109 $ 962,102
========== ========== ==========
Allocation of Net Income:
General partners........................... $ 11,577 $ 10,641 $ 9,621
Limited partners........................... 1,237,180 1,072,468 952,481
---------- ---------- ----------
$1,248,757 $1,083,109 $ 962,102
========== ========== ==========
Net Income Per Limited Partner Unit.......... $ 41.24 $ 35.75 $ 31.75
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding........................... 30,000 30,000 30,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<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,
1994................... $193,400 $ 96,520 $13,314,525 $(12,164,195) $ 9,752,623 $(1,663,140) $9,529,733
Distributions to limited
partners ($42.16 per
limited partner unit).. -- -- -- (1,264,883) -- -- (1,264,883)
Net income.............. -- 9,621 -- -- 952,481 -- 962,102
-------- -------- ----------- ------------ ----------- ----------- ----------
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
======== ======== =========== ============ =========== =========== ==========
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants................ $1,227,883 $1,096,290 $1,152,159
Distributions from joint ventures......... 152,019 133,296 129,006
Cash paid for expenses.................... (84,642) (106,546) (110,488)
Interest received......................... 21,556 9,648 11,837
---------- ---------- ----------
Net cash provided by operating activi-
ties.................................... 1,316,816 1,132,688 1,182,514
---------- ---------- ----------
Cash Flows from Investing Activities:
Proceeds from sale of land and building... 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) -- --
Increase in restricted cash............... (126,009) -- --
---------- ---------- ----------
Net cash provided by (used in) investing
activities.............................. (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) --
Contributions from general partner -- -- --
Distributions to limited partners......... (1,264,884) (1,264,884) (2,164,568)
---------- ---------- ----------
Net cash used in financing activities.... (1,264,884) (1,264,884) (2,164,568)
---------- ---------- ----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................... 24,751 (112,196) (982,054)
Cash and Cash Equivalents at Beginning of
Year...................................... 159,379 271,575 1,253,629
---------- ---------- ----------
Cash and Cash Equivalents at End of Year... $ 184,130 $ 159,379 $ 271,575
========== ========== ==========
Reconciliation of Net Income to Net Cash
Provided by
Operating Activities:
Net income................................ $1,248,757 $1,083,109 $ 962,102
---------- ---------- ----------
Adjustments to reconcile net income to net
cash provided by
operating activities:
Depreciation.............................. 206,307 207,706 207,697
Amortization.............................. 2,500 2,500 2,500
Equity in earnings of joint ventures, net
of distributions......................... (98,123) 17,220 16,032
Gain on sale of land and building......... (233,183) (19,000) --
Decrease (increase) in receivables........ 158,360 (151,105) (16,414)
Increase in prepaid expenses.............. (524) (650) (1,252)
Decrease (increase) in accrued rental in-
come..................................... (3,706) 1,234 (2,081)
Increase (decrease) in accounts payable
and accrued expenses..................... 673 (11,712) 458
Increase in due to related parties........ 20,729 19,873 8,389
Increase (decrease) in rents paid in ad-
vance and deposits....................... 15,026 (16,487) 5,083
---------- ---------- ----------
Total adjustments........................ 68,059 49,579 220,412
---------- ---------- ----------
Net Cash Provided by Operating Activities.. $1,316,816 $1,132,688 $1,182,514
========== ========== ==========
Supplemental Schedule of Non-Cash Financing
Activities:
Distributions declared and unpaid at De-
cember 31................................ $ 316,221 $ 316,221 $ 316,221
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-11
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
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.
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.
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, Seventh 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.
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.
F-12
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
1. Significant Accounting Policies--Continued
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.
3. Land and Buildings on Operating Leases
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land............................................... $3,999,700 $3,973,607
Buildings.......................................... 6,358,678 6,226,321
---------- ----------
10,358,378 10,199,928
Less accumulated depreciation...................... (2,172,913) (2,108,774)
---------- ----------
$8,185,465 $8,091,154
========== ==========
</TABLE>
In June 1996, the Partnership sold a small, undeveloped portion of the land
relating to its property in Mesquite, Texas. In connection therewith, the
Partnership received net sales proceeds of $20,000, and recognized a gain for
financial reporting purposes, of $19,000.
F-13
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. Land and Buildings on Operating Leases--Continued
In August 1997, the Partnership sold its property in Casa Grande, Arizona,
to a third party for $840,000 and received net sales proceeds (net of $2,691
which represents prorated rent returned to the tenant) 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.
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, 1997 and 1995, the Partnership recognized $3,706 and $2,081, 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, 1997:
<TABLE>
<S> <C>
1998.......................................................... $ 936,961
1999.......................................................... 911,652
2000.......................................................... 911,305
2001.......................................................... 887,428
2002.......................................................... 481,464
Thereafter.................................................... 3,394,672
----------
$7,523,482
==========
</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. Investment in and Due from 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 (net of $2,678 which represents prorated rent
returned to the tenant) 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, 1997, the Partnership owned a 12.17% interest in this property.
F-14
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Investment in and Due from Joint Ventures--Continued
As of December 31, 1997, 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>
1997 1996
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation....................... $3,338,774 $1,750,065
Cash............................................ 1,636 11,934
Receivables..................................... -- 18,456
Accrued rental income........................... -- 16,620
Liabilities..................................... 1,677 30,232
Partners' capital............................... 3,338,733 1,766,843
Revenues........................................ 246,236 277,652
Gain on sale of land and building............... 295,080 --
Net income...................................... 500,285 232,152
</TABLE>
The Partnership recognized income totalling $250,142, $116,076 and $112,974
for the years ended December 31, 1997, 1996 and 1995, respectively, from these
joint ventures.
The investment in and due from joint ventures included $27,682 at December
31, 1996, which was due from Seventh Avenue Joint Venture as a result of an
underpayment of distributions to the Partnership.
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.
6. Receivables
In March 1996, the Partnership accepted a promissory note from the tenant of
the property in Mesquite, Texas, in the amount of $156,308, for past due rental
and other amounts, and real estate taxes previously paid by the Partnership 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. In
January 1997, the Partnership collected the full amount of the promissory note.
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, noncumulative, noncompounded annual
return on their adjusted capital contributions (the "10% Preferred Return").
F-15
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
7. Allocations and Distributions--Continued
Generally, net sales proceeds from the sale of properties, 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 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.
During each of the years ended December 31, 1997 and 1996, the Partnership
declared distributions to the limited partners of $1,264,884, and during the
year ended December 31, 1995, the Partnership declared distributions to the
limited partners of $1,264,883. Distributions for the year ended December 31,
1994, included $861,500 as a result of the distribution of net sales proceeds
from the sale of the property in Fairfield, California, which were treated as a
return of capital for purposes of calculating the limited partners' cumulative
10% Preferred Return. As a result of the return of capital, the amount of the
limited partners' adjusted 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' adjusted capital contributions
on which the 10% Preferred Return is calculated was lowered accordingly. 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>
1997 1996 1995
---------- ---------- --------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................ $1,248,757 $1,083,109 $962,102
Depreciation for tax reporting
purposes in excess of depreciation
for financial reporting purposes.... (104,279) (108,995) (109,002)
Gain on sale of land and building for
financial reporting purposes in
excess of gain for tax reporting
purposes............................ (233,183) -- --
Equity in earnings of joint ventures
for financial reporting purposes in
excess of equity in earnings of
joint ventures for tax reporting
purposes............................ (18,410) (17,987) (14,739)
Accrued rental income................ (3,706) 1,234 (2,081)
Rents paid in advance................ 15,026 (16,487) 5,083
Allowance for doubtful accounts...... 1,679 (120,724) 22,392
---------- ---------- --------
Net income for federal income tax
purposes............................ $ 905,884 $ 820,150 $863,755
========== ========== ========
</TABLE>
F-16
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 parent company of CNL Securities
Corp. and CNL Fund Advisors, Inc. James M. Seneff, Jr. is director and chief
executive officer of CNL Securities Corp. and 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, is director and president
of CNL Securities Corp., is director, vice chairman of the board of directors
and treasurer of CNL Fund Advisors, Inc. and served as president of CNL Fund
Advisors, Inc through October 1997.
During the years ended December 31, 1997, 1996 and 1995, certain Affiliates
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 Affiliates 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,
1997, 1996 and 1995.
Certain Affiliates are 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 Affiliates provide 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, cumulative 10% Preferred
Return, plus their adjusted capital contributions. No deferred, subordinated
real estate disposition fees were incurred for the years ended December 31,
1997, 1996 and 1995.
During the years ended December 31, 1997, 1996 and 1995, the Affiliates
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $57,679, $67,685 and $58,543 for the years
ended December 31, 1997, 1996 and 1995, respectively, for such services.
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Due to Affiliates:
Deferred, subordinated real estate disposition fee... $ 66,750 $66,750
Expenditures incurred on behalf of the Partnership... 17,902 9,527
Accounting and administrative services............... 31,089 18,735
-------- -------
$115,741 $95,012
======== =======
</TABLE>
The deferred, subordinated real estate disposition fees are the result of
the Partnership's sale of 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.
F-17
<PAGE>
CNL INCOME FUND, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
10. 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 Partner-ship's share of rental income from joint ventures
and the property held as tenants-in-common with an affiliate), for at least one
of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Corporation.................... $452,653 $452,653 $452,653
Wendy's Inter national, Inc.................. 164,857 212,322 206,805
Restaurant Management Services, Inc.......... 128,737 129,633 124,315
</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 at least one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Family Steakhouse
Restaurants............................... $452,653 $452,653 $452,653
Wendy's Old Fashioned Hamburger
Restaurants............................... 443,335 507,642 582,315
Popeyes Famous Fried Chicken............... 128,737 129,633 124,315
</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. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
F-18
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to the
Company gives effect to the Acquisition, and is based on estimates and
assumptions set for the 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 the Company, the
historical combined financial information of CNL Income Fund, Ltd., (the "CNL
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 the Company, the CNL Income
Fund, Advisor and CNL Restaurant Financial Services Group. The pro forma
balance sheet assumes that the Acquisition occurred on September 30, 1998; the
pro forma consolidated statements of earnings assume that the Property
Acquisitions (as defined on page ) and the Acquisition occurred on January
1, 1997.
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.
UNAUDITED PRO FORMA BALANCE SHEET
September 30, 1998
<TABLE>
<CAPTION>
Historical
---------------------------------------------------------------------------------
CNL
Income Fund, CNL Financial CNL Combined
APF Ltd. Advisor Services, Inc. Financial Corp. Portfolios
------------ ------------ ---------- -------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Land and
buildings on
operating
leases, net..... $298,967,972 $7,624,993 $ 0 $ 0 $ 0 $306,592,965
Net investment in
direct financing
leases.......... 117,028,760 0 0 0 0 117,028,760
Mortgages and
notes
receivable...... 33,523,506 0 0 0 173,776,981 207,300,487
Other
Investments..... 16,200,316 0 200,000 0 6,561,628 22,961,944
Investment in
joint ventures.. 631,374 896,601 0 0 0 1,527,975
Cash and cash
equivalents..... 90,674,289 285,367 283,300 599,997 5,098,033 96,940,986
Receivables...... 575,104 586 7,544,985 6,824,632 517,471 15,462,778
Accrued rental
income.......... 3,071,451 29,628 0 0 0 3,101,079
Other assets..... 5,711,195 32,237 401,524 295,570 3,854,477 10,295,003
------------ ---------- ---------- ---------- ------------ ------------
Total assets.... $566,383,967 $8,869,412 $8,429,809 $7,720,199 $189,808,590 $781,211,977
============ ========== ========== ========== ============ ============
LIABILITIES &
EQUITY:
Accounts payable
and accrued
liabilities..... $ 379,496 $ 7,981 $ 449,751 $ 193,949 $1,236,138 $ 2,267,315
Accrued
construction
costs payable... 3,045,304 0 0 0 0 3,045,304
Distributions
payable......... 0 266,982 2,220,000 0 0 2,486,982
Due to related
parties......... 2,552,411 131,112 0 1,452,512 6,556,920 10,692,955
Income tax
payable......... 0 0 1,989,003 0 1,001,861 2,990,864
Line of credit... 6,765,575 0 0 0 0 6,765,575
Notes payable.... 0 0 390,398 28,462 175,528,203 175,947,063
Deferred income.. 1,015,758 0 0 0 0 1,015,758
Rents paid in
advance......... 437,497 24,673 0 0 0 462,170
Minority
interest........ 282,544 0 0 0 0 282,544
Common Stock..... 621,187 0 9,800 2,000 200 633,187
Additional paid
in capital...... 556,830,578 0 482,964 5,231,827 3,887,496 566,432,865
Accumulated
distributions in
excess of net
earnings........ (5,546,383) 0 2,887,893 811,449 1,597,772 (249,269)
Partners
capital......... 0 8,438,664 0 0 0 8,438,664
------------ ---------- ---------- ---------- ------------ ------------
Total
liabilities and
equity......... $566,383,967 $8,869,412 $8,429,809 $7,720,199 $189,808,590 $781,211,977
============ ========== ========== ========== ============ ============
<CAPTION>
Pro Forma
-----------------------------
Adjustments Pro Forma
--------------- -------------
<S> <C> <C>
ASSETS:
Land and
buildings on
operating
leases, net..... $ 3,638,185 (1)
26,052,741 (2) $336,283,891
Net investment in
direct financing
leases.......... -- 117,028,760
Mortgages and
notes
receivable...... 849,195 (2) 208,149,682
Other
Investments..... -- 22,961,944
Investment in
joint ventures.. 331,106 (1) 1,859,081
Cash and cash
equivalents..... (161,000)(1)
(8,933,000)(1)
(26,901,936)(2) 60,945,050
Receivables...... (7,980,491)(3) 7,482,287
Accrued rental
income.......... (29,628)(1) 3,071,451
Other assets..... 42,243,858 (1)
(3,687,070)(1) 48,851,791
--------------- -------------
Total assets.... $25,421,960 $806,633,937
=============== =============
LIABILITIES &
EQUITY:
Accounts payable
and accrued
liabilities..... $ -- $ 2,267,315
Accrued
construction
costs payable... -- 3,045,304
Distributions
payable......... -- 2,486,982
Due to related
parties......... (7,980,491)(3) 2,712,464
Income tax
payable......... (2,990,864)(4) 0
Line of credit... -- 6,765,575
Notes payable.... -- 175,947,063
Deferred income.. -- 1,015,758
Rents paid in
advance......... -- 462,170
Minority
interest........ -- 282,544
Common Stock..... 122,417 (1) 755,604
Additional paid
in capital...... 124,679,888 (1) 691,112,753
Accumulated
distributions in
excess of net
earnings........ (82,961,190)(1)
2,990,864 (4) (80,219,595)
Partners
capital......... (8,438,664)(1) 0
--------------- -------------
Total
liabilities and
equity......... $25,421,960 $806,633,937
=============== =============
</TABLE>
F-20
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA INCOME STATEMENT
September 30, 1998
<TABLE>
<CAPTION>
Historical Pro Forma
-------------------------------------------------------------------------------- ---------------------------
CNL
Income Funds, CNL Financial CNL Combined
APF Ltd. Advisor Services, Inc. Financial Corp. Portfolios Adjustments Pro Forma
----------- ------------- ---------- -------------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and
earned income.. $22,947,199 $774,444 $ 0 $ 0 $ 0 $23,721,643 $ 9,635,208 (a)
16,606 (b) $33,373,457
Fees............ 0 0 21,405,127 5,115,549 6,817 26,527,493 (21,001,116)(c)
(2,875,906)(d) 2,650,471
Interest and
other income... 6,117,911 19,053 751 432,506 18,031,141 24,601,362 1,526,547 (e) 26,127,909
----------- -------- ---------- --------- ---------- ----------- ----------- -----------
Total revenue... 29,065,110 793,497 21,405,878 5,548,055 18,037,958 74,850,498 (12,698,661) 62,151,837
Expenses:
General and
administrative.. 1,539,004 83,894 6,701,115 4,107,311 2,597,171 15,028,495 (1,297,339)(f)
(1,415,100)(g)
(17,906)(h) 12,298,150
Advisory fees... 1,248,393 0 0 0 1,026,231 2,274,624 (2,274,624)(i) 0
Fees to
Restaurant
Financial
Services
Group.......... 0 0 256,456 1,569,202 0 1,825,658 (1,825,658)(n) 0
Interest........ 0 0 105,668 3,534 14,230,999 14,340,201 (68,670)(m) 14,271,531
State taxes..... 397,569 4,450 15,226 18,564 201,616 637,425 16,632 (j) 654,057
Depreciation--
other.......... 0 0 75,607 55,056 0 130,663 -- 130,663
Depreciation--
property....... 2,684,924 155,376 0 0 0 2,840,300 1,504,308 (k) 4,344,608
Amortization.... 8,096 1,875 55,932 138 945,299 1,011,340 1,584,145 (l) 2,595,485
----------- -------- ---------- --------- ---------- ----------- ----------- -----------
Total operating
expenses....... 5,877,986 245,595 7,210,004 5,753,805 19,001,316 38,088,706 (3,794,212) 34,294,494
----------- -------- ---------- --------- ---------- ----------- ----------- -----------
Operating
earnings
(losses)........ 23,187,124 547,902 14,195,874 (205,750) (963,358) 36,761,792 (8,904,449) 27,857,343
Equity in
earnings of
joint
ventures/minority
interest....... (23,271) 62,394 0 12,452 0 51,575 -- 51,575
Gain on sale of
properties..... 0 235,804 0 0 0 235,804 -- 235,804
Gain on
securitization.. 0 0 0 0 3,018,268 3,018,268 -- 3,018,268
----------- -------- ---------- --------- ---------- ----------- ----------- -----------
Net earnings
(losses) before
income taxes.... 23,163,853 846,100 14,195,874 (193,298) 2,054,910 40,067,439 (8,904,449) 31,162,990
Provision
(credit) for
federal income
taxes.......... 0 0 5,607,415 (81,229) 789,895 6,316,081 (6,316,081)(o) 0
----------- -------- ---------- --------- ---------- ----------- ----------- -----------
Net income....... $23,163,853 $846,100 $8,588,459 $(112,069) $1,265,015 $33,751,358 $(2,588,368) $31,162,990
=========== ======== ========== ========= ========== =========== =========== ===========
Earnings per
share........... $ 0.49 $ 0.44
=========== ===========
Shares
outstanding:
Weighted
average........ 47,633,909 70,848,762(p)
=========== ===========
End of period... 62,118,679 75,560,338
=========== ===========
</TABLE>
F-21
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA INCOME STATEMENT
For the year ended December 31, 1997
<TABLE>
<CAPTION>
Historical Pro Forma
-------------------------------------------------------------------------------- ---------------------------
CNL
Income Funds, CNL Financial CNL Combined
APF Ltd. Advisor Services, Inc. Financial Corp. Portfolios Adjustments Pro Forma
----------- ------------- ---------- -------------- --------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and
earned income.. $15,490,615 $1,060,648 $ 0 $ 0 $ 0 $16,551,263 $24,048,982 (a)
13,312 (b) $40,613,557
Fees............ 0 0 8,310,836 5,965,110 73,704 14,349,650 (9,064,237)(c)
(2,662,141)(d) 2,623,272
Interest and
other income... 3,967,318 22,210 165,569 0 10,932,843 15,087,940 249,395 (e) 15,337,335
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Total Revenue... 19,457,933 1,082,858 8,476,405 5,965,110 11,006,547 45,988,853 12,585,311 58,574,164
Expenses:
General and
administrative.. 1,010,725 103,481 4,266,169 1,889,904 828,848 8,099,127 (729,472)(f)
(1,619,238)(g)
(22,062)(h) 5,728,355
Advisory fees... 804,879 0 0 0 1,802,532 2,607,411 (2,607,411)(i) 0
Fees to
Restaurant
Financial
Services
Group.......... 0 0 151,041 594,041 0 745,082 (745,082)(n) 0
Interest........ 0 0 162,153 183,315 8,320,000 8,665,468 (81,594)(m) 8,583,874
State taxes..... 251,358 5,138 12,084 1,294 1,600 271,474 6,685 (j) 278,159
Depreciation--
other.......... 0 0 48,490 14,637 0 63,127 -- 63,127
Depreciation--
property....... 1,784,269 206,307 0 0 0 1,990,576 3,154,157 (k) 5,144,733
Amortization.... 10,793 2,500 18,093 61,324 916,577 1,009,287 2,112,193 (l) 3,121,480
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Total operating
expenses....... 3,862,024 317,426 4,658,030 2,744,515 11,869,557 23,451,552 (531,824) 22,919,728
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Operating
earnings
(losses)........ 15,595,909 765,432 3,818,375 3,220,595 (863,010) 22,537,301 13,117,135 35,654,436
Equity in
earnings of
joint
ventures/minority
interest....... (31,453) 250,142 0 (126,627) 0 92,062 -- 92,062
Gain on sale of
properties..... 0 233,183 0 0 0 233,183 -- 233,183
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Net earnings
before income
taxes........... 15,564,456 1,248,757 3,818,375 3,093,968 (863,010) 22,862,546 13,117,135 35,979,681
Provision
(credit) for
federal income
taxes.......... 0 0 1,508,258 1,272,133 (317,785) 2,462,606 (2,462,606)(o) 0
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Net earnings
(losses)........ $15,564,456 $1,248,757 $2,310,117 $1,821,835 $ (545,225) $20,399,940 $15,579,741 $35,979,681
=========== ========== ========== ========== =========== =========== =========== ===========
Earnings per
share........... $ 0.66 $ 0.51
=========== ===========
Shares
outstanding:
Weighted
average........ 23,423,868 71,517,136(p)
=========== ===========
End of period... 36,192,971 71,517,136
=========== ===========
</TABLE>
F-22
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of September 30, 1998 reflects the
transactions of the acquisition of the CNL Income Fund, Advisor and CNL
Restaurant Financial Services Group (the "Acquisition Proposal") as set forth
in this Proxy Statement. The Pro Forma Statements of Earnings for the nine
months ended September 30, 1998, and for the year ended December 31, 1997, have
been prepared to reflect a) the issuance of additional shares and the property
acquisitions completed from January 1, 1997 through November 30, 1998
("Offering and Property Transactions") and b) the transactions of the
Acquisition Proposal as set forth in this Proxy Statement. This unaudited pro
forma financial information has been prepared utilizing the historical
financial statements of the Company and the historical combined financial
information of the CNL Income Fund, Advisor and CNL Restaurant Financial
Services Group and should be read in conjunction with the selected historical
financial data and accompanying notes of the Company, the CNL Income Fund,
Advisor and the CNL Restaurant Financial Services Group. The Pro Forma Balance
Sheet was prepared as if the Offering and Property Transactions and the
Acquisition Proposal occurred on September 30, 1998. The Pro Forma Statements
of Earnings were prepared as if the Property Acquisitions and the Acquisition
Proposal occurred as of January 1, 1997. The pro forma information is unaudited
and is not necessarily indicative of the consolidated operating results which
would have occurred if the Offering and Acquisition Transaction and the
Acquisition Proposal 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 Acquisition
Proposal have been made. Capitalized terms have the meanings as defined in the
Proxy Statement.
2. Method of Accounting
The acquisition of the CNL Income Fund and the CNL Restaurant Financial
Services Group will be accounted for under the purchase accounting method. The
Company 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, the Company 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 operating expense on the Company's consolidated statements of
earnings, but the Company will not deduct this expense for purposes of
calculating funds from operations due to the non-recurring and non-cash nature
of the expense.
All significant intercompany balances and transactions between the Company,
CNL Income Fund, Advisor and CNL Restaurant Financial Services Group have been
eliminated in the pro forma financial statements.
3. Adjustments to Pro Forma Balance Sheet
The following describes the pro forma adjustments to the Pro Forma Balance
Sheet as of September 30, 1998, as if the Acquisition was consummated on such
date. For purposes of the pro forma financial statements, it is assumed that at
an annual meeting of stockholders, the stockholders of the Company approved an
amendment to increase the number of authorized shares to an amount necessary to
enable the Company to issue the shares for the Acquisition.
(1) Represents the payment of $161,000 in cash and the issuance of
13,441,659 common shares in consideration for the purchase of the CNL
Income Fund, Advisor and CNL Restaurant Financial Services Group at
September 30, 1998 at a share price of $10 plus estimated transaction
costs. The acquisition of the CNL Income Fund and the CNL Restaurant
Financial Services Group has been accounted for under the purchase
accounting method and goodwill was recognized to the extent that the
consideration paid
F-23
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
exceeded the fair value of the net tangible assets acquired. As for the
acquisition of the Advisor from a related party, the consideration paid in
excess of the fair value of the net tangible assets received has been
accounted for as costs incurred in acquiring the Advisor from a related
party because the Advisor has not been deemed to qualify as a "business"
for purposes of applying APB Opinion No. 16 "Business Combinations." Upon
consummation of the Acquisition, this expense will be recorded as an
operating expense on the Company's statement of earnings. The Company will
not deduct this expense for purposes of calculating funds from operations
due to the nonrecurring and non-cash nature of the expense. As of September
30, 1998, $249,403 of transaction costs had been incurred by the Company.
<TABLE>
<S> <C>
CNL Income Fund.............................................. $ 11,577,592
Advisor...................................................... 76,000,000
CNL Restaurant Financial Services Group...................... 47,000,000
------------
Total Purchase Price (cash and shares)..................... 134,577,592
Less cash paid to CNL Income Fund............................ (161,000)
------------
Share consideration........................................ 134,416,592
Transaction costs of the Company............................. 8,933,000
------------
Total costs incurred....................................... $143,349,592
============
</TABLE>
In addition, the Company i) used $8,933,000 in cash to pay the transaction
costs related to the Acquisition, ii) made an upward adjustment to the CNL
Income Fund carrying value of land and building on operating leases by
$3,638,185, investment in joint venture by $331,106, made downward adjustments
to the carrying value of accrued rental income of $29,628, made downward
adjustments to other assets of $3,687,070 to adjust historical values to fair
value, iii) recorded goodwill of $42,243,858 for the acquisition of the CNL
Restaurant Financial Services Group, iv) reduced retained earnings by
$77,664,076 for the excess consideration paid over the net assets of the
Advisor and removed the historical common stock balance of $12,000, additional
paid in capital balance of $9,602,287, retained earnings balance of $5,297,114
and partners capital balance of $8,438,664 of the CNL Income Fund, Advisor and
CNL Restaurant Financial Services Group.
(2) Represents the use of $26,901,936 in cash and cash equivalents at
September 30, 1998 to acquire $26,052,741 in properties and issue $849,195
in mortgage notes which occurred from October 1, 1998 through November 30,
1998.
(3) Represents the elimination by the CNL Income Fund of $131,112 in
related party payables recorded as receivables by the Advisor, the
elimination by the CNL Restaurant Financial Services Group of $6,641,379 in
related party payables recorded as receivables by CNL Restaurant Financial
Services Group and the elimination by the Company of $1,208,000 in related
party payables recorded as receivables by the Advisor.
(4) Represents the elimination of income taxes payable of $2,990,864
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.
4. Adjustments to Pro Forma Income Statements
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the nine months ended September 30, 1998, as if
the Acquisition was consummated as of January 1, 1997.
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(a) Represents rental and earned income as if 1) properties that had been
previously constructed and acquired from January 1, 1998 through
November 30, 1998 had been acquired and leased on January 1, 1997 and
2) properties that were developed by the Company from January 1, 1998
through November 30, 1998 had been placed in service on May 1, 1997
(assumes a four month development period).
<TABLE>
<S> <C>
Rental and earned income on Property Transactions by the
Company................................................... $9,635,208
</TABLE>
(b) Represents $16,606 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms
for the leases acquired from the CNL Income Fund as if the leases had
been acquired on January 1, 1997.
(c) Represents the elimination of intercompany fees between the Company,
the CNL Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Origination fees.......................................... $ (1,569,202)
Secured equipment lease fee............................... (44,426)
Advisory fees............................................. (1,722,383)
Reimbursement of administrative costs..................... (283,222)
Acquisition fees.......................................... (15,392,193)
Underwriting fees......................................... (254,945)
Administrative fees....................................... (148,491)
Executive fee............................................. (310,000)
Guarantee fees............................................ (93,750)
Servicing fee............................................. (1,014,117)
Development fees.......................................... (166,876)
Consulting fee............................................ (1,511)
------------
Total................................................... $(21,001,116)
============
</TABLE>
(d) Represents the deferral of $2,875,906 in origination fees collected by
CNL Restaurant Financial Services Group that should be amortized over
the term of the loans originated (20 years) in accordance with the
Statement of Financial Accounting Standards #91 "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring
Loans and Initial Direct Costs of Leases."
(e) Represents interest income of $1,318,870 earned from Other Investments
acquired and mortgage notes issued from January 1, 1998 through
November 30, 1998 as if this had occurred on January 1, 1997 and the
amortization of $207,677 of deferred origination fees collected during
the year ended December 31, 1997 and during the nine months ended
September 30, 1998, which were capitalized and deferred in (d) above as
if they had been collected on January 1, 1997. These deferred fees are
being amortized and recorded as interest income.
(f) Represents the elimination of intercompany expenses paid between the
Company, the CNL Income Fund, the Advisor and the CNL Restaurant
Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs...................... $ (283,222)
Servicing fee.............................................. (1,014,117)
-----------
$(1,297,339)
===========
</TABLE>
F-25
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by the Company
were subject to capitalization during the entire period and 2) costs
relating to properties not developed by the Company were subject to
capitalization up through the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs........................... $(1,415,100)
</TABLE>
(h) Represents savings of $17,906 in professional services and
administrative expenses resulting from reporting on one combined
Company versus 22 separate entities.
(i) Represents the elimination of advisory fees between the Company, the
CNL Income Fund, the Advisor and the CNL Restaurant Financial Services
Group:
<TABLE>
<S> <C>
Advisory fees............................................... $(1,722,383)
Administrative fees......................................... (148,491)
Executive fee............................................... (310,000)
Guarantee fees.............................................. (93,750)
-----------
$(2,274,624)
===========
</TABLE>
(j) Represents additional income taxes of $16,632 resulting from assuming
that acquisitions from January 1, 1998 through November 30, 1998 had
been acquired on January 1, 1997 and assuming that the CNL Income Fund
had operated under a REIT structure.
(k) Represents an increase in depreciation of the building portion of the
properties acquired from January 1, 1998 through November 30, 1998 as
if they had been acquired on January 1, 1997 and the step up in basis
referred to in footnote (2) from acquiring the CNL Income Fund
portfolio using the straight-line method over the estimated useful
lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense.......................................... $1,504,308
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of the
CNL Restaurant Financial Services Group referred to in footnote (2)
<TABLE>
<S> <C>
Amortization of goodwill................................... $1,584,145
</TABLE>
(m) Represents elimination of interest expense recorded for the
amortization of $350,000 in arrangement fees collected during the year
ended December 31, 1997 which were eliminated in II (d ) below.
<TABLE>
<S> <C>
Interest expense............................................... $(68,670)
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees incurred
between the Company, the CNL Income Fund, the Advisor and the CNL
Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees............................................ $(1,569,202)
Underwriting fees........................................... (254,945)
Consulting fee.............................................. (1,511)
-----------
$(1,825,658)
===========
</TABLE>
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(o) Represents the elimination of $6,316,081 in the provision for income
taxes as a result of the Acquisition. The Company expects to continue
to qualify as a REIT and does not expect to incur federal income taxes.
(p) Common shares issued during the period required to fund acquisitions as
if they had been acquired on January 1, 1997 were assumed to have been
issued and outstanding as of January 1, 1998. For purposes of the
proforma financial statements, it is assumed that the stockholders
approved the proposal to increase the number of authorized common
shares of the Company.
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the year ended December 31, 1997, as if the
Acquisition was consummated as of January 1, 1997.
(a) Represents rental and earned income as if 1) properties that had been
previously constructed and acquired from January 1, 1998 through
November 30, 1998 had been acquired and leased on January 1, 1997 and
2) properties that were developed by the Company from January 1, 1997
through November 30, 1998 had been placed in service on May 1, 1997
(assumes a four month development period).
<TABLE>
<S> <C>
Rental and earned income on Property Transactions by the
Company.................................................. $24,048,982
</TABLE>
(b) Represents $13,312 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms
for the leases acquired from the CNL Income Fund as if the leases had
been acquired on January 1, 1997.
(c) Represents the elimination of intercompany fees between the Company,
the CNL Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Origination fees........................................... $ (594,041)
Secured equipment lease fee................................ (375,219)
Advisory fees.............................................. (1,775,680)
Reimbursement of administrative costs...................... (130,484)
Acquisition fees........................................... (3,887,483)
Underwriting fees.......................................... (151,041)
Administrative fees........................................ (269,231)
Executive fee.............................................. (250,000)
Guarantee fees............................................. (312,500)
Arrangement fees........................................... (350,000)
Servicing fee.............................................. (598,988)
Development fees........................................... (369,570)
-----------
Total.................................................... $(9,064,237)
===========
</TABLE>
(d) Represents the deferral of $2,662,141 in origination fees collected by
CNL Restaurant Financial Services Group that should be amortized over
the term of the loans originated (20 years) in accordance with the
Statement of Financial Accounting Standards #91 "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring
Loans and Initial Direct Costs of Leases."
F-27
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(e) Represents the elimination of interest income of $1,931,331 earned
during the year ended December 31, 1997 assuming all monies raised
during 1997 and all cash held on January 1, 1997 was used to effect the
Acquisition on January 1, 1997, represents interest income of
$2,047,619 earned from Other Investments acquired and mortgage notes
issued from January 1, 1998 through November 30, 1998 as if this had
occurred on January 1, 1997 and the recognition of $133,107 of
origination fees collected during the year ended December 31, 1997
which were deferred in (d) and are being amortized and recorded as
interest income.
(f) Represents the elimination of intercompany expenses paid between the
Company, the CNL Income Fund, the Advisor and the CNL Restaurant
Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs........................ $(130,484)
Servicing fee................................................ (598,988)
---------
$(729,472)
=========
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by the Company
were subject to capitalization during the entire period and 2) costs
relating to properties not developed by the Company were subject to
capitalization up through the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs........................... $(1,619,238)
</TABLE>
(h) Represents savings of $22,062 in professional services and
administrative expenses resulting from reporting on one combined
Company versus 22 separate entities.
(i) Represents the elimination of advisory fees between the Company, the
CNL Income Fund, the Advisor and the CNL Restaurant Financial Services
Group:
<TABLE>
<S> <C>
Advisory fees............................................... $(1,775,680)
Administrative fees......................................... (269,231)
Executive fee............................................... (250,000)
Guarantee fees.............................................. (312,500)
-----------
$(2,607,411)
===========
</TABLE>
(j) Represents additional income taxes of $6,685 resulting from assuming
that acquisitions from January 1, 1997 through November 30, 1998 had
been acquired on January 1, 1997 and assuming that the CNL Income Fund
had operated under a REIT structure.
(k) Represents increase in depreciation of the building portion of the
properties acquired from January 1, 1997 through November 30, 1998 as
if they had been acquired on January 1, 1997 and the step up in basis
referred to in footnote (2) from acquiring the CNL Income Fund
portfolio using the straight-line method over the estimated useful
lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense.......................................... $3,154,157
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of the
CNL Restaurant Financial Services Group referred to in footnote (2)
<TABLE>
<S> <C>
Amortization of goodwill..................................... $2,112,193
</TABLE>
F-28
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(m) Represents elimination of yearly amortization of arrangement fees of
$350,000 capitalized as deferred costs and amortized as interest
expense and the capitalization of interest expense during the period
that properties were under development.
<TABLE>
<S> <C>
Amortization of arrangement fees.............................. $(24,144)
Capitalization of interest during development period.......... (57,450)
--------
$(81,594)
========
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees incurred
between the Company, the CNL Income Fund, the Advisor and the CNL
Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees.............................................. $(594,041)
Underwriting fees............................................. (151,041)
---------
(745,082)
=========
</TABLE>
(o) Represents the elimination of $2,462,606 in the provision for income
taxes as a result of the Acquisition. The Company expects to continue
to qualify as a REIT and does not expect to incur federal income taxes.
(p) Common shares issued during the period were assumed to have been issued
and outstanding as of January 1, 1997. For purposes of the proforma
financial statement, it is assumed that the stockholders approved the
proposal to increase the number of authorized common shares of the
Company.
F-29
<PAGE>
Appendix A
[LETTERHEAD OF LEGG MASON WOOD WALKER, INCORPORATED]
March 10, 1999
James M. Seneff, Jr.
Robert A. Bourne
CNL Realty Corporation
as General Partners of
CNL Income Fund, Ltd.
400 East South Street
Orlando, FL 32801-2878
Re: CNL Income Fund, Ltd. (the "Partnership")
Gentlemen:
You have requested our opinion as investment bankers (a) as to the
fairness, from a financial point of view, to the Partnership and its limited
partners of the shares of common stock (the "Common Stock") of CNL American
Properties Fund, Inc. (the "Acquiror") offered to them in the Merger (as
defined below), (b) as to the fairness, from a financial point of view, of the
aggregate Common Stock offered to the CNL Income Funds (as defined below) in
the Merger Transactions (as defined below) and (c) as to the fairness, from a
financial point of view, of the method of allocating the aggregate shares of
Common Stock among the CNL Income Funds in the Merger Transactions. Under the
terms of an agreement and plan of merger (the "Merger Agreement"), dated March
11, 1999, between the Partnership and the Acquiror, the Partnership will merge
with and into a wholly owned subsidiary of the Acquiror and the partners of
the Partnership will be offered shares of Common Stock as determined pursuant
to the Merger Agreement (the "Share Consideration"); such transaction is
hereafter referred to as the "Merger."
The Partnership is one of eighteen 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
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
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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) 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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<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 $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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<PAGE>
transactions contemplated by this Agreement to be rescinded following
consummation (and no such injunction, judgment, order, decree, ruling, or
charge is in effect);
(b) APF shall have delivered to the Fund for distribution to the Partners
the Share Consideration pursuant to Section 4.2 and, as applicable, the cash
and Notes pursuant to Section 4.4;
(c) since September 30, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of APF;
(d) APF shall have acquired the CNL Restaurant Services Group;
(e) the General Partners shall have received Schedule 1 and approved it in
accordance with Section 8.14;
(f) the APF Common Shares shall have been approved for listing on the NYSE
subject to official notice of issuance;
(g) the General Partners shall have received an opinion dated as of the
Closing Date from Shaw Pittman Potts & Trowbridge, counsel to APF and the
Operating Partnership, in form and substance reasonably satisfactory to the
General Partners; and
(h) Legg Mason Wood Walker Incorporated shall not have withdrawn the Fund
Fairness Opinion.
The General Partners and the Fund may waive any condition specified in this
Section 10.3 if they execute a writing so stating at or prior to the Closing.
ARTICLE XI
Termination
11.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by the General Partners, the limited partners of the Fund,
the OP General Partner or the stockholders of APF, respectively, either by the
mutual written consent of APF, the OP General Partner and the General Partners
or by mutual action of the General Partners and the Boards of Directors of
each of the corporate General Partner and the OP General Partner and the
Special Committee.
11.2 Termination by Individual Parties. This Agreement may be terminated
and the Merger may be abandoned (a) by action of the Special Committee and the
Board of Directors of the OP General Partner in the event of a failure of a
condition to the obligations of APF and the Operating Partnership set forth in
Section 10.2 of this Agreement; (b) by the General Partners in the event of a
failure of a condition to the obligations of General Partners or the Fund set
forth in Section 10.3 of this Agreement; (c) any Party if the Merger shall not
have occurred by December 31, 1999 or (d) if a United States federal or state
court of competent jurisdiction or United States federal or state governmental
agency shall have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other action
shall have become final and non-appealable; provided, in the case of a
termination pursuant to clause (a) or (b) above, that the terminating party
shall not have breached in any material respect its obligations under this
Agreement in any manner that shall have proximately contributed to the
occurrence of the failure referred to in said clause.
11.3 Effect of Termination and Abandonment. In the event of termination of
this Agreement and abandonment of the Merger pursuant to this Article XI, no
Party hereto (or any of its directors or officers) shall have any liability or
further obligation to any other Party to this Agreement, except that nothing
herein will relieve any Party from liability for any breach of this Agreement
or the obligations set forth in Sections 9.4 and 13.11.
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ARTICLE XII
Indemnification
12.1 Indemnity Obligations of the General Partners and the Fund. Subject to
Sections 12.5 and 12.6 hereof, each of the General Partners severally, in
accordance with its percentage interest in the Share Consideration and limited
in amount to the value of the APF Common Shares received by it, based upon the
average per share closing price of the APF Common Shares for the first twenty
trading days after the APF Common Shares are listed on NYSE (the "20 Day
Average Price"), agree to indemnify and hold APF, the OP General Partner and
the Surviving Partnership harmless from, and to reimburse APF, the OP General
Partner and the Surviving Partnership for, any APF Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "APF Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, obligation, suit, action, fee, cost, or expense
of any nature whatsoever resulting from (i) any breach of any representation
and warranty of any of the General Partners or the Fund which is contained in
this Agreement or any Schedule, Exhibit, or certificate delivered pursuant
hereto; (ii) any breach or non-fulfillment of, or any failure to perform, any
of the covenants, agreements, or undertakings of any of the General Partners or
the Fund which are contained in or made pursuant to this Agreement; and (iii)
all interest, penalties, costs, and expenses (including, without limitation,
all reasonable fees and disbursements of counsel) arising out of or related to
any indemnification made under this Section 12.1.
12.2 Indemnity Obligations of APF, the OP General Partner and the Operating
Partnership. Subject to Sections 12.5 and 12.6 hereof, APF, the OP General
Partner and the Operating Partnership (including in its capacity as the
Surviving Partnership) hereby jointly and severally agree to indemnify and hold
each of the General Partners and the Fund harmless from, and to reimburse each
of the General Partners and the Fund for, any Fund Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "Fund Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, suit, action, fee, cost, or expense of any nature
whatsoever incurred by any of the General Partners or the Fund resulting from
(i) any breach of any representation and warranty of APF, the OP General
Partner or the Operating Partnership which is contained in this Agreement or
any Schedule, Exhibit, or certificate delivered pursuant hereto; (ii) any
breach or non-fulfillment of, or failure to perform, any of the covenants,
agreements, or undertakings of APF, the OP General Partner and the Operating
Partnership which are contained in or made pursuant to the terms and conditions
of this Agreement; and (iii) all interest, penalties, costs, and expenses
(including, without limitation, all reasonable fees and disbursements of
counsel) arising out of or related to any indemnification made under this
Section 12.2.
12.3 Appointment of Representative. James M. Seneff, Jr. is hereby appointed
as the exclusive agent of the General Partners and the Fund to act on their
behalf with respect to any and all Fund Indemnity Claims and any and all APF
Indemnity Claims arising under this Agreement or such other representative as
may be hereafter appointed by the General Partners. Such agent is herein
referred to as the "Representative." The Representative shall take, and the
General Partners agree that the Representative shall take, any and all actions
which the Representative believes are necessary or appropriate under this
Agreement for and on behalf of the General Partners and the Fund, as fully as
if such parties were acting on their own behalf, including, without limitation,
asserting Fund Indemnity Claims against APF, the OP General Partner and the
Operating Partnership, defending all APF Indemnity Claims, consenting to,
compromising, or settling all Fund Indemnity Claims and APF Indemnity Claims,
conducting negotiations with APF, the OP General Partner and the Operating
Partnership and their representatives regarding such claims, taking any and all
other actions specified in or contemplated by this Agreement and engaging
counsel, accountants, or other representatives in connection with the foregoing
matters. APF, the OP General Partner and the Operating Partnership shall have
the right to rely upon all actions taken or omitted to be taken by the
Representative pursuant to this Agreement, all of which actions or omissions
shall be legally binding upon each of the General Partners and the Fund. The
Representative, acting pursuant to this Section 12.3, shall not be liable to
any of the General Partners or the Fund for any act or omission, except in
connection with any act or omission that was the result of the Representative's
bad faith or gross negligence.
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<PAGE>
12.4 Notification of Claims. Subject to the provisions of Section 12.5, in
the event of the occurrence of an event which any Party asserts constitutes an
APF Indemnity Claim or a Fund Indemnity Claim, as applicable, such Party shall
provide the indemnifying party with prompt notice of such event and shall
otherwise make available to the indemnifying party all relevant information
which is material to the claim and which is in the possession of the
indemnified party. If such event involves the claim of any third party (a
"Third-Party Claim"), the indemnifying party shall have the right to elect to
join in the defense, settlement, adjustment, or compromise of any such Third-
Party Claim, and to employ counsel to assist such indemnifying party in
connection with the handling of such claim, at the sole expense of the
indemnifying party, and no such claim shall be settled, adjusted or
compromised, or the defense thereof terminated, without the prior consent of
the indemnifying party unless and until the indemnifying party shall have
failed, after the lapse of a reasonable period of time, but in no event more
than 30 days after written notice to it of the Third-Party Claim, to join in
the defense, settlement, adjustment, or compromise of the same. An indemnified
party's failure to give timely notice or to furnish the indemnifying party with
any relevant data and documents in connection with any Third-Party Claim shall
not constitute a defense (in part or in whole) to any claim for indemnification
by such Party, except and only to the extent that such failure shall result in
any material prejudice to the indemnifying party. Any indemnifying party may
elect, at such Party's sole expense, to assume control of the defense,
settlement, adjustment, or compromise of any Third-Party Claim, with counsel
reasonably acceptable to the indemnified parties, insofar as such claim relates
to the liability of the indemnifying party, provided that such indemnifying
party shall obtain the consent of all indemnified parties before entering into
any settlement, adjustment, or compromise of such claims, or ceasing to defend
against such claims, unless such settlement is a cash settlement and contains
an unconditional release of the indemnified party from all existing and future
claims with respect to the matter being contested. In connection with any
Third-Party Claim, the indemnified party, or the indemnifying party if it has
assumed the defense of such claim pursuant to the preceding sentence, shall
diligently pursue the defense of such Third-Party Claim.
12.5 Survival. All representations and warranties, and, except as otherwise
provided in this Agreement, all covenants and agreements of the parties
contained in or made pursuant to this Agreement, and the rights of the parties
to seek indemnification with respect thereto, shall survive until eighteen
months from the Closing Date; provided, however, the representations and
warranties contained in Sections 6.2, 6.3 and 7.11 shall survive until the
expiration of the applicable statute of limitations with respect to the matters
covered thereby. No claim shall be made after the applicable survival period.
12.6 Limitations. Notwithstanding the foregoing, any claim by an indemnified
party against any indemnifying party under this Agreement shall be payable by
the indemnifying party only in the event, and to the extent, that the
accumulated amount of the claims in respect of such indemnifying party's
obligations to indemnify under this Agreement shall and the other claims
described in Article XIII exceed in the aggregate the dollar amount specified
in Article XIII. As to APF Indemnity Claims, the liability of each General
Partner shall be limited as provided in Article XIII.
12.7 Exclusive Provisions; No Rescission. Except as set forth in this
Agreement, no Party hereto is making any representation, warranty, covenant, or
agreement with respect to the matters contained herein. Anything herein to the
contrary notwithstanding, no breach of any representation, warranty, covenant,
or agreement contained herein or in any certificate or other document delivered
pursuant hereto relating to the Merger shall give rise to any right on the part
of any Party hereto, after the consummation of the Merger, to rescind this
Agreement or the transactions contemplated by this Agreement. Following the
consummation of the Merger, the rights of the Parties under the provisions of
this Article XII shall be the sole and exclusive remedy available to the
Parties with respect to claims, assertions, events, or proceedings arising out
of or relating to the Merger.
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<PAGE>
ARTICLE XIII
Limitation of Liability
13.1 Threshold. Notwithstanding anything to the contrary stated in this
Agreement, in no event (i) shall the General Partners or any of them have any
liability to APF and/or the OP General Partner and the Surviving Partnership on
account of any APF Indemnity Claim or for any claim for breach of warranty or
for misrepresentation, or any other claim whatsoever arising under this
Agreement or in connection with the transaction contemplated herein
(individually a "Claim" and collectively, "Claims") or for any loss, damage,
deficiency, liability, obligation, suit, action, judgment, fee, cost or expense
of any nature whatsoever directly resulting from Claims (collectively,
"Losses") unless, until and only to the extent that the accumulated amount of
all Losses exceeds the amount of $115,776 in the aggregate (the "Threshold")
nor (ii) shall the individual or aggregate liability of the General Partners on
account of Claims and Losses exceed the value of APF Common Shares actually
issued to the General Partners in the Merger valued at the 20 Day Average
Price. To the extent that any Claim is asserted against more than one General
Partner, each General Partner shall be liable only for such General Partner's
proportionate share of the Claim based on the percentage that the APF Common
Shares received by such General Partner in the Merger is of the total APF
Commons Shares comprising the Share Consideration. Any Claim against a General
Partner, including an APF Indemnity Claim, may be satisfied by such General
Partner, in its sole discretion, by surrendering to the claimant(s) APF Common
Shares at a value equal to the closing price per share of such shares on the
NYSE on the last trading day preceding the date such APF Common Shares are
surrendered.
13.2 Special Indemnification. APF agrees to indemnify, defend and hold
harmless the General Partners against any loss, damage, deficiency, liability,
obligation, suit, action, judgment, fee, cost or expense of any nature
whatsoever, including reasonable attorneys' fees, arising after the Effective
Time that would have arisen in their capacity as General Partners of the Fund
had the Merger not been consummated and that are the result of APF's alleged
actions or inactions. The Threshold described in Section 13.1 above shall not
apply to APF obligations to indemnify the General Partners pursuant to this
Section 13.2.
ARTICLE XIV
Miscellaneous
14.1 Press Releases and Public Announcements. No Party shall issue any press
release or make any public announcement relating to the subject matter of this
Agreement prior to the Closing without the prior written approval of APF and
the General Partners; provided, however, that any Party may make any public
disclosure it believes in good faith is required by applicable law or any
listing or trading agreement concerning its publicly-traded securities (in
which case the disclosing Party will use its best efforts to advise the other
Parties prior to making the disclosure).
14.2 No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
14.3 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
14.4 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior
written approval of APF and the General Partners.
14.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
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<PAGE>
14.6 Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.7 Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given, as of the
date two business days after mailing, if it is sent by registered or certified
mail, return receipt requested, postage prepaid, and addressed to the intended
recipient as set forth below:
If to the Fund or the General Partners:
c/o James M. Seneff, Jr.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 423-2894
With copy to:
Baker & Hostetler LLP
Sun Trust Center, Suite 2300
200 South Orange Avenue
Orlando, Florida 32801
Attn: Kenneth C. Wright, Esq.
Telecopy: (407) 841-0168
If to APF or the Operating Partnership:
Curtis B. McWilliams
Executive Vice President
CNL American Properties, Inc.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 650-1000
With copy to:
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Attn: John M. McDonald, Esq.
Telecopy: (202) 663-8007
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth
above using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving the other Parties notice in the manner herein set forth.
14.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of Florida
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
B-31
<PAGE>
14.9 Amendments and Waivers. No amendment of any provision of this Agreement
shall be valid unless the same shall be in writing and signed by APF, the OP
General Partner and the General Partners. No waiver by any Party of any
default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or
subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
14.10 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
14.11 Expenses. If the Closing occurs, APF will bear all costs and expenses
of the Parties incurred in connection with this Agreement and the transactions
contemplated hereby to the extent not already paid by the Fund or the General
Partners. If the Closing does not occur, APF, the OP General Partner and the
Operating Partnership will bear their own costs and expenses (including legal
fees and expenses) incurred in connection with this Agreement and the
transactions contemplated hereby, and the General Partners and the Fund will
divide their costs and expenses (including legal fees and expenses) as follows:
(i) the Fund shall bear that percentage of the costs and expenses equal to the
percentage obtained by dividing the number of Fund votes in favor of the Merger
by the sum of the total number of votes cast and the total number of
abstentions and (ii) the General Partners shall bear the remainder of the costs
and expenses.
14.12 Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.
14.13 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
14.14 Specific Performance. Each of the Parties acknowledges and agrees that
the other Parties would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Parties shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter (subject to the provisions set
forth in Section 13.15 below), in addition to any other remedy to which they
may be entitled, at law or in equity.
14.15 Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in and for Orange County,
Florida, in any action or proceeding arising out of or relating to this
Agreement and agrees that all claims in respect of the action or proceeding may
be heard and determined in any such court.
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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, 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 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 Prospectus/Consent Solicitation Statement.
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.
OVERVIEW
Pursuant to the Prospectus/Consent Solicitation Statement and this
Supplement, you are being asked to approve the Acquisition of your Income Fund
by APF. Your Income Fund is one of 18 limited partnerships (which we refer to
collectively as the Funds) that APF is seeking to acquire. Supplements have
also been prepared for each of the other Funds, copies of which may be obtained
without charge to 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 (or a REIT), formed in
1994, whose primary business, like that of the Funds, is the ownership of
restaurant properties leased to operators of national and regional restaurant
chains on a triple-net lease basis. As a full-service REIT, 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 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 shares of common stock (or APF Shares) will I receive if my Income
Fund is acquired by APF?
Your Income Fund will receive 2,393,267 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 $10.00 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
approximately 75 million APF Shares through three public offerings at offering
prices
S-1
<PAGE>
per APF share equal to the Exchange Value. At December 31, 1998, of the
approximately $750 million raised by APF, APF has used approximately $550
million to acquire restaurant properties and to make mortgage loans and had
approximately $120 million in uninvested proceeds which APF expects to invest
during the first quarter of 1999. The remaining proceeds were used to pay fees
and other offering expenses.
What is the required vote necessary to approve the Acquisition?
Pursuant to the terms of your Income Fund's partnership agreement, APF's
acquisition of your Income Fund may not be consummated without the approval of
greater than 50% of the outstanding 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
Fund?
Yes. Legg Mason Wood Walker, Incorporated 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 Funds, and (c) the method of allocating the APF
Shares among the Funds.
Do you, as the general partners of my Income Fund, recommend that I vote in
favor 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 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 how you want to vote, and sign
and mail it in the enclosed postage-paid return envelope as soon as possible,
so that at the Special Meeting of Limited Partners, your Units may be voted
"For" or "Against" APF's acquisition of your Income Fund. If you sign and send
in your consent form and do not indicate how you want to vote, your consent
form will be counted as a vote "For" the Acquisition. If you do not vote or you
abstain from voting, it will count as a vote "Against" the Acquisition.
In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to certain limitations. If you vote "Against" the Acquisition,
but your Income Fund is nevertheless acquired by APF, you may elect to receive
a payment (which we call the Cash/Notes Option) that is 10% in cash and 90% in
% Callable Notes due , 2006 (or Notes) based on the liquidation value of
your Income Fund, as determined by Valuation Associates, the appraisal firm
that we engaged in connection with the Acquisition. Such liquidation value will
be lower than the aggregate Exchange Value of the APF Shares offered to your
Income Fund in the Acquisition. The Notes will bear interest at a rate equal to
%, which was determined based on 120% of the applicable federal rate as of
, 1999. Please note that you may only receive the Cash/Notes Option if you
have voted "Against" the Acquisition and you elect to receive the Cash/Notes
Option on your consent form. You will receive APF Shares if your Income Fund
elects to be acquired in the Acquisition and you voted "For" the Acquisition,
or you voted "Against" the Acquisition and did not affirmatively select the
Cash/Notes Option. 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 (for example, 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 be based on the difference between the
value of the APF Shares or the tax basis of your Units. If you elect the
Cash/Notes Option, your tax will be based upon your allocable share of the gain
which will be
S-2
<PAGE>
recognized by your Income Fund; your Income Fund's gain will generally equal
the excess, if any, of the value of the APF Shares and cash received by your
Income Fund over the tax basis of your Fund's net assets. Some of the gain may
be subject to the 25% rate of tax applicable to certain 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 $1,541. To
review the tax consequences to the Limited Partners of the Funds in greater
detail, see pages through of the Prospectus/Consent Solicitation Statement
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 Funds acquired by APF.
Although the majority of APF's assets and the assets of the other Funds
acquired by APF are substantially similar to those of your Income Fund, the
restaurant properties owned by APF and the other 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 Funds' restaurant properties,
see "APF's Business and The Restaurant Properties--Business Objectives and
Strategies" and "--The Restaurant Properties--General" and "Business of the
Funds--Description of Restaurant Properties" in the Prospectus/Consent
Solicitation Statement.
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 Prospectus/Consent Solicitation Statement.
Investment Risks
. Uncertainty Regarding the Exchange Value and Trading Price of APF Shares
Following Listing. Your Income Fund will be receiving 2,393,267 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 is 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 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.
. Decrease in Distributions. In each of the years ended December 31, 1995,
1996 and 1997, your Income Fund made $950 in distributions per $10,000
investment to you. Based on APF's pro forma financial information, and
assuming APF acquires only your Income Fund and that each Limited Partner
of your Income receives only APF Shares, you would have received, for the
year ended December 31, 1997, $550 in distributions per $10,000 of
original investment, which is 42.1% less than the $950 distributed to you
as Limited Partner during the same period. 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
S-3
<PAGE>
APF stockholders for the year ended December 31, 1997 for the nine months
ended September 30, 1998 is not necessarily indicative of the
distributions you will receive as a stockholder of APF after the
Acquisition. See "Cash Distributions to Limited Partners of Your Fund."
. Conflicts of Interest in the Acquisition; Substantial Benefits to Related
Parties. There are certain conflicts of interest inherent in the
structure of the Acquisition of your Income Fund. 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 that may or may not be aligned with your
interests 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.
. Fundamental Change in Nature of 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 September 30, 1998), 395 restaurant properties. The risks inherent
in investing in an operating company such as APF include APF's ability to
invest in new restaurant properties that are not as profitable as APF
anticipated, the incurrence of substantial indebtedness to make future
acquisitions of restaurant properties which it may be unable to repay and
making mortgage loans to prospective operators of national and regional
restaurant chains which may not have the ability to repay.
As an APF stockholder, you will receive the benefits of your investment
through (i) dividend distributions on, and (ii) increases in the value of,
your APF Shares. In addition, 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 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 Cash/Notes Option). An
investment in APF may not outperform your investment in the Income Fund.
. Original Investment Timeframe. 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, 2026. 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 1994 and 2002. Because
your Income Fund is in the anticipated termination timeframe, we could
elect to liquidate your Income Fund. However, we have no current plans to
dispose of your Income Fund's restaurant properties if the Limited
Partners do not approve the Acquisition.
Real Estate/Business Risks
. Risk of Default on Mortgage Loans and Market Risks associated with
Securitizations. 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
S-4
<PAGE>
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.
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,) and 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 may 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.
. Risks Associated with Leverage. 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. At the time of the consummation of the
Acquisition, as a general policy, APF's Board of Directors will 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 funds from
operations and its ability to make distributions to its stockholders.
. Acquisition and Development Risks. APF plans to pursue its growth
strategy through the acquisition and development of additional restaurant
properties. To the extent that APF does pursue this growth strategy, we
do not know that it 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.
Tax Risks
. Failure of APF to Qualify as a REIT for Tax Purposes. 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
S-5
<PAGE>
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.
. Risks Associated with Distribution Requirements. 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 Tax Law. 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 Prospectus/Consent Solicitation Statement.
CONSIDERATION PAID TO INCOME FUND
The following table sets forth, for your Income Fund (i) the aggregate
amount of original Limited Partner investments in each Fund less any
distributions of net sales proceeds paid to the Limited Partners of that Fund,
(ii) the original amount of Limited Partner investments in each Fund less any
distributions of net sales proceeds per average $10,000 investment, (iii) the
number of APF Shares to be paid to your Income Fund, (iv) the estimated value
of the APF Shares paid to your Income Fund, (v) the estimated Acquisition
expenses allocated to your Income Fund, (vi) the estimated value, based on the
Exchange Value, of APF Shares paid to your Income Fund after deducting
Acquisition expenses, and (vii) the estimated value, based on the Exchange
Value, of APF Shares you will receive for each $10,000 of your original
investment:
<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) Fund(2) Fund(3) Expenses Expenses(3) Investment(3)
- ------------- ------------- ---------- ------------ ----------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$23,768,000 $9,507 2,393,267 $23,932,670 267,731 $23,664,939 $9,466
</TABLE>
- --------
(1) The original Limited Partner investment in the Income Fund was $25,000,000.
These columns reflect, as of September 30, 1998, an adjustment to the
Limited Partners' original investments based on distributions of net sales
proceeds received from sales of properties made pursuant to the partnership
agreements.
(2) The APF Shares payable to each Fund as set forth in this chart will not
change if APF acquires fewer than all of the Funds in the Acquisition. This
number assumes that none of the Limited Partners of the Fund has elected
the Cash/Notes Option.
(3) 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-6
<PAGE>
Upon completion of the Acquisition of your Income Fund, the operations and
existence of your Income Fund will cease. For more detailed information, see
"The Acquisition" in the Prospectus/Consent Solicitation Statement. If your
Income Fund does not approve the Acquisition, we do not contemplate that your
Income Fund would be liquidated in the near future. The Acquisition, however,
does not result in an all-cash payment to you in the liquidation of your
investment. For example, if you are eligible for and choose the Cash/Notes
Option, you become a Noteholder of APF. You will have exchanged your Units for
unsecured debt obligations of APF which may not be retired in full until ,
2006, a date approximately seven years after the date the Acquisition of your
Income Fund occurs. On the other hand, if you exchange your Units for APF
Shares, you will receive an equity interest in APF whose marketability will
depend upon the market that may develop with respect to the APF Shares, which
will be listed on the NYSE.
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......................................................... $ 11,712
Appraisals and Valuation........................................... 4,685
Fairness Opinions.................................................. 21,082
Registration, Listing and Filing Fees.............................. --
Soliciting Dealer Fee.............................................. 51,144
Financial Consulting Fees.......................................... --
Environmental Fees................................................. 29,281
Accounting and Other Fees.......................................... 30,793
--------
Subtotal......................................................... 148,697
Closing Transaction Costs
Transfer Fees and Taxes............................................ 36,283
Legal Fees......................................................... 43,514
Recording Costs.................................................... --
Other.............................................................. 39,237
--------
Subtotal......................................................... 119,034
--------
Total.............................................................. $267,731
========
</TABLE>
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<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 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
seven to 15 years after they were acquired (or as soon thereafter as, in our
opinion, market conditions permit), as contemplated by the terms of the
partnership agreement.
Special Meeting to Discuss the Acquisition
We have scheduled a special meeting of the Limited Partners of your Income
Fund to discuss the solicitation materials, which include the
Prospectus/Consent Solicitation Statement, 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 (as defined below) and to explain in person our
reasons for recommending that you vote "For" the Acquisition.
VOTING PROCEDURE
The Prospectus/Consent Solicitation Statement, 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.
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 Prospectus/Consent Solicitation
Statement. A copy of the Agreement and Plan of Merger dated March 11, 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 December 31,
1999. 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
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<PAGE>
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.
The consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and certain 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
(including the Acquisition), 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. The partnership agreement also provide 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
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, 1995, 1996 and 1997 and the nine months
ended September 30, 1998, the aggregate amounts accrued or paid by your Income
Fund 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 years presented, are shown below under "Pro Forma":
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<PAGE>
<TABLE>
<CAPTION>
Nine
Months
Year Ended December 31, Ended
--------------------------- September
1995 1996 1997 30, 1998
------- ------- ------- ---------
<S> <C> <C> <C> <C>
Historical:
General Partner Distributions...... -- -- -- --
Broker/Dealer Commissions(1)....... -- -- -- --
Due Diligence and Marketing Support
Fees.............................. -- -- -- --
Acquisition Fees................... -- -- -- --
Asset Management Fees.............. -- -- -- --
Real Estate Disposition Fees(2).... -- -- -- $45,150
------- ------- ------- -------
Total historical................. -- -- -- $45,150
Pro Forma:
Cash Distributions on APF Shares... -- -- -- --
Salary Compensation................ -- -- -- --
------- ------- ------- -------
Total pro forma.................. -- -- -- --
</TABLE>
- --------
(1) A majority of the fees paid as broker-dealer commissions and due diligence
and marketing support fees were reallowed to other broker-dealers
participating in the offering of the Income Fund's Units.
(2) 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 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 the Acquisition--Prices for 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>
Nine Months Ended
Sept. 30, 1998
--------------------
1993 1994 1995 1996 1997 Historical Pro Forma
---- ---- ---- ---- ---- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income....... $733 $763 $728 $739 $950 $ 488 $414
Distributions from Sales of
Properties..................... -- -- -- -- -- 493 --
Distributions from Return of
Capital(1)..................... 242 187 222 211 -- 131 19
---- ---- ---- ---- ---- ------ ----
Total......................... $975 $950 $950 $950 $950 $1,112 $433
==== ==== ==== ==== ==== ====== ====
</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 nine months ended September 30,
1998 is not necessarily indicative of the distributions you will receive as a
stockholder of APF after the Acquisition.
Assuming APF maintains its current level of debt for acquiring future
restaurant properties, the expected distribution rate per APF Share will be
8.8% (assuming a $10.00 per APF Share price based on the Exchange Value, the
annualized dividend per year is expected to be $0.88 per APF Share). Based on
the number of APF Shares that you would receive in the Acquisition per your
average $10,000 original investment and this distribution rate, you would
receive an annual distribution of approximately $833.
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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 certain 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 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 Cash/Note Option.
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, our relief 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 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 Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the Cash/Notes Option, constitutes 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 and is the best way to maximize the return on your
investment in light of the values of such consideration.
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
S-11
<PAGE>
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
of Valuation Associates and Legg Mason received fees for its services and
notwithstanding that Legg Mason has previously provided investment banking
services to the Funds and to Commercial Net Lease Realty, Inc., a former
affiliate of ours. See "Reports, Opinions and Appraisals--Fairness Opinions" in
the Prospectus/Consent Solicitation Statement.
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 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 cash and promissory 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 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 Cash/Notes Option.
3. Valuation of Alternatives. Based on the appraisal of the Income Fund's
restaurant properties, we estimated the value of your Income Fund as an ongoing
concern and if liquidated. 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 Fund to 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
September 30, 1998 per $10,000 original investment. Since the calculation of
the book value was done on a GAAP basis, it is not indicative of the true fair
market value of your Income Fund. This figure was compared to the (i) value of
the Fund if it commenced an orderly liquidation of its investment portfolio on
December 31, 1998, (ii) value of the Fund if it continued to operate in
accordance with its existing partnership agreement and business plans, and
(iii) estimated value of the APF Shares, based on the Exchange Value, paid to
each Fund per average $10,000 invested.
S-12
<PAGE>
Summary of Valuations
(per $10,000 original investment)
<TABLE>
<CAPTION>
Estimated Value
of APF Shares
per Average
Going $10,000 Original
GAAP Book Liquidation Concern Limited Partner
Value Value(1) Value(1) Investment(2)
--------- ----------- -------- ----------------
<S> <C> <C> <C> <C>
CNL Income Fund II, Ltd........ $7,062 $8,724 $9,419 $9,466
</TABLE>
- --------
(1) 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.
(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.
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have an independent
obligation 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 Funds). James M. Seneff, Jr. and
Robert A. Bourne act as the individual general partners of all of the 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.
Benefits to General Partners
As a result of the Acquisition (assuming only your Income Fund is acquired),
we are expected to receive certain benefits, including that we will be relieved
from certain ongoing liabilities with respect to Funds that are acquired by
APF.
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 Funds if the Acquisition does not occur.
S-13
<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 the Cash/Notes Option, in which case you will
receive cash and 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 Prospectus/Consent Solicitation Statement.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, the
assets (and any liabilities) of your Income Fund (if your Income Fund is
acquired by APF) will be transferred to APF in return for APF Shares and/or
cash and 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-14
<PAGE>
<TABLE>
<CAPTION>
Estimated
Gain/(Loss)
per Average
$10,000 Original
Limited Partner
Investment(1)
----------------
<S> <C>
CNL Income Fund II, Ltd........................................ $1,541
</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 Code, no gain or loss is recognized if (i)
property is transferred to a corporation by one more individuals or entities in
exchange for the stock of that corporation, and (ii) 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 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 the
Cash/Notes Option, 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 (1) 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 (2) 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 Cash/Notes Option, your Income Fund will receive APF
Shares, cash and Notes in exchange for your Income Fund's assets. Because the
principal portion of the Notes will not be due until , 2006, 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 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 (without reduction for
any selling expenses) 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 are 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, cash 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" (i.e., real property and
S-15
<PAGE>
depreciable assets used in a trade or business and held for more than one
year). Your share of gains or losses from the sale of section 1231 assets of
your Income Fund would be combined with any other section 1231 gains and losses
that you recognize in that year. If the result is a net loss, such loss is
characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property will be taxed as ordinary income to the extent of all
prior depreciation deductions taken by your Income Fund prior to sale. In
general, you may only use up to $3,000 of capital losses in excess of capital
gains to offset ordinary income in any taxable year. Any excess loss is carried
forward to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your Income Fund recognizes will be allocated to you and the other
Limited Partners in accordance with the terms of your Income Fund's partnership
agreement. Each Limited Partner will be allocated and must report his, her or
its allocable share of such gain, if any, pursuant to these terms, regardless
of the Limited Partner's decision to receive 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 Cash/Notes Option may
recognize gain in the year of the Acquisition despite the fact that they will
receive only a small amount of cash and no publicly-traded instruments 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 the Cash/Notes Option. See "--Tax Consequences of
Liquidation and Termination of Your Fund" below.
Tax Consequences of the Liquidation and Termination of Your Fund. If your
Fund is acquired by APF, your Fund will be deemed to have liquidated and
distributed APF Shares and/or cash and 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 cash and 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 pro rata 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 (determined on the closing date of the Acquisition) and your
adjusted tax basis in your Units (adjusted by your distributive share of
income, gain, loss, deduction and credit for the final taxable year of your
Income Fund (including any such items recognized by your Income Fund as a
result of the Acquisition) as well as any distributions you receive in such
final taxable year (other than the distribution of the APF Shares)). 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 cash and Notes in the Acquisition, you will recognize gain to
the extent that the amount of cash you receive in the Acquisition exceeds your
adjusted basis in your Units (adjusted by your distributive share of income,
gain, loss, deduction and credit for the final taxable year of your Income Fund
(including any such items recognized by your Income Fund as a result of the
Acquisition) as well as any distributions you receive in such final taxable
year (other than the distributions of the cash and Notes)). Your basis in the
Notes
S-16
<PAGE>
distributed to you will equal your adjusted basis in your Units, reduced (but
not below zero) by the amount of any cash distributed to you 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 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.
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 cash and 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 Prospectus/Consent Solicitation
Statement.
S-17
<PAGE>
SUMMARY SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
APF, FUNDS, ADVISOR AND CNL RESTAURANT FINANCIAL SERVICES GROUP
Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
Historical Pro Forma
--------------------------------------------------- -------------------------------
CNL
CNL Restaurant
Income Financial
Fund II, Services Combined Pro Forma Combined
APF Ltd. Advisor Group Historical Adjustments Pro Forma
------------ ----------- ----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data
Revenues:
Rental and earned
income.............. $ 22,947,199 $ 1,323,420 $ -- $ -- $ 24,270,619 $ 9,635,208 (a) $ 33,915,561
9,734 (b)
Management fees...... -- -- 21,405,127 5,122,366 26,527,493 (21,006,601)(c)
(2,875,906)(d) 2,644,986
Interest and other
income.............. 6,117,911 60,100 751 18,463,647 24,642,409 1,526,547 (e) 26,168,956
------------ ----------- ----------- ------------ ------------ ----------- ------------
Total revenue........ 29,065,110 1,383,520 21,405,878 23,586,013 75,440,521 (12,711,018) 62,729,503
Expenses:
General and
administrative...... 1,539,004 160,654 6,701,115 6,704,482 15,105,255 (1,302,824)(f)
(1,415,100)(g)
(27,945)(h) 12,359,386
Advisory fees........ 1,248,393 -- -- 1,026,231 2,274,624 (2,274,624)(i) --
State taxes.......... 397,569 14,732 15,226 220,180 647,707 33,370 (j) 681,077
Depreciation and
amortization........ 2,693,020 249,584 131,539 1,000,493 4,074,636 3,131,930 (k)(l) 7,206,566
Interest expense..... -- -- 105,668 14,234,533 14,340,201 (68,670)(m) 14,271,531
Paid to affiliates... -- -- 256,456 1,569,202 1,825,658 (1,825,658)(n) --
------------ ----------- ----------- ------------ ------------ ----------- ------------
Total expenses....... 5,877,986 424,970 7,210,004 24,755,121 38,268,081 (3,749,521) 34,518,560
------------ ----------- ----------- ------------ ------------ ----------- ------------
Net earnings (loss)
before equity in
earnings of joint
ventures/minority
interests, gain
(loss) on sale of
properties, gain on
securitization, and
provision for federal
income taxes......... 23,187,124 958,550 14,195,874 (1,169,108) 37,172,440 (8,961,497) 28,210,943
------------ ----------- ----------- ------------ ------------ ----------- ------------
Equity in earnings of
joint
ventures/minority
interests............ (23,271) 319,894 -- 12,452 309,075 -- 309,075
Gain (loss) on sales
of properties ....... -- -- -- -- -- -- --
Gain on
securitization....... -- -- -- 3,018,268 3,018,268 -- 3,018,268
Other expenses........ -- (45,150) -- -- (45,150) -- (45,150)
Provision for federal
income taxes......... -- -- 5,607,415 708,666 6,316,081 (6,316,081)(o) --
------------ ----------- ----------- ------------ ------------ ----------- ------------
Net earnings.......... $ 23,163,853 $ 1,233,294 $ 8,588,459 $ 1,152,946 $ 34,138,552 $(2,645,416) $ 31,493,136
============ =========== =========== ============ ============ =========== ============
Other Data:
Weighted average
number of shares of
common stock
outstanding during
period............... 47,633,909 N/A N/A N/A N/A -- 72,083,919 (p)
Total properties owned
at end of period..... 357 38 N/A N/A N/A -- 395
Funds from
operations........... $ 26,408,569 $ 1,482,878 N/A N/A N/A -- $ 36,236,129
Total cash
distributions
declared*............ $ 26,460,446 $ 1,546,878 N/A N/A N/A -- $ 36,236,129
Cash distributions
declared per $10,000
investment........... $ 572 $ 1,112 N/A N/A N/A -- $ 503
<CAPTION>
Historical Combined Pro Forma
September 30, 1998 Historical September 30, 1998
--------------------------------------------------- ------------ -------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data
Real estate assets,
net.................. $407,663,180 $12,917,620 $ -- $ -- $420,580,800 $ 6,257,390 (q)
26,052,741 (r) $452,890,931
Mortgages/notes
receivable........... 33,523,506 28,731 -- 173,776,981 207,329,218 849,195 (r) 208,178,413
Accounts receivable,
net.................. 575,104 57,717 7,544,985 7,342,103 15,519,909 (8,024,778)(s) 7,495,131
Investment in/due from
joint ventures....... 631,374 4,360,442 -- -- 4,991,816 1,656,984 (q) 6,648,800
Total assets.......... 566,383,967 18,397,678 8,429,809 197,528,789 790,740,243 28,832,813 819,573,056
Total
liabilities/minority
interest............. 14,478,585 741,613 5,049,152 185,998,045 206,267,395 (11,015,642)(s)(t) 195,251,753
Total equity.......... 551,905,382 17,656,065 3,380,657 11,530,744 584,472,848 39,848,455 (q)(t) 624,321,303
</TABLE>
- --------
* Distributions for the nine months ended September 30, 1998 included
$1,477,747 as a result of the distribution of net sales proceeds from the
sales of two properties.
S-18
<PAGE>
(a) Represents rental and earned income as if 1) properties that had been
previously constructed and acquired from January 1, 1998 through
November 30, 1998 had been acquired and leased on January 1, 1997 and
2) properties that were developed by APF from January 1, 1998 through
November 30, 1998 had been placed in service on May 1, 1997 (assumes a
four month development period).
<TABLE>
<S> <C>
Rental and earned income on Property Transactions by APF... $9,635,208
</TABLE>
(b) Represents $9,734 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, 1997.
(c) Represents the elimination of intercompany fees between APF, Income
Fund, the Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees.......................................... $ (1,569,202)
Secured equipment lease fee............................... (44,426)
Advisory fees............................................. (1,722,383)
Reimbursement of administrative costs..................... (288,707)
Acquisition fees.......................................... (15,392,193)
Underwriting fees......................................... (254,945)
Administrative fees....................................... (148,491)
Executive fee............................................. (310,000)
Guarantee fees............................................ (93,750)
Servicing fee............................................. (1,014,117)
Development fees.......................................... (166,876)
Consulting fee............................................ (1,511)
------------
Total..................................................... $(21,006,601)
============
</TABLE>
(d) Represents the deferral of $2,875,906 in origination fees collected by
CNL Restaurant Financial Services Group that should be amortized over
the term of the loans originated (20 years) in accordance with the
Statement of Financial Accounting Standards #91 "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring
Loans and Initial Direct Costs of Leases."
(e) Represents interest income of $1,318,870 earned from Other Investments
acquired and mortgage notes issued from January 1, 1998 through
November 30, 1998 as if this had occurred on January 1, 1997 and the
amortization of $207,677 of deferred origination fees collected during
the year ended December 31, 1997 and during the nine months ended
September 30, 1998, which were capitalized and deferred in (d) above as
if they had been collected on January 1, 1997. These deferred fees are
being amortized and recorded as interest income.
(f) Represents the elimination of intercompany expenses paid between APF,
the Income Fund, the Advisor and the CNL Restaurant Financial Services
Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs...................... $ (288,707)
Servicing fee.............................................. (1,014,117)
-----------
$(1,302,824)
===========
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by APF were
subject to capitalization during the entire period and 2) costs
relating to properties not developed by APF were subject to
capitalization up through the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs........................... $(1,415,100)
</TABLE>
(h) Represents savings of $27,945 in professional services and
administrative expenses resulting from reporting on one combined
company versus 22 separate entities.
(i) Represents the elimination of fees between APF, the Income Fund, the
Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Advisory fees............................................... $(1,722,383)
Administrative fees......................................... (148,491)
Executive fee............................................... (310,000)
Guarantee fees.............................................. (93,750)
-----------
$(2,274,624)
===========
</TABLE>
S-19
<PAGE>
(j) Represents additional state taxes of $33,370 resulting from assuming
that acquisitions from January 1, 1998 through November 30, 1998 had
been acquired on January 1, 1997 and assuming that the Income Fund had
operated under a REIT structure.
(k) Represents an increase in depreciation of the building portion of the
properties acquired from January 1, 1998 through November 30, 1998 as
if they had been acquired on January 1, 1997 and the step up in basis
referred to in footnote (q) from acquiring the Income Fund portfolio
using the straight-line method over the estimated useful lives of
generally 30 years.
<TABLE>
<S> <C>
Depreciation expense.......................................... $1,557,623
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of the
CNL Restaurant Financial Services Group referred to in footnote (q).
<TABLE>
<S> <C>
Amortization of goodwill..................................... $1,574,307
</TABLE>
(m) Represents elimination of interest expense recorded for the
amortization of $350,000 in arrangement fees collected during the year
ended December 31, 1997 which were eliminated in footnote (4), II (d)
in the Notes to the Pro Forma Financial Statements attached to this
Supplement.
<TABLE>
<S> <C>
Interest expense............................................... $(68,670)
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees incurred
between APF, the Income Fund, the Advisor and the CNL Restaurant
Financial Services Group:
<TABLE>
<S> <C>
Origination fees............................................ $(1,569,202)
Underwriting fees........................................... (254,945)
Consulting fee.............................................. (1,511)
-----------
$(1,825,658)
===========
</TABLE>
(o) Represents the elimination of $6,316,081 in the provision for income
taxes as a result of the acquisition. APF expects to continue to
qualify as a REIT and does not expect to incur federal income taxes.
(p) APF Shares issued during the period required to fund acquisitions as if
they had been acquired on January 1, 1997 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 the proposal to amend and restate APF's articles of
incorporation to increase the number of authorized APF Shares.
(q) Represents the payment of $267,731 in cash and the issuance of
14,666,494 APF Shares in consideration for the purchase of the Income
Fund, Advisor and CNL Restaurant Financial Services Group at September
30, 1998 using the Exchange Value of $10 per APF Share plus estimated
transaction costs. The acquisitions of the Income Fund and the CNL
Restaurant Financial Services Group have been accounted for under the
purchase accounting method and goodwill was recognized to the extent
the estimated value of the consideration paid exceeded the fair value
of the net tangible assets acquired. As for the acquisition of the
Advisor from a related party, the consideration paid in excess of the
fair value of the net tangible assets received has been accounted for
as costs incurred in acquiring the Advisor from a related party because
the Advisor has not been deemed to qualify as a "business" for purposes
of applying APB Opinion No. 16 "Business Combinations." Upon
consummation of the Acquisition, this expense will be recorded as an
operating expense on APF's statement of earnings. APF will not deduct
this expense for purposes of calculating funds from operations due to
the nonrecurring and non-cash nature of the expense. As of September
30, 1998, $249,403 of transaction costs had been incurred by APF.
<TABLE>
<S> <C>
Income Fund................................................ $ 23,932,669
Advisor.................................................... 76,000,000
CNL Restaurant Financial Services Group.................... 47,000,000
------------
Total Purchase Price (cash and shares)..................... 146,932,669
Less cash paid to Income Fund.............................. (267,731)
------------
Share consideration........................................ 146,644,938
Transaction costs of APF................................... 8,933,000
------------
Total costs incurred....................................... $155,597,938
============
</TABLE>
In addition, APF i) used $8,933,000 in cash to pay the transaction
costs related to the Acquisition, ii) made an upward adjustment to the
Income Fund carrying value of land and building on operating leases by
$6,257,390, investment in joint
S-20
<PAGE>
venture by $1,656,984, made downward adjustments to the carrying value
of accrued rental income of $168,738, and made downward adjustments to
other assets of $3,668,841 to adjust historical values to fair value,
iii) recorded goodwill of $41,981,527 for the acquisition of the CNL
Restaurant Financial Services Group, iv) reduced retained earnings by
$77,239,881 for the excess consideration paid over the net assets of
the Advisor and removed the historical common stock balance of $12,000,
additional paid in capital balance of $9,602,287, retained earnings
balance of $5,297,114 and partners capital balance of $17,656,065 of
the Income Fund, Advisor and CNL Restaurant Financial Services Group.
(r) Represents the use of $26,901,936 in cash and cash equivalents at
September 30, 1998 to acquire $26,052,741 in properties and issue
$849,195 in mortgage notes which occurred from October 1, 1998 through
November 30, 1998.
(s) Represents the elimination by the Income Fund of $175,399 in related
party payables recorded as receivables by the Advisor, the elimination
by the CNL Restaurant Financial Services Group of $6,641,379 in related
party payables recorded as receivables by CNL Restaurant Financial
Services Group and the elimination by APF of $1,208,000 in related
party payables recorded as receivables by the Advisor.
(t) Represents the elimination of income taxes payable of $2,990,864 from
liabilities assumed in the acquisition of the CNL Restaurant Businesses
since the acquisition agreements require that the Advisor and CNL
Restaurant Financial Services Group have no accumulated or current
earnings and profits for federal income tax purposes at the time of the
acquisition.
S-21
<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>
Nine Months Ended
September 30, Year Ended December 31,
----------------------- -----------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues (1)............ $ 1,703,414 $ 1,957,732 $ 2,547,854 $ 2,455,884 $ 2,455,754
Net income (2).......... 1,233,294 1,969,023 3,639,880 1,866,961 1,838,517
Cash distributions
declared (3)........... 2,778,878 1,782,000 2,376,000 2,376,000 2,376,000
Net income per Unit
(2).................... 24.41 39.03 72.18 36.97 36.40
Cash distributions
declared per Unit (3).. 55.58 35.64 47.52 47.52 47.52
Weighted average number
of Limited Partner
Units outstanding...... 50,000 50,000 50,000 50,000 50,000
<CAPTION>
September 30, December 31,
----------------------- -----------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total assets............ $18,397,678 $18,871,957 $19,959,059 $18,671,318 $19,110,615
Total partners'
capital................ 17,656,065 18,124,792 19,201,649 17,937,769 18,446,808
</TABLE>
- --------
(1) Revenues include equity in earnings of joint ventures.
(2) Net income for the nine months ended September 30, 1998 has been reduced by
a real estate disposition fee of $41,150. Net income for the nine months
ended September 30, 1997 includes $460,152 from gain on sale of land and
building. Net income for the year ended December 31, 1997, includes
$1,476,124 from gain on sale of land and buildings. Net income for the year
ended December 31, 1997 also includes lease termination income of $214,000,
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 nine months ended September 30, 1998 included
$1,232,003 as a result of the distribution of net sales proceeds from the
sales of two properties.
S-22
<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 September 30, 1998, the Income Fund owned 38 restaurant
properties, including 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
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 1998 and 1997, 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 $1,601,005 and $1,579,694, respectively. The
increase in cash from operations for the nine months ended September 30, 1998,
as compared to the nine months ended September 30, 1997, is primarily a result
of changes in the Income Fund's working capital.
Other sources and uses of capital included the following items during the
nine months ended September 30, 1998.
During January 1998, the Income Fund used a portion of the net sales
proceeds from the 1997 sale of two restaurant properties to acquire a
restaurant property in Overland Park, Kansas, and a restaurant property in
Memphis, Tennessee, as tenants-in-common with certain of our affiliates. In
connection therewith, the Income Fund and the affiliates entered into separate
agreements whereby each co-venturer will share in the profits and losses of
each restaurant property in proportion to its applicable percentage interest.
As of September 30, 1998, the Income Fund owned a 39.42% and a 13.38% interest
in the restaurant property in Overland Park, Kansas and the restaurant property
in Memphis, Tennessee, respectively.
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 the partners. At September 30, 1998, the
Income Fund had $850,422 invested in such short-term investments, as compared
to $470,194 at December 31, 1997. The increase in cash and cash equivalents
during the nine months ended September 30, 1998, 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 September
30, 1998, after payment of distributions 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 $741,613 at September 30, 1998, from $757,410 at December 31,
1997. We believe that the Income Fund has sufficient cash on hand to meet its
current working capital needs.
Based on (i) current and anticipated future cash from operations, (ii) for
the nine months ended September 30, 1998, a portion of the proceeds received
from the 1997 sales of the restaurant properties as described above, and (iii)
for the nine months ended September 30, 1997, the $214,000 in termination fees
received in conjunction with the sale of the two restaurant properties in
Farmington Hills, Michigan, in October 1997, the Income Fund declared
distributions to the Limited Partners of $2,778,878 and $1,782,000 for the nine
months ended September 30, 1998 and 1997, respectively ($515,625 and $594,000
for the quarters ended
S-23
<PAGE>
September 30, 1998 and 1997, respectively). This represents distributions for
the applicable nine months of $55.58 and $35.64 per unit, respectively ($10.31
and $11.88 for the quarters ended September 30, 1998 and 1997, respectively).
Distributions for the nine months ended September 30, 1998 included $1,232,003
as a result of the distribution of the majority of the net sales proceeds from
the 1997 sale 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 agreement, it was applied to the Limited Partners' unpaid preferred
return. As a result of the sale of the restaurant properties, the Income Fund's
total revenue was reduced, while the majority of the Income Fund's operating
expenses remained fixed. Therefore, distributions of net cash flow were
adjusted for the nine months ended September 30, 1998. No distributions were
made to us for the quarters and nine months ended September 30, 1998 and 1997.
No amounts distributed to the Limited Partners for the nine months ended
September 30, 1998 and 1997, 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, as the general partners of the Income Fund, have the right, but not the
obligation, to make additional capital contributions if we deem it appropriate
in connection with the operations of the Income Fund.
The Years Ended December 31, 1997, 1996 and 1995
The Income Fund's primary source of capital for the years ended December 31,
1997, 1996 and 1995, 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 $2,157,912, $2,347,731 and
$2,168,367 for the years ended December 31, 1997, 1996 and 1995, respectively.
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, and the
increase in cash from operations during 1996, as compared to 1995, is primarily
a result of changes in income and expenses as described in "Results of
Operations" below, and as 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, 1997, 1996 and 1995.
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 being 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% 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 1997, the Income Fund collected and recognized as income
approximately $18,100 relating to this promissory note. As of December 31, 1997
and 1996, the balances in the allowance for doubtful accounts relating to this
promissory note were $74,590 and $92,987, respectively, including accrued
interest of $2,654 and $3,493, respectively.
Other sources and uses of capital included the following during the years
ended December 31, 1997, 1996 and 1995.
S-24
<PAGE>
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 CNL
Realty Corp., 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,
in 1996, the Income Fund entered into various promissory notes with the
corporate general partner for loans totalling $177,600 in connection with the
operations of the Income Fund. The loans were uncollateralized, non-interest
bearing and due on demand. As of December 31, 1996, the Income Fund had repaid
the loans in full to the corporate general partner. In addition, in 1997, the
Income Fund entered into various promissory notes with the corporate general
partner for loans totalling $721,000 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%
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 its
affiliate entered into an agreement whereby each co-venturer will share in the
profits and losses of the restaurant property in proportion to each co-
venturer's interest. The Income Fund owns a 57.77% interest in the restaurant
property. 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 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, is
collateralized by personal property and is being collected in 18 monthly
installments of interest only and thereafter, the entire principal balance
shall become due. As of December 31, 1997, the mortgage note receivable was
$42,734, including accrued interest of $734.
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 two restaurant 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 rents) of $4,035,196, resulting in aggregate gains of
$1,317,873 for financial reporting purposes. These six restaurant properties
were
S-25
<PAGE>
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. Some of the sales transactions, or
portions thereof, relating to the sales of these six restaurant properties and
the reinvestment of some of the net sales proceeds in additional restaurant
properties qualified as like-kind exchange transactions for federal income tax
purposes. However, 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 and distributed the
remaining net sales proceeds to the Limited Partners in 1998. 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 the partners. At December 31, 1997, the
Income Fund had $470,194 invested in such short-term investments, as compared
to $318,756 at December 31, 1996.
During 1997, 1996 and 1995, certain of our affiliates incurred on behalf of
the Income Fund $68,555, $103,909 and $95,036, respectively, for certain
operating expenses. As of December 31, 1997 and 1996, the Income Fund owed
$126,284 and $45,078, respectively, to affiliates for such amounts and
accounting and administrative services. Amounts payable to other parties,
including distributions payable, decreased to $605,826 at December 31, 1997,
from $642,163 at December 31, 1996. Liabilities at December 31, 1997, to the
extent they exceed cash and cash equivalents at December 31, 1997, will be paid
from future cash from operations, from proceeds from sales of restaurant
properties as described above, from collections of amounts received in
accordance with the agreement relating to past due rents described above, and,
in the event we elect to make additional contributions or loans to the Income
Fund, from future contributions or loans from us.
Based primarily on current and anticipated future cash from operations, 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 loans
received from us, the Income Fund declared distributions to the Limited
Partners of $2,376,000 for each of the years ended December 31, 1997, 1996 and
1995. This represents distributions of $47.52 per Unit for each of the years
ended December 31, 1997, 1996 and 1995. In deciding whether to sell restaurant
properties, we will consider 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, is expected to reduce the Income Fund's revenues.
The decrease in Income Fund revenues, combined with the fact that a significant
portion of the Income Fund's expenses are fixed in nature, is expected to
result in a decrease in cash distributions to the Limited Partners during 1998.
No
S-26
<PAGE>
amounts distributed or to be distributed to the Limited Partners for the years
ended December 31, 1997, 1996 and 1995, 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.
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
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 1997, the Income Fund owned and
leased 36 wholly-owned restaurant properties (including seven restaurant
properties sold in 1997), and during the nine months ended September 30, 1998,
the Income Fund owned and leased 29 wholly-owned restaurant properties, to
operators of fast-food and family-style restaurant chains. In connection
therewith, during the nine months ended September 30, 1998 and 1997, the Income
Fund earned $1,323,420 and $1,589,749, respectively, in rental income and
contingent rental income from these restaurant properties, $452,276 and
$545,365 of which was earned during the quarters ended September 30, 1998 and
1997, respectively. The decrease in rental income and contingent rental income
during the quarter and nine months ended September 30, 1998, as compared to the
quarter and nine months ended September 30, 1997 is primarily attributable to a
decrease in rental income and contingent 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 and contingent rental income are
expected to remain at reduced amounts as a result of the Income Fund
distributing the majority of the net sales proceeds from the 1997 sales of the
restaurant properties in Avon Park, Florida and Farmington Hills, Michigan.
In addition, during the nine months ended September 30, 1998 and 1997, the
Income Fund earned $60,100 and $34,466, respectively in interest and other
income, $17,361 and $17,521 of which was earned during the quarters ended
September 30, 1998 and 1997, respectively. The increase in interest and other
income for the nine months ended September 30, 1998 is primarily due to an
increase in interest income earned on net sales proceeds relating to the sales
of several properties during 1997 described above, pending the reinvestment of
the net sales proceeds in additional restaurant properties and distributions to
Limited Partners.
For the nine months ended September 30, 1997, the Income Fund also owned and
leased four restaurant properties indirectly through joint venture arrangements
(including one restaurant property in Show Low Joint Venture, which was sold in
January 1997) and one restaurant property as tenants-in-common with one of our
affiliates. In addition, for the nine months ended September 30, 1998, the
Income Fund 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 nine months
ended September 30, 1998 and 1997, the Income Fund earned $319,894 and
$333,517, respectively, attributable to net income earned by these joint
ventures, $104,979 and $40,610 of which was earned during the quarters ended
September 30, 1998 and 1997, respectively. The decrease in net income earned by
joint ventures for the nine months ended September 30, 1998, is primarily
attributable to the fact that in January 1997, Show Low Joint Venture, in
S-27
<PAGE>
which the Income Fund owns a 64% 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 an additional property in June 1997. The decrease in net
income earned by joint ventures during the nine months ended September 30,
1998, is partially offset by, and the increase in net income earned by joint
ventures during the quarter ended September 30, 1998 is primarily attributable
to, the fact that subsequent to September 30, 1997, the Income Fund reinvested
the net sales proceeds from the sale of five restaurant properties during 1997,
in five restaurant properties with certain of our affiliates as tenants-in-
common.
Operating expenses, including depreciation and amortization, were $424,970
and $448,861 for the nine months ended September 30, 1998 and 1997,
respectively, of which $153,104 and $138,539 were incurred for the quarters
ended September 30, 1998 and 1997, respectively. Depreciation expense during
the quarter and nine months ended September 30, 1998, decreased, as compared to
the same periods in 1997, primarily as a result of the sales of several
restaurant properties during 1997. General operating and administrative
expenses increased during the quarter and nine months ended September 30, 1998,
primarily due to the Income Fund incurring roof 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 future periods.
During the nine months ended September 30, 1998, the Income Fund recorded
deferred, subordinated real estate disposition fees of $45,150 payable to CNL
Fund Advisors, Inc. relating to the 1997 sales of the restaurant properties in
Avon Park, Florida and Farmington Hills, Michigan. Initially, the Income Fund
considered reinvesting the sales proceeds in additional restaurant properties
and therefore did not include these amounts in the determination of the gain on
sale for financial reporting purposes during 1997. However, during the nine
months ended September 30, 1998, the Income Fund declared a special
distribution of net sales proceeds from these restaurant properties payable to
the Limited Partners. Accordingly, the Income Fund recorded these subordinated
real estate disposition fees during the nine months ended September 30, 1998.
The payment of these fees is subordinated to the Limited Partners receiving
their 10% preferred return and their adjusted capital.
As a result of the sales of the restaurant properties in Eagan, Minnesota
and Jacksonville, Florida, during 1997, the Income Fund recognized gains of
$301,901 and $460,152 for financial reporting purposes during the quarter and
nine months ended September 30, 1997, respectively. No restaurant properties
were sold during the quarter and nine months ended September 30, 1998.
The Years Ended December 31, 1997, 1996 and 1995
During 1995, 1996 and 1997, the Income Fund owned and leased 36 wholly-owned
restaurant properties (including seven restaurant properties, one in each of
Eagan, Minnesota, which was sold in June 1997, Jacksonville, Florida, which was
sold in September 1997, Plant City, Florida, which was sold in October 1997,
Mathis, Texas and Avon Park, Florida which were sold in December 1997 and two
restaurant properties in Farmington Hills, Michigan, which were sold in October
1997). In addition, during 1995, 1996 and 1997, the Income Fund was a co-
venturer in three separate joint ventures that each owned and leased one
restaurant property, and during 1995 and 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. As of December 31, 1997, the Income Fund owned, either
directly, as tenants-in-common with affiliates, or through joint venture
arrangements, 36 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 $8,100 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, 1997, 1996 and 1995, the Income Fund
earned $2,024,119, $2,224,500 and $2,207,971, respectively, in rental income
from the Income Fund's wholly-owned restaurant
S-28
<PAGE>
properties described above. Rental income for 1997, as compared to 1996,
decreased approximately $218,900 primarily as the result of the sales during
1997 of the two restaurant properties in Farmington Hills, Michigan and the
restaurant properties in Plant City, Florida; Mathis, Texas; Jacksonville,
Florida; Eagan, Michigan and Avon Park, Florida. The decrease in rental income
was partially offset by an increase of approximately $12,200 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." Rental income earned from wholly-owned restaurant
properties is expected to decrease during 1998 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."
During the years ended December 31, 1997, 1996 and 1995, the Income Fund
also earned $68,920, $79,313 and $70,159, respectively, in contingent rental
income. The decrease in contingent rental income for 1997, as compared to 1996,
is primarily due to the sales of several restaurant properties, the leases of
which required the payment of contingent rental income. Contingent rental
income for the year ended December 31, 1996, as compared to 1995, increased
primarily as a result of an increase in gross sales of certain restaurant
properties that are subject to leases requiring the payment of contingent
rental income.
For the years ended December 31, 1997, 1996 and 1995, the Income Fund also
earned $389,915, $130,996 and $153,677, 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 is primarily attributable to
the fact that Show Low Joint Venture, in which the Income Fund owns a 64%
interest, recognized a gain of approximately $360,000 for financial reporting
purposes as a result of the sale of its restaurant property in January 1997, as
described above in "Liquidity and Capital Resources." Show Low Joint Venture
reinvested the majority of the net sales proceeds in an additional restaurant
property in June 1997. In addition, the increase in net income earned by joint
ventures during 1997, as compared to 1996, is attributable to the fact that
during 1997, the Income Fund acquired an interest in a restaurant property in
Mesa, Arizona, a restaurant property in Smithfield, North Carolina and a
restaurant property in Vancouver, Washington, all of which are owned with
affiliates as tenants-in-common, as described above in "Liquidity and Capital
Resources." The increase in net income earned by joint ventures during 1997, as
compared to 1996, and the decrease in net income earned by joint ventures
during 1996, as compared to 1995, is primarily a result of the fact that during
1996, the former tenant of the restaurant property in Arvada, Colorado, owned
with an affiliate as tenants-in-common, defaulted under the terms of its lease.
The Income Fund and the affiliate, as tenants-in-common, entered into a new
lease for this restaurant property with a new tenant during 1996.
During at least one of the years ended December 31, 1997, 1996 and 1995, two
of the Income Fund's lessees, Golden Corral Corporation and Restaurant
Management Services, Inc., each contributed more than 10% 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 four restaurant
properties owned with affiliates as tenants-in-common). As of December 31,
1997, 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, Golden Corral
Corporation will continue to contribute more than 10% of the Income Fund's
total rental income during 1998 and subsequent years. In addition, during at
least one of the three years ending December 31, 1997, 1996 and 1995, five
restaurant chains, Golden Corral, Popeyes, KFC, Denny's and Wendy's, each
accounted for more than 10% of the Income Fund's total rental income (including
the Income Fund's share of the rental income from three restaurant properties
owned by joint ventures and four restaurant properties owned with affiliates as
tenants-in-common). In subsequent years, it is anticipated that Golden Corral,
Popeyes, KFC and Wendy's each will continue to account for more than 10% of the
total rental income to which the Income Fund is entitled under the terms of its
leases. Any failure of these lessees or restaurant chains could materially
affect the Income Fund's income.
Operating expenses, including depreciation and amortization expense, were
$598,098, $588,923 and $617,237 for the years ended December 31, 1997, 1996 and
1995, respectively. The increase in operating
S-29
<PAGE>
expenses during 1997, as compared to 1996, is partially due to the fact that
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, and the decrease in
operating expenses during 1996, as compared to 1995, was partially offset by,
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." The decrease in operating expenses during
1996, as compared to 1995, was primarily a result of the fact that during 1995,
the Income Fund expensed the balance of unamortized lease costs totalling
approximately $35,600, relating to the original lease for the restaurant
property in Gainesville, Texas, following the termination of such lease during
the year ended December 31, 1995.
As a result of the sales of the two restaurant properties in Farmington
Hills, Michigan and the restaurant properties in Eagan, Minnesota;
Jacksonville, Florida; Plant City, Florida; Mathis, Texas and Avon Park,
Florida, as described above in "Liquidity and Capital Resources," 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, 1996 and 1995.
General
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." The adoption of this consensus did not have a material effect on the
Income Fund's financial position or results of operations.
The Income Fund's leases as of September 30, 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.
The Year 2000 problem is the result of information technology systems and
embedded systems (products which are made with microprocessor (computer) chips
such as HVAC systems, physical security systems and elevators) using a two-
digit format, as opposed to four digits, to indicate the year. Such information
technology and embedded systems may be unable to properly recognize and process
date-sensitive information beginning January 1, 2000.
The Income Fund does not have any information technology systems. Certain of
our affiliates provide all services requiring the use of information technology
systems pursuant to a management agreement with the Income Fund. The
maintenance of embedded systems, if any, at the Income Fund's properties is the
responsibility of the tenants of the properties in accordance with the terms of
the Income Fund's leases. We and our affiliates have established a team
dedicated to reviewing the internal information technology systems used in the
operation of the Income Fund, and the information technology and embedded
systems and the Year 2000 compliance plans of the Income Fund's tenants,
significant suppliers, financial institutions and transfer agent.
S-30
<PAGE>
The information technology infrastructure of our affiliates consists of a
network of personal computers and servers that were obtained from major
suppliers. The affiliates utilize various administrative and financial software
applications on that infrastructure to perform the business functions of the
Income Fund. Our inability and that of our affiliates to identify and timely
correct material Year 2000 deficiencies in the software and/or infrastructure
could result in an interruption in, or failure of, certain of the Income Fund's
business activities or operations. Accordingly, we and our affiliates have
requested and are evaluating documentation from the suppliers of our affiliates
regarding the Year 2000 compliance of their products that are used in the
business activities or operations of the Income Fund. The costs expected to be
incurred by us and our affiliates to become Year 2000 compliant will be
incurred by us and our affiliates; therefore, these costs will have no impact
on the Income Fund's financial position or results of operations.
The Income Fund has material third party relationships with its tenants,
financial institutions and 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. If
any of these third parties are unable to meet their obligations to the Income
Fund because of the Year 2000 deficiencies, such a failure may have a material
impact on the Income Fund. Accordingly, we have requested and are evaluating
documentation from the Income Fund's tenants, financial institutions, and
transfer agent relating to their Year 2000 compliance plans. At this time, we
have not yet received sufficient certifications to be assured that the tenants,
financial institutions, and transfer agent have fully considered and mitigated
any potential material impact of the Year 2000 deficiencies. Therefore, we do
not, at this time, know of the potential costs to the Income Fund of any
adverse impact or effect of any Year 2000 deficiencies by these third parties.
We currently expect that all Year 2000 compliance testing and any necessary
remedial measures on the information technology systems used in the business
activities and operations of the Income Fund will be completed prior to June
30, 1999. Based on the progress we and our affiliates have made in identifying
and addressing the Income Fund's Year 2000 issues and the plan and timeline to
complete the compliance program, we do not foresee significant risks associated
with the Income Fund's Year 2000 compliance at this time. Because we and our
affiliates are still evaluating the status of the systems used in business
activities and operations of the Income Fund and the systems of the third
parties with which the Income Fund conducts its business, we have not yet
developed a comprehensive contingency plan and are unable to identify "the most
reasonably likely worst case scenario" at this time. As we identify significant
risks related to the Income Fund's Year 2000 compliance or if the Income Fund's
Year 2000 compliance program's progress deviates substantially from the
anticipated timeline, we will develop appropriate contingency plans.
S-31
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997... F-1
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997.............................................. F-2
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997.............. F-3
Condensed Statements of Cash Flows for the Nine Months Ended September 30,
1998 and 1997............................................................ F-4
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997........................................ F-5
Report of Independent Accountants......................................... F-7
Balance Sheets as of December 31, 1997 and 1996........................... F-8
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995..................................................................... F-9
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995............................................................ F-10
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995..................................................................... F-11
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and 1995................................................................. F-12
Unaudited Pro Forma Financial Information................................. F-20
Unaudited Pro Forma Balance Sheet as of September 30, 1998................ F-21
Unaudited Pro Forma Income Statement for the Nine Months Ended September
30, 1998................................................................. F-22
Unaudited Pro Forma Income Statement for the Year Ended December 31,
1997..................................................................... F-23
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements............................................................... F-24
</TABLE>
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $3,549,043 and
$3,302,095......................................... $12,917,620 $13,164,568
Investment in joint ventures........................ 4,360,442 3,568,155
Mortgage note receivable............................ 28,731 42,734
Cash and cash equivalents........................... 850,422 470,194
Restricted cash..................................... -- 2,470,175
Receivables, less allowance for doubtful accounts of
$70,868 and $83,254................................ 57,717 80,577
Prepaid expenses.................................... 7,601 5,510
Lease costs, less accumulated amortization of
$14,156 and $11,520................................ 6,407 9,043
Accrued rental income............................... 168,738 148,103
----------- -----------
$18,397,678 $19,959,059
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable.................................... $ 18,197 $ 7,170
Accrued and escrowed real estate taxes payable...... 5,417 4,656
Distributions payable............................... 515,625 594,000
Due to related parties.............................. 175,399 126,284
Rents paid in advance and deposits.................. 26,975 25,300
----------- -----------
Total liabilities............................... 741,613 757,410
Partners' capital................................... 17,656,065 19,201,649
----------- -----------
$18,397,678 $19,959,059
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-1
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
----------------- ----------------------
1998 1997 1998 1997
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases............................. $450,831 $522,972 $1,321,975 $1,567,356
Contingent rental income............ 1,445 22,393 1,445 22,393
Interest and other income........... 17,361 17,521 60,100 34,466
-------- -------- ---------- ----------
469,637 562,886 1,383,520 1,624,215
-------- -------- ---------- ----------
Expenses:
General operating and
administrative..................... 65,025 33,496 129,895 93,225
Bad debt expense.................... -- -- -- 18,033
Professional services............... 5,119 3,557 30,759 13,907
Real estate taxes................... -- -- -- 1,259
State and other taxes............... -- -- 14,732 10,403
Depreciation and amortization....... 82,960 101,486 249,584 312,034
-------- -------- ---------- ----------
153,104 138,539 424,970 448,861
-------- -------- ---------- ----------
Income Before Equity in Earnings of
Joint Ventures, Gain on Sale of Land
and Buildings and Real Estate
Disposition Fees..................... 316,533 424,347 958,550 1,175,354
Equity in Earnings of Joint Ventures.. 104,979 40,610 319,894 333,517
Gain on Sale of Land and Buildings.... -- 301,901 -- 460,152
Real Estate Disposition Fees.......... -- -- (45,150) --
-------- -------- ---------- ----------
Net Income............................ $421,512 $766,858 $1,233,294 $1,969,023
======== ======== ========== ==========
Allocation of Net Income:
General partners.................... $ 4,214 $ 5,636 $ 12,783 $ 17,583
Limited partners.................... 417,298 761,222 1,220,511 1,951,440
-------- -------- ---------- ----------
$421,512 $766,858 $1,233,294 $1,969,023
======== ======== ========== ==========
Net Income Per Limited Partner Unit... $ 8.35 $ 15.22 $ 24.41 $ 39.03
======== ======== ========== ==========
Weighted Average Number of Limited
Partner Units Outstanding............ 50,000 50,000 50,000 50,000
======== ======== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1998 1997
----------------- ------------
<S> <C> <C>
General partners:
Beginning balance........................... $ 373,111 $ 342,375
Net income.................................. 12,783 30,736
----------- -----------
385,894 373,111
----------- -----------
Limited partners:
Beginning balance........................... 18,828,538 17,595,394
Net income.................................. 1,220,511 3,609,144
Distributions ($55.58 and $47.52 per limited
partner unit, respectively)................ (2,778,878) (2,376,000)
----------- -----------
17,270,171 18,828,538
----------- -----------
Total partners' capital....................... $17,656,065 $19,201,649
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities.......... $ 1,601,005 $ 1,579,694
----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and building.......... -- 1,259,417
Additions to land and buildings on operating
leases.......................................... -- (29,526)
Return of capital from joint venture............. -- 124,440
Investment in joint ventures..................... (834,888) --
Collections on mortgage note receivable.......... 13,694 --
Decrease (increase) in restricted cash........... 2,457,670 (1,259,417)
Payment of lease costs........................... -- (4,507)
----------- -----------
Net cash provided by investing activities...... 1,636,476 90,407
----------- -----------
Cash Flows from Financing Activities:
Proceeds from loans from corporate general part-
ner............................................. -- 721,000
Repayment of loans from corporate general part-
ner............................................. -- (721,000)
Distributions to limited partners................ (2,857,253) (1,782,000)
----------- -----------
Net cash used in financing activities.......... (2,857,253) (1,782,000)
----------- -----------
Net Increase (Decrease) in Cash and Cash Equiva-
lents............................................... 380,228 (111,899)
Cash and Cash Equivalents at Beginning of Period..... 470,194 318,756
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 850,422 $ 206,857
=========== ===========
Supplemental Schedule of Non-Cash Investing and Fi-
nancing Activities:
Mortgage note accepted in exchange for 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 end of peri-
od................................................ $ 515,625 $ 594,000
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, 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, 1997.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." The adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2. Investment in Joint Ventures
In January 1998, the Partnership acquired a 39.42% 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.
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>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land and buildings on operating leases,
less accumulated depreciation............. $8,457,326 $7,091,781
Net investment in direct financing leases.. 2,123,134 518,399
Cash....................................... 37,273 56,815
Receivables................................ 84 4,685
Accrued rental income...................... 183,483 102,913
Other assets............................... 1,056 418
Liabilities................................ 38,145 31,673
Partners' capital.......................... 10,764,211 7,743,338
Revenues................................... 938,768 399,579
Gain on sale of land and building.......... -- 360,002
Net income................................. 780,857 687,021
</TABLE>
The Partnership recognized income totalling $319,894 and $333,517 for the
nine months ended September 30, 1998 and 1997, respectively, from these joint
ventures, $104,979 and $40,610 of which was earned for the quarters ended
September 30, 1998 and 1997, respectively.
F-5
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Nine Months Ended September 30, 1998 and 1997
3. 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, 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 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.
During the nine months ended September 30, 1998 and 1997, the Partnership
declared distributions to the limited partners of $2,778,878 and $1,782,000,
respectively ($515,625 and $594,000 for each of the quarters ended September
30, 1998 and 1997, respectively). This represents distributions of $55.58 and
$35.64 per unit for the nine months ended September 30, 1998 and 1997,
respectively ($10.31 and $11.88 per unit for each of the quarters ended
September 30, 1998 and 1997, respectively). Distributions for the nine months
ended September 30, 1998, included $1,232,003 as a result of the distribution
of net sales proceeds from the 1997 sale of the Properties in Avon Park,
Florida and Farmington Hills, Michigan. This amount was applied toward the
limited partners' 10% Preferred Return. No distributions have been made to the
general partners to date.
4. Related Party Transactions
An affiliate of the Partnership 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. 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 nine months ended September 30, 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 nine months ended September 30, 1997.
F-6
<PAGE>
Report of Independent Accountants
To the Partners
CNL Income Fund II, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund II, Ltd.
(a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. 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 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 Income Fund II, Ltd. as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
February 2, 1998
F-7
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation............................. $13,164,568 $16,803,789
Investment in joint ventures.......................... 3,568,155 1,314,386
Mortgage note receivable.............................. 42,734 --
Cash and cash equivalents............................. 470,194 318,756
Restricted cash....................................... 2,470,175 --
Receivables, less allowance for doubtful accounts of
$83,254 and $126,036................................. 80,577 99,185
Prepaid expenses...................................... 5,510 4,819
Lease costs, less accumulated amortization of $11,520
and $7,537........................................... 9,043 13,026
Accrued rental income................................. 148,103 117,357
----------- -----------
$19,959,059 $18,671,318
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 7,170 $ 12,188
Accrued construction costs payable.................... -- 29,526
Accrued and escrowed real estate taxes payable........ 4,656 6,449
Distributions payable................................. 594,000 594,000
Due to related parties................................ 126,284 45,078
Rents paid in advance and deposits.................... 25,300 46,308
----------- -----------
Total liabilities................................. 757,410 733,549
Partners' capital..................................... 19,201,649 17,937,769
----------- -----------
$19,959,059 $18,671,318
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases......... $2,024,119 $2,224,500 $2,207,971
Contingent rental income.................... 68,920 79,313 70,159
Interest and other income................... 64,900 21,075 23,947
---------- ---------- ----------
2,157,939 2,324,888 2,302,077
---------- ---------- ----------
Expenses:
General operating and administrative........ 137,924 131,628 121,317
Professional services....................... 21,576 26,634 25,161
Bad debt expense............................ 27,965 -- 4,745
Real estate taxes........................... 410 4,647 3,588
State and other taxes....................... 10,403 4,255 5,633
Depreciation and amortization............... 399,820 421,759 456,793
---------- ---------- ----------
598,098 588,923 617,237
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Ventures, Gain on Sale of Land and Buildings
and Lease Termination Income................. 1,559,841 1,735,965 1,684,840
Equity in Earnings of Joint Ventures.......... 389,915 130,996 153,677
Gain on Sale of Land and Buildings............ 1,476,124 -- --
Lease Termination Income...................... 214,000 -- --
---------- ---------- ----------
Net Income.................................... $3,639,880 $1,866,961 $1,838,517
========== ========== ==========
Allocation of Net Income:
General partners............................ $ 30,736 $ 18,670 $ 18,385
Limited partners............................ 3,609,144 1,848,291 1,820,132
---------- ---------- ----------
$3,639,880 $1,866,961 $1,838,517
========== ========== ==========
Net Income Per Limited Partner Unit........... $ 72.18 $ 36.97 $ 36.40
========== ========== ==========
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 II, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<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, 1994.. $162,000 $143,320 $25,000,000 $(17,941,377) $14,310,170 $(2,689,822) $18,984,291
Distributions to limited
partners ($47.52 per
limited partner unit)..... -- -- -- (2,376,000) -- -- (2,376,000)
Net income................. -- 18,385 -- -- 1,820,132 -- 1,838,517
-------- -------- ----------- ------------ ----------- ----------- -----------
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
======== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash Equiv-
alents:
Cash Flows from Operating Activities:
Cash received from tenants............... $2,054,519 $2,295,531 $2,198,821
Distributions from joint ventures........ 147,995 164,718 181,908
Cash paid for expenses................... (80,744) (130,042) (229,879)
Interest received........................ 36,142 17,524 17,517
---------- ---------- ----------
Net cash provided by operating activi-
ties................................... 2,157,912 2,347,731 2,168,367
---------- ---------- ----------
Cash Flows from Investing Activities:
Proceeds from sale of land and build-
ings.................................... 4,659,078 -- --
Proceeds received from tenant in connec-
tion with termination of leases......... 214,000 -- --
Additions to land and buildings on oper-
ating leases............................ (29,526) (11,107) (4,323)
Investment in joint ventures............. (2,136,289) -- (121)
Return of capital from joint venture..... 124,440 -- --
Decrease (increase) in restricted cash... (2,457,670) 25,000 (25,000)
Payment of lease costs................... (4,507) (1,930) (12,426)
Other.................................... -- (25,000) 25,000
---------- ---------- ----------
Net cash provided by (used in) investing
activities............................. 369,526 (13,037) (16,870)
---------- ---------- ----------
Cash Flows from Financing Activities:
Proceeds from loans from corporate gen-
eral partner............................ 721,000 203,900 --
Repayment of loans from corporate general
partner................................. (721,000) (203,900) --
Distributions to limited partners........ (2,376,000) (2,376,000) (2,376,000)
---------- ---------- ----------
Net cash used in financing activities.... (2,376,000) (2,376,000) (2,376,000)
---------- ---------- ----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................... 151,438 (41,306) (224,503)
Cash and Cash Equivalents at Beginning of
Year...................................... 318,756 360,062 584,565
---------- ---------- ----------
Cash and Cash Equivalents at End of Year... $ 470,194 $ 318,756 $ 360,062
========== ========== ==========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income................................ $3,639,880 $1,866,961 $1,838,517
---------- ---------- ----------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation............................. 395,837 417,776 417,614
Amortization............................. 3,983 3,983 39,179
Gain on sale of land and buildings....... (1,476,124) -- --
Lease termination income................. (214,000) -- --
Equity in earnings of joint ventures, net
of distributions........................ (241,920) 33,722 28,231
Decrease (increase) in receivables....... 23,799 (8,803) (1,075)
Increase in prepaid expenses............. (691) (1,570) (2,211)
Increase in accrued rental income........ (30,746) (33,234) (34,086)
Decrease in other assets................. -- 1,750 --
Increase (decrease) in accounts payable
and accrued expenses.................... (2,304) 4,014 (21,043)
Increase (decrease) in due to related
parties................................. 81,206 35,824 (65,627)
Increase (decrease) in rents paid in ad-
vance and deposits...................... (21,008) 27,308 (31,132)
---------- ---------- ----------
Total adjustments....................... (1,481,968) 480,770 329,850
---------- ---------- ----------
Net Cash Provided by Operating Activities.. $2,157,912 $2,347,731 $2,168,367
========== ========== ==========
Supplemental Schedule of Non-Cash Investing
and Financing Activities:
Mortgage note accepted as consideration in
sale of land and building................ $ 42,000 $ -- $ --
========== ========== ==========
Distributions declared and unpaid at De-
cember 31................................ $ 594,000 $ 594,000 $ 594,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-11
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
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.
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.
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
property in Arvada, Colorado, the property in Mesa, Arizona, the property in
Smithfield, North Carolina, and the property in Vancouver, Washington, 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
F-12
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
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)
3. Land and Buildings on Operating Leases
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Land........................................... $ 6,608,400 $ 8,052,723
Buildings...................................... 9,858,263 12,567,157
----------- -----------
16,466,663 20,619,880
Less accumulated depreciation.................. (3,302,095) (3,816,091)
----------- -----------
$13,164,568 $16,803,789
=========== ===========
</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 12). 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, 1997, 1996 and 1995, the Partnership recognized $30,746,
$33,234 and $34,086, 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, 1997:
<TABLE>
<S> <C>
1998......................................................... $ 1,621,842
1999......................................................... 1,609,878
2000......................................................... 1,538,676
2001......................................................... 1,554,429
2002......................................................... 1,387,650
Thereafter................................................... 6,256,157
-----------
$13,968,632
===========
</TABLE>
F-14
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 Partnership which have the same general partners. The
Partnership also has a 33.87% interest in a property in Arvada, Colorado, with
an affiliate 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 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, 1997, 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, 1997, the Partnership owned a 57.77% 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, 1997, 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, 1997, the Partnership owned a 37.01% interest in
this property.
Kirkman Road Joint Venture, Holland Joint Venture, Show Low Joint Venture
and the Partnership and affiliates, as tenants-in-common in four separate
tenancy-in-common arrangements, each own and lease one
F-15
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 four properties held as tenants-in-common with affiliates at
December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation....................... $7,091,781 $2,664,752
Net investment in direct financing lease........ 518,399 --
Cash............................................ 56,815 21,905
Receivables..................................... 4,685 9,980
Accrued rental income........................... 102,913 70,782
Other assets.................................... 418 44,263
Liabilities..................................... 31,673 28,558
Partners' capital............................... 7,743,338 2,783,124
Revenues........................................ 399,579 363,338
Gain on sale of land and building............... 360,002 --
Net income...................................... 687,021 250,026
</TABLE>
The Partnership recognized income totalling $389,915, $130,996 and $153,677
for the years ended December 31, 1997, 1996 and 1995, 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, is
collateralized by personal property and is being collected in 18 monthly
installments of interest only and thereafter, the entire principal balance
shall become due. As of December 31, 1997, the mortgage note receivable balance
was $42,734, including accrued interest of $734.
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.
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, 1997 and 1996, the balances in the
allowance for doubtful accounts of $74,590 and $92,987, respectively, including
accrued interest of $2,654 and $3,493, respectively, represents the uncollected
amounts under this promissory note.
F-16
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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, 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 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.
During each of the years ended December 31, 1997, 1996 and 1995, the
Partnership declared distributions to the limited partners of $2,376,000. No
distributions have been made to the general partners to date.
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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes.......................... $3,639,880 $1,866,961 $1,838,517
Depreciation for financial
reporting purposes in excess of
depreciation for tax reporting
purposes.......................... 19,440 20,922 20,840
Gain on sale of land and buildings
for financial reporting purposes
in excess of gain for tax
reporting purposes................ (638,739) -- --
Equity in earnings of joint
ventures for tax reporting
purposes less than equity in
earnings of joint ventures for
financial reporting purposes...... (146,161) (1,240) (7,297)
Allowance for doubtful accounts.... (42,782) 25,225 2,449
Accrued rental income.............. (30,746) (33,234) (34,086)
Rents paid in advance.............. (21,008) 22,508 (34,132)
---------- ---------- ----------
Net income for federal income tax
purposes.......................... $2,779,884 $1,901,142 $1,786,291
========== ========== ==========
</TABLE>
F-17
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 parent company of CNL Securities
Corp. and CNL Fund Advisors, Inc. James M. Seneff, Jr. is director and chief
executive officer of CNL Securities Corp. and 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, is director and president
of CNL Securities Corp., is director, vice chairman of the board of directors
and treasurer of CNL Fund Advisors, Inc. and served as president of CNL Fund
Advisors, Inc. through October 1997.
During the years ended December 31, 1997, 1996 and 1995, certain Affiliates
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 Affiliates 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 property held as tenants-in-
common with an affiliate 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, 1997, 1996 and 1995.
Certain Affiliates are 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 Affiliates provide 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, cumulative 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, 1997, 1996 and 1995, the Affiliates
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $78,139, $79,624 and $81,023 for the years
ended December 31, 1997, 1996 and 1995, respectively, for such services.
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Due to Affiliates:
Expenditures incurred on behalf of the Partnership... $ 59,608 $21,079
Accounting and administrative services............... 66,676 23,999
-------- -------
$126,284 $45,078
======== =======
</TABLE>
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 percent of interest
in the costs incurred by CNL BB Corp. to acquire and carry the property,
including closing costs.
F-18
<PAGE>
CNL INCOME FUND II, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 four properties held as tenants-in-common with affiliates) for at least
one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Corporation.................... $408,333 $403,875 $410,226
Restaurant Management Services, Inc.......... 251,480 243,270 243,358
</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 four properties held as tenants-in-common with
affiliates) for at least one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Family Steakhouse
Restaurants............................... $408,333 $403,875 $410,226
Wendy's Old Fashioned Hamburger
Restaurants............................... 381,567 421,165 412,949
KFC........................................ 278,348 358,463 352,939
Popeyes Famous Fried Chicken Restaurants... 251,480 243,270 243,358
Denny's.................................... 221,580 388,050 372,639
</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. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
12. Subsequent Events
In January 1998, the Partnership acquired a property in Overland Park,
Kansas, as tenants-in-common with affiliates of the general partners. In
connection therewith, the Partnership contributed approximately $634,100 for a
39.42% interest in such property. The Partnership will account for its
investment in this property using the equity method since the Partnership will
share control with affiliates.
In addition, in January 1998, the Partnership acquired a property in
Memphis, Tennessee, as tenants-in-common with affiliates of the general
partners. In connection therewith, the Partnership contributed $201,300 for a
13.38% interest in such property. The Partnership will account for its
investment in this property using the equity method since the Partnership will
share control with affiliates.
F-19
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to the
Company gives effect to 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 the Company, the
historical combined financial information of CNL Income Fund II, Ltd. (the "CNL
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 the Company, the CNL Income
Fund, Advisor and CNL Restaurant Financial Services Group. The pro forma
balance sheet assumes that the Acquisition occurred on September 30, 1998; the
pro forma consolidated statements of earnings assume that the Property
Acquisitions (as defined on page ) and the Acquisition occurred on January 1,
1997.
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.
UNAUDITED PRO FORMA BALANCE SHEET
September 30, 1998
<TABLE>
<CAPTION>
Historical Pro Forma
-------------------------------------------------------------------------------- ----------------------------
CNL Income CNL Financial CNL Financial Combined
APF Fund II, Ltd. Advisor Services, Inc. Corp. Portfolios Adjustments Pro Forma
------------ ------------- ---------- -------------- ------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Land and
buildings on
operating
leases, net..... $298,967,972 $12,917,620 $ 0 $ 0 $ 0 $311,885,592 $ 6,257,390 (1)
26,052,741 (2) $344,195,723
Net investment in
direct financing
leases.......... 117,028,760 0 0 0 0 117,028,760 -- 117,028,760
Mortgages and
notes
receivable...... 33,523,506 28,731 0 0 173,776,981 207,329,218 849,195 (2) 208,178,413
Other
Investments..... 16,200,316 0 200,000 0 6,561,628 22,961,944 -- 22,961,944
Investment in
joint ventures.. 631,374 4,360,442 0 0 0 4,991,816 1,656,984 (1) 6,648,800
Cash and cash
equivalents..... 90,674,289 850,422 283,300 599,997 5,098,033 97,506,041 (267,731)(1)
(8,933,000)(1)
(26,901,936)(2) 61,403,374
Receivables...... 575,104 57,717 7,544,985 6,824,632 517,471 15,519,909 (8,024,778)(3) 7,495,131
Accrued rental
income.......... 3,071,451 168,738 0 0 0 3,240,189 (168,738)(1) 3,071,451
Other assets..... 5,711,195 14,008 401,524 295,570 3,854,477 10,276,774 41,981,527 (1)
(3,668,841)(1) 48,589,460
------------ ----------- ---------- ---------- ------------ ------------ ----------- ------------
Total assets.... $566,383,967 $18,397,678 $8,429,809 $7,720,199 $189,808,590 $790,740,243 $28,832,813 $819,573,056
============ =========== ========== ========== ============ ============ =========== ============
Liabilities &
Equity:
Accounts payable
and accrued
liabilities..... $ 379,496 $ 23,614 $ 449,751 $ 193,949 $ 1,236,138 $ 2,282,948 $ -- $ 2,282,948
Accrued
construction
costs payable... 3,045,304 0 0 0 0 3,045,304 -- 3,045,304
Distributions
payable......... 0 515,625 2,220,000 0 0 2,735,625 -- 2,735,625
Due to related
parties......... 2,552,411 175,399 0 1,452,512 6,556,920 10,737,242 (8,024,778)(3) 2,712,464
Income tax
payable......... 0 0 1,989,003 0 1,001,861 2,990,864 (2,990,864)(4) 0
Line of credit... 6,765,575 0 0 0 0 6,765,575 -- 6,765,575
Notes payable.... 0 0 390,398 28,462 175,528,203 175,947,063 -- 175,947,063
Deferred income.. 1,015,758 0 0 0 0 1,015,758 -- 1,015,758
Rents paid in
advance......... 437,497 26,975 0 0 0 464,472 -- 464,472
Minority
interest........ 282,544 0 0 0 0 282,544 -- 282,544
Common Stock..... 621,187 0 9,800 2,000 200 633,187 134,665 (1) 767,852
Additional paid
in capital...... 556,830,578 0 482,964 5,231,827 3,887,496 566,432,865 136,915,986 (1) 703,348,851
Accumulated
distributions in
excess of net
earnings........ (5,546,383) 0 2,887,893 811,449 1,597,772 (249,269) (82,536,995)(1)
2,990,864 (4) (79,795,400)
Partners
capital......... 0 17,656,065 0 0 0 17,656,065 (17,656,065)(1) 0
------------ ----------- ---------- ---------- ------------ ------------ ----------- ------------
Total
liabilities and
equity......... $566,383,967 $18,397,678 $8,429,809 $7,720,199 $189,808,590 $790,740,243 $28,832,813 $819,573,056
============ =========== ========== ========== ============ ============ =========== ============
</TABLE>
F-21
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA INCOME STATEMENT
September 30, 1998
<TABLE>
<CAPTION>
Historical Pro Forma
------------------------------------------------------------------------------ ---------------------------
CNL Income CNL Financial CNL Financial Combined
APF Fund II, Ltd. Advisor Services, Inc. Corp. Portfolios Adjustments Pro Forma
----------- ------------- ---------- -------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and
earned income.. $22,947,199 $1,323,420 $ 0 $ 0 $ 0 $24,270,619 $ 9,635,208 (a)
9,734 (b) $33,915,561
Fees............ 0 0 21,405,127 5,115,549 6,817 26,527,493 (21,006,601)(c)
(2,875,906)(d) 2,644,986
Interest and
other income... 6,117,911 60,100 751 432,506 18,031,141 24,642,409 1,526,547 (e) 26,168,956
----------- ---------- ---------- --------- ---------- ----------- ----------- -----------
Total revenue... 29,065,110 1,383,520 21,405,878 5,548,055 18,037,958 75,440,521 (12,711,018) 62,729,503
Expenses:
General and
administrative.. 1,539,004 160,654 6,701,115 4,107,311 2,597,171 15,105,255 (1,302,824)(f)
(1,415,100)(g)
(27,945)(h) 12,359,386
Advisory fees... 1,248,393 0 0 0 1,026,231 2,274,624 (2,274,624)(i) 0
Fees to
Restaurant
Financial
Services
Group.......... 0 0 256,456 1,569,202 0 1,825,658 (1,825,658)(n) 0
Interest........ 0 0 105,668 3,534 14,230,999 14,340,201 (68,670)(m) 14,271,531
State taxes..... 397,569 14,732 15,226 18,564 201,616 647,707 33,370 (j) 681,077
Depreciation --
other.......... 0 0 75,607 55,056 0 130,663 -- 130,663
Depreciation --
property....... 2,684,924 246,948 0 0 0 2,931,872 1,557,623 (k) 4,489,495
Amortization.... 8,096 2,636 55,932 138 945,299 1,012,101 1,574,307 (l) 2,586,408
----------- ---------- ---------- --------- ---------- ----------- ----------- -----------
Total operating
expenses....... 5,877,986 424,970 7,210,004 5,753,805 19,001,316 38,268,081 (3,749,521) 34,518,560
----------- ---------- ---------- --------- ---------- ----------- ----------- -----------
Operating
earnings
(losses)........ 23,187,124 958,550 14,195,874 (205,750) (963,358) 37,172,440 (8,961,497) 28,210,943
Equity in
earnings of
joint
ventures/minority
interest....... (23,271) 319,894 0 12,452 0 309,075 -- 309,075
Gain on
securitization.. 0 0 0 0 3,018,268 3,018,268 -- 3,018,268
Other expenses.. 0 (45,150) 0 0 0 (45,150) -- (45,150)
----------- ---------- ---------- --------- ---------- ----------- ----------- -----------
Net earnings
(losses) before
income taxes.... 23,163,853 1,233,294 14,195,874 (193,298) 2,054,910 40,454,633 (8,961,497) 31,493,136
Provision
(credit) for
federal income
taxes........... 0 0 5,607,415 (81,229) 789,895 6,316,081 (6,316,081)(o) 0
----------- ---------- ---------- --------- ---------- ----------- ----------- -----------
Net income....... $23,163,853 $1,233,294 $8,588,459 $(112,069) $1,265,015 $34,138,552 $(2,645,416) $31,493,136
=========== ========== ========== ========= ========== =========== =========== ===========
Earnings per
share........... $ 0.49 $ 0.44
=========== ===========
Shares
outstanding:
Weighted
average........ 47,633,909 72,083,919 (p)
=========== ===========
End of period... 62,118,679 76,785,173
=========== ===========
</TABLE>
F-22
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA INCOME STATEMENT
For the year ended December 31, 1997
<TABLE>
<CAPTION>
Historical Pro Forma
------------------------------------------------------------------------------ ---------------------------
CNL Income CNL Financial CNL Financial Combined
APF Fund II, Ltd. Advisor Services, Inc. Corp. Portfolios Adjustments Pro Forma
----------- ------------- ---------- -------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and
earned income.. $15,490,615 $2,093,039 $ 0 $ 0 $ 0 $17,583,654 $24,048,982 (a)
23,656 (b) $41,656,292
Fees............ 0 0 8,310,836 5,965,110 73,704 14,349,650 (9,069,522)(c)
(2,662,141)(d) 2,617,987
Interest and
other income... 3,967,318 64,900 165,569 0 10,932,843 15,130,630 249,395 (e) 15,380,025
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Total Revenue... 19,457,933 2,157,939 8,476,405 5,965,110 11,006,547 47,063,934 12,590,370 59,654,304
Expenses:
General and
administrative.. 1,010,725 187,875 4,266,169 1,889,904 828,848 8,183,521 (734,757)(f)
(1,619,238)(g)
(34,077)(h) 5,795,449
Advisory fees... 804,879 0 0 0 1,802,532 2,607,411 (2,607,411)(i) 0
Fees to
Restaurant
Financial
Services
Group.......... 0 0 151,041 594,041 0 745,082 (745,082)(n) 0
Interest........ 0 0 162,153 183,315 8,320,000 8,665,468 (81,594)(m) 8,583,874
State taxes..... 251,358 10,403 12,084 1,294 1,600 276,739 13,367 (j) 290,106
Depreciation--
other.......... 0 0 48,490 14,637 0 63,127 -- 63,127
Depreciation--
property....... 1,784,269 395,837 0 0 0 2,180,106 3,225,243 (k) 5,405,349
Amortization.... 10,793 3,983 18,093 61,324 916,577 1,010,770 2,099,076 (l) 3,109,846
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Total operating
expenses....... 3,862,024 598,098 4,658,030 2,744,515 11,869,557 23,732,224 (484,473) 23,247,751
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Operating
earnings
(losses)........ 15,595,909 1,559,841 3,818,375 3,220,595 (863,010) 23,331,710 13,074,843 36,406,553
Equity in
earnings of
joint
ventures/minority
interest....... (31,453) 389,915 0 (126,627) 0 231,835 -- 231,835
Gain on sale of
properties..... 0 1,476,124 0 0 0 1,476,124 -- 1,476,124
Other income.... 0 214,000 0 0 0 214,000 -- 214,000
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Net earnings
before income
taxes........... 15,564,456 3,639,880 3,818,375 3,093,968 (863,010) 25,253,669 13,074,843 38,328,512
Provision
(credit) for
federal income
taxes.......... 0 0 1,508,258 1,272,133 (317,785) 2,462,606 (2,462,606)(o) 0
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Net earnings
(losses)........ $15,564,456 $3,639,880 $2,310,117 $1,821,835 $ (545,225) $22,791,063 $15,537,449 $38,328,512
=========== ========== ========== ========== =========== =========== =========== ===========
Earnings per
share........... $ 0.66 $ 0.53
=========== ===========
Shares
outstanding:
Weighted
average........ 23,423,868 72,753,963(p)
=========== ===========
End of period... 36,192,971 72,753,963
=========== ===========
</TABLE>
F-23
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of September 30, 1998 reflects the
transactions of the acquisition of the CNL Income Fund, Advisor and CNL
Restaurant Financial Services Group (the "Acquisition Proposal") as set forth
in this Proxy Statement. The Pro Forma Statements of Earnings for the nine
months ended September 30, 1998, and for the year ended December 31, 1997, have
been prepared to reflect a) the issuance of additional shares and the property
acquisitions completed from January 1, 1997 through November 30, 1998
("Offering and Property Transactions") and b) the transactions of the
Acquisition Proposal as set forth in this Proxy Statement. This unaudited pro
forma financial information has been prepared utilizing the historical
financial statements of the Company and the historical combined financial
information of the CNL Income Fund, Advisor and CNL Restaurant Financial
Services Group and should be read in conjunction with the selected historical
financial data and accompanying notes of the Company, the CNL Income Fund,
Advisor and the CNL Restaurant Financial Services Group. The Pro Forma Balance
Sheet was prepared as if the Offering and Property Transactions and the
Acquisition Proposal occurred on September 30, 1998. The Pro Forma Statements
of Earnings were prepared as if the Property Acquisitions and the Acquisition
Proposal occurred as of January 1, 1997. The pro forma information is unaudited
and is not necessarily indicative of the consolidated operating results which
would have occurred if the Offering and Acquisition Transaction and the
Acquisition Proposal 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 Acquisition
Proposal have been made. Capitalized terms have the meanings as defined in the
Proxy Statement.
2. Method of Accounting
The acquisition of the CNL Income Fund and the CNL Restaurant Financial
Services Group will be accounted for under the purchase accounting method. The
Company 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, the Company 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 operating expense on the Company's consolidated statements of
earnings, but the Company will not deduct this expense for purposes of
calculating funds from operations due to the non-recurring and non-cash nature
of the expense.
All significant intercompany balances and transactions between the Company,
CNL Income Fund, Advisor and CNL Restaurant Financial Services Group have been
eliminated in the pro forma financial statements.
3. Adjustments to Pro Forma Balance Sheet
The following describes the pro forma adjustments to the Pro Forma Balance
Sheet as of September 30, 1998, as if the Acquisition was consummated on such
date. For purposes of the pro forma financial statements, it is assumed that at
an annual meeting of stockholders, the stockholders of the Company approved an
amendment to increase the number of authorized shares to an amount necessary to
enable the Company to issue the shares for the Acquisition.
(1) Represents the payment of $267,731 in cash and the issuance of
14,666,494 common shares in consideration for the purchase of the CNL
Income Fund, Advisor and CNL Restaurant Financial Services Group at
September 30, 1998 at a share price of $10 plus estimated transaction
costs.
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
The acquisition of the CNL Income Fund and the CNL Restaurant Financial
Services Group has been accounted for under the purchase accounting method
and goodwill was recognized to the extent that the consideration paid
exceeded the fair value of the net tangible assets acquired. As for the
acquisition of the Advisor from a related party, the consideration paid in
excess of the fair value of the net tangible assets received has been
accounted for as costs incurred in acquiring the Advisor from a related
party because the Advisor has not been deemed to qualify as a "business"
for purposes of applying APB Opinion No. 16 "Business Combinations." Upon
consummation of the Acquisition, this expense will be recorded as an
operating expense on the Company's statement of earnings. The Company will
not deduct this expense for purposes of calculating funds from operations
due to the nonrecurring and non-cash nature of the expense. As of September
30, 1998, $249,403 of transaction costs had been incurred by the Company.
<TABLE>
<S> <C>
CNL Income Fund............................................ $ 23,932,669
Advisor.................................................... 76,000,000
CNL Restaurant Financial Services Group.................... 47,000,000
------------
Total Purchase Price (cash and shares)................... 146,932,669
Less cash paid to CNL Income Fund.......................... (267,731)
------------
Share consideration...................................... 146,664,938
Transaction costs of the Company........................... 8,933,000
------------
Total costs incurred..................................... $155,597,938
============
</TABLE>
In addition, the Company i) used $8,933,000 in cash to pay the transaction
costs related to the Acquisition, ii) made an upward adjustment to the CNL
Income Fund carrying value of land and building on operating leases by
$6,257,390, investment in joint venture by $1,656,984, made downward
adjustments to the carrying value of accrued rental income of $168,738,
made downward adjustments to other assets of $3,668,841 to adjust
historical values to fair value, iii) recorded goodwill of $41,981,527 for
the acquisition of the CNL Restaurant Financial Services Group, iv) reduced
retained earnings by $77,239,881 for the excess consideration paid over the
net assets of the Advisor and removed the historical common stock balance
of $12,000, additional paid in capital balance of $9,602,287, retained
earnings balance of $5,297,114 and partners capital balance of $17,656,065
of the CNL Income Fund, Advisor and CNL Restaurant Financial Services
Group.
(2) Represents the use of $26,901,936 in cash and cash equivalents at
September 30, 1998 to acquire $26,052,741 in properties and issue
$849,195 in mortgage notes which occurred from October 1, 1998 through
November 30, 1998.
(3) Represents the elimination by the CNL Income Fund of $175,399 in
related party payables recorded as receivables by the Advisor, the
elimination by the CNL Restaurant Financial Services Group of
$6,641,379 in related party payables recorded as receivables by CNL
Restaurant Financial Services Group and the elimination by the Company
of $1,208,000 in related party payables recorded as receivables by the
Advisor.
(4) Represents the elimination of income taxes payable of $2,990,864 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.
F-25
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
4. Adjustments to Pro Forma Income Statements
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the nine months ended September 30, 1998, as
if the Acquisition was consummated as of January 1, 1997.
(a) Represents rental and earned income as if 1) properties that had
been previously constructed and acquired from January 1, 1998
through November 30, 1998 had been acquired and leased on January
1, 1997 and 2) properties that were developed by the Company from
January 1, 1998 through November 30, 1998 had been placed in
service on May 1, 1997 (assumes a four month development period).
<TABLE>
<S> <C>
Rental and earned income on Property Transactions by
APF..................................................... $9,635,208
</TABLE>
(b) Represents $9,734 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, 1997.
(c) Represents the elimination of intercompany fees between the
Company, the CNL Income Fund, the Advisor and the CNL Restaurant
Financial Services Group:
<TABLE>
<S> <C>
Origination fees........................................ $ (1,569,202)
Secured equipment lease fee............................. (44,426)
Advisory fees........................................... (1,722,383)
Reimbursement of administrative costs................... (288,707)
Acquisition fees........................................ (15,392,193)
Underwriting fees....................................... (254,945)
Administrative fees..................................... (148,491)
Executive fee........................................... (310,000)
Guarantee fees.......................................... (93,750)
Servicing fee........................................... (1,014,117)
Development fees........................................ (166,876)
Consulting fee.......................................... (1,511)
------------
Total................................................. $(21,006,601)
============
</TABLE>
(d) Represents the deferral of $2,875,906 in origination fees collected
by CNL Restaurant Financial Services Group that should be amortized
over the term of the loans originated (20 years) in accordance with
the Statement of Financial Accounting Standards #91 "Accounting for
Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases."
(e) Represents interest income of $1,318,870 earned from Other
Investments acquired and mortgage notes issued from January 1, 1998
through November 30, 1998 as if this had occurred on January 1,
1997 and the amortization of $207,677 of deferred origination fees
collected during the year ended December 31, 1997 and during the
nine months ended September 30, 1998, which were capitalized and
deferred in (d) above as if they had been collected on January 1,
1997. These deferred fees are being amortized and recorded as
interest income.
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(f) Represents the elimination of intercompany expenses paid between
the Company, the CNL Income Fund, the Advisor and the CNL
Restaurant Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs.................... $ (288,707)
Servicing fee............................................ (1,014,117)
-----------
$(1,302,824)
===========
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during
the period as if 1) costs relating to properties developed by the
Company were subject to capitalization during the entire period and
2) costs relating to properties not developed by the Company were
subject to capitalization up through the time that EITF 97-11
became effective.
<TABLE>
<S> <C>
General and administrative costs......................... $(1,415,100)
</TABLE>
(h) Represents savings of $27,945 in professional services and
administrative expenses resulting from reporting on one combined
Company versus 22 separate entities.
(i) Represents the elimination of advisory fees between the Company,
the CNL Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Advisory fees............................................. $(1,722,383)
Administrative fees....................................... (148,491)
Executive fee............................................. (310,000)
Guarantee fees............................................ (93,750)
-----------
$(2,274,624)
===========
</TABLE>
(j) Represents additional income taxes of $33,370 resulting from
assuming that acquisitions from January 1, 1998 through November
30, 1998 had been acquired on January 1, 1997 and assuming that the
CNL Income Fund had operated under a REIT structure.
(k) Represents an increase in depreciation of the building portion of
the properties acquired from January 1, 1998 through November 30,
1998 as if they had been acquired on January 1, 1997 and the step
up in basis referred to in footnote (2) from acquiring the CNL
Income Fund portfolio using the straight-line method over the
estimated useful lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense........................................ $1,557,623
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of
the CNL Restaurant Financial Services Group referred to in footnote
(2)
<TABLE>
<S> <C>
Amortization of goodwill................................... $1,574,307
</TABLE>
(m) Represents elimination of interest expense recorded for the
amortization of $350,000 in arrangement fees collected during the
year ended December 31, 1997 which were eliminated in II (d )
below.
<TABLE>
<S> <C>
Interest expense............................................. $(68,670)
</TABLE>
F-27
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(n) Represents the elimination of fees paid to affiliates for fees
incurred between the Company, the CNL Income Fund, the Advisor and
the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees.......................................... $(1,569,202)
Underwriting fees......................................... (254,945)
Consulting fee............................................ (1,511)
-----------
$(1,825,658)
===========
</TABLE>
(o) Represents the elimination of $6,316,081 in the provision for
income taxes as a result of the Acquisition. The Company expects to
continue to qualify as a REIT and does not expect to incur federal
income taxes.
(p) Common shares issued during the period required to fund
acquisitions as if they had been acquired on January 1, 1997 were
assumed to have been issued and outstanding as of January 1, 1998.
For purposes of the proforma financial statements, it is assumed
that the stockholders approved the proposal to increase the number
of authorized common shares of the Company.
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the year ended December 31, 1997, as if the
Acquisition was consummated as of January 1, 1997.
(a) Represents rental and earned income as if 1) properties that had
been previously constructed and acquired from January 1, 1998
through November 30, 1998 had been acquired and leased on January
1, 1997 and 2) properties that were developed by the Company from
January 1, 1997 through November 30, 1998 had been placed in
service on May 1, 1997 (assumes a four month development period).
<TABLE>
<S> <C>
Rental and earned income on Property Transactions by the
Company................................................ $24,048,982
</TABLE>
(b) Represents $23,656 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the CNL Income Fund as if the
leases had been acquired on January 1, 1997.
(c) Represents the elimination of intercompany fees between the
Company, the CNL Income Fund, the Advisor and the CNL Restaurant
Financial Services Group:
<TABLE>
<S> <C>
Origination fees......................................... $ (594,041)
Secured equipment lease fee.............................. (375,219)
Advisory fees............................................ (1,775,680)
Reimbursement of administrative costs.................... (135,769)
Acquisition fees......................................... (3,887,483)
Underwriting fees........................................ (151,041)
Administrative fees...................................... (269,231)
Executive fee............................................ (250,000)
Guarantee fees........................................... (312,500)
Arrangement fees......................................... (350,000)
Servicing fee............................................ (598,988)
Development fees......................................... (369,570)
-----------
Total.................................................. $(9,069,522)
===========
</TABLE>
F-28
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(d) Represents the deferral of $2,662,141 in origination fees collected
by CNL Restaurant Financial Services Group that should be amortized
over the term of the loans originated (20 years) in accordance with
the Statement of Financial Accounting Standards #91 "Accounting for
Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases."
(e) Represents the elimination of interest income of $1,931,331 earned
during the year ended December 31, 1997 assuming all monies raised
during 1997 and all cash held on January 1, 1997 was used to effect
the Acquisition on January 1, 1997, represents interest income of
$2,047,619 earned from Other Investments acquired and mortgage
notes issued from January 1, 1998 through November 30, 1998 as if
this had occurred on January 1, 1997 and the recognition of
$133,107 of origination fees collected during the year ended
December 31, 1997 which were deferred in (d) and are being
amortized and recorded as interest income.
(f) Represents the elimination of intercompany expenses paid between
the Company, the CNL Income Fund, the Advisor and the CNL
Restaurant Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs...................... $(135,769)
Servicing fee.............................................. (598,988)
---------
$(734,757)
=========
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during
the period as if 1) costs relating to properties developed by the
Company were subject to capitalization during the entire period and
2) costs relating to properties not developed by the Company were
subject to capitalization up through the time that EITF 97-11
became effective.
<TABLE>
<S> <C>
General and administrative costs......................... $(1,619,238)
</TABLE>
(h) Represents savings of $34,077 in professional services and
administrative expenses resulting from reporting on one combined
Company versus 22 separate entities.
(i) Represents the elimination of advisory fees between the Company,
the CNL Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Advisory fees............................................. $(1,775,680)
Administrative fees....................................... (269,231)
Executive fee............................................. (250,000)
Guarantee fees............................................ (312,500)
-----------
$(2,607,411)
===========
</TABLE>
(j) Represents additional income taxes of $13,367 resulting from
assuming that acquisitions from January 1, 1997 through November
30, 1998 had been acquired on January 1, 1997 and assuming that the
CNL Income Fund had operated under a REIT structure.
(k) Represents increase in depreciation of the building portion of the
properties acquired from January 1, 1997 through November 30, 1998
as if they had been acquired on January 1, 1997
F-29
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
and the step up in basis referred to in footnote (2) from acquiring
the CNL Income Fund portfolio using the straight-line method over
the estimated useful lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense........................................ $3,225,243
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of
the CNL Restaurant Financial Services Group referred to in footnote
(2)
<TABLE>
<S> <C>
Amortization of goodwill................................... $2,099,076
</TABLE>
(m) Represents elimination of yearly amortization of arrangement fees
of $350,000 capitalized as deferred costs and amortized as interest
expense and the capitalization of interest expense during the
period that properties were under development.
<TABLE>
<S> <C>
Amortization of arrangement fees............................ $(24,144)
Capitalization of interest during development period........ (57,450)
--------
$(81,594)
========
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees
incurred between the Company, the CNL Income Fund, the Advisor and
the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees............................................ $(594,041)
Underwriting fees........................................... (151,041)
---------
(745,082)
=========
</TABLE>
(o) Represents the elimination of $2,462,606 in the provision for
income taxes as a result of the Acquisition. The Company expects to
continue to qualify as a REIT and does not expect to incur federal
income taxes.
(p) Common shares issued during the period were assumed to have been
issued and outstanding as of January 1, 1997. For purposes of the
proforma financial statement, it is assumed that the stockholders
approved the proposal to increase the number of authorized common
shares of the Company.
F-30
<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 eighteen 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
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.
B-1
<PAGE>
"Affiliated Group" means any affiliated group within the meaning of Code
(S)1504, or any similar group defined under a similar provision of state, local
or foreign law.
"Agreement" means this Agreement, as amended from time to time.
"APF" has the meaning set forth in the preface above.
"APF Common Shares" shall mean the shares of common stock, par value $0.01,
of APF.
"APF Indemnity Claim" has the meaning set forth in Section 12.1 below.
"APF SEC Documents" has the meaning set forth in Section 6.7 below.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms the basis for any specified
consequence.
"Business Combination" has the meaning set forth in Section 4.1(b) below.
"Cash/Note Option" has the meaning set forth in Section 4.4 below.
"Closing" has the meaning set forth in Section 2.3 below.
"CNL Income Funds" has the meaning set forth in the second paragraph of the
Recitals above.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the businesses
and affairs of the Fund, the Operating Partnership or APF, if any, that is not
already generally available to the public.
"Delaware RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Disclosure Schedule" has the meaning set forth in the first paragraph of
Article VII below.
"Dissenting Partners" has the meaning set forth in Section 4.4 below.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
tax-qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) tax-qualified defined benefit retirement
plan or arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Fairness Opinion" has the meaning set forth in the third paragraph of the
Recitals above.
"Florida RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Fund" has the meaning set forth in the preface above.
"Fund Articles of Merger" has the meaning set forth in Section 2.2 below.
"Fund Fairness Opinion" has the meaning set forth in the fifth paragraph of
the recitals above.
B-2
<PAGE>
"Fund Indemnity Claim" has the meaning set forth in Section 12.2 below.
"Fund Interests" means the general and limited partnership interests in the
Fund.
"Fund SEC Documents" has the meaning set forth in Section 7.7 below.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"General Partners" has the meaning set forth in the preface above.
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements
thereto, and all patents, patent applications, and patent disclosures,
together with all reissuances, continuations, continuations-in-part,
revisions, extensions, and reexaminations thereof, (b) all trademarks, service
marks, trade dress, logos, trade names, and corporate names, together with all
translations, adaptations, derivations, and combinations thereof and including
all goodwill associated therewith, and all applications, registrations, and
renewals in connection therewith, (c) all copyrightable works, all copyrights,
and all applications, registrations, and renewals in connection therewith, (d)
all mask works and all applications, registrations, and renewals in connection
therewith, (e) all trade secrets and confidential business information
(including ideas, research and development, know-how, formulas, compositions,
manufacturing and production processes and techniques, technical data,
designs, drawings, specifications, customer and supplier lists, pricing and
cost information, and business and marketing plans and proposals), (f) all
computer software (including data and related documentation but excluding
commercially available shrink wrap software), (g) all other proprietary
rights, and (h) all copies and tangible embodiments thereof (in whatever form
or medium).
"IRS" means the Internal Revenue Service.
"Knowledge" means in the case of the Fund, CNL Realty Corporation, Inc.,
APF and the OP General Partner, the actual knowledge of a director or an
executive officer after reasonable investigation and, in the case of the
individual General Partners, the collective actual Knowledge of all of the
General Partners after reasonable investigation. For the purposes of this
Agreement, the Knowledge of one General Partner shall be attributed to the
other General Partners.
"Known" and "Knowingly" mean that the Fund, any General Partner or APF, as
applicable, had Knowledge of the particular matter or took the action
described with prior Knowledge.
"Liability" means any liability (whether Known or unknown, whether asserted
or unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due),
including any liability for Taxes.
"Material Adverse Effect" means, as to any Party, a material adverse effect
on the business, properties, operations or condition (financial or otherwise)
which is not related to an industry-wide change in the economy or market or
other conditions affecting all businesses in the industry of the Party to
which the term is applied.
"Merger" has the meaning set forth in the first paragraph of the Recitals
above.
"Merger Proposal" has the meaning set forth in fourth paragraph of the
Recitals above.
"Most Recent 10-Q" has the meaning set forth in Section 7.5 below.
"Most Recent Balance Sheet" means the most recent balance sheet filed in a
Fund SEC Document.
"Notes" has the meaning set forth in Section 4.4 below.
"NYSE" means the New York Stock Exchange.
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"OP Certificate of Merger" has the meaning set forth in Section 2.2 below.
"OP General Partner" has the meaning set forth in the Preface above.
"OP Limited Partner" means CNL APF LP Corp., a Delaware corporation and
wholly owned subsidiary of APF.
"Operating Partnership" has the meaning set forth in the preface above.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity
and frequency).
"Party" or "Parties" has the meaning set forth in the preface above.
"Partner" means any holder of Fund Interests.
"Person" means an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, a limited liability company,
an unincorporated organization, a governmental entity (or any department,
agency, or political subdivision thereof) or other entity.
"Proposed Acquisitions" has the meaning set forth in the second paragraph of
the Recitals above.
"Registration Statement" means the registration statement on Form S-4 to be
filed by APF to register the APF Common Shares to be issued as Share
Consideration in the Merger.
"Representative" has the meaning set forth in Section 12.3 below.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance, charge,
or other security interest, other than (a) mechanic's, materialmen's, and
similar liens, (b) liens for Taxes not yet due and payable or for Taxes that
the taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money and (e) any minor
imperfection of title or similar lien which individually or in the aggregate
could not reasonably be expected to have a Material Adverse Effect on such
Party.
"Share Consideration" has the meaning set forth in Section 4.1(a) below.
"Special Committee" has the meaning set forth in the third paragraph to the
Recitals above.
"Subsidiary" means any corporation, partnership, joint venture, limited
liability company or other entity with respect to which a specified Person (or
a Subsidiary thereof) owns a majority of the common stock or other voting
interests or has the power to vote or direct the voting of sufficient
securities or interests to elect a majority of the directors or otherwise
control the management.
"Surviving Partnership" has the meaning set forth in Section 2.1 below.
"Takeover Statute" has the meaning set forth in Section 8.9 below.
"Tax" means any federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Code
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(S)59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-
on minimum, estimated, or other tax of any kind whatsoever, including any
interest, penalty, or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Third-Party Claim" has the meaning set forth in Section 12.4 below.
ARTICLE II
Merger; Effective Time; Closing
2.1 Merger. Subject to the terms and conditions of this Agreement, the
Delaware RULPA and the Florida RULPA, at the Effective Time, the Operating
Partnership and the Fund shall consummate the Merger in which (i) the Fund
shall be merged with and into the Operating Partnership and the separate
limited partnership existence of the Fund shall thereupon cease, (ii) the
Operating Partnership shall be the successor or surviving limited partnership
in the Merger and shall continue to be governed by the laws of the State of
Delaware and (iii) the separate limited partnership existence of the Operating
Partnership with all its rights, privileges, immunities, powers and franchises
shall continue unaffected by the Merger. The limited partnership surviving the
Merger is sometimes hereinafter referred to as the "Surviving Partnership." The
Merger shall have the effects set forth in the Delaware RULPA and the Florida
RULPA. As a result of the Merger, the outstanding Fund Interests shall be
converted or cancelled in the manner provided in Article IV.
2.2 Effective Time. On the Closing Date, subject to the terms and conditions
of this Agreement, the Operating Partnership and the Fund shall (i) execute or
cause to be executed (A) a Certificate of Merger in the form required by the
Delaware RULPA (the "OP Certificate of Merger") and (B) Articles of Merger in
the form required by the Florida RULPA (the "Fund Articles of Merger"), and
(ii) cause the OP Certificate of Merger to be filed with the Delaware Secretary
of State as provided in the Delaware RULPA and the Fund Articles of Merger to
be filed with the Florida Department of State as provided in the Florida RULPA,
in each case, on the Closing Date or as soon as practicable thereafter. The
Merger shall become effective at (i) such time as the OP Certificate of Merger
has been duly filed with the Delaware of Secretary of State and the Fund
Articles of Merger has been duly filed with the Florida Department of State or
(ii) such other time as is agreed upon by APF, the OP General Partner and the
General Partners and specified in the OP Certificate of Merger and the Fund
Articles of Merger. Such time is hereinafter referred to as the "Effective
Time."
2.3 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Shaw Pittman Potts
& Trowbridge, 2300 N Street, N.W., Washington, D.C. 20037, commencing at 9:00
a.m. local time on such date as within five (5) business days following the
fulfillment or waiver of the conditions set forth in Article X (other than
conditions which by their nature are intended to be fulfilled at the Closing)
or such other place or time or on such other date as APF, the OP General
Partner and the General Partners may agree or as may be necessary to permit the
fulfillment or waiver of the conditions set forth in Article X (the "Closing
Date"). In no event shall the Closing Date be a date subsequent to December 31,
1999. At the Closing, there shall be delivered to APF, the Operating
Partnership, the OP General Partner, the General Partners and the Fund the
certificates and other documents and instruments required to be delivered under
Article X.
2.4 Further Assurances. Each Party hereto will execute such further
documents and instruments and take such further actions as may be reasonably
requested by one or more of the other Parties to consummate the Merger, to vest
the Surviving Partnership with full title to all assets, properties, rights,
approvals, immunities and franchises of either the Fund or the Operating
Partnership or to effect the other purposes of this Agreement.
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ARTICLE III
Certificate of Limited Partnership; Limited Partnership Agreement;and General
Partner of Surviving Partnership
3.1 Certificate of Limited Partnership. At the Effective Time, the
certificate of limited partnership of the Operating Partnership, as in effect
immediately prior to the Effective Time, shall be the certificate of limited
partnership of the Surviving Partnership until thereafter amended as provided
therein.
3.2 Limited Partnership Agreement. At the Effective Time, the limited
partnership agreement of the Operating Partnership, as in effect immediately
prior to the Effective Time, shall be the limited partnership agreement of the
Surviving Partnership.
3.3 General Partner. The general partner of the Operating Partnership
immediately prior to the Effective Time shall be the general partner of the
Surviving Partnership from and after the Effective Time until it is replaced or
it resigns in accordance with the limited partnership agreement of the
Surviving Partnership.
ARTICLE IV
Share Consideration; Payment of Share Consideration
4.1 Share Consideration; Conversion or Cancellation of Fund Interests in
Merger.
(a) At the Effective Time, by virtue of the Merger and without any action by
the Parties, all of the outstanding Fund Interests (i) shall be converted into
the right to receive up to 2,393,267 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
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execute and deliver this Agreement and to perform their obligations hereunder.
The execution, delivery and performance by APF, the OP General Partner and the
Operating Partnership of this Agreement have been duly and validly authorized
by the boards of directors of APF and the OP General Partner. This Agreement
constitutes the valid and legally binding obligation of APF, the OP General
Partner and the Operating Partnership, enforceable in accordance with its terms
and conditions. None of APF, the OP General Partner or the Operating
Partnership needs to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
6.5 Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which, APF, the OP General Partner or the
Operating Partnership is subject or any provision of APF's or the OP General
Partner's articles of incorporation or by-laws or the Operating Partnership's
certificate of limited partnership or limited partnership agreement or (ii)
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice or consent under any agreement, contract, lease, license,
instrument, or other arrangement to which APF, the OP General Partner or the
Operating Partnership is a party or by which it is bound or to which any of its
assets is subject or (iii) result in the imposition of a Security Interest upon
any of its assets.
6.6 Title to Assets. APF has good title to, or a valid leasehold interest
in, the properties and assets used by it, located on its premises, or set forth
in its most recent quarterly report on Form 10-Q filed with the SEC or acquired
after the date thereof, free and clear of all Security Interests, except for
properties and assets disposed of in the Ordinary Course of Business since the
date of its most recent quarterly report on Form 10-Q.
6.7 Reports and Financial Statements. APF has filed all required reports,
schedules, forms, statements and other documents with the SEC since January 1,
1996 (along with any such documents filed subsequent to the date hereof, the
"APF SEC Documents"). All of the APF SEC Documents (other than preliminary
material), as of their respective filing dates, complied in all material
respects with all applicable requirements of the Securities Act and the
Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such APF SEC Documents. None of the APF SEC Documents
at the time of filing contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading, except to the extent such statements have
been modified or superseded by later filed APF SEC Documents. There is no
unresolved violation, criticism or exception by any governmental entity of
which APF has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to APF could have a Material Adverse
Effect on APF. The financial statements of APF included in the APF SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP (except, the case
of interim financial statements, as permitted by Forms 10-Q and 8-K of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly presented, in accordance with the
applicable requirements of GAAP, the financial position of APF as of the dates
thereof and the results of operations and cash flows of APF for the periods
then ended (subject, in the case of interim financial statements, to normal
year-end adjustments).
6.8 Events Subsequent to September 30, 1998. Since September 30, 1998,
nothing has occurred which has had or would reasonably be expected to have a
Material Adverse Effect on APF.
6.9 Litigation. Except as publicly disclosed by APF in its APF SEC Documents
or on Schedule 1, there is no suit, claim, action, proceeding or investigation
pending or, to the Knowledge of APF, threatened against APF or any of its
Subsidiaries or any of their respective properties or assets which (a) if
adversely determined, could reasonably be expected to have a Material Adverse
Effect on APF or (b) as of the date hereof, questions
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the validity of this Agreement or any action to be taken by APF in connection
with the consummation of the transactions contemplated hereby or could
otherwise prevent or delay the consummation of the transactions contemplated by
this Agreement. Except as publicly disclosed by APF in any APF SEC Document,
none of APF or its Subsidiaries is subject to any outstanding order, writ,
injunction or decree which, insofar as can be reasonably foreseen in the
future, could reasonably be expected to have a Material Adverse Effect on APF
or would prevent or delay the consummation of the transactions contemplated
hereby.
6.10 Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by APF for inclusion or incorporation by reference
in (i) the Registration Statement to be filed by APF with the SEC in connection
with the Merger will, at the time the Registration Statement becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading and (ii) the proxy statement sent by APF to its
shareholders pertaining to the Merger will, at the date mailed to shareholders
and at the times of the meeting of shareholders to be held in connection with
the Merger, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event with
respect to APF, its officers and directors or any of its Subsidiaries should
occur which is required to be described in an amendment of, or a supplement to,
the Registration Statement or the proxy statement, APF shall promptly so advise
the General Partners and such event shall be so described, and such amendment
or supplement (which the General Partners shall have a reasonable opportunity
to review) shall be promptly filed with the SEC. The Registration Statement
will comply as to form in all material respects with the provisions of the
Securities Act and the rules and regulations thereunder.
6.11 No Undisclosed Liabilities; Absence of Changes. Except as and to the
extent publicly disclosed by APF in its APF SEC Documents or disclosed in
Schedule 1, as of December 31, 1998, to APF's Knowledge, none of APF or its
Subsidiaries had any liabilities or obligations of any nature, whether or not
accrued, contingent or otherwise, and whether due or to become due or asserted
or unasserted, which are not fully reflected in, reserved against or otherwise
described in the consolidated balance sheet of APF and its consolidated
Subsidiaries (including the notes thereto) as of such date or which could
reasonably be expected to have a Material Adverse Effect on APF. Except as
publicly disclosed by APF in any reports filed by it with the APF SEC
Documents, since December 31, 1998, the business of APF and its Subsidiaries
has been carried on only in the ordinary and usual course, to APF's Knowledge,
none of APF or its Subsidiaries has incurred any liabilities of any nature,
whether or not accrued, contingent or otherwise, and whether due or to become
due or asserted or unasserted, which could reasonably be expected to have, and
there have been no events, changes or effects with respect to APF or its
Subsidiaries Known to APF having or which could reasonably be expected to have,
a Material Adverse Effect on APF.
6.12 Brokers' Fees. Except for the fees and expenses paid to Merrill Lynch &
Co. with respect to the delivery of the Fairness Opinion to the Special
Committee and in connection with the financial services provided by Salomon
Smith Barney, none of APF, the OP General Partner or the Operating Partnership
has any Liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this
Agreement.
6.13 Qualification as a REIT. APF is a "real estate investment trust" for
federal income tax purposes. The consummation of the transactions contemplated
by this Agreement will not cause APF to cease to qualify as a "real estate
investment trust" for federal income tax purposes.
6.14 Compliance with Applicable Law. Except as publicly disclosed by APF in
its APF SEC Documents, to APF's Knowledge, it and its Subsidiaries hold all
permits, licenses, variances, exemptions, order and approvals of all
governmental entities necessary for the lawful conduct of their respective
businesses, except for failures to hold such permits, licenses, variances,
exemptions, orders and approvals which could not reasonably be expected to have
a Material Adverse Effect on APF. Except as publicly disclosed by APF in its
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APF SEC Documents, to APF's Knowledge, APF and its Subsidiaries are in
compliance with the material terms of its permits, except where the failure so
to comply could not reasonably be expected to have a Material Adverse Effect on
APF. Except as publicly disclosed by APF, the businesses of APF and its
Subsidiaries are not, to APF's Knowledge, being conducted in violation of any
law, ordinance or regulation of any governmental entity except that no
representation or warranty is made in this Section 6.14 with respect to
environmental laws and except for violations or possible violations which do
not, and, insofar as reasonably can be foreseen, in the future will not, have a
Material Adverse Effect on APF. Except as publicly disclosed by APF in its APF
SEC Documents, no investigation or review by any governmental entity with
respect to APF or its Subsidiaries is pending or, to the Knowledge of APF,
threatened, nor, to the Knowledge of APF, has any government entity indicated
an intention to conduct the same, other than, in each case, those which APF
reasonably believes will not have a Material Adverse Effect on APF.
6.15 Intellectual Property.
(a) APF owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of APF as presently conducted. Each item of Intellectual Property
owned or used by APF immediately prior to the Closing hereunder will be owned
or available for use by APF on identical terms and conditions immediately
subsequent to the Closing hereunder. APF has taken all necessary action to
maintain and protect each item of Intellectual Property that it owns or uses.
(b) APF has not interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of third
parties, and none of APF's directors or officers (or employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that APF must
license or refrain from using any Intellectual Property rights of any third
party). No third party has interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of APF which
are material to the operation of APF's business.
(c) APF has no patent or registration which has been issued to APF with
respect to any of its Intellectual Property.
(d) Nothing will interfere with, infringe upon, misappropriate, or otherwise
come into conflict with, any Intellectual Property rights of third parties as a
result of the continued operation of APF's business as presently conducted.
6.16 Insurance. With respect to each current insurance policy to which APF
is a party, a named insured or is otherwise the beneficiary of coverage, to the
knowledge of APF: (i) the policy is legal, valid, binding, enforceable, and in
full force and effect; (ii) the policy will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the consummation of the transactions contemplated hereby; (iii) neither APF nor
any other party to the policy is in breach or default (including with respect
to the payment of premiums or the giving of notices), and no event has occurred
which, with notice or the lapse of time, would constitute such a breach or
default, or permit termination, modification, or acceleration, under the
policy; and (iv) no party to the policy has repudiated any provision thereof.
6.17 Tenants. To the Knowledge of APF and except as set forth on Schedule
1, no current tenant of a property owned by APF, which as of the date of APF's
most recent quarterly report on Form 10-Q represented more than 5% of APF's
total revenues, presently intends to materially change its relationship with
the owner of the property, either due to the transactions contemplated hereby
or otherwise.
6.18 Disclosure. APF is in compliance in all material respects with its
obligation under the Securities Exchange Act to publicly disclose material
information in a timely fashion.
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ARTICLE VII
Representations and Warranties Concerning the Fund
The General Partners and the Fund jointly and severally represent and
warrant to APF and the Operating Partnership that the statements contained in
this Article VII are correct and complete as of the date hereof, except as set
forth in the disclosure schedule delivered by the General Partners and the Fund
to APF and the Operating Partnership in accordance with the provisions of
Section 8.14 (the "Disclosure Schedule"). Nothing in the Disclosure Schedule
shall be deemed adequate to disclose an exception to a representation or
warranty made herein, however, unless the Disclosure Schedule identifies the
exception with particularity and describes the relevant facts in reasonable
detail. Without limiting the generality of the foregoing, the mere listing (or
inclusion of a copy) of a document or other item shall not be deemed adequate
to disclose an exception to a representation or warranty made herein (unless
the representation or warranty has to do with the existence of the document or
other item itself). The Disclosure Schedule will be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in this Article
VII.
7.1 Organization, Qualification, and Corporate Power. The Fund is a limited
partnership duly organized, validly existing, and in good standing under the
laws of Florida. The Fund is duly authorized to conduct business and is in good
standing under the laws of each jurisdiction where such qualification is
required, except where the failure to so qualify or obtain authorization would
not have a Material Adverse Effect on the Fund. Except as set forth in Section
7.1(a) of the Disclosure Schedule, the Fund has full limited partnership power
and authority and all licenses, permits, and authorizations necessary to carry
on the businesses in which it is engaged and to own and use the properties
owned and used by it, except where the failure to so qualify or obtain
authorization would not have a Material Adverse Effect on the Fund. Section
7.1(b) of the Disclosure Schedule lists the directors and officers of the
corporate General Partner. The General Partners have been made available to APF
and the Operating Partnership correct and complete copies of the certificate of
limited partnership and the limited partnership agreement of the Fund (as
amended to date). The minute books (containing the records of meetings of the
stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of the
corporate General Partner and any organizational records of the Fund have been
made available to APF and the Operating Partnership and are correct and
complete in all material respects. The Fund is not in default under or in
violation of any provision of its certificate of limited partnership or limited
partnership agreement.
7.2 Capitalization. All of the outstanding ownership interests in the Fund
(the "Fund Interests") consist of (i) one percent in general partnership
interests and (ii) 50,000 units of limited partnership interests. All of the
outstanding Fund Interests have been duly authorized, are validly issued, fully
paid, and nonassessable. There are no outstanding or authorized options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights, or other contracts or commitments that could require the Fund to issue,
sell, or otherwise cause to become outstanding any additional ownership
interests. There are no outstanding or authorized stock appreciation, phantom
stock, profit participation, or similar rights with respect to the Fund.
7.3 Authorization of Transaction. The Fund has full power and authority
(including full limited partnership power and authority) to execute and deliver
this Agreement and, upon the affirmative vote of a majority of the outstanding
limited partnership Fund Interests, will have full power and authority
(including limited partnership power and authority) to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of the Fund, enforceable in accordance with its terms and conditions, subject
to bankruptcy, insolvency, moratorium and rights of creditors generally. The
Fund is not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
7.4 Noncontravention. Except as set forth in Section 7.4 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby,
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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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<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 $2,393,267 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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<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 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
B-33
<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 Prospectus/Consent Solicitation Statement.
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.
OVERVIEW
Pursuant to the Prospectus/Consent Solicitation Statement and this
Supplement, you are being asked to approve the Acquisition of your Income Fund
by APF. Your Income Fund is one of 18 limited partnerships (which we refer to
collectively as the Funds) that APF is seeking to acquire. Supplements have
also been prepared for each of the other Funds, copies of which may be obtained
without charge to 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 (or a REIT), formed in
1994, whose primary business, like that of the Funds, is the ownership of
restaurant properties leased to operators of national and regional restaurant
chains on a triple-net lease basis. As a full-service REIT, 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 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 shares of common stock (or APF Shares) will I receive if my Income
Fund is acquired by APF?
Your Income Fund will receive 2,082,901 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 $10.00 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
approximately 75 million APF Shares through three public offerings at offering
prices per APF share equal to the Exchange Value. At December 31, 1998, of the
approximately $750 million raised by
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<PAGE>
APF, APF has used approximately $550 million to acquire restaurant properties
and to make mortgage loans and had approximately $120 million in uninvested
proceeds which APF expects to invest during the first quarter of 1999. The
remaining proceeds were used to pay fees and other offering expenses.
What is the required vote necessary to approve the Acquisition?
Pursuant to the terms of your Income Fund's partnership agreement, APF's
acquisition of your Income Fund may not be consummated without the approval of
greater than 50% of the outstanding 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
Fund?
Yes. Legg Mason Wood Walker, Incorporated 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 Funds, and (c) the method of allocating the APF
Shares among the Funds.
Do you, as the general partners of my Income Fund, recommend that I vote in
favor 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 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 how you want to vote, and sign
and mail it in the enclosed postage-paid return envelope as soon as possible,
so that at the Special Meeting of Limited Partners, your Units may be voted
"For" or "Against" APF's acquisition of your Income Fund. If you sign and send
in your consent form and do not indicate how you want to vote, your consent
form will be counted as a vote "For" the Acquisition. If you do not vote or you
abstain from voting, it will count as a vote "Against" the Acquisition.
In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to certain limitations. If you vote "Against" the Acquisition,
but your Income Fund is nevertheless acquired by APF, you may elect to receive
a payment (which we call the Cash/Notes Option) that is 10% in cash and 90% in
% Callable Notes due , 2006 (or Notes) based on the liquidation value of
your Income Fund, as determined by Valuation Associates, the appraisal firm
that we engaged in connection with the Acquisition. Such liquidation value will
be lower than the aggregate Exchange Value of the APF Shares offered to your
Income Fund in the Acquisition. The Notes will bear interest at a rate equal to
%, which was determined based on 120% of the applicable federal rate as of
, 1999. Please note that you may only receive the Cash/Notes Option if you
have voted "Against" the Acquisition and you elect to receive the Cash/Notes
Option on your consent form. You will receive APF Shares if your Income Fund
elects to be acquired in the Acquisition and you voted "For" the Acquisition,
or you voted "Against" the Acquisition and did not affirmatively select the
Cash/Notes Option. 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 (for example, 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 be based on the difference between the
value of the APF Shares or the tax basis of your Units. If you elect the
Cash/Notes Option, 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
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<PAGE>
of the APF Shares and cash received by your Income Fund over the tax basis of
your Fund's net assets. Some of the gain may be subject to the 25% rate of tax
applicable to certain 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 $749. To review
the tax consequences to the Limited Partners of the Funds in greater detail,
see pages through of the Prospectus/Consent Solicitation Statement 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 Funds acquired by APF.
Although the majority of APF's assets and the assets of the other Funds
acquired by APF are substantially similar to those of your Income Fund, the
restaurant properties owned by APF and the other 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 Funds' restaurant properties,
see "APF's Business and The Restaurant Properties--Business Objectives and
Strategies" and "--The Restaurant Properties--General" and "Business of the
Funds--Description of Restaurant Properties" in the Prospectus/Consent
Solicitation Statement.
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 Prospectus/Consent Solicitation Statement.
Investment Risks
. Uncertainty Regarding the Exchange Value and Trading Price of APF Shares
Following Listing. Your Income Fund will be receiving 2,082,901 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 is 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 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.
. Decrease in Distributions. In each of the years ended December 31, 1995,
1996 and 1997, your Income Fund made $950 in distributions per $10,000
investment to you. Based on APF's pro forma financial information, and
assuming APF acquires only your Income Fund and that each Limited Partner
of your Income receives only APF Shares, you would have received, for the
year ended December 31, 1997, $471 in distributions per $10,000 of
original investment, which is 50.4% less than the $950 distributed to you
as Limited Partner during the same period. 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
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<PAGE>
APF stockholders for the year ended December 31, 1997 and for the nine
months ended September 30, 1998 is not necessarily indicative of the
distributions you will receive as a stockholder of APF after the
Acquisition. See "Cash Distributions to Limited Partners of Your Fund."
. Conflicts of Interest in the Acquisition; Substantial Benefits to Related
Parties. There are certain conflicts of interest inherent in the
structure of the Acquisition of your Income Fund. 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 that may or may not be aligned with your
interests 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.
. Fundamental Change in Nature of 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 September 30, 1998), 385 restaurant properties. The risks
inherent in investing in an operating company such as APF include APF's
ability to invest in new restaurant properties that are not as
profitable as APF anticipated, the incurrence of substantial
indebtedness to make future acquisitions of restaurant properties which
it may be unable to repay and making mortgage loans to prospective
operators of national and regional restaurant chains which may not have
the ability to repay.
As an APF stockholder, you will receive the benefits of your investment
through (i) dividend distributions on, and (ii) increases in the value of,
your APF Shares. In addition, 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 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 Cash/Notes Option). An
investment in APF may not outperform your investment in the Income Fund.
. Original Investment Timeframe. 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
June 1, 2017. 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 1995 and 2003. Because
your Income Fund is in the anticipated termination timeframe, we could
elect to liquidate your Income Fund. However, we have no current plans to
dispose of your Income Fund's restaurant properties if the Limited
Partners do not approve the Acquisition.
Real Estate/Business Risks
. Risk of Default on Mortgage Loans and Market Risks associated with
Securitizations. 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
S-4
<PAGE>
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.
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,) and 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 may 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.
. Risks Associated with Leverage. 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. At the time of the consummation of the
Acquisition, as a general policy, APF's Board of Directors will 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 funds from
operations and its ability to make distributions to its stockholders.
. Acquisition and Development Risks. APF plans to pursue its growth
strategy through the acquisition and development of additional restaurant
properties. To the extent that APF does pursue this growth strategy, we
do not know that it 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.
Tax Risks
. Failure of APF to Qualify as a REIT for Tax Purposes. 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
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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.
. Risks Associated with Distribution Requirements. 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 Tax Law. 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 Prospectus/Consent Solicitation Statement.
CONSIDERATION PAID TO INCOME FUND
The following table sets forth, for your Income Fund (i) the aggregate
amount of original Limited Partner investments in each Fund less any
distributions of net sales proceeds paid to the Limited Partners of that Fund,
(ii) the original amount of Limited Partner investments in each Fund less any
distributions of net sales proceeds per average $10,000 investment, (iii) the
number of APF Shares to be paid to your Income Fund, (iv) the estimated value
of the APF Shares paid to your Income Fund, (v) the estimated Acquisition
expenses allocated to your Income Fund, (vi) the estimated value, based on the
Exchange Value, of APF Shares paid to your Income Fund after deducting
Acquisition expenses, and (vii) the estimated value, based on the Exchange
Value, of APF Shares you will receive for each $10,000 of your original
investment:
<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) Fund(2) Fund(3) Expenses Expenses(3) Investment(3)
- ------------- ------------- ---------- ------------ ----------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$23,522,253 $9,409 2,082,901 $20,829,010 $237,562 $20,591,448 $8,237
</TABLE>
- --------
(1) The original Limited Partner investment in the Income Fund was $25,000,000.
These columns reflect, as of September 30, 1998, an adjustment to the
Limited Partners original investments based on distributions of net sales
proceeds received from sales of properties made pursuant to the partnership
agreements.
(2) The APF Shares payable to each Fund as set forth in this chart will not
change if APF acquires fewer than all of the Funds in the Acquisition. This
number assumes that none of the Limited Partners of the Fund has elected
the Cash/Notes Option.
(3) 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 below the Exchange Value.
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<PAGE>
Upon completion of the Acquisition of your Income Fund, the operations and
existence of your Income Fund will cease. For more detailed information, see
"The Acquisition" in the Prospectus/Consent Solicitation Statement. If your
Income Fund does not approve the Acquisition, we do not contemplate that your
Income Fund would be liquidated in the near future. The Acquisition, however,
does not result in an all-cash payment to you in the liquidation of your
investment. For example, if you are eligible for and choose the Cash/Notes
Option, you become a Noteholder of APF. You will have exchanged your Units for
unsecured debt obligations of APF which may not be retired in full until ,
2006, a date approximately seven years after the date the Acquisition of your
Income Fund occurs. On the other hand, if you exchange your Units for APF
Shares, you will receive an equity interest in APF whose marketability will
depend upon the market that may develop with respect to the APF Shares, which
will be listed on the NYSE.
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......................................................... $ 9,592
Appraisals and Valuation........................................... 3,837
Fairness Opinions.................................................. 17,266
Registration, Listing and Filing Fees.............................. --
Soliciting Dealer Fee.............................................. 43,152
Financial Consulting Fees.......................................... --
Environmental Fees................................................. 23,981
Accounting and Other Fees.......................................... 28,157
--------
Subtotal......................................................... 125,985
========
Closing Transaction Costs
Transfer Fees and Taxes............................................ 43,420
Legal Fees......................................................... 36,010
Recording Costs.................................................... --
Other.............................................................. 32,147
--------
Subtotal......................................................... 111,577
--------
Total.............................................................. $237,562
========
</TABLE>
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 Income Fund's
restaurant properties. Because the Acquisition of your Income Fund
S-7
<PAGE>
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
seven to 15 years after they were acquired (or as soon thereafter as, in our
opinion, market conditions permit), as contemplated by the terms of the
partnership agreement.
Special Meeting to Discuss the Acquisition
We have scheduled a special meeting of the Limited Partners of your Income
Fund to discuss the solicitation materials, which include the
Prospectus/Consent Solicitation Statement, 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 (as defined below) and to explain in
person our reasons for recommending that you vote "For" the Acquisition.
VOTING PROCEDURE
The Prospectus/Consent Solicitation Statement, 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.
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 Prospectus/Consent Solicitation
Statement. A copy of the Agreement and Plan of Merger dated March 11, 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 December 31,
1999. 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.
The consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and certain 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
S-8
<PAGE>
fail to indicate whether you are voting "For" or "Against" any matter
(including the Acquisition), 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. The partnership agreement also provide 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
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, 1995, 1996 and 1997 and the nine months
ended September 30, 1998, the aggregate amounts accrued or paid by your Income
Fund 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 years presented, are shown below under "Pro Forma":
<TABLE>
<CAPTION>
Year Ended Nine Months
December 31, Ended
----------------- September 30,
1995 1996 1997 1998
---- ---- ------- -------------
<S> <C> <C> <C> <C>
Historical:
General Partner Distributions................. -- -- -- --
Broker/Dealer Commissions(1).................. -- -- -- --
Due Diligence and Marketing Support Fees...... -- -- -- --
Acquisition Fees.............................. -- -- -- --
Asset Management Fees......................... -- -- -- --
Real Estate Disposition Fees(2)............... -- -- $15,150 $53,400
--- --- ------- -------
Total historical............................ -- -- $15,150 $53,400
Pro Forma:
Cash Distributions on APF Shares.............. -- -- -- --
Salary Compensation........................... -- -- -- --
--- --- ------- -------
Total pro forma............................. -- -- -- --
</TABLE>
- --------
1) A majority of the fees paid as broker-dealer commissions and due diligence
and marketing support fees were reallowed to other broker-dealers
participating in the offerings of the Income Fund's Units.
(2) 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.
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<PAGE>
CASH DISTRIBUTIONS TO LIMITED PARTNERS OF YOUR 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 the Acquisition--Prices for 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>
Nine Months Ended
Sept. 30, 1998
--------------------
1993 1994 1995 1996 1997 Historical Pro Forma
---- ---- ---- ---- ---- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income....... $735 $736 $587 $719 $949 $ 538 $363
Distributions from Sales of
Properties..................... -- -- -- -- -- 591 --
Distributions from Return of
Capital(1)..................... 215 214 363 231 1 62 9
---- ---- ---- ---- ---- ------ ----
Total......................... $950 $950 $950 $950 $950 $1,191 $373
==== ==== ==== ==== ==== ====== ====
</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 nine months ended September 30,
1998 is not necessarily indicative of the distributions you will receive as a
stockholder of APF after the Acquisition.
Assuming APF maintains its current level of debt for acquiring future
restaurant properties, the expected distribution rate per APF Share will be
8.8% (assuming a $10.00 per APF Share price based on the Exchange Value, the
annualized dividend per year is expected to be $0.88 per APF Share). Based on
the number of APF Shares that you would receive in the Acquisition per your
average $10,000 original investment and this distribution rate, you would
receive an annual distribution of approximately $725.
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 certain 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 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 Cash/Note
Option.
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, our relief 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 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 Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the Cash/Notes Option, constitutes 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 and is the best way to maximize the return on your
investment in light of the values of such consideration.
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 of Valuation Associates and
Legg Mason received fees for its services and notwithstanding that Legg Mason
has previously provided investment banking services to the Funds and to
Commercial Net Lease Realty, Inc., a former affiliate of ours. See "Reports,
Opinions and Appraisals" in the Prospectus/Consent Solicitation Statement.
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 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 cash and promissory 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.
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<PAGE>
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 Cash/Notes Option.
3. Valuation of Alternatives. Based on the appraisal of the Income Fund's
restaurant properties, we estimated the value of your Income Fund as an ongoing
concern and if liquidated. 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 Fund to 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
September 30, 1998 per $10,000 original investment. Since the calculation of
the book value was done on a GAAP basis, it is not indicative of the true fair
market value of your Income Fund. This figure was compared to the (i) value of
the Fund if it commenced an orderly liquidation of its investment portfolio on
December 31, 1998, (ii) value of the Fund if it continued to operate in
accordance with its existing partnership agreement and business plans, and
(iii) estimated value of the APF Shares, based on the Exchange Value, paid to
each Fund per average $10,000 invested.
Summary of Valuations
(per $10,000 original investment)
<TABLE>
<CAPTION>
Estimated
Value of APF
Shares per
Going Average $10,000
GAAP Book Liquidation Concern Original Limited
Value Value(1) Value(1) Partners Investment(2)
--------- ----------- -------- ----------------------
<S> <C> <C> <C> <C>
CNL Income Fund III,
Ltd.................... $6,396 $7,650 $8,214 $8,237
</TABLE>
- --------
(1) 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.
(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.
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have an independent
obligation 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 Funds). James M. Seneff, Jr. and
Robert A. Bourne act as the individual general partners of all of the
S-12
<PAGE>
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.
Benefits to General Partners
As a result of the Acquisition (assuming only your Income Fund is acquired),
we are expected to receive certain benefits, including that we will be relieved
from certain ongoing liabilities with respect to Funds that are acquired by
APF.
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 Funds if the Acquisition does not occur.
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 the Cash/Notes Option, in which case you will
receive cash and 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
S-13
<PAGE>
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
Prospectus/Consent Solicitation Statement.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, the
assets (and any liabilities) of your Income Fund (if your Income Fund is
acquired by APF) will be transferred to APF in return for APF Shares and/or
cash and 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. ....................... $749
</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 Code, no gain or loss is recognized if (i)
property is transferred to a corporation by one more individuals or entities in
exchange for the stock of that corporation, and (ii) 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 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 the
Cash/Notes Option, 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 (1) 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 (2) 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 Cash/Notes Option, your Income Fund will receive APF
Shares, cash and Notes in exchange for your Income Fund's assets. Because the
principal portion of the Notes will not be due until , 2006, 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
S-14
<PAGE>
equal to 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 (without reduction for
any selling expenses) 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 are 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, cash 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" (i.e., real property and
depreciable assets used in a trade or business and held for more than one
year). Your share of gains or losses from the sale of section 1231 assets of
your Income Fund would be combined with any other section 1231 gains and losses
that you recognize in that year. If the result is a net loss, such loss is
characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property will be taxed as ordinary income to the extent of all
prior depreciation deductions taken by your Income Fund prior to sale. In
general, you may only use up to $3,000 of capital losses in excess of capital
gains to offset ordinary income in any taxable year. Any excess loss is carried
forward to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your Income Fund recognizes will be allocated to you and the other
Limited Partners in accordance with the terms of your Income Fund's partnership
agreement. Each Limited Partner will be allocated and must report his, her or
its allocable share of such gain, if any, pursuant to these terms, regardless
of the Limited Partner's decision to receive 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 Cash/Notes Option may
recognize gain in the year of the Acquisition despite the fact that they will
receive only a small amount of cash and no publicly-traded instruments 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 the Cash/Notes Option. See "--Tax Consequences of
Liquidation and Termination of Your Fund" below.
Tax Consequences of the Liquidation and Termination of Your Fund. If your
Fund is acquired by APF, your Fund will be deemed to have liquidated and
distributed APF Shares and/or cash and 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 cash and 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 pro rata based on your respective
S-15
<PAGE>
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 (determined on the closing date of the
Acquisition) and your adjusted tax basis in your Units (adjusted by your
distributive share of income, gain, loss, deduction and credit for the final
taxable year of your Income Fund (including any such items recognized by your
Income Fund as a result of the Acquisition) as well as any distributions you
receive in such final taxable year (other than the distribution of the APF
Shares)). 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 cash and Notes in the Acquisition, you will recognize gain to
the extent that the amount of cash you receive in the Acquisition exceeds your
adjusted basis in your Units (adjusted by your distributive share of income,
gain, loss, deduction and credit for the final taxable year of your Income Fund
(including any such items recognized by your Income Fund as a result of the
Acquisition) as well as any distributions you receive in such final taxable
year (other than the distributions of the cash and Notes)). Your basis in the
Notes distributed to you will equal your adjusted basis in your Units, reduced
(but not below zero) by the amount of any cash distributed to you 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 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.
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 cash and 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 Prospectus/Consent Solicitation
Statement.
S-16
<PAGE>
SUMMARY SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
APF, FUNDS, ADVISOR AND CNL RESTAURANT FINANCIAL SERVICES GROUP
Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
Historical Pro Forma
-------------------------------------------------- -------------------------------
CNL
CNL Restaurant
Income Financial
Fund III, Services Combined Pro Forma Combined
APF Ltd. Advisor Group Historical Adjustments Pro Forma
------------ ----------- ----------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data
Revenues:
Rental and earned
income............... $ 22,947,199 $ 1,196,056 $ -- $ -- $ 24,143,255 $ 9,635,208 (a)
1,752 (b) $ 33,780,215
Management fees....... -- -- 21,405,127 5,122,366 26,527,493 (21,007,126)(c)
(2,875,906)(d) 2,644,461
Interest and other
income............... 6,117,911 103,546 751 18,463,647 24,685,855 1,526,547 (e) 26,212,402
------------ ----------- ----------- ----------- ------------ ----------- ------------
Total revenue......... 29,065,110 1,299,602 21,405,878 23,586,013 75,356,603 (12,719,525) 62,637,078
Expenses:
General and
administrative....... 1,539,004 144,067 6,701,115 6,704,482 15,088,668 (1,303,349)(f)
(1,415,100)(g)
(29,339)(h) 12,340,880
Advisory fees......... 1,248,393 -- -- 1,026,231 2,274,624 (2,274,624)(i) --
State taxes........... 397,569 12,250 15,226 220,180 645,225 27,946 (j) 673,171
Depreciation and
amortization......... 2,693,020 236,345 131,539 1,000,493 4,061,397 3,104,092 (k)(l) 7,165,489
Interest expense...... -- -- 105,668 14,234,533 14,340,201 (68,670)(m) 14,271,531
Paid to affiliates.... -- -- 256,456 1,569,202 1,825,658 (1,825,658)(n) --
------------ ----------- ----------- ----------- ------------ ----------- ------------
Total expenses........ 5,877,986 392,662 7,210,004 24,755,121 38,235,773 (3,784,702) 34,451,071
------------ ----------- ----------- ----------- ------------ ----------- ------------
Net earnings (loss)
before equity in
earnings of joint
ventures/minority
interests, gain (loss)
on sale of properties,
gain on
securitization, and
provision for federal
income taxes.......... 23,187,124 906,940 14,195,874 (1,169,108) 37,120,830 (8,934,823) 28,186,007
------------ ----------- ----------- ----------- ------------ ----------- ------------
Equity in earnings of
joint ventures/
minority interests.... (23,271) (47,276) -- 12,452 (58,095) -- (58,095)
Gain (loss) on sales of
properties............ -- 596,586 -- -- 596,586 -- 596,586
Provision for loss on
land and building..... -- (99,865) -- -- (99,865) -- (99,865)
Gain on
securitization........ -- -- -- 3,018,268 3,018,268 -- 3,018,268
Provision for federal
income taxes.......... -- -- 5,607,415 708,666 6,316,081 (6,316,081)(o) --
------------ ----------- ----------- ----------- ------------ ----------- ------------
Net earnings........... $ 23,163,853 $ 1,356,385 $ 8,588,459 $ 1,152,946 $ 34,261,643 $(2,618,742) $ 31,642,901
============ =========== =========== =========== ============ =========== ============
Other Data:
Weighted average number
of shares of common
stock outstanding
during period......... $ 47,633,909 N/A N/A N/A N/A -- 71,773,652(p)
Total properties owned
at end of period...... 357 28 N/A N/A N/A -- 385
Funds from operations.. $ 26,408,569 $ 2,977,747 N/A N/A N/A -- $ 35,758,513
Total cash
distributions
declared*............. $ 26,460,446 $ 2,977,747 N/A N/A N/A -- $ 35,758,513
Cash distributions
declared per $10,000
investment............ $ 572 $ 1,191 N/A N/A N/A -- $ 498
<CAPTION>
Historical Combined Pro Forma
September 30, 1998 Historical September 30, 1998
-------------------------------------------------- ------------ -------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data
Real estate assets,
net................... $407,663,180 $12,839,689 $ -- $ -- $420,502,869 $ 5,497,341 (q)
26,052,741 (r) $452,052,951
Mortgages/notes
receivable............ 33,523,506 -- -- 173,776,981 207,300,487 849,195 (r) 208,149,682
Accounts receivable,
net................... 575,104 40,088 7,544,985 7,342,103 15,502,280 (7,996,204)(s) 7,506,076
Investment in/due from
joint ventures........ 631,374 2,093,452 -- -- 2,724,826 758,948 (q) 3,483,774
Total assets........... 566,383,967 16,822,967 8,429,809 197,528,789 789,165,532 27,354,484 816,520,016
Total
liabilities/minority
interest ............. 14,478,585 833,193 5,049,152 185,998,045 206,358,975 (10,987,068)(s)(t) 195,371,907
Total equity........... 551,905,382 15,989,774 3,380,657 11,530,744 582,806,557 38,341,552 (q)(t) 621,148,109
</TABLE>
- --------
* Cash distributions for the nine months ended September 30, 1998 included
$1,477,747 as a result of the distribution of net sales proceeds from the
sales of two properties.
S-17
<PAGE>
(a) Represents rental and earned income as if 1) properties that had been
previously constructed and acquired from January 1, 1998 through November
30, 1998 had been acquired and leased on January 1, 1997 and 2) properties
that were developed by APF from January 1, 1998 through November 30, 1998
had been placed in service on May 1, 1997 (assumes a four month development
period).
<TABLE>
<S> <C>
Rental and earned income on Property Transactions by APF... $9,635,208
</TABLE>
(b) Represents $1,752 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, 1997.
(c) Represents the elimination of intercompany fees between APF, the Income
Fund, the Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees.......................................... $ (1,569,202)
Secured equipment lease fee............................... (44,426)
Advisory fees............................................. (1,722,383)
Reimbursement of administrative costs..................... (289,232)
Acquisition fees.......................................... (15,392,193)
Underwriting fees......................................... (254,945)
Administrative fees....................................... (148,491)
Executive fee............................................. (310,000)
Guarantee fees............................................ (93,750)
Servicing fee............................................. (1,014,117)
Development fees.......................................... (166,876)
Consulting fee............................................ (1,511)
------------
Total................................................... $(21,007,126)
============
</TABLE>
(d) Represents the deferral of $2,875,906 in origination fees collected by CNL
Restaurant Financial Services Group that should be amortized over the term
of the loans originated (20 years) in accordance with the Statement of
Financial Accounting Standards #91 "Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases."
(e) Represents interest income of $1,318,870 earned from Other Investments
acquired and mortgage notes issued from January 1, 1998 through November
30, 1998 as if this had occurred on January 1, 1997 and the amortization of
$207,677 of deferred origination fees collected during the year ended
December 31, 1997 and during the nine months ended September 30, 1998,
which were capitalized and deferred in (d) above as if they had been
collected on January 1, 1997. These deferred fees are being amortized and
recorded as interest income.
(f) Represents the elimination of intercompany expenses paid between APF, the
Income Fund, the Advisor and the CNL Restaurant Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs...................... $ (289,232)
Servicing fee.............................................. (1,014,117)
-----------
$(1,303,349)
===========
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by APF were subject
to capitalization during the entire period and 2) costs relating to
properties not developed by APF were subject to capitalization up through
the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs........................... $(1,415,100)
</TABLE>
(h) Represents savings of $29,339 in professional services and administrative
expenses resulting from reporting on one combined company versus 22
separate entities.
(i) Represents the elimination of fees between APF, the Income Fund, the
Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Advisory fees............................................... $(1,722,383)
Administrative fees......................................... (148,491)
Executive fee............................................... (310,000)
Guarantee fees.............................................. (93,750)
-----------
$(2,274,624)
===========
</TABLE>
(j) Represents additional state taxes of $27,946 resulting from assuming that
acquisitions from January 1, 1998 through November 30, 1998 had been
acquired on January 1, 1997 and assuming that the Income Fund had operated
under a REIT structure.
(k) Represents an increase in depreciation of the building portion of the
properties acquired from January 1, 1998 through November 30, 1998 as if
they had been acquired on January 1, 1997 and the step up in basis referred
to in footnote (q) from acquiring the Income Fund portfolio using the
straight-line method over the estimated useful lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense.......................................... $1,527,472
</TABLE>
S-18
<PAGE>
(l) Represents the amortization of the goodwill on the acquisition of the CNL
Restaurant Financial Services Group referred to in footnote (q)
<TABLE>
<S> <C>
Amortization of goodwill..................................... $1,576,620
</TABLE>
(m) Represents elimination of interest expense recorded for the amortization of
$350,000 in arrangement fees collected during the year ended December 31,
1997 which were eliminated in footnote (4), II (d) in the Notes to the Pro
Forma Financial Statements attached to this Supplement.
<TABLE>
<S> <C>
Interest expense............................................... $(68,670)
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees incurred
between APF, the Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Origination fees............................................ $(1,569,202)
Underwriting fees........................................... (254,945)
Consulting fee.............................................. (1,511)
-----------
$(1,825,658)
===========
</TABLE>
(o) Represents the elimination of $6,316,081 in the provision for income taxes
as a result of the acquisition. APF expects to continue to qualify as a
REIT and does not expect to incur federal income taxes.
(p) APF Shares issued during the period required to fund acquisitions as if
they had been acquired on January 1, 1997 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 the
proposal to amend and restate APF's articles of incorporation to increase
the number of authorized APF Shares.
(q) Represents the payment of $237,562 in cash and the issuance of 14,359,145
APF shares in consideration for the purchase of the Income Fund, Advisor
and CNL Restaurant Financial Services Group at September 30, 1998 using the
Exchange Value of $10 per APF Share plus estimated transaction costs. The
acquisitions of the Income Fund and the CNL Restaurant Financial Services
Group have been accounted for under the purchase accounting method and
goodwill was recognized to the extent that the consideration paid exceeded
the fair value of the net tangible assets acquired. As for the acquisition
of the Advisor from a related party, the consideration paid in excess of
the fair value of the net tangible assets received has been accounted for
as costs incurred in acquiring the Advisor from a related party because the
Advisor has not been deemed to qualify as a "business" for purposes of
applying APB Opinion No. 16 "Business Combinations." Upon consummation of
the Acquisition, this expense will be recorded as an operating expense on
APF's statement of earnings. APF will not deduct this expense for purposes
of calculating funds from operations due to the nonrecurring and non-cash
nature of the expense. As of September 30, 1998, $249,403 of transaction
costs had been incurred by APF.
<TABLE>
<S> <C>
Income Fund............................................... $ 20,829,012
Advisor................................................... 76,000,000
CNL Restaurant Financial Services Group................... 47,000,000
------------
Total Purchase Price (cash and shares)................... 143,829,012
Less cash paid to Income Fund............................. (237,562)
------------
Share consideration...................................... 143,591,450
Transaction costs of APF.................................. 8,933,000
------------
Total costs incurred..................................... $152,524,450
============
</TABLE>
In addition, APF i) used $8,933,000 in cash to pay the transaction costs
related to the Acquisition, ii) made an upward adjustment to the Income Fund
carrying value of land and building on operating leases by $5,150,131, net
investment in direct financing leases by $347,210, investment in joint
venture by $758,948, made downward adjustments to the carrying value of
accrued rental income of $85,729, and made downward adjustments to other
assets of $3,692,497 to adjust historical values to fair value, iii)
recorded goodwill of $42,043,187 for the acquisition of the CNL Restaurant
Financial Services Group, iv) reduced retained earnings by $77,339,587 for
the excess consideration paid over the net assets of the Advisor and removed
the historical common stock balance of $12,000, additional paid in capital
balance of $9,602,287, retained earnings balance of $5,297,114 and partners
capital balance of $15,989,774 of the Income Fund, Advisor and CNL
Restaurant Financial Services Group.
(r) Represents the use of $26,901,936 in cash and cash equivalents at September
30, 1998 to acquire $26,052,741 in properties and issue $849,195 in
mortgage notes which occurred from October 1, 1998 through November 30,
1998.
(s) Represents the elimination by the Income Fund of $146,825 in related party
payables recorded as receivables by the Advisor, the elimination by the CNL
Restaurant Financial Services Group of $6,641,379 in related party payables
recorded as receivables by CNL Restaurant Financial Services Group and the
elimination by APF of $1,208,000 in related party payables recorded as
receivables by the Advisor.
(t) Represents the elimination of income taxes payable of $2,990,864 from
liabilities assumed in the acquisition of the CNL Restaurant Businesses
since the acquisition agreements require that the Advisor and CNL
Restaurant Financial Services Group have no accumulated or current earnings
and profits for federal income tax purposes at the time of the acquisition.
S-19
<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>
Nine Months Ended
September 30, Year Ended December 31,
--------------------- --------------------------------
1998 1997 1997 1996 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues (1)............ $1,252,326 $1,649,769 $2,023,495 $2,452,797 $2,358,235
Net income (2).......... 1,356,385 2,160,829 2,391,835 1,814,657 1,482,515
Cash distributions
declared (3)........... 2,977,747 1,782,000 2,376,000 2,376,000 2,376,000
Net income per Unit
(2).................... 26.90 42.89 47.47 35.93 29.37
Cash distributions
declared per Unit (3).. 59.55 35.64 47.52 47.52 47.52
Weighted average number
of Limited Partner
Units outstanding...... 50,000 50,000 50,000 50,000 50,000
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
----------------------- -----------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total assets............ $16,822,967 $18,833,287 $18,479,002 $18,608,907 $19,065,305
Total partners'
capital................ 15,989,774 17,974,130 17,611,136 17,595,301 18,156,644
</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 nine months ended September 30, 1998 and 1997 includes
$596,586 and 969,052, respectively, from gain on sale of land and building.
Net income for the nine months ended September 30, 1998 and 1997 includes
$99,865 and $32,819, respectively, from provision for loss on land and
building. 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 nine months ended September 30, 1998 included
$1,477,747 as a result of the distribution of net sales proceeds from the
sales of two properties.
S-20
<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 September 30, 1998, 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
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 1998 and 1997, 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 $1,376,910 and $1,500,218, respectively. The
decrease in cash from operations for the nine months ended September 30, 1998,
is primarily a result of changes in income and expenses as described in
"Results of Operations" below and changes in the Income Fund's working
capital.
Other sources and uses of capital included the following during the nine
months ended September 30, 1998.
In January 1998, the Income Fund used the net sales proceeds from the 1997
sale of the restaurant property in Mason City, Iowa to acquire a restaurant
property located in Overland Park, Kansas, 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 September 30, 1998, the Income Fund owned a 25.84%
interest in this restaurant property.
During the nine months ended September 30, 1998, the Income Fund sold its
restaurant properties in Daytona Beach, Fernandina Beach and Punta Gorda,
Florida, and Hagerstown, Maryland, for a total of approximately $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
restaurant properties in Daytona Beach and Fernandina Beach, Florida, 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, used a portion of the net sales
proceeds to acquire an interest in RTO Joint Venture, as described below, and
intends to use the remaining net sales proceeds to reinvest in additional
restaurant properties or use for other Income Fund 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 these sales.
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 September 30, 1998, the Income Fund had
contributed $629,925 to purchase land and pay for construction relating to the
joint venture. The Income Fund has agreed to contribute approximately $36,100
in additional construction costs to the joint venture. When construction is
completed, the Income Fund will have an approximate 47% interest in the
profits and losses of the joint venture.
In September 1998, the Income Fund entered into a new lease agreement for
the Golden Corral restaurant property located in Stockbridge, Georgia. In
connection therewith, the Income Fund funded $150,000 in renovation costs.
S-21
<PAGE>
In connection with the sale of the restaurant property in Roswell, Georgia,
in June 1997, the Income Fund accepted a promissory note in the principal sum
of $685,000 collateralized by a mortgage on the restaurant property. During the
nine months ended September 30, 1998, the Income Fund collected the full amount
of the outstanding mortgage note receivable balance. The Income Fund intends to
use the mortgage note proceeds to invest in an additional restaurant property
or for other Income Fund purposes.
Currently, rental income from the Income Fund's restaurant properties is
invested in money market accounts and 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 the partners. At September 30, 1998, the
Income Fund had $1,726,345 invested in such short-term investments, as compared
to $493,118 at December 31, 1997. The increase in cash and cash equivalents at
September 30, 1998, is primarily attributable to the remaining net sales
proceeds relating to the sale of the restaurant properties in Daytona Beach,
Punta Gorda and Fernandina Beach, Florida, and Hagerstown, Maryland, at
September 30, 1998, and the receipt of the balance of the mortgage note
receivable as described above. The funds remaining at September 30, 1998, will
be used to pay distributions and other liabilities, to make additional
contributions to RTO Joint Venture to pay for additional construction costs
relating to the restaurant property owned by the joint venture and to acquire
an additional restaurant property.
Total liabilities of the Income Fund, including distributions payable,
decreased to $696,791 at September 30, 1998, from $729,249 at December 31,
1997. 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 proceeds
received from the sales of several restaurant properties during 1998 and 1997,
the Income Fund declared distributions to Limited Partners of $2,977,747 and
$1,782,000 for the nine months ended September 30, 1998 and 1997, respectively
($500,000 and $594,000 for the quarters ended September 30, 1998 and 1997,
respectively). This represents distributions of $59.55 and $35.64 per unit for
the nine months ended September 30, 1998 and 1997, respectively ($10.00 and
$11.88 per unit for the quarters ended September 30, 1998 and 1997,
respectively). Distributions for the nine months ended September 30, 1998,
included $1,477,747 as a result of the distribution of net sales proceeds from
the sale of the restaurant properties in Fernandina Beach and Daytona Beach,
Florida. 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. As a result of the sale of the restaurant properties, the Income Fund's
total revenue was reduced, while the majority of the Income Fund's operating
expenses remained fixed. Therefore, distributions of net cash flow were
adjusted for the nine months ended September 30, 1998. No distributions were
made to us for the quarter and nine months ended September 30, 1998 and 1997.
No amounts distributed to the Limited Partners for the nine months ended
September 30, 1998 and 1997, 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.
The Years Ended December 31, 1997, 1996 and 1995
The Income Fund's primary source of capital for the years ended December 31,
1997, 1996 and 1995, was cash from operations (which includes cash received
from tenants, distributions from joint ventures and interest
S-22
<PAGE>
received, less cash paid for expenses). Cash from operations was $2,021,689,
$2,091,754 and $2,203,437 for the years ended December 31, 1997, 1996 and 1995,
respectively. The decrease in cash from operations during 1997 and 1996, 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. Cash from
operations was also affected by the following transactions during the years
ended December 31, 1997, 1996 and 1995.
In February 1995, the tenant of the Po Folks restaurant property in
Hagerstown, Maryland, ceased operations of the restaurant business located on
such restaurant property and discontinued payment of rental amounts as provided
in its lease agreement. Due to the uncertainty of the collectibility of the
past due rental amounts, the Income Fund established an allowance for doubtful
accounts relating to the amount due from the former tenant. At December 31,
1995, the balance in the allowance for doubtful accounts for this restaurant
property was $259,242; therefore, no amount was included in receivables at
December 31, 1995, relating to this restaurant property. In addition, at
December 31, 1995, the balance in the allowance for doubtful accounts for the
Denny's restaurant property in Hagerstown, Maryland, (which was leased to the
same tenant of the Po Folks restaurant property) for past due rental amounts
was $76,948. In September 1996, the Income Fund agreed to accept $175,000 in
the form of promissory notes from the new tenant of the Denny's restaurant
property, as full satisfaction of past due rental amounts and past due real
estate taxes from the former tenant of the Denny's and Po Folks restaurant
properties. In connection therewith, during 1996, the Income Fund recognized
approximately $118,700 in base rental income for amounts which the Income Fund
had previously established an allowance for doubtful accounts, and wrote off
the remaining balances in the allowance for doubtful accounts. During 1996, the
Income Fund accepted a three year promissory note for $25,000, which bears
interest at 10% per annum and for which collections commenced in October 1996.
Receivables at December 31, 1997, include approximately $16,300 relating to
this promissory note. However, due to the uncertainty of the collectibility of
the remaining $150,000 to be received from the new tenant of the Denny's
restaurant property, the Income Fund established an allowance for doubtful
accounts of $150,000 during the year ended December 31, 1997. The Income Fund
sold this restaurant property in June 1998.
Other sources and uses of capital included the following items during the
years ended December 31, 1997, 1996 and 1995.
In January 1996, the Income Fund entered into a promissory note with CNL
Realty Corp., 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, the Income Fund entered into various promissory notes with the
corporate general partners for loans totaling $575,200 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, 1996. In addition, during 1997,
the Income Fund entered into various promissory notes with the corporate
general partner for loans totaling $117,000 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, 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 nets sales proceeds to pay liabilities of the
Income Fund, including quarterly distributions to the Limited Partners. The
balance of the proceeds 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 (net of
$4,330 which represents real estate tax amounts due from
S-23
<PAGE>
tenant) 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 expenses; 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 intends to use the remaining
net sales proceeds for other Income Fund purposes. We believe that 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. However, 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 expenses; 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 32.77% interest in the restaurant
property. In January 1998, the Income Fund reinvested the remaining net sales
proceeds in the restaurant property in Overland Park, Kansas, with our
affiliates, as tenants-in-common. We believe that 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. However, 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. The promissory note bore interest at a rate of nine
percent per annum and was collected in full, with interest, during the nine
months ended September 30, 1998. In December 1997, the Income Fund reinvested a
portion of the net sales proceeds in a restaurant property located in Miami,
Florida, as tenants-in-common with one of our affiliates. In connection
therewith, the Income Fund and the affiliate entered into an agreement whereby
each co-venturer will share in the profits and losses of the restaurant
property in proportion to each co-venturer's percentage interest. As of
December 31, 1997, the Income Fund owned a 9.84% interest in the restaurant
property. 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 (net of $511
which represents prorated rent returned to the tenant) of
S-24
<PAGE>
$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. We believe that 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. However, the Income Fund
distributed amounts sufficient to enable the Limited Partners to pay federal
and state income taxes, if any (at a level reasonably assumed by us), resulting
from the sale.
None of the restaurant properties owned by the Income Fund or the joint
ventures in which the Income Fund owns an interest is or may be encumbered.
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 the partners. At December 31, 1997, the
Income Fund had $493,118 invested in such short-term investments as compared to
$57,751 at December 31, 1996. The increase in cash and cash equivalents is
primarily attributable to the fact that during 1997, the Income Fund used net
sales proceeds from the sales of restaurant properties to pay a portion of the
liabilities of the Income Fund, including quarterly distributions to the
Limited Partners. During 1996, the Income Fund used cash generated from
operations to pay liabilities of the Income Fund.
During 1997, 1996 and 1995, certain of our affiliates incurred on behalf of
the Income Fund $71,681, $108,900 and $149,252, respectively, for certain
operating expenses. At December 31, 1997 and 1996, the Income Fund owed $82,239
and $102,859, respectively, to affiliates for such amounts and accounting and
administrative services. In addition, during the year ended December 31, 1997,
the Income Fund incurred $15,150 in real estate disposition fees due to an
affiliate as a result of services provided in connection with the sale of the
restaurant property in Chicago, Illinois. 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 $611,116 at December 31, 1997,
from $681,010 at December 31, 1996. The decrease in amounts payable to other
parties was primarily attributable to a decrease in accrued and escrowed real
estate taxes at December 31, 1997. Total liabilities at December 31, 1997, to
the extent they exceed cash and cash equivalents at December 31, 1997, will be
paid from future cash from operations, proceeds from the sales of restaurant
properties as described above, and in the event we elect to make additional
contributions or loans to the Income Fund, from future contributions or loans
from us.
Based primarily on current and anticipated cash from operations, the Income
Fund declared distributions to the Limited Partners of $2,376,000 for each of
the years ended December 31, 1997, 1996 and 1995. This represents distributions
of $47.52 per unit for each of the years ended December 31, 1997, 1996 and
1995. We expect to distribute some or all of the net sales proceeds from the
sales of the restaurant properties in Fernandina Beach and Daytona Beach,
Florida, to the Limited Partners. In deciding whether to sell restaurant
properties, we will consider 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, is expected to reduce the Income Fund's revenues.
The decrease in
S-25
<PAGE>
Income Fund revenues, combined with the fact that a significant portion of the
Income Fund's expenses are fixed in nature, is expected to result 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, 1997, 1996
or 1995 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.
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
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 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 in 1997) and during the nine months ended September 30, 1998, the
Income Fund and its consolidated joint venture owned and leased 27 wholly-owned
restaurant properties (including four restaurant properties which were sold in
1998), to operators of fast-food and family-style restaurant chains. In
connection therewith, during the nine months ended September 30, 1998 and 1997,
the Income Fund and Tuscawilla Joint Venture earned $1,196,056 and $1,593,167,
respectively, in rental income from operating leases (net of adjustments to
accrued rental income), earned income from direct financing leases and
contingent rental income for these restaurant properties, $355,160 and $494,795
of which was earned during the quarters ended September 30, 1998 and 1997,
respectively. The decrease in rental, earned and contingent rental income
during the quarter and nine months ended September 30, 1998, as compared to the
quarter and nine months ended September 30, 1997, is partially attributable to
a decrease of approximately $73,500 and $325,200, respectively, as a result of
the sales of restaurant properties during 1997 and 1998. The decrease in rental
income was partially offset by an increase of approximately $69,100 for the
nine months ended September 30, 1998, due to the reinvestment of the majority
of the net sales proceeds from the 1997 sale of the restaurant property in
Bradenton, Florida, in a restaurant property in Fayetteville, North Carolina in
June 1997. The Income Fund reinvested the net sales proceeds from the 1997
sales of the restaurant properties in Kissimmee, Florida, Roswell, Georgia and
Mason City, Iowa, in restaurant properties held as tenants-in-common with
certain of our affiliates resulting in an increase in equity in earnings of
joint venture as described below.
Rental, earned and contingent rental income also decreased during the nine
months ended September 30, 1998 due to the fact that, during the nine months
ended September 30, 1998, (i) the tenant of the restaurant property in Canton
Township, Michigan, vacated the restaurant property and ceased operations and
(ii) the Income Fund terminated the lease with the tenant of the restaurant
property in Hazard, Kentucky. Due to the fact that the Income Fund had
recognized accrued rental income since the inception of these leases relating
to the straight lining of future scheduled rent increases in accordance with
generally accepted accounting principles, the Income Fund wrote off
approximately $80,800 of such accrued rental income relating to these
restaurant properties during the nine months ended September 30, 1998
approximately $29,500 of which was written off during the quarter ended
September 30, 1998. The Income Fund is currently seeking either replacement
tenants or purchasers for these restaurant properties. Rental and earned income
are expected to remain at reduced amounts until the Income Fund executes new
leases for these restaurant properties or
S-26
<PAGE>
until the restaurant properties are sold and the proceeds from such sales are
reinvested in additional restaurant properties.
Rental and earned income during the nine months ended September 30, 1998 and
1997, remained at reduced amounts 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. The Income Fund intends to reinvest the net sales
proceeds in an additional restaurant property.
During the nine months ended September 30, 1997, the Income Fund owned and
leased one restaurant property indirectly through a joint venture arrangement
and one restaurant property as tenants-in-common with one of our affiliates.
During the nine months ended September 30, 1998, the Income Fund owned and
leased three restaurant properties as tenants-in-common with certain of our
affiliates and three restaurant properties indirectly through joint venture
arrangements. In connection therewith, during the nine months ended September
30, 1998 and 1997, the Income Fund recorded a loss of $34,343 and $12,496,
respectively, attributable to losses recorded by these joint ventures, a loss
of $75,617 and $9,494 during the quarters ended September 30, 1998 and 1997,
respectively. The losses recorded during the quarter and nine months ended
September 30, 1998 and 1997 are primarily 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, the joint venture established an allowance for doubtful accounts
during the quarter and nine months ended September 30, 1997, for past due
rental amounts. During the nine months ended September 30, 1998, the joint
venture wrote off all uncollected balances and established an allowance for
loss on land and building for its restaurant property in Titusville, Florida of
approximately $139,300. The allowance represents the difference between the
restaurant property's net carrying value at September 30, 1998, and the current
estimated net realizable value of the restaurant property. The joint venture is
currently seeking either a replacement tenant or purchaser for this restaurant
property. The losses recorded by Titusville Joint Venture during the quarter
and nine months ended September 30, 1998 and 1997, were partially offset by 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.
Operating expenses, including depreciation and amortization expense, were
$392,662 and $425,173 for the nine months ended September 30, 1998 and 1997,
respectively, of which $113,310 and $131,090 were incurred for the quarters
ended September 30, 1998 and 1997, respectively. The decrease in operating
expenses during the quarter and nine months ended September 30, 1998, as
compared to the quarter and nine months ended September 30, 1997, is primarily
attributable to a decrease in depreciation expense due to the sales of several
restaurant properties during 1998 and 1997.
As a result of the sales of three restaurant properties during the nine
months ended September 30, 1998, as described above in "Liquidity and Capital
Resources," and as a result of the sales of four restaurant properties during
the nine months ended September 30, 1997, the Income Fund recognized total
gains during the nine months ended September 30, 1998 and 1997, of $583,373 and
$969,052, respectively, for financial reporting purposes.
During the nine months ended September 30, 1997, the Income Fund recorded an
allowance for loss on land and building of $32,819, for financial reporting
purposes, relating to the Po Folks restaurant property in Hagerstown, Maryland.
The loss represented the difference between the restaurant property's net
carrying value at September 30, 1997 and the estimated net realizable value of
this restaurant property. During June 1998, the Income Fund sold this
restaurant property and recognized a gain of $13,213 for financial reporting
purposes.
In addition, during the nine months ended September 30, 1998, the Income
Fund recorded an allowance for loss on land and building of $99,865 for
financial reporting purposes, relating to the restaurant property in Hazard,
Kentucky. The loss represents the difference between the restaurant property's
net carrying value and the current estimated net realizable value of the
restaurant property.
S-27
<PAGE>
The Years Ended December 31, 1997, 1996 and 1995
During the years ended December 31, 1995 and 1996, the Income Fund owned and
leased 30 wholly-owned restaurant properties and during 1997, the Income Fund
owned and leased 31 wholly-owned restaurant properties (including five
restaurant properties, one in each of Chicago, Illinois; Bradenton, Florida;
Kissimmee, Florida; Roswell, Georgia and Mason City, Iowa, which were sold
during the year ended December 31, 1997). In addition, during the years ended
December 31, 1997, 1996 and 1995, the Income Fund was a co-venturer in two
separate joint ventures that each owned and leased one restaurant property and
during 1997, the Income Fund owned and leased two restaurant properties, with
certain of our affiliates, as tenants-in-common. As of December 31, 1997, the
Income Fund owned, either directly or through joint venture arrangements, 30
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. All 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, 1997, 1996 and 1995, the Income Fund and
its consolidated joint venture, Tuscawilla Joint Venture, earned $1,930,486,
$2,273,850 and $2,188,000, 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 partially attributable to a
decrease of approximately $219,700 as a result of the sales of the restaurant
properties in Chicago, Illinois (in January 1997), Bradenton, Florida (in March
1997), Kissimmee, Florida (in April 1997), Roswell, Georgia (in June 1997), and
Mason City, Iowa (in October 1997), as described above in "Liquidity and
Capital Resources." During 1997, the decrease in rental income was partially
offset by an increase of approximately $86,200 due to the reinvestment of a
portion of these net sales proceeds in a restaurant property in Fayetteville,
North Carolina, in June 1997, as described above in "Liquidity and Capital
Resources."
The decrease in rental and earned income during 1997, as compared to 1996,
and the increase during 1996, as compared to 1995, is partially attributable to
the fact that during 1996, 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, as described above in "Liquidity and Capital Resources." The decrease
in 1997, as compared to 1996, is also partially attributable to the fact that
during 1997, the Income Fund established an allowance for doubtful accounts of
approximately $77,100 for past due amounts for these restaurant properties due
to the uncertainty of the collectibility of these amounts.
Rental and earned income during 1997 and 1996, continued to remain at
reduced amounts due to the fact that the Income Fund was not receiving any
rental income relating to the Po Folks restaurant property in Hagerstown,
Maryland. This restaurant property was sold in June 1998.
In addition, 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 $15,400 for rental amounts
relating to the restaurant property in Canton Township, Michigan, due to
financial difficulties the tenant is experiencing. We intend to pursue
collection of past due amounts relating to this restaurant property and will
recognize any such amounts as income if collected. No such allowance was
established during 1996 and 1995.
The increase in rental and earned income during 1996, as compared to 1995,
is partially offset by a decrease in rental income of approximately $31,000 due
to the fact that in September 1996, the tenant of the restaurant property in
Chicago, Illinois, ceased operations of the restaurant business located on such
restaurant property and the Income Fund ceased recording rental revenue
relating to such restaurant property. The tenant filed for bankruptcy and in
January 1997, the Income Fund sold this restaurant property to an unrelated
third party, as described above in "Liquidity and Capital Resources."
S-28
<PAGE>
During the years ended December 31, 1997, 1996 and 1995, the Income Fund
also earned $157,648, $157,993 and $143,039, respectively, in contingent rental
income. The increase in contingent rental income during 1996, as compared to
1995, is primarily attributable to an increase in gross sales of certain
restaurant properties requiring the payment of contingent rent.
In addition, during 1997, 1996 and 1995, the Income Fund earned $100,816,
$26,496 and $22,386, respectively, in interest and other income. The increase
in interest and other income during 1997, was partially attributable to the
interest earned on the net sales proceeds relating to the sales of the
restaurant properties in Chicago, Illinois; Bradenton, Florida; Kissimmee,
Florida; Roswell, Georgia and Mason City, Iowa 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, all
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 a loss of $148,170 during the year ended December
31, 1997 and income of $11,740 and $22,015 for the years ended December 31,
1996 and 1995, respectively, attributable to net income and net loss earned by
unconsolidated joint ventures in which the Income Fund is a co-venturer. The
decrease in net income earned by joint ventures 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 73.4% 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 expenses of approximately
$16,600 during 1997. No such real estate taxes were incurred during 1996. The
joint venture intends to pursue collection of these amounts from the former
tenant and will recognize such amounts as income if collected. In addition,
during 1997, the joint venture established an allowance for loss on land and
building for its restaurant property in Titusville, Florida, for approximately
$147,000. The allowance represents the difference between the restaurant
property's carrying value at December 31, 1997, and the estimated net
realizable value of the restaurant property. 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 is currently seeking either a
replacement tenant or purchaser for this restaurant property. The decrease
during 1997, as compared to 1996, was partially offset by an increase in net
income earned by joint ventures due to the fact that in July 1997, the Income
Fund reinvested the majority of the net sales proceeds it received from the
sale of the restaurant property in Kissimmee, Florida, in an IHOP restaurant
property located in Englewood, Colorado, as tenants-in-common with one of our
affiliates. The decrease in net income earned during 1996, as compared to 1995,
is primarily attributable to the receipt by Titusville Joint Venture of
bankruptcy proceeds relating to the former tenant during 1995. These amounts
had previously been written off; therefore, they were recognized as income when
received, during 1995.
During the years ended December 31, 1997, 1996 and 1995, one lessee of the
Income Fund and its consolidated joint venture, Golden Corral Corporation,
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 the rental income from one restaurant property owned by an
unconsolidated joint venture and two restaurant properties owned with
affiliates as tenants-in-common). As of December 31, 1997, Golden Corral
Corporation was the lessee under leases relating to six restaurants. It is
anticipated that, based on the minimum rental payments required by the leases,
this lessee will continue to contribute more than 10% of the Income Fund's
total rental income during 1998 and subsequent years. In addition, during at
least one of the years ended December 31, 1997, 1996 or 1995, six restaurant
chains, Golden Corral, Denny's, Perkins,
S-29
<PAGE>
Pizza Hut, KFC and Taco Bell, 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 the rental income
from one restaurant property owned by an unconsolidated joint venture and two
restaurant properties owned with affiliates as tenants-in-common). In
subsequent years, it is anticipated that Golden Corral, Denny's, Pizza Hut, KFC
and Taco Bell each will continue to account for more than 10% 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.
Operating expenses, including depreciation and amortization expense, were
$626,431, $638,140 and $667,876 for the years ended December 31, 1997, 1996 and
1995, respectively. The decrease in operating expenses during 1997, as compared
to 1996, was partially attributable to a decrease of approximately $56,600 in
depreciation expense as a result of the sales of restaurant properties in 1997,
as described above in "Liquidity and Capital Resources." In addition, the
decrease during 1996, as compared to 1995, is partially attributable to a
decrease in depreciation expense relating to the Po Folks restaurant property
in Hagerstown, Maryland, due to the Income Fund establishing an allowance for
loss on land and building which represented the difference between the
restaurant property's carrying value at December 31, 1995, and the estimated
net realizable value of the restaurant property. This allowance reduced the
depreciable basis of the restaurant property.
The decrease in operating expenses during 1997, as compared to 1996, is
partially attributable to, and the decrease during 1996, as compared to 1995,
is partially offset by, the fact that during 1996, the Income Fund recorded
approximately $15,000, relating to legal fees associated with the tenant of the
restaurant property in Chicago, Illinois, filing bankruptcy. The Income Fund
sold this restaurant property in January 1997, as described above in "Liquidity
and Capital Resources." The decrease in operating expenses during 1997, as
compared to 1996, is also attributable to a decrease in accounting and
administrative expenses associated with operating the Income Fund and its
restaurant properties.
The decrease in operating expenses during 1997, as compared to 1996, is
partially offset by an increase in operating expenses due to the fact that
during 1997 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 now appears 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. The decrease in operating expenses during 1996,
as compared to 1995, was partially attributable to the fact that during 1996,
the Income Fund did not record real estate tax expense relating to the Denny's
restaurant property and Po Folks restaurant property in Hagerstown, Maryland,
as described above. The Income Fund recorded such expenses during 1995. As a
result of the former tenant of the Po Folks restaurant property in Hagerstown,
Maryland, defaulting under the terms of its lease in February 1995, the Income
Fund incurred real estate tax expense and insurance expense until the
restaurant property was sold in June 1998.
In addition, the decrease in operating expenses during 1996, as compared to
1995, is partially offset by an increase in accounting and administrative
expenses associated with operating the Income Fund and its restaurant
properties and an increase in insurance expense as a result of our obtaining
contingent liability and property coverage for the Income Fund beginning in May
1995.
As a result of the sales of the five restaurant properties during 1997, and
the sale of the 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 totaling $1,027,590 during the year ended December 31, 1997.
No restaurant properties were sold during 1996 or 1995. In addition, during the
years ended December 31, 1997 and 1995, the Income Fund recorded an allowance
for loss on land and building of $32,819 and $207,844,
S-30
<PAGE>
respectively, relating to the Po Folks restaurant property in Hagerstown,
Maryland. The allowance represented the difference between the carrying value
of the restaurant property at December 31, 1997 and 1995, and the net
realizable value of the restaurant property based on anticipated sales prices
at December 31, 1997 and 1995.
General
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Income Fund's financial position or results of operations.
The Income Fund's leases as of September 30, 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.
The Year 2000 problem is the result of information technology systems and
embedded systems (products which are made with microprocessor (computer) chips
such as HVAC systems, physical security systems and elevators) using a two-
digit format, as opposed to four digits, to indicate the year. Such information
technology and embedded systems may be unable to properly recognize and process
date-sensitive information beginning January 1, 2000.
The Income Fund does not have any information technology systems. Certain of
our affiliates provide all services requiring the use of information technology
systems pursuant to a management agreement with the Income Fund. The
maintenance of embedded systems, if any, at the Income Fund's properties is the
responsibility of the tenants of the properties in accordance with the terms of
the Income Fund's leases. We and our affiliates have established a team
dedicated to reviewing the internal information technology systems used in the
operation of the Income Fund, and the information technology and embedded
systems and the Year 2000 compliance plans of the Income Fund's tenants,
significant suppliers, financial institutions and transfer agent.
The information technology infrastructure of our affiliates consists of a
network of personal computers and servers that were obtained from major
suppliers. The affiliates utilize various administrative and financial software
applications on that infrastructure to perform the business functions of the
Income Fund. Our inability and that of our affiliates to identify and timely
correct material Year 2000 deficiencies in the software and/or infrastructure
could result in an interruption in, or failure of, certain of the Income Fund's
business activities or operations. Accordingly, we and our affiliates have
requested and are evaluating documentation from the suppliers of the affiliates
regarding the Year 2000 compliance of their products that are used in the
business activities or operations of the Income Fund. The costs expected to be
incurred by us and our affiliates to become Year 2000 compliant will be
incurred by us and by our affiliates; therefore, these costs will have no
impact on the Income Fund's financial position or results of operations.
The Income Fund has material third party relationships with its tenants,
financial institutions and 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. If
any of these third parties are unable to meet their obligations to the Income
Fund because of the Year 2000 deficiencies, such a failure may have a material
impact on the Income Fund. Accordingly, we have requested and are evaluating
documentation from the Income Fund's tenants, financial institutions, and
transfer agent relating to their Year 2000 compliance plans. At this time, we
have not yet received sufficient certifications to be assured that the tenants,
financial institutions, and transfer agent have fully considered and mitigated
any potential material impact of the Year 2000 deficiencies. Therefore, we do
not, at this time, know of the potential costs to the Income Fund of any
adverse impact or effect of any Year 2000 deficiencies by these third parties.
S-31
<PAGE>
We currently expect that all Year 2000 compliance testing and any necessary
remedial measures on the information technology systems used in the business
activities and operations of the Income Fund will be completed prior to June
30, 1999. Based on the progress we and our affiliates have made in identifying
and addressing the Income Fund's Year 2000 issues and the plan and timeline to
complete the compliance program, we do not foresee significant risks associated
with the Income Fund's Year 2000 compliance at this time. Because we and our
affiliates are still evaluating the status of the systems used in business
activities and operations of the Income Fund and the systems of the third
parties with which the Income Fund conducts its business, we have not yet
developed a comprehensive contingency plan and are unable to identify "the most
reasonably likely worst case scenario" at this time. As we identify significant
risks related to the Income Fund's Year 2000 compliance or if the Income Fund's
Year 2000 compliance program's progress deviates substantially from the
anticipated timeline, we will develop appropriate contingency.
S-32
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997... F-1
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997.............................................. F-2
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997.............. F-3
Condensed Statements of Cash Flows for the Nine Months Ended September 30,
1998 and 1997............................................................ F-4
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997........................................ F-5
Report of Independent Accountants......................................... F-9
Balance Sheets as of December 31, 1997 and 1996........................... F-10
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995..................................................................... F-11
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995............................................................ F-12
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995..................................................................... F-13
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and 1995................................................................. F-14
Unaudited Pro Forma Financial Information................................. F-23
Unaudited Pro Forma Balance Sheet as of September 30, 1998................ F-24
Unaudited Pro Forma Income Statement for the Nine Months Ended September
30, 1998................................................................. F-25
Unaudited Pro Forma Income Statement for the Year Ended December 31,
1997..................................................................... F-26
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements............................................................... F-27
</TABLE>
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 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................................. $11,923,109 $14,635,583
Investment in direct financing leases............... 916,580 926,862
Investment in joint ventures........................ 2,093,452 1,179,762
Mortgage note receivable............................ -- 681,687
Cash and cash equivalents........................... 1,726,345 493,118
Restricted cash..................................... -- 251,879
Receivables, less allowance for doubtful accounts of
$152,230 and $154,469.............................. 40,088 102,420
Prepaid expenses.................................... 8,310 14,361
Lease costs, less accumulated amortization of $2,762
in 1997............................................ -- 9,238
Accrued rental income, less allowance for doubtful
accounts of $14,735 and $15,384.................... 85,729 154,738
Other assets........................................ 29,354 29,354
----------- -----------
$16,822,967 $18,479,002
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable.................................... $ 1,192 $ 5,219
Accrued and escrowed real estate taxes payable...... 11,011 11,897
Distributions payable............................... 500,000 594,000
Due to related parties.............................. 146,825 97,388
Rents paid in advance and deposits.................. 37,763 20,745
----------- -----------
Total liabilities................................. 696,791 729,249
Minority interest................................... 136,402 138,617
Partners' capital................................... 15,989,774 17,611,136
----------- -----------
$16,822,967 $18,479,002
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-1
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
------------------ ----------------------
1998 1997 1998 1997
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases......................... $351,021 $460,694 $1,175,634 $1,490,536
Adjustments to accrued rental
income......................... (29,474) -- (80,800) --
Earned income from direct fi-
nancing leases................. 33,613 34,101 101,222 102,631
Interest and other income....... 22,875 37,122 103,546 82,031
-------- -------- ---------- ----------
378,035 531,917 1,299,602 1,675,198
-------- -------- ---------- ----------
Expenses:
General operating and adminis-
trative........................ 32,218 31,361 102,940 104,699
Professional services........... 6,650 4,583 31,706 19,983
Real estate taxes............... 1,886 4,229 9,421 11,789
State and other taxes........... 530 -- 12,250 9,924
Depreciation and amortization... 72,026 90,917 236,345 278,778
-------- -------- ---------- ----------
113,310 131,090 392,662 425,173
-------- -------- ---------- ----------
Income Before Minority Interest in
Income of Consolidated Joint
Venture, Equity in Losses of
Unconsolidated Joint Ventures,
Gain on Sale of Land and
Buildings and Provision for Loss
on Land and Buildings............ 264,725 400,827 906,940 1,250,025
Minority Interest in Income of
Consolidated Joint Venture....... (4,352) (4,352) (12,933) (12,933)
Equity in Losses of Unconsolidated
Joint Ventures................... (75,617) (9,494) (34,343) (12,496)
Gain on Sale of Land and Build-
ings............................. -- -- 596,586 969,052
Provision for Loss on Land and
Buildings........................ (99,865) -- (99,865) (32,819)
-------- -------- ---------- ----------
Net Income........................ $ 84,891 $386,981 $1,356,385 $2,160,829
======== ======== ========== ==========
Allocation of Net Income:
General partners................ $ (11) $ 3,870 $ 11,479 $ 16,113
Limited partners................ 84,902 383,111 1,344,906 2,144,716
-------- -------- ---------- ----------
$ 84,891 $386,981 $1,356,385 $2,160,829
======== ======== ========== ==========
Net Income Per Limited Partner
Unit............................. $ 1.70 $ 7.66 $ 26.90 $ 42.89
======== ======== ========== ==========
Weighted Average Number of Limited
Partner Units Outstanding........ 50,000 50,000 50,000 50,000
======== ======== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1998 1997
----------------- ------------
<S> <C> <C>
General partners:
Beginning balance............................. $ 339,611 $ 321,305
Net income.................................... 11,479 18,306
----------- -----------
351,090 339,611
----------- -----------
Limited partners:
Beginning balance............................. 17,271,525 17,273,996
Net income.................................... 1,344,906 2,373,529
Distributions ($59.55 and $47.52 per limited
partner unit, respectively).................. (2,977,747) (2,376,000)
----------- -----------
15,638,684 17,271,525
----------- -----------
Total partners' capital......................... $15,989,774 $17,611,136
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities.......... $ 1,376,910 $ 1,500,218
----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and buildings......... 3,214,616 2,811,159
Additions to land and buildings on operating
leases.......................................... (150,000) (1,272,960)
Investment in joint ventures..................... (1,045,511) (511,667)
Collections on mortgage note receivable.......... 678,730 3,100
Decrease (increase) in restricted cash........... 245,377 (159,912)
----------- -----------
Net cash provided by investing activities...... 2,943,212 869,720
----------- -----------
Cash Flows from Financing Activities:
Proceeds from loans from corporate general part-
ner............................................. -- 37,000
Repayment of loans from corporate general part-
ner............................................. -- (37,000)
Distributions to limited partners................ (3,071,747) (1,782,000)
Distributions to holders of minority interest.... (15,148) (15,031)
----------- -----------
Net cash used in financing Activities.......... (3,086,895) (1,797,031)
----------- -----------
Net Increase in Cash and Cash Equivalents............ 1,233,227 572,907
Cash and Cash Equivalents at Beginning of Period..... 493,118 57,751
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 1,726,345 $ 630,658
=========== ===========
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Mortgage note accepted in exchange for sale of land
and building...................................... $ -- $ 685,000
=========== ===========
Deferred real estate disposition fees incurred and
unpaid at end of period........................... $ 53,400 $ 15,150
=========== ===========
Distributions declared and unpaid at end of peri-
od................................................ $ 500,000 $ 594,000
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, 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, 1997.
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.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
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. Land and Buildings on Operating Leases
Land and buildings on operating leases consisted of the following at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land.......................................... $ 6,123,402 $ 7,325,960
Buildings..................................... 8,720,879 10,891,910
----------- -----------
14,844,281 18,217,870
Less accumulated depreciation................. (2,821,307) (3,341,624)
----------- -----------
12,022,974 14,876,246
Less allowance for loss on land and building.. (99,865) (240,663)
----------- -----------
$11,923,109 $14,635,583
=========== ===========
</TABLE>
During the nine months ended September 30, 1998, the Partnership sold its
properties in Daytona Beach, Fernandina Beach and Punta Gorda, Florida, and
Hagerstown, Maryland, for a total of approximately $3,280,000 and received net
sales proceeds of $3,214,616, resulting in a total gain of $596,586 for
financial
F-5
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Nine Months Ended September 30, 1998 and 1997
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 6).
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.
As of December 31, 1997, the Partnership had established an allowance for
loss on land and building of $240,663 for the property in Hagerstown, Maryland.
The allowance represented the difference between the net carrying value at
December 31, 1997 and the estimate of net realizable value of the property. The
Partnership sold this property during the nine months ended September 30, 1998,
as described above.
In addition, during the nine months ended September 30, 1998, the
Partnership established an allowance for loss on land and building of $99,865,
for financial reporting purposes, relating to the property located in Hazard,
Kentucky. The allowance represents the difference between the net carrying
value of the property at September 30, 1998 and the current estimate of net
realizable value for the property.
3. Investment in Joint Ventures
In January 1998, the Partnership acquired a 25.84% interest in 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.
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 September 30, 1998, the Partnership had
contributed $629,925 to purchase land and pay for construction relating to the
joint venture. The Partnership has agreed to contribute approximately $36,100
in additional construction costs to the joint venture. When construction is
completed, the Partnership will have an approximate 47 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.
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>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation and allowance for
loss on land and building.................... $3,580,196 $3,152,962
Net investment in direct financing leases..... 3,406,017 1,003,680
Cash.......................................... 18,304 16,481
Accrued rental income......................... 48,509 11,621
Other assets.................................. 3,368 1,480
Liabilities................................... 123,346 18,722
Partners' capital............................. 6,933,048 4,167,502
Revenues...................................... 423,873 82,837
Provision for loss on land and building....... (139,266) (147,039)
Net income (loss)............................. 222,725 (157,912)
</TABLE>
F-6
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Nine Months Ended September 30, 1998 and 1997
The Partnership recognized losses totalling $34,343 and $12,496 for the nine
months ended September 30, 1998 and 1997, respectively, from these joint
ventures, of which losses totaling $75,617 and $9,494 were incurred during the
quarters ended September 30, 1998 and 1997, respectively.
4. 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. During the nine months
ended September 30, 1998, the Partnership collected the full amount of the
outstanding mortgage note receivable balance.
The mortgage note receivable consisted of the following at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Principal balance............................... $-- $678,730
Accrued interest receivable..................... -- 2,957
---- --------
$-- $681,687
==== ========
</TABLE>
5. 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, noncompounded annual return on their
adjusted capital contributions (the "10% Preferred Return") on a noncumulative
basis.
Generally, net sales proceeds from the sale of properties, to the extent
distributed, will be distributed first to the limited partners in an amount
sufficient to provide them with the 10% Preferred Return on a cumulative basis,
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 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.
During the nine months ended September 30, 1998 and 1997, the Partnership
declared distributions to the limited partners of $2,977,747 and $1,782,000,
respectively ($500,000 and $594,000 for the quarters ended September 30, 1998
and 1997, respectively). This represents distributions of $59.55 and $35.64 per
unit for the nine months ended September 30, 1998 and 1997, respectively
($10.00 and $11.88 per unit for the quarters ended September 30, 1998 and 1997,
respectively). Distributions for the nine months ended September 30, 1998,
included $1,477,747 as a result of the distribution 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-7
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Nine Months Ended September 30, 1998 and 1997
6. Related Party Transactions
An affiliate of the Partnership 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. 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 nine months ended September 30, 1998 and 1997, the
Partnership incurred $53,400 and $15,150, respectively, in deferred,
subordinated, real estate disposition fees as a result of the sale of
properties in 1998 and 1997.
F-8
<PAGE>
Report of Independent Accountants
To the Partners
CNL Income Fund III, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund III, Ltd.
(a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. 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 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 Income Fund III, Ltd.
as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
January 31, 1998
F-9
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
ASSETS ----------- -----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land and building..................................... $14,635,583 $16,483,532
Net investment in direct financing leases.............. 926,862 938,918
Investment in joint ventures........................... 1,179,762 643,912
Mortgage note receivable............................... 681,687 --
Cash and cash equivalents.............................. 493,118 57,751
Restricted cash........................................ 251,879 --
Receivables, less allowance for doubtful accounts of
$154,469 and $70,142.................................. 102,420 321,831
Prepaid expenses....................................... 14,361 6,898
Lease costs, less accumulated amortization of $2,762
and $2,162............................................ 9,238 9,838
Accrued rental income, less allowance for doubtful
accounts of $15,384 in 1997........................... 154,738 114,738
Other assets........................................... 29,354 31,489
----------- -----------
$18,479,002 $18,608,907
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable....................................... $ 5,219 $ 14,183
Accrued and escrowed real estate taxes payable......... 11,897 72,827
Distributions payable.................................. 594,000 594,000
Due to related parties................................. 97,388 102,859
Rents paid in advance and deposits..................... 20,745 88,325
Total liabilities...................................... 729,249 872,194
Minority interest...................................... 138,617 141,412
Partners' capital...................................... 17,611,136 17,595,301
----------- -----------
$18,479,002 $18,608,907
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases..... $1,859,911 $2,184,460 $2,115,798
Earned income from direct Financing
leases................................. 70,575 89,390 72,202
Contingent rental income................ 157,648 157,993 143,039
Interest and other income............... 100,816 26,496 22,386
---------- ---------- ----------
2,188,950 2,458,339 2,353,425
---------- ---------- ----------
Expenses:
General operating and administrative.... 140,886 147,840 131,071
Professional services................... 27,314 50,064 28,758
Bad debt expense........................ 32,360 924 11,418
Real estate taxes....................... 47,165 1,973 50,815
State and other taxes................... 9,924 11,973 11,322
Depreciation and amortization........... 368,782 425,366 434,492
---------- ---------- ----------
626,431 638,140 667,876
---------- ---------- ----------
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............................. 1,562,519 1,820,199 1,685,549
Minority Interest in Income of Consoli-
dated Joint Ventures..................... (17,285) (17,282) (17,205)
Equity in Earnings (Loss) of Unconsoli-
dated Joint Venture...................... (148,170) 11,740 22,015
Gain on Sale of Land and Buildings........ 1,027,590 -- --
Provision for Loss on Land and Building... (32,819) -- (207,844)
---------- ---------- ----------
Net Income................................ $2,391,835 $1,814,657 $1,482,515
========== ========== ==========
Allocation of Net Income:
General partners........................ $ 18,306 $ 18,147 $ 13,906
Limited partners........................ 2,373,529 1,796,510 1,468,609
---------- ---------- ----------
$2,391,835 $1,814,657 $1,482,515
========== ========== ==========
Net Income Per Limited Partner Unit....... $ 47.47 $ 35.93 $ 29.37
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding........................ 50,000 50,000 50,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-11
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<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,
1994................... $161,500 $127,752 $25,000,000 $(16,021,640) $12,647,415 $(2,864,898) $19,050,129
Distributions to
limited partners
($47.52 per limited
partner unit)......... -- -- -- (2,376,000) -- -- (2,376,000)
Net income............. -- 13,906 -- -- 1,468,609 -- 1,482,515
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
======== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-12
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows From Operating Activities:
Cash received from tenants............. $ 2,268,568 $ 2,226,794 $ 2,340,729
Distributions from unconsolidated joint
ventures.............................. 19,647 31,670 47,499
Cash paid for expenses................. (325,067) (175,148) (198,797)
Interest received...................... 58,541 8,438 14,006
----------- ----------- -----------
Net cash provided by operating
activities........................... 2,021,689 2,091,754 2,203,437
----------- ----------- -----------
Cash Flows From Investing Activities:
Proceeds from sale of land and
buildings............................. 3,023,357 -- --
Deposit received on sale of land
parcel................................ -- 51,400 --
Additions to land and buildings........ (1,272,960) -- --
Investment in joint ventures........... (703,667) -- --
Collections on note receivable......... 6,270 -- --
Increase in restricted cash............ (245,377) -- --
Decrease (increase) in other assets.... 2,135 (2,135) --
----------- ----------- -----------
Net cash provided by investing
activities........................... 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.............................. (20,080) (20,082) (19,997)
Distributions to limited partners...... (2,376,000) (2,376,000) (2,376,000)
----------- ----------- -----------
Net cash used in Financing
activities........................... (2,396,080) (2,396,082) (2,395,997)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................ 435,367 (255,063) (192,560)
Cash and Cash Equivalents at Beginning
of Year................................ 57,751 312,814 505,374
Cash and Cash Equivalents at End of
Year................................... $ 493,118 $ 57,751 $ 312,814
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................. $ 2,391,835 $ 1,814,657 $ 1,482,515
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation........................... 368,182 424,766 433,892
Amortization........................... 600 600 600
Minority interest in income of
consolidated joint venture............ 17,285 17,282 17,205
Equity in earnings of unconsolidated
joint ventures, net of distributions.. 167,817 19,930 25,484
Gain on sale of land and buildings..... (1,027,590) -- --
Provision for loss on land and
building.............................. 32,819 -- 207,844
Decrease (increase) in receivables..... 214,793 (215,193) 9,339
Decrease in net investment in direct
financing leases...................... 12,056 7,331 5,358
Increase in prepaid expenses........... (7,463) (1,297) (1,778)
Decrease (increase) in accrued rental
income................................ (40,000) (32,667) 7,161
Decrease in accounts payable and
accrued expenses...................... (71,844) (4,732) (21,689)
Increase (decrease) in due to related
parties............................... (20,621) 48,944 51,578
Increase (decrease) in rents paid in
advance and deposits.................. (16,180) 12,133 (14,072)
----------- ----------- -----------
Total adjustments..................... (370,146) 277,097 720,922
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. $ 2,021,689 $ 2,091,754 $ 2,203,437
=========== =========== ===========
Supplemental Schedule of 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 December 31.... $ 15,150 $ -- $ --
Distributions declared and unpaid at
December 31........................... $ 594,000 $ 594,000 $ 594,000
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-13
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
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.
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. 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 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-14
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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 and a property in
each of Englewood, Colorado and Miami, Florida, held as tenants-in-common with
affiliates, is 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 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 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
F-15
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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>
1997 1996
----------- -----------
<S> <C> <C>
Land............................................ $ 7,325,960 $ 7,835,279
Buildings....................................... 10,891,910 12,467,020
----------- -----------
18,217,870 20,619,880
Less accumulated depreciation................... (3,341,624) (3,610,923)
----------- -----------
Less allowance for loss on land and building.... (240,663) (207,844)
----------- -----------
$14,635,583 $16,483,532
=========== ===========
</TABLE>
In 1995, the Partnership 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 allowance represents the difference between (i) the
property's carrying value at December 31, 1997 and 1995, and (ii) the estimated
net realizable value of the property based on the anticipated sales price
relating to this property as of such dates.
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
funds 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 (net of $4,330 which
represents real estate tax amounts due from tenant) 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 expense; therefore, the Partnership sold the property 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.
F-16
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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 (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 (net of $511 which
represents prorated rent returned to the tenant) 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.
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, 1997, 1996 and 1995, the Partnership recognized $40,000, $32,667 and
$27,669, 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, 1997:
<TABLE>
<S> <C>
1998........................................................... $ 1,534,701
1999........................................................... 1,547,630
2000........................................................... 1,547,630
2001........................................................... 1,552,155
2002........................................................... 1,529,200
Thereafter..................................................... 8,374,163
-----------
$16,085,479
===========
</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 leases 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>
1997 1996
----------- -----------
<S> <C> <C>
Minimum lease payments receivable................ $ 2,191,519 $ 2,340,192
Estimated residual value......................... 239,432 239,432
Less unearned income............................. (1,504,089) (1,640,706)
----------- -----------
Net investment in direct financing leases........ $ 926,682 $ 938,918
=========== ===========
</TABLE>
F-17
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998............................................................ $ 148,672
1999............................................................ 148,672
2000............................................................ 148,672
2001............................................................ 148,672
2002............................................................ 148,672
Thereafter...................................................... 1,448,159
----------
$2,191,519
==========
</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 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,
1997, the Partnership owned a 32.77% 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, 1997, the Partnership owned a 9.84% interest in this property.
Titusville 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 or family-style restaurants. The
following presents the joint venture's condensed financial information at
December 31:
<TABLE>
<CAPTION>
1997 1996
---------- --------
<S> <C> <C>
Land and building on operating leases, less
accumulated depreciation and allowance for loss on
land and building.................................. $3,152,962 $822,072
Net investment in direct financing leases........... 1,003,680 --
Cash................................................ 16,481 9,677
Receivables......................................... -- 11,233
Accrued rental income............................... 11,621 17,700
Other assets........................................ 1,480 29,631
Liabilities......................................... 18,722 9,665
Partners' capital................................... 4,167,502 880,648
Revenues............................................ 82,837 51,778
Net income (loss)................................... (157,912) 15,995
</TABLE>
F-18
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
The Partnership recognized a loss totalling $148,170 for the year ended
December 31, 1997 and income of $11,740 and $22,015 for the years ended
December 31, 1996 and 1995, respectively, from these 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 promissory note
bears interest at a rate of nine percent per annum and is being collected in 36
monthly installments of $6,163, including interest, with a balloon payment of
$642,798 due in July 2000.
The mortgage note receivable consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
--------- ----
<S> <C> <C>
Principal balance........................................... $ 678,730 $--
Accrued interest receivable................................. 2,957 --
--------- ---
$ 681,687 $--
========= ===
</TABLE>
The general partners believe that the estimated fair value of the mortgage
note receivable at December 31, 1997, approximates 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
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
restaurant located on the Partnership'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 of ten percent
per annum and is being collected in 36 equal monthly installments of $807 and
commenced in October 1996. Receivables at December 31, 1997 and 1996, include
$16,318 and $23,240, respectively, including accrued interest of $164 and $50,
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.
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-19
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
Generally, net sales proceeds from the sale of properties, 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 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.
During each of the years ended December 31, 1997, 1996 and 1995, the
Partnership declared distributions to the limited partners of $2,376,000. No
distributions have been made to the general partners to date.
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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................ $2,391,835 $1,814,657 $1,482,515
Depreciation for tax reporting pur-
poses in excess of depreciation for
financial reporting purposes........ (21,782) (9,754) (628)
Allowance for loss on land and build-
ing................................. 32,819 -- 207,844
Direct financing leases recorded as
operating leases for tax reporting
purposes............................ 12,056 7,330 5,358
Gain on sale of land for tax report-
ing purposes........................ -- 20,724 --
Gain on sale of land and buildings
for financial reporting purposes in
excess of gain on sale for tax re-
porting purposes.................... (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 report-
ing purposes........................ 140,707 (1,329) (1,769)
Allowance for doubtful accounts...... 84,326 (283,135) 42,770
Accrued rental income................ (40,000) (32,667) 7,161
Rents paid in advance................ (16,680) 12,133 (14,572)
Minority interest in timing differ-
ences of consolidated joint ven-
ture................................ (133) (162) (106)
Net income for federal income tax
purposes............................ $1,893,867 $1,527,797 $1,728,573
========== ========== ==========
</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 parent company of CNL Securities
Corp. and CNL Fund Advisors, Inc. James M. Seneff, Jr. is director and chief
executive officer of CNL Securities Corp. and 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, is director and president
of CNL Securities Corp., is director, vice chairman of the board of directors
and treasurer of CNL Fund Advisors, Inc. and served as president of CNL Fund
Advisors, Inc. through October 1997.
F-20
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
During the years ended December 31, 1997, 1996 and 1995, certain Affiliates
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 Affiliates 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 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 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, 1997, 1996 and 1995.
Certain Affiliates are 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-percent of the sales price if the Affiliates provide
a substantial amount of services in connection with the 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 10% Preferred Return, plus their adjusted capital contributions.
During the year ended December 31, 1997, the Partnership incurred $15,150 in
deferred, subordinated real estate disposition fees as a result of the
Partnership's sale of the Property in Chicago, Illinois. No deferred,
subordinated real estate disposition fees were incurred for the years ended
December 31, 1996 and 1995.
During the years ended December 31, 1997, 1996 and 1995, the Affiliates
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $87,056, $85,906 and $78,597 for the years
ended December 31, 1997, 1996 and 1995, respectively, for such services.
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Due to Affiliates:
Expenditures incurred on behalf of the Partnership......... $ 38,492 $ 56,942
Accounting and administrative services..................... 43,746 45,917
Deferred, subordinated real estate disposition fee......... 15,150 --
-------- --------
$ 97,388 $102,859
======== ========
</TABLE>
12. Concentration of Credit Risk
For the years ended December 31, 1997, 1996 and 1995, rental income from
Golden Corral Corporation was $474,553, $490,196 and $470,952, 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 the
joint venture and the properties held as tenants-in-common with affiliates).
F-21
<PAGE>
CNL INCOME FUND III, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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 the joint venture and the properties
held as tenants-in-common with affiliates) for at least one of the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Family Steakhouse Restaurants... $474,553 $490,196 $470,952
KFC........................................... 261,415 254,646 279,075
Pizza Hut..................................... 255,055 292,795 289,161
Taco Bell..................................... 250,140 254,395 260,119
Denny's....................................... 229,537 355,123 254,043
Perkins....................................... 154,819 276,114 276,114
</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. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
13. Subsequent Event
In January 1998, the Partnership sold its property in Fernandina Beach,
Florida, to the tenant, for $730,000 and received net sales proceeds (net of
$3,018 which represents prorated rent collected at closing) of $724,672,
resulting in a gain of approximately $264,000 for financial reporting purposes.
In addition, in January 1998, the Partnership sold its property in Daytona
Beach, Florida to the tenant, for $1,050,000 and received net sales proceeds
(net of $1,975 which represents prorated rent returned to the tenant) of
$1,007,001, resulting in a gain of approximately $299,300 for financial
reporting purposes.
In January 1998, the Partnership used the net sales proceeds from the sale
of the property in Kissimmee, Florida, to acquire a property in Overland Park,
Kansas, as tenants-in-common with affiliates of the general partners. In
connection therewith, the Partnership contributed approximately $415,600 for a
25.84% interest in such property.
F-22
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to the
Company gives effect to 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 the Company, the
historical combined financial information of CNL Income Fund III, Ltd. (the
"CNL 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 the Company, the
CNL Income Fund, Advisor and CNL Restaurant Financial Services Group. The pro
forma balance sheet assumes that the Acquisition occurred on September 30,
1998; the pro forma consolidated statements of earnings assume that the
Property Acquisitions (as defined on page ) and the Acquisition occurred on
January 1, 1997.
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.
UNAUDITED PRO FORMA BALANCE SHEET
September 30, 1998
<TABLE>
<CAPTION>
Historical
----------------------------------------------------------------------------------
CNL Income CNL Financial CNL Financial Combined
APF Fund III, Ltd. Advisor Services, Inc. Corp. Portfolios
------------ -------------- ---------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Land and
buildings on
operating
leases, net..... $298,967,972 $ 11,923,109 $ 0 $ 0 $ 0 $ 310,891,081
Net investment in
direct financing
leases.......... 117,028,760 916,580 0 0 0 117,945,340
Mortgages and
notes
receivable...... 33,523,506 0 0 0 173,776,981 207,300,487
Other
Investments..... 16,200,316 0 200,000 0 6,561,628 22,961,944
Investment in
joint ventures.. 631,374 2,093,452 0 0 0 2,724,826
Cash and cash
equivalents..... 90,674,289 1,726,345 283,300 599,997 5,098,033 98,381,964
Receivables...... 575,104 40,088 7,544,985 6,824,632 517,471 15,502,280
Accrued rental
income.......... 3,071,451 85,729 0 0 0 3,157,180
Other assets..... 5,711,195 37,664 401,524 295,570 3,854,477 10,300,430
------------ ------------ ---------- ----------- ------------ -------------
Total assets.... $566,383,967 $ 16,822,967 $8,429,809 $ 7,720,199 $189,808,590 $ 789,165,532
============ ============ ========== =========== ============ =============
Liabilities &
Equity:
Accounts payable
and accrued
liabilities..... $ 379,496 $ 12,203 $ 449,751 $ 193,949 $ 1,236,138 $ 2,271,537
Accrued
construction
costs payable... 3,045,304 0 0 0 0 3,045,304
Distributions
payable......... 0 500,000 2,220,000 0 0 2,720,000
Due to related
parties......... 2,552,411 146,825 0 1,452,512 6,556,920 10,708,668
Income tax
payable......... 0 0 1,989,003 0 1,001,861 2,990,864
Line of credit... 6,765,575 0 0 0 0 6,765,575
Notes payable.... 0 0 390,398 28,462 175,528,203 175,947,063
Deferred income.. 1,015,758 0 0 0 0 1,015,758
Rents paid in
advance......... 437,497 37,763 0 0 0 475,260
Minority
interest........ 282,544 136,402 0 0 0 418,946
Common Stock..... 621,187 0 9,800 2,000 200 633,187
Additional paid
in capital...... 556,830,578 0 482,964 5,231,827 3,887,496 566,432,865
Accumulated
distributions in
excess of net
earnings........ (5,546,383) 0 2,887,893 811,449 1,597,772 (249,269)
Partners
capital......... 0 15,989,774 0 0 0 15,989,774
------------ ------------ ---------- ----------- ------------ -------------
Total
liabilities and
equity......... $566,383,967 $ 16,822,967 $8,429,809 $ 7,720,199 $189,808,590 $ 789,165,532
============ ============ ========== =========== ============ =============
<CAPTION>
Pro Forma
------------------------------
Adjustments Pro Forma
---------------- -------------
<S> <C> <C>
Assets:
Land and
buildings on
operating
leases, net..... $ 5,150,131 (1)
26,052,741 (2) $342,093,953
Net investment in
direct financing
leases.......... 347,210 (1) 118,292,550
Mortgages and
notes
receivable...... 849,195 (2) 208,149,682
Other
Investments..... -- 22,961,944
Investment in
joint ventures.. 758,948 (1) 3,483,774
Cash and cash
equivalents..... (237,562)(1)
(8,933,000)(1)
(26,901,936)(2) 62,309,466
Receivables...... (7,996,204)(3) 7,506,076
Accrued rental
income.......... (85,729)(1) 3,071,451
Other assets..... 42,043,187 (1)
(3,692,497)(1) 48,651,120
---------------- -------------
Total assets.... $ 27,354,484 $816,520,016
================ =============
Liabilities &
Equity:
Accounts payable
and accrued
liabilities..... $ -- $ 2,271,537
Accrued
construction
costs payable... -- 3,045,304
Distributions
payable......... -- 2,720,000
Due to related
parties......... (7,996,204)(3) 2,712,464
Income tax
payable......... (2,990,864)(4) 0
Line of credit... -- 6,765,575
Notes payable.... -- 175,947,063
Deferred income.. -- 1,015,758
Rents paid in
advance......... -- 475,260
Minority
interest........ -- 418,946
Common Stock..... 131,591 (1) 764,778
Additional paid
in capital...... 133,845,572 (1) 700,278,437
Accumulated
distributions in
excess of net
earnings........ (82,636,701)(1)
2,990,864 (4) (79,895,106)
Partners
capital......... (15,989,774)(1) 0
---------------- -------------
Total
liabilities and
equity......... $ 27,354,484 $816,520,016
================ =============
</TABLE>
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA INCOME STATEMENT
September 30, 1998
<TABLE>
<CAPTION>
Historical
--------------------------------------------------------------------------------
CNL Income CNL Financial CNL Financial Combined
APF Fund III, Ltd. Advisor Services, Inc. Corp. Portfolios
----------- -------------- ----------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and earned
income.......... $22,947,199 $1,196,056 $ 0 $ 0 $ 0 $24,143,255
Fees............. 0 0 21,405,127 5,115,549 6,817 26,527,493
Interest and
other income.... 6,117,911 103,546 751 432,506 18,031,141 24,685,855
----------- ---------- ----------- ---------- ----------- -----------
Total revenue... 29,065,110 1,299,602 21,405,878 5,548,055 18,037,958 75,356,603
Expenses:
General and
administrative.. 1,539,004 144,067 6,701,115 4,107,311 2,597,171 15,088,668
Advisory fees.... 1,248,393 0 0 0 1,026,231 2,274,624
Fees to
Restaurant
Financial
Services Group.. 0 0 256,456 1,569,202 0 1,825,658
Interest......... 0 0 105,668 3,534 14,230,999 14,340,201
State taxes...... 397,569 12,250 15,226 18,564 201,616 645,225
Depreciation--
other........... 0 0 75,607 55,056 0 130,663
Depreciation--
property........ 2,684,924 227,107 0 0 0 2,912,031
Amortization..... 8,096 9,238 55,932 138 945,299 1,018,703
----------- ---------- ----------- ---------- ----------- -----------
Total operating
expenses....... 5,877,986 392,662 7,210,004 5,753,805 19,001,316 38,235,773
----------- ---------- ----------- ---------- ----------- -----------
Operating
earnings
(losses)........ 23,187,124 906,940 14,195,874 (205,750) (963,358) 37,120,830
Equity in
earnings of
joint
ventures/minority
interest........ (23,271) (47,276) 0 12,452 0 (58,095)
Gain on sale of
properties...... 0 596,586 0 0 0 596,586
Gain on
securitization.. 0 0 0 0 3,018,268 3,018,268
Provision for
loss on
properties...... 0 (99,865) 0 0 0 (99,865)
----------- ---------- ----------- ---------- ----------- -----------
Net earnings
(losses) before
income taxes.... 23,163,853 1,356,385 14,195,874 (193,298) 2,054,910 40,577,724
Provision
(credit) for
federal income
taxes........... 0 0 5,607,415 (81,229) 789,895 6,316,081
----------- ---------- ----------- ---------- ----------- -----------
Net income....... $23,163,853 $1,356,385 $ 8,588,459 $ (112,069) $ 1,265,015 $34,261,643
=========== ========== =========== ========== =========== ===========
Earnings per
share........... $ 0.49
===========
Shares
outstanding:
Weighted
average........ 47,633,909
===========
End of period... 62,118,679
===========
<CAPTION>
Pro Forma
-------------------------------
Adjustments Pro Forma
---------------- --------------
<S> <C> <C>
Revenues:
Rental and earned
income.......... $ 9,635,208 (a) $33,780,215
1,752 (b)
Fees............. (21,007,126)(c) 2,644,461
(2,875,906)(d)
Interest and
other income.... 1,526,547 (e) 26,212,402
---------------- --------------
Total revenue... (12,719,525) 62,637,078
Expenses:
General and
administrative.. (1,303,349)(f) 12,340,880
(1,415,100)(g)
(29,339)(h)
Advisory fees.... (2,274,624)(i) 0
Fees to
Restaurant
Financial
Services Group.. (1,825,658)(n) 0
Interest......... (68,670)(m) 14,271,531
State taxes...... 27,946 (j) 673,171
Depreciation--
other........... 0 130,663
Depreciation--
property........ 1,527,472 (k) 4,439,503
Amortization..... 1,576,620 (l) 2,595,323
---------------- --------------
Total operating
expenses....... (3,784,702) 34,451,071
---------------- --------------
Operating
earnings
(losses)........ (8,934,823) 28,186,007
Equity in
earnings of
joint
ventures/minority
interest........ 0 (58,095)
Gain on sale of
properties...... 0 596,586
Gain on
securitization.. 0 3,018,268
Provision for
loss on
properties...... 0 (99,865)
---------------- --------------
Net earnings
(losses) before
income taxes.... (8,934,823) 31,642,901
Provision
(credit) for
federal income
taxes........... (6,316,081)(o) 0
---------------- --------------
Net income....... $ (2,618,742) $31,642,901
================ ==============
Earnings per
share........... $ 0.44
==============
Shares
outstanding:
Weighted
average........ 71,773,652(p)
==============
End of period... 76,477,824
==============
</TABLE>
F-25
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA INCOME STATEMENT
For the year ended December 31, 1997
<TABLE>
<CAPTION>
Historical Pro Forma
------------------------------------------------------------------------------- ---------------------------
CNL Income CNL Financial CNL Financial Combined
APF Fund III, Ltd. Advisor Services, Inc. Corp. Portfolios Adjustments Pro Forma
----------- -------------- ---------- -------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and earned
income.......... $15,490,615 $2,088,134 $ 0 $ 0 $ 0 $17,578,749 $24,048,982 (a)
2,364 (b) $41,630,095
Fees............. 0 0 8,310,836 5,965,110 73,704 14,349,650 (9,069,419)(c)
(2,662,141)(d) 2,618,090
Interest and
other income.... 3,967,318 100,816 165,569 0 10,932,843 15,166,546 249,395 (e) 15,415,941
----------- ---------- ---------- ---------- ---------- ----------- ----------- -----------
Total Revenue... 19,457,933 2,188,950 8,476,405 5,965,110 11,006,547 47,094,945 12,569,181 59,664,126
Expenses:
General and
administrative.. 1,010,725 247,725 4,266,169 1,889,904 828,848 8,243,371 (734,654)(f)
(1,619,238)(g)
(33,885)(h) 5,855,594
Advisory fees.... 804,879 0 0 0 1,802,532 2,607,411 (2,607,411)(i) 0
Fees to
Restaurant
Financial
Services Group.. 0 0 151,041 594,041 0 745,082 (745,082)(n) 0
Interest......... 0 0 162,153 183,315 8,320,000 8,665,468 (81,594)(m) 8,583,874
State taxes...... 251,358 9,924 12,084 1,294 1,600 276,260 11,147 (j) 287,407
Depreciation--
other........... 0 0 48,490 14,637 0 63,127 -- 63,127
Depreciation--
property........ 1,784,269 368,182 0 0 0 2,152,451 3,185,042 (k) 5,337,493
Amortization..... 10,793 600 18,093 61,324 916,577 1,007,387 2,102,159 (l) 3,109,546
----------- ---------- ---------- ---------- ---------- ----------- ----------- -----------
Total operating
expenses....... 3,862,024 626,431 4,658,030 2,744,515 11,869,557 23,760,557 (523,516) 23,237,041
----------- ---------- ---------- ---------- ---------- ----------- ----------- -----------
Operating
earnings
(losses)........ 15,595,909 1,562,519 3,818,375 3,220,595 (863,010) 23,334,388 13,092,697 36,427,085
Equity in
earnings of
joint
ventures/minority
interest........ (31,453) (165,455) 0 (126,627) 0 (323,535) -- (323,535)
Gain on sale of
properties...... 0 1,027,590 0 0 0 1,027,590 -- 1,027,590
Provision for
loss on
properties...... 0 (32,819) 0 0 0 (32,819) -- (32,819)
----------- ---------- ---------- ---------- ---------- ----------- ----------- -----------
Net earnings
before income
taxes........... 15,564,456 2,391,835 3,818,375 3,093,968 (863,010) 24,005,624 13,092,697 37,098,321
Provision
(credit) for
federal income
taxes........... 0 0 1,508,258 1,272,133 (317,785) 2,462,606 (2,462,606)(o) 0
----------- ---------- ---------- ---------- ---------- ----------- ----------- -----------
Net earnings
(losses)........ $15,564,456 2,391,835 $2,310,117 $1,821,835 $(545,225) $21,543,018 $15,555,303 $37,098,321
=========== ========== ========== ========== ========== =========== =========== ===========
Earnings per
share........... $ 0.66 $ 0.51
=========== ===========
Shares
outstanding:
Weighted
average......... 23,423,868 72,443,225(p)
=========== ===========
End of period.... 36,192,971 72,443,225
=========== ===========
</TABLE>
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of September 30, 1998 reflects the
transactions of the acquisition of the CNL Income Fund, Advisor and CNL
Restaurant Financial Services Group (the "Acquisition Proposal") as set forth
in this Proxy Statement. The Pro Forma Statements of Earnings for the nine
months ended September 30, 1998, and for the year ended December 31, 1997, have
been prepared to reflect a) the issuance of additional shares and the property
acquisitions completed from January 1, 1997 through November 30, 1998
("Offering and Property Transactions") and b) the transactions of the
Acquisition Proposal as set forth in this Proxy Statement. This unaudited pro
forma financial information has been prepared utilizing the historical
financial statements of the Company and the historical combined financial
information of the CNL Income Fund, Advisor and CNL Restaurant Financial
Services Group and should be read in conjunction with the selected historical
financial data and accompanying notes of the Company, the CNL Income Fund,
Advisor and the CNL Restaurant Financial Services Group. The Pro Forma Balance
Sheet was prepared as if the Offering and Property Transactions and the
Acquisition Proposal occurred on September 30, 1998. The Pro Forma Statements
of Earnings were prepared as if the Property Acquisitions and the Acquisition
Proposal occurred as of January 1, 1997. The pro forma information is unaudited
and is not necessarily indicative of the consolidated operating results which
would have occurred if the Offering and Acquisition Transaction and the
Acquisition Proposal 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 Acquisition
Proposal have been made. Capitalized terms have the meanings as defined in the
Proxy Statement.
2. Method of Accounting
The acquisition of the CNL Income Fund and the CNL Restaurant Financial
Services Group will be accounted for under the purchase accounting method. The
Company 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, the Company 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 operating expense on the Company's consolidated statements of
earnings, but the Company will not deduct this expense for purposes of
calculating funds from operations due to the non-recurring and non-cash nature
of the expense.
All significant intercompany balances and transactions between the Company,
CNL Income Fund, Advisor and CNL Restaurant Financial Services Group have been
eliminated in the pro forma financial statements.
3. Adjustments to Pro Forma Balance Sheet
The following describes the pro forma adjustments to the Pro Forma Balance
Sheet as of September 30, 1998, as if the Acquisition was consummated on such
date. For purposes of the pro forma financial statements, it is assumed that at
an annual meeting of stockholders, the stockholders of the Company approved an
amendment to increase the number of authorized shares to an amount necessary to
enable the Company to issue the shares for the Acquisition.
(1) Represents the payment of $237,562 in cash and the issuance of
14,359,145 common shares in consideration for the purchase of the CNL
Income Fund, Advisor and CNL Restaurant Financial Services Group at
September 30, 1998 at a share price of $10 plus estimated transaction
costs.
The acquisition of the CNL Income Fund and the CNL Restaurant Financial
Services Group has been accounted for under the purchase accounting method
and goodwill was recognized to the extent that the
F-27
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
consideration paid exceeded the fair value of the net tangible assets
acquired. As for the acquisition of the Advisor from a related party, the
consideration paid in excess of the fair value of the net tangible assets
received has been accounted for as costs incurred in acquiring the Advisor
from a related party because the Advisor has not been deemed to qualify as
a "business" for purposes of applying APB Opinion No. 16 "Business
Combinations." Upon consummation of the Acquisition, this expense will be
recorded as an operating expense on the Company's statement of earnings.
The Company will not deduct this expense for purposes of calculating funds
from operations due to the nonrecurring and non-cash nature of the expense.
As of September 30, 1998, $249,403 of transaction costs had been incurred
by the Company.
<TABLE>
<S> <C>
CNL Income Fund............................................ $ 20,829,012
Advisor.................................................... 76,000,000
CNL Restaurant Financial Services Group.................... 47,000,000
------------
Total Purchase Price (cash and shares)................... 143,829,012
Less cash paid to CNL Income Fund.......................... (237,562)
------------
Share consideration...................................... 143,591,450
Transaction costs of the Company........................... 8,933,000
------------
Total costs incurred..................................... $152,524,450
============
</TABLE>
In addition, the Company i) used $8,933,000 in cash to pay the
transaction costs related to the Acquisition, ii) made an upward adjustment
to the CNL Income Fund carrying value of land and building on operating
leases by $5,150,131, net investment in direct financing leases by
$347,210, investment in joint venture by $758,948, made downward
adjustments to the carrying value of accrued rental income of $85,729, made
downward adjustments to other assets of $3,692,497 to adjust historical
values to fair value, iii) recorded goodwill of $42,043,187 for the
acquisition of the CNL Restaurant Financial Services Group, iv) reduced
retained earnings by $77,339,587 for the excess consideration paid over the
net assets of the Advisor and removed the historical common stock balance
of $12,000, additional paid in capital balance of $9,602,287, retained
earnings balance of $5,297,114 and partners capital balance of $15,989,774
of the CNL Income Fund, Advisor and CNL Restaurant Financial Services
Group.
(2) Represents the use of $26,901,936 in cash and cash equivalents at
September 30, 1998 to acquire $26,052,741 in properties and issue $849,195
in mortgage notes which occurred from October 1, 1998 through November 30,
1998.
(3) Represents the elimination by the CNL Income Fund of $146,825 in
related party payables recorded as receivables by the Advisor, the
elimination by the CNL Restaurant Financial Services Group of $6,641,379 in
related party payables recorded as receivables by CNL Restaurant Financial
Services Group and the elimination by the Company of $1,208,000 in related
party payables recorded as receivables by the Advisor.
(4) Represents the elimination of income taxes payable of $2,990,864
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.
4. Adjustments to Pro Forma Income Statements
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the nine months ended September 30, 1998,
as if the Acquisition was consummated as of January , 1997.
(a) Represents rental and earned income as if 1) properties that
had been previously constructed and acquired from January 1,
1998 through November 30, 1998 had been acquired and
F-28
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
leased on January 1, 1997 and 2) properties that were developed
by the Company from January 1, 1998 through November 30, 1998 had
been placed in service on May 1, 1997 (assumes a four month
development period).
<TABLE>
<S> <C>
Rental and earned income on Property
Transactions by the Company............... $9,635,208
</TABLE>
(b) Represents $1,752 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the
lease terms for the leases acquired from the CNL Income Fund as
if the leases had been acquired on January 1, 1997.
(c) Represents the elimination of intercompany fees between the
Company, the CNL Income Fund, the Advisor and the CNL
Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees......................... $ (1,569,202)
Secured equipment lease fee.............. (44,426)
Advisory fees............................ (1,722,383)
Reimbursement of administrative costs.... (289,232)
Acquisition fees......................... (15,392,193)
Underwriting fees........................ (254,945)
Administrative fees...................... (148,491)
Executive fee............................ (310,000)
Guarantee fees........................... (93,750)
Servicing fee............................ (1,014,117)
Development fees......................... (166,876)
Consulting fee........................... (1,511)
------------
Total.................................. $(21,007,126)
============
</TABLE>
(d) Represents the deferral of $2,875,906 in origination fees
collected by CNL Restaurant Financial Services Group that
should be amortized over the term of the loans originated (20
years) in accordance with the Statement of Financial Accounting
Standards #91 "Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial
Direct Costs of Leases."
(e) Represents interest income of $1,318,870 earned from Other
Investments acquired and mortgage notes issued from January 1,
1998 through November 30, 1998 as if this had occurred on
January 1, 1997 and the amortization of $207,677 of deferred
origination fees collected during the year ended December 31,
1997 and during the nine months ended September 30, 1998, which
were capitalized and deferred in (d) above as if they had been
collected on January 1, 1997. These deferred fees are being
amortized and recorded as interest income.
(f) Represents the elimination of intercompany expenses paid
between the Company, the CNL Income Fund, the Advisor and the
CNL Restaurant Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs..... $ (289,232)
Servicing fee............................. (1,014,117)
-----------
$(1,303,349)
===========
</TABLE>
(g) Represents capitalization of incremental costs associated with
the acquisition, development and leasing of properties acquired
during the period as if 1) costs relating to properties
developed by the Company were subject to capitalization during
the entire period and 2)
F-29
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
costs relating to properties not developed by the Company were
subject to capitalization up through the time that EITF 97-11
became effective.
<TABLE>
<S> <C>
General and administrative costs.......... $(1,415,100)
</TABLE>
(h) Represents savings of $29,339 in professional services and
administrative expenses resulting from reporting on one combined
Company versus 22 separate entities.
(i) Represents the elimination of advisory fees between the Company,
the CNL Income Fund, the Advisor and the CNL Restaurant
Financial Services Group:
<TABLE>
<S> <C>
Advisory fees............................. $(1,722,383)
Administration fees....................... (148,491)
Executive fee............................. (310,000)
Guarantee fees............................ (93,750)
-----------
$(2,274,624)
===========
</TABLE>
(j) Represents additional income taxes of $27,946 resulting from
assuming that acquisitions from January 1, 1998 through November
30, 1998 had been acquired on January 1, 1997 and assuming that
the CNL Income Fund had operated under a REIT structure.
(k) Represents an increase in depreciation of the building portion
of the properties acquired from January 1, 1998 through November
30, 1998 as if they had been acquired on January 1, 1997 and the
step up in basis referred to in footnote (2) from acquiring the
CNL Income Fund portfolio using the straight-line method over
the estimated useful lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense........................ $1,527,472
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition
of the CNL Restaurant Financial Services Group referred to in
footnote (2)
<TABLE>
<S> <C>
Amortization of goodwill.................... $1,576,620
</TABLE>
(m) Represents elimination of interest expense recorded for the
amortization of $350,000 in arrangement fees collected during
the year ended December 31, 1997 which were eliminated in II (d
) below.
<TABLE>
<S> <C>
Interest expense............................. $(68,670)
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees
incurred between the Company, the CNL Income Funds, the Advisor
and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees.......................... $(1,569,202)
Underwriting fees......................... (254,945)
Consulting fee............................ (1,511)
-----------
$(1,825,658)
===========
</TABLE>
(o) Represents the elimination of $6,316,081 in the provision for
income taxes as a result of the Acquisition. The Company expects
to continue to qualify as a REIT and does not expect to incur
federal income taxes.
(p) Common shares issued during the period required to fund
acquisitions as if they had been acquired on January 1, 1997
were assumed to have been issued and outstanding as of January
1, 1998. For purposes of the proforma financial statements, it
is assumed that the stockholders approved the proposal to
increase the number of authorized common shares of the Company.
F-30
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
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, 1997, as if the
Acquisition was consummated as of January 1, 1997.
(a) Represents rental and earned income as if 1) properties that had
been previously constructed and acquired from January 1, 1998
through November 30, 1998 had been acquired and leased on
January 1, 1997 and 2) properties that were developed by the
Company from January 1, 1997 through November 30, 1998 had been
placed in service on May 1, 1997 (assumes a four month
development period).
<TABLE>
<S> <C>
Rental and earned income on Property
Transactions by the Company............... $24,048,982
</TABLE>
(b) Represents $2,364 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the CNL Income Fund as if the
leases had been acquired on January 1, 1997.
(c) Represents the elimination of intercompany fees between the
Company, the CNL Income Fund, the Advisor and the CNL Restaurant
Financial Services Group:
<TABLE>
<S> <C>
Origination fees.......................... $ (594,041)
Secured equipment lease fee............... (375,219)
Advisory fees............................. (1,775,680)
Reimbursement of administrative costs..... (135,666)
Acquisition fees.......................... (3,887,483)
Underwriting fees......................... (151,041)
Administrative fees....................... (269,231)
Executive fee............................. (250,000)
Guarantee fees............................ (312,500)
Arrangement fees.......................... (350,000)
Servicing fee............................. (598,988)
Development fees.......................... (369,570)
-----------
Total................................... $(9,069,419)
===========
</TABLE>
(d) Represents the deferral of $2,662,141 in origination fees
collected by CNL Restaurant Financial Services Group that should
be amortized over the term of the loans originated (20 years) in
accordance with the Statement of Financial Accounting Standards
#91 "Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of
Leases."
(e) Represents the elimination of interest income of $1,931,331
earned during the year ended December 31, 1997 assuming all
monies raised during 1997 and all cash held on January 1, 1997
was used to effect the Acquisition on January 1, 1997,
represents interest income of $2,047,619 earned from Other
Investments acquired and mortgage notes issued from January 1,
1998 through November 30, 1998 as if this had occurred on
January 1, 1997 and the recognition of $133,107 of origination
fees collected during the year ended December 31, 1997 which
were deferred in (d) and are being amortized and recorded as
interest income.
F-31
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(f) Represents the elimination of intercompany expenses paid between
the Company, the CNL Income Fund, the Advisor and the CNL
Restaurant Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs....... $(135,666)
Servicing fee............................... (598,988)
---------
$(734,654)
=========
</TABLE>
(g) Represents capitalization of incremental costs associated with
the acquisition, development and leasing of properties acquired
during the period as if 1) costs relating to properties
developed by the Company were subject to capitalization during
the entire period and 2) costs relating to properties not
developed by the Company were subject to capitalization up
through the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs.......... $(1,619,238)
</TABLE>
(h) Represents savings of $33,885 in professional services and
administrative expenses resulting from reporting on one combined
Company versus 22 separate entities.
(i) Represents the elimination of advisory fees between the Company,
the CNL Income Fund, the Advisor and the CNL Restaurant
Financial Services Group:
<TABLE>
<S> <C>
Advisory fees............................. $(1,775,680)
Administrative fees....................... (269,231)
Executive fee............................. (250,000)
Guarantee fees............................ (312,500)
-----------
$(2,607,411)
===========
</TABLE>
(j) Represents additional income taxes of $11,147 resulting from
assuming that acquisitions from January 1, 1997 through November
30, 1998 had been acquired on January 1, 1997 and assuming that
the CNL Income Fund had operated under a REIT structure.
(k) Represents increase in depreciation of the building portion of
the properties acquired from January 1, 1997 through November
30, 1998 as if they had been acquired on January 1, 1997 and the
step up in basis referred to in footnote (2) from acquiring the
CNL Income Fund portfolio using the straight-line method over
the estimated useful lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense........................ $3,185,042
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition
of the CNL Restaurant Financial Services Group referred to in
footnote (2)
<TABLE>
<S> <C>
Amortization of goodwill.................... $2,102,159
</TABLE>
(m) Represents elimination of yearly amortization of arrangement
fees of $350,000 capitalized as deferred costs and amortized as
interest expense and the capitalization of interest expense
during the period that properties were under development.
<TABLE>
<S> <C>
Amortization of arrangement fees............. $(24,144)
Capitalization of interest during development
period...................................... (57,450)
--------
$(81,594)
========
</TABLE>
F-32
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(n) Represents the elimination of fees paid to affiliates for fees
incurred between the Company, the CNL Income Fund, the Advisor
and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees............................ $(594,041)
Underwriting fees........................... (151,041)
---------
$(745,082)
=========
</TABLE>
(o) Represents the elimination of $2,462,606 in the provision for
income taxes as a result of the Acquisition. The Company expects
to continue to qualify as a REIT and does not expect to incur
federal income taxes.
(p) Common shares issued during the period were assumed to have been
issued and outstanding as of January 1, 1997. For purposes of
the proforma financial statement, it is assumed that the
stockholders approved the proposal to increase the number of
authorized common shares of the Company.
F-33
<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 eighteen 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
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger is entered into as of this 11th day of
March, 1999, by and among CNL American Properties Fund, Inc., a Maryland
corporation ("APF"), CNL APF Partners, L.P., a Delaware limited partnership
(the "Operating Partnership"), CNL APF GP Corp., a Delaware corporation (the
"OP General Partner"), CNL Income Fund III, Ltd., a Florida limited partnership
(the "Fund"), and Robert A. Bourne, James M. Seneff, Jr., and CNL Realty
Corporation, a Florida corporation (together with Messrs. Bourne and Seneff,
the "General Partners"). APF, the Operating Partnership, the OP General
Partner, the Fund and the General Partners are referred to collectively herein
as the "Parties" and individually as a "Party."
RECITALS:
WHEREAS, the Parties hereto desire to consummate a merger (the "Merger")
whereby the Fund will be merged with and into the Operating Partnership, and
the Operating Partnership will be the surviving limited partnership in the
Merger, upon the terms and subject to the conditions of this Agreement and in
accordance with the Delaware Revised Uniform Limited Partnership Act (the
"Delaware RULPA") and the Florida Revised Uniform Limited Partnership Act (the
"Florida RULPA");
WHEREAS, the Fund is one of 18 CNL Income Funds (collectively with the Fund,
the "CNL Income Funds") that APF is proposing to acquire (the "Proposed
Acquisitions");
WHEREAS, the Special Committee (the "Special Committee") of the independent
members of the Board of Directors of APF has received a fairness opinion (the
"Fairness Opinion") from Merrill Lynch & Co. as to the fairness to APF, from a
financial point of view, of the consideration to be paid in connection with the
Proposed Acquisitions;
WHEREAS, the Special Committee has recommended the Merger to the Board of
Directors of APF and the Board has approved the proposal to consummate the
Merger (the "Merger Proposal") and the related transactions;
WHEREAS, Legg Mason Wood Walker Incorporated has delivered a fairness
opinion (the "Fund Fairness Opinion") to the General Partners as to the
fairness to the Fund and its limited partners from a financial point of view,
of the APF Common Share consideration offered to the Fund and its limited
partners; and
WHEREAS, the Board of Directors of the OP General Partner has unanimously
approved the Merger Proposal;
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the receipt and sufficiency of which are
acknowledged, the Parties agree as follows:
ARTICLE I
Definitions
1.1 Terms Defined in this Agreement. As used in this Agreement, the
following terms shall have the respective meanings set forth below:
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
B-1
<PAGE>
"Affiliated Group" means any affiliated group within the meaning of Code
(S)1504, or any similar group defined under a similar provision of state, local
or foreign law.
"Agreement" means this Agreement, as amended from time to time.
"APF" has the meaning set forth in the preface above.
"APF Common Shares" shall mean the shares of common stock, par value $0.01,
of APF.
"APF Indemnity Claim" has the meaning set forth in Section 12.1 below.
"APF SEC Documents" has the meaning set forth in Section 6.7 below.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms the basis for any specified
consequence.
"Business Combination" has the meaning set forth in Section 4.1(b) below.
"Cash/Note Option" has the meaning set forth in Section 4.4 below.
"Closing" has the meaning set forth in Section 2.3 below.
"CNL Income Funds" has the meaning set forth in the second paragraph of the
Recitals above.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the businesses
and affairs of the Fund, the Operating Partnership or APF, if any, that is not
already generally available to the public.
"Delaware RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Disclosure Schedule" has the meaning set forth in the first paragraph of
Article VII below.
"Dissenting Partners" has the meaning set forth in Section 4.4 below.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
tax-qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) tax-qualified defined benefit retirement
plan or arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Fairness Opinion" has the meaning set forth in the third paragraph of the
Recitals above.
"Florida RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Fund" has the meaning set forth in the preface above.
"Fund Articles of Merger" has the meaning set forth in Section 2.2 below.
"Fund Fairness Opinion" has the meaning set forth in the fifth paragraph of
the recitals above.
B-2
<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-3
<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-4
<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.
B-5
<PAGE>
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
B-6
<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 $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
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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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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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<PAGE>
(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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<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 $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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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 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
B-33
<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 Prospectus/ Consent Solicitation Statement.
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.
OVERVIEW
Pursuant to the Prospectus/Consent Solicitation Statement and this
Supplement, you are being asked to approve the Acquisition of your Income Fund
by APF. Your Income Fund is one of 18 limited partnerships (which we refer to
collectively as the Funds) that APF is seeking to acquire. Supplements have
also been prepared for each of the other Funds, copies of which may be obtained
without charge to 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 (or a REIT), formed in
1994, whose primary business, like that of the Funds, is the ownership of
restaurant properties leased to operators of national and regional restaurant
chains on a triple-net lease basis. As a full-service REIT, 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 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 shares of common stock (or APF Shares) will I receive if my Income
Fund is acquired by APF?
Your Income Fund will receive 2,668,016 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 $10.00 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
approximately 75 million APF Shares through three public offerings at offering
prices per APF share equal to the Exchange Value. At December 31, 1998, of the
approximately $750 million raised by APF, APF has used approximately
$550 million to acquire restaurant properties and to make mortgage loans and
had approximately $120 million in uninvested proceeds which it expects to
invest during the first quarter of 1999. The remaining proceeds were used to
pay fees and other offering expenses.
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<PAGE>
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
Fund?
Yes. Legg Mason Wood Walker, Incorporated 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 Funds, and (c) the method of allocating the APF
Shares among the Funds.
Do you, as the general partners of my Income Fund, recommend that I vote in
favor 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 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 how you want to vote, and sign
and mail it in the enclosed postage-paid return envelope as soon as possible,
so that at the Special Meeting of Limited Partners, your Units may be voted
"For" or "Against" APF's acquisition of your Income Fund. If you sign and send
in your consent form and do not indicate how you want to vote, your consent
form will be counted as a vote "For" the Acquisition. If you do not vote or you
abstain from voting, it will count as a vote "Against" the Acquisition.
In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to certain limitations. If you vote "Against" the Acquisition,
but your Income Fund is nevertheless acquired by APF, you may elect to receive
a payment (which we call the Cash/Notes Option) that is 10% in cash and 90% in
% Callable Notes due , 2006 (or Notes) based on the liquidation value of
your Income Fund, as determined by Valuation Associates, the appraisal firm
that we engaged in connection with the Acquisition. Such liquidation value will
be lower than the aggregate Exchange Value of the APF Shares offered to your
Income Fund in the Acquisition. The Notes will bear interest at a rate equal to
%, which was determined based on 120% of the applicable federal rate as of
, 1999. Please note that you may only receive the Cash/Notes Option if
you have voted "Against" the Acquisition and you elect to receive the
Cash/Notes Option on your consent form. You will receive APF Shares if your
Income Fund elects to be acquired in the Acquisition and you voted "For" the
Acquisition, or you voted "Against" the Acquisition and did not affirmatively
select the Cash/Notes Option. 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 (for example, 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 be based on the difference between the
value of the APF Shares or the tax basis of your Units. If you elect the
Cash/Notes Option, 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 and cash
received by your Income Fund over the tax basis of your Fund's net assets. Some
of the gain may be subject to the 25% rate of tax applicable to certain 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 $919. To review
the tax consequences to the Limited Partners of the
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<PAGE>
Funds in greater detail, see pages through of the Prospectus/Consent
Solicitation Statement 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 Funds acquired by APF.
Although the majority of APF's assets and the assets of the other Funds
acquired by APF are substantially similar to those of your Income Fund, the
restaurant properties owned by APF and the other 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 Funds' restaurant properties,
see "APF's Business and The Restaurant Properties--Business Objectives and
Strategies" and "--The Restaurant Properties--General" and "Business of the
Funds--Description of Restaurant Properties" in the Prospectus/Consent
Solicitation Statement.
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 Prospectus/Consent Solicitation Statement.
Investment Risks
. Uncertainty Regarding the Exchange Value and Trading Price of APF Shares
Following Listing. Your Income Fund will be receiving 2,668,016 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 is 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 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.
. Decrease in Distributions. In each of the years ended December 31, 1995,
1996 and 1997, your Income Fund made $920 in distributions per $10,000
investment to you. Based on APF's pro forma financial information, and
assuming APF acquires only your Income Fund and that each Limited Partner
of your Income receives only APF Shares, you would have received, for the
year ended December 31, 1997, $504 in distributions per $10,000 of
original investment, which is 45.2% less than the $920 distributed to you
as Limited Partner during the same period. 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 year ended December 31, 1997 is not necessarily
indicative of the distributions you will receive as a stockholder of APF
after the Acquisition. See "Cash Distributions to Limited Partners of
Your Fund."
. Conflicts of Interest in the Acquisition; Substantial Benefits to Related
Parties. There are certain conflicts of interest inherent in the
structure of the Acquisition of your Income Fund. We, James M. Seneff,
Jr. and Robert A. Bourne, who also sit on the Board of Directors of APF,
and CNL Realty
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<PAGE>
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
that may or may not be aligned with your interests 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.
. Fundamental Change in Nature of 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 September 30, 1998), 394 restaurant properties. The risks inherent
in investing in an operating company such as APF include APF's ability to
invest in new restaurant properties that are not as profitable as APF
anticipated, the incurrence of substantial indebtedness to make future
acquisitions of restaurant properties which it may be unable to repay and
making mortgage loans to prospective operators of national and regional
restaurant chains which may not have the ability to repay.
As an APF stockholder, you will receive the benefits of your investment
through (i) dividend distributions on, and (ii) increases in the value
of, your APF Shares. In addition, 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 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 Cash/Notes
Option). An investment in APF may not outperform your investment in the
Income Fund.
. Original Investment Timeframe. 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, 2017. 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 1995 and 2003. Because
your Income Fund is in the anticipated termination timeframe, we could
elect to liquidate your Income Fund. However, we have no current plans to
dispose of your Income Fund's restaurant properties if the Limited
Partners do not approve the Acquisition.
Real Estate/Business Risks
. Risk of Default on Mortgage Loans and Market Risks associated with
Securitizations. 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.
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
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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,) and 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 may 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.
. Risks Associated with Leverage. 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. At the time of the consummation of the
Acquisition, as a general policy, APF's Board of Directors will 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 funds from
operations and its ability to make distributions to its stockholders.
. Acquisition and Development Risks. APF plans to pursue its growth
strategy through the acquisition and development of additional restaurant
properties. To the extent that APF does pursue this growth strategy, we
do not know that it 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.
Tax Risks
. Failure of APF to Qualify as a REIT for Tax Purposes. 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 sta-
tus, the funds available for distribution to you, as a stockholder, would
be reduced substantially for each of the years involved.
. Risks Associated with Distribution Requirements. 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
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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 Tax Law. 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 Prospectus/Consent Solicitation Statement.
CONSIDERATION PAID TO INCOME FUND
The following table sets forth, for your Income Fund (i) the aggregate
amount of original Limited Partner investments in each Fund less any
distributions of net sales proceeds paid to the Limited Partners of that Fund,
(ii) the original amount of Limited Partner investments in each Fund less any
distributions of net sales proceeds per average $10,000 investment, (iii) the
number of APF Shares to be paid to your Income Fund, (iv) the estimated value
of the APF Shares paid to your Income Fund, (v) the estimated Acquisition
expenses allocated to your Income Fund, (vi) the estimated value, based on the
Exchange Value, of APF Shares paid to your Income Fund after deducting
Acquisition expenses, and (vii) the estimated value, based on the Exchange
Value, of APF Shares you will receive for each $10,000 of your original
investment:
<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) Fund(2) Fund(3) Expenses Expenses(3) Investment(3)
- ------------- ------------- ---------- ------------ ----------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$28,766,256 $9,589 2,668,016 $26,680,160 $338,472 $26,341,688 $8,781
</TABLE>
- --------
(1) The original Limited Partner investment in the Income Fund was
$30,000,000. These columns reflect, as of September 30, 1998, an
adjustment to the Limited Partners' original investments based on
distributions of net sales proceeds received from sales of properties made
pursuant to the partnership agreements.
(2) The APF Shares payable to each Fund as set forth in this chart will not
change if APF acquires fewer than all of the Funds in the Acquisition.
This number assumes that none of the Limited Partners of the Fund has
elected the Cash/Notes Option.
(3) 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.
Upon completion of the Acquisition of your Income Fund, the operations and
existence of your Income Fund will cease. For more detailed information, see
"The Acquisition" in the Prospectus/Consent Solicitation Statement. If your
Income Fund does not approve the Acquisition, we do not contemplate that your
Income Fund would be liquidated in the near future. The Acquisition, however,
does not result in an all-cash payment to you in the liquidation of your
investment. For example, if you are eligible for and choose the Cash/Notes
Option, you become a Noteholder of APF. You will have exchanged your Units for
unsecured debt obligations of APF which may not be retired in full until
, 2006, a date approximately seven years after the date the Acquisition of
your Income Fund occurs. On the other hand, if you exchange your Units for APF
Shares, you will receive an equity interest in APF whose marketability will
depend upon the market that may develop with respect to the APF Shares, which
will be listed on the NYSE.
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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.
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...................................................... $ 12,704
Appraisals and Valuation........................................ 5,081
Fairness Opinions............................................... 22,866
Registration, Listing and Filing Fees........................... --
Soliciting Dealer Fee........................................... 58,310
Financial Consulting Fees....................................... --
Environmental Fees.............................................. 31,758
Accounting and Other Fees....................................... 35,704
--------
Subtotal...................................................... 166,423
Closing Transaction Costs
Transfer Fees and Taxes......................................... 80,707
Legal Fees...................................................... 48,755
Recording Costs................................................. --
Other........................................................... 42,587
--------
Subtotal...................................................... 172,049
--------
Total........................................................... $338,472
========
</TABLE>
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 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
S-7
<PAGE>
acquired (or as soon thereafter as, in our opinion, market conditions permit),
as contemplated by the terms of the partnership agreement.
Special Meeting to Discuss the Acquisition
We have scheduled a special meeting of the Limited Partners of your Income
Fund to discuss the solicitation materials, which include the
Prospectus/Consent Solicitation Statement, 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 (as defined below) and to
explain in person our reasons for recommending that you vote "For" the
Acquisition.
VOTING PROCEDURE
The Prospectus/Consent Solicitation Statement, 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.
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 Prospectus/Consent Solicitation
Statement. A copy of the Agreement and Plan of Merger dated March 11, 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 December 31,
1999. 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.
The consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and certain 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
(including the Acquisition), 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-8
<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. The partnership agreement also provide 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
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, 1995, 1996 and 1997 and the nine months
ended September 30, 1998, the aggregate amounts accrued or paid by your Income
Fund 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 years presented, are shown below under "Pro Forma":
<TABLE>
<CAPTION>
Nine
Year Ended Months
December 31, Ended
-------------------- September 30,
1995 1996 1997 1998
------ ------ ------ -------------
<S> <C> <C> <C> <C>
Historical:
General Partner Distributions.............. -- -- -- --
Broker/Dealer Commissions(1)............... -- -- -- --
Due Diligence and Marketing Support Fees... -- -- -- --
Acquisition Fees........................... -- -- -- --
Asset Management Fees...................... -- -- -- --
Real Estate Disposition Fees(2)............ -- -- -- $45,663
--- --- --- -------
Total historical......................... -- -- -- $45,663
=== === === =======
Pro Forma:
Cash Distributions on APF Shares........... -- -- -- --
Salary Compensation........................ -- -- -- --
--- --- --- -------
Total pro forma.......................... -- -- -- --
=== === === =======
</TABLE>
- --------
(1) A majority of the fees paid as broker-dealer commissions and due diligence
and marketing support fees were reallowed to other broker-dealers
participating in the offering of the Income Fund's Units.
(2) 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-9
<PAGE>
CASH DISTRIBUTIONS TO LIMITED PARTNERS OF YOUR 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 the Acquisition--Prices for 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>
Nine Months Ended
Sept. 30, 1998
--------------------
1993 1994 1995 1996 1997 Historical Pro Forma
---- ---- ---- ---- ---- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income....... $747 $763 $730 $775 $568 $ 434 $383
Distributions from Sales of
Properties .................... -- -- -- -- -- 411 --
Distributions from Return of
Capital(1)..................... 173 157 190 145 352 166 16
---- ---- ---- ---- ---- ------ ----
Total......................... $920 $920 $920 $920 $920 $1,011 $399
==== ==== ==== ==== ==== ====== ====
</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 nine months ended September 30,
1998 is not necessarily indicative of the distributions you will receive as a
stockholder of APF after the Acquisition.
Assuming APF maintains its current level of debt for acquiring future
restaurant properties, the expected distribution rate per APF Share will be
8.8% (assuming a $10.00 per APF Share price based on the Exchange Value, the
annualized dividend per year is expected to be $0.88 per APF Share). Based on
the number of APF Shares that you would receive in the Acquisition per your
average $10,000 original investment and this distribution rate, you would
receive an annual distribution of approximately $773.
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 certain 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
S-10
<PAGE>
Fund and is subject to certain 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 Cash/Note
Option.
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, our relief 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 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 Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the Cash/Notes Option, constitutes 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 and is the best way to maximize the return on your
investment in light of the values of such consideration.
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 of Valuation Associates and
Legg Mason received fees for its services and notwithstanding that Legg Mason
has previously provided investment banking services to the Funds and to
Commercial Net Lease Realty, Inc., a former affiliate of ours. See "Reports,
Opinions and Appraisals" in the Prospectus/Consent Solicitation Statement.
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 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 cash and promissory 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.
S-11
<PAGE>
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 Cash/Notes Option.
3. Valuation of Alternatives. Based on the appraisal of the Income Fund's
restaurant properties, we estimated the value of your Income Fund as an ongoing
concern and if liquidated. 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 Fund to 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
September 30, 1998 per $10,000 original investment. Since the calculation of
the book value was done on a GAAP basis, it is not indicative of the true fair
market value of your Income Fund. This figure was compared to the (i) value of
the Fund if it commenced an orderly liquidation of its investment portfolio on
December 31, 1998, (ii) value of the Fund if it continued to operate in
accordance with its existing partnership agreement and business plans, and
(iii) estimated value of the APF Shares, based on the Exchange Value, paid to
each Fund per average $10,000 invested.
Summary of Valuations
(per $10,000 original investment)
<TABLE>
<CAPTION>
Estimated
Value of APF
Shares per Average
Going $10,000
GAAP Book Liquidation Concern Original Limited
Value Value(1) Value(1) Partner Investment(2)
--------- ----------- -------- ---------------------
<S> <C> <C> <C> <C>
CNL Income Fund IV, Ltd... $6,810 $8,102 $8,753 $8,781
</TABLE>
- --------
(1) 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.
(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.
Benefits to General Partners
As a result of the Acquisition (assuming only your Income Fund is acquired),
we are expected to receive certain benefits, including that we will be relieved
from certain ongoing liabilities with respect to Funds that are acquired by
APF.
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
S-12
<PAGE>
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
Funds if the Acquisition does not occur.
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have an independent
obligation 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 Funds). James M. Seneff, Jr. and
Robert A. Bourne act as the individual general partners of all of the 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.
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 the Cash/Notes Option, in which case you will
receive cash and 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-13
<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 Prospectus/Consent
Solicitation Statement.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, the
assets (and any liabilities) of your Income Fund (if your Income Fund is
acquired by APF) will be transferred to APF in return for APF Shares and/or
cash and 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 IV, Ltd........................... $919
</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 Code, no gain or loss is recognized if (i)
property is transferred to a corporation by one more individuals or entities in
exchange for the stock of that corporation, and (ii) 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 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 the
Cash/Notes Option, 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 (1) 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 (2) 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 Cash/Notes Option, your Income Fund will receive APF
Shares, cash and Notes in exchange for your Income Fund's assets. Because the
principal portion of the Notes will not be due until , 2006, 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 and cash
received by your Income Fund multiplied by the ratio that the gross
S-14
<PAGE>
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 (without reduction for
any selling expenses) 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 are 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, cash 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" (i.e., real property and
depreciable assets used in a trade or business and held for more than one
year). Your share of gains or losses from the sale of section 1231 assets of
your Income Fund would be combined with any other section 1231 gains and losses
that you recognize in that year. If the result is a net loss, such loss is
characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property will be taxed as ordinary income to the extent of all
prior depreciation deductions taken by your Income Fund prior to sale. In
general, you may only use up to $3,000 of capital losses in excess of capital
gains to offset ordinary income in any taxable year. Any excess loss is carried
forward to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your Income Fund recognizes will be allocated to you and the other
Limited Partners in accordance with the terms of your Income Fund's partnership
agreement. Each Limited Partner will be allocated and must report his, her or
its allocable share of such gain, if any, pursuant to these terms, regardless
of the Limited Partner's decision to receive 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 Cash/Notes Option may
recognize gain in the year of the Acquisition despite the fact that they will
receive only a small amount of cash and no publicly-traded instruments 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 the Cash/Notes Option. See "--Tax Consequences of
Liquidation and Termination of Your Fund" below.
Tax Consequences of the Liquidation and Termination of Your Fund. If your
Fund is acquired by APF, your Fund will be deemed to have liquidated and
distributed APF Shares and/or cash and 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 cash and 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 pro rata based on your respective capital account
balances. If you receive APF Shares in the Acquisition, you will recognize gain
or loss equal to
S-15
<PAGE>
the difference between the fair market value of the APF Shares that you receive
(determined on the closing date of the Acquisition) and your adjusted tax basis
in your Units (adjusted by your distributive share of income, gain, loss,
deduction and credit for the final taxable year of your Income Fund (including
any such items recognized by your Income Fund as a result of the Acquisition)
as well as any distributions you receive in such final taxable year (other than
the distribution of the APF Shares)). 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 cash and Notes in the Acquisition, you will recognize gain to
the extent that the amount of cash you receive in the Acquisition exceeds your
adjusted basis in your Units (adjusted by your distributive share of income,
gain, loss, deduction and credit for the final taxable year of your Income Fund
(including any such items recognized by your Income Fund as a result of the
Acquisition) as well as any distributions you receive in such final taxable
year (other than the distributions of the cash and Notes)). Your basis in the
Notes distributed to you will equal your adjusted basis in your Units, reduced
(but not below zero) by the amount of any cash distributed to you 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 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.
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 cash and 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 Prospectus/Consent Solicitation
Statement.
S-16
<PAGE>
SUMMARY SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
APF, FUNDS, ADVISOR AND CNL RESTAURANT FINANCIAL SERVICES GROUP
Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
Historical Pro Forma
------------------------------------------------- --------------------------------
CNL
CNL Restaurant
Income Financial
Fund IV, Services Combined Pro Forma Combined
APF Ltd. Advisor Group Historical Adjustments Pro Forma
----------- ----------- ----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data Revenues:
Rental and earned
income................ $22,947,199 $ 1,731,672 $ -- $ -- $24,678,871 $ 9,635,208 (a) $ 34,329,294
15,215 (b)
Management fees........ -- -- 21,405,127 5,122,366 26,527,493 (21,008,296)(c) 2,643,291
(2,875,906)(d)
Interest and other
income................ 6,117,911 46,143 751 18,463,647 24,628,452 1,526,547 (e) 26,154,999
----------- ----------- ----------- ----------- ----------- ------------ ------------
Total revenue.......... 29,065,110 1,777,815 21,405,878 23,586,013 75,834,816 (12,707,232) 63,127,584
Expenses:
General and
administrative........ 1,539,004 207,435 6,701,115 6,704,482 15,152,036 (1,304,519)(f) 12,400,618
(1,415,100)(g)
(31,799)(h)
Advisory fees.......... 1,248,393 -- -- 1,026,231 2,274,624 (2,274,624)(i) --
State taxes............ 397,569 15,747 15,226 220,180 648,722 37,283 (j) 686,005
Depreciation and
amortization.......... 2,693,020 326,835 131,539 1,000,493 4,151,887 3,133,903 (k)(l) 7,155,127
Interest expense....... -- -- 105,668 14,234,533 14,340,201 (68,670)(m) 14,271,531
Paid to affiliates..... -- -- 256,456 1,569,202 1,825,658 (1,825,658)(n) --
----------- ----------- ----------- ----------- ----------- ------------ ------------
Total expenses......... 5,877,986 550,017 7,210,004 24,755,121 38,393,128 (3,749,184) (34,643,944)
----------- ----------- ----------- ----------- ----------- ------------ ------------
Net earnings (loss)
before equity in
earnings of joint
ventures/minority
interests, gain (loss)
on sale of properties,
gain on securitization,
and provision for
federal income taxes... 23,187,124 1,227,798 14,195,874 (1,169,108) 37,441,688 (8,958,048) 28,483,640
----------- ----------- ----------- ----------- ----------- ------------ ------------
Equity in earnings of
joint ventures/minority
interests.............. (23,271) (143,612) -- 12,452 (154,431) -- (154,431)
Gain on sales of
properties............. -- 226,024 -- -- 226,024 -- 226,024
Gain on securitization.. -- -- -- 3,018,268 3,018,268 -- 3,018,268
Provision for federal
income taxes........... -- 5,607,415 708,666 6,316,081 (6,316,081)(o) --
----------- ----------- ----------- ----------- ----------- ------------ ------------
Net earnings............ $23,163,853 $ 1,310,210 $ 8,588,459 $ 1,152,946 $34,215,468 $ (2,641,967) $ 31,573,501
=========== =========== =========== =========== =========== ============ ============
Other Data:
Weighted average number
of shares of common
stock outstanding
during period.......... 47,633,909 N/A N/A N/A N/A -- 72,358,425 (p)
Total properties owned
at end of period....... 357 37 N/A N/A N/A -- 394
Funds from operations... $26,408,569 $ 1,439,084 N/A N/A N/A -- $ 36,067,094
Total cash distributions
declared*.............. $26,460,446 $ 1,800,004 N/A N/A N/A -- $ 36,067,094
Cash distributions
declared per $10,000
investment............. $ 572 $ 1,011 N/A N/A N/A -- $ 498
</TABLE>
<TABLE>
<CAPTION>
Historical Combined Pro Forma
September 30, 1998 Historical September 30, 1998
------------------------------------------------ ------------ -------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data
Real estate assets, $407,663,180 $16,829,156 $ -- $ -- $424,492,336 $ 7,149,792 (q)
net.................... 26,052,741 (r) $457,694,869
Mortgages/notes
receivable............. 33,523,506 -- -- 173,776,981 207,300,487 849,195 (r) 208,149,682
Accounts receivable,
net.................... 575,104 18,718 7,544,985 7,342,103 15,480,910 (7,987,572)(s) 7,493,338
Investment in/due from
joint ventures......... 631,374 2,883,497 -- -- 3,514,871 995,429 (q) 4,510,300
Total assets............ 566,383,967 21,331,281 8,429,809 197,528,789 793,673,846 28,858,888 822,532,734
Total
liabilities/minority
interest............... 14,478,585 902,520 5,049,152 185,998,045 206,428,302 (10,978,436)(s)(t) 195,449,866
Total equity............ 551,905,382 20,428,761 3,380,657 11,530,744 587,245,544 39,837,324 (q)(t) 627,082,868
</TABLE>
- -------
* Distributions for the nine months ended September 30, 1998 included
$1,235,748 as a result of the distribution of net sales proceeds from the
sales of two properties.
S-17
<PAGE>
(a) Represents rental and earned income as if 1) properties that had been
previously constructed and acquired from January 1, 1998 through November
30, 1998 had been acquired and leased on January 1, 1997 and 2) properties
that were developed by APF from January 1, 1998 through November 30, 1998
had been placed in service on May 1, 1997 (assumes a four month development
period).
<TABLE>
<S> <C>
Rental and earned income on Property Transactions by APF..... $9,635,208
</TABLE>
(b) Represents $15,215 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, 1997.
(c) Represents the elimination of intercompany fees between APF, the Income
Fund, the Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees........................................... $ (1,569,202)
Secured equipment lease fee................................ (44,426)
Advisory fees.............................................. (1,722,383)
Reimbursement of administrative costs...................... (290,402)
Acquisition fees........................................... (15,392,193)
Underwriting fees.......................................... (254,945)
Administrative fees........................................ (148,491)
Executive fee.............................................. (310,000)
Guarantee fees............................................. (93,750)
Servicing fee.............................................. (1,014,117)
Development fees........................................... (166,876)
Consulting fee............................................. (1,511)
------------
Total.................................................... $(21,008,296)
============
</TABLE>
(d) Represents the deferral of $2,875,906 in origination fees collected by CNL
Restaurant Financial Services Group that should be amortized over the term
of the loans originated (20 years) in accordance with the Statement of
Financial Accounting Standards #91 "Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases."
(e) Represents interest income of $1,318,870 earned from Other Investments
acquired and mortgage notes issued from January 1, 1998 through November
30, 1998 as if this had occurred on January 1, 1997 and the amortization of
$207,677 of deferred origination fees collected during the year ended
December 31, 1997 and during the nine months ended September 30, 1998,
which were capitalized and deferred in (d) above as if they had been
collected on January 1, 1997. These deferred fees are being amortized and
recorded as interest income.
(f) Represents the elimination of intercompany expenses paid between APF, the
Income Fund, the Advisor and the CNL Restaurant Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs....................... $ (290,402)
Servicing fee............................................... (1,014,117)
-----------
$(1,304,519)
===========
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by APF were subject
to capitalization during the entire period and 2) costs relating to
properties not developed by APF were subject to capitalization up through
the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs............................ $(1,415,100)
</TABLE>
(h) Represents savings of $31,799 in professional services and administrative
expenses resulting from reporting on one combined company versus 22
separate entities.
(i) Represents the elimination of fees between APF, the Income Fund, the
Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Advisory fees................................................ $(1,722,383)
Administrative fees.......................................... (148,491)
Executive fee................................................ (310,000)
Guarantee fees............................................... (93,750)
-----------
$(2,274,624)
===========
</TABLE>
S-18
<PAGE>
(j) Represents additional state taxes of $37,283 resulting from assuming that
acquisitions from January 1, 1998 through November 30, 1998 had been
acquired on January 1, 1997 and assuming that the Income Fund had operated
under a REIT structure.
(k) Represents an increase in depreciation of the building portion of the
properties acquired from January 1, 1998 through November 30, 1998 as if
they had been acquired on January 1, 1997 and the step up in basis referred
to in footnote (q) from acquiring the Income Fund portfolio using the
straight-line method over the estimated useful lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense........................................... $1,561,563
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of the CNL
Restaurant Financial Services Group referred to in footnote (q):
<TABLE>
<S> <C>
Amortization of goodwill...................................... $1,572,340
</TABLE>
(m) Represents elimination of interest expense recorded for the amortization of
$350,000 in arrangement fees collected during the year ended December 31,
1997 which were eliminated in footnote (4), II (d) in the Notes to the Pro
Forma Financial Statements attached to this Supplement.
<TABLE>
<S> <C>
Interest expense................................................ $(68,670)
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees incurred
between APF, the Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Origination fees............................................. $(1,569,202)
Underwriting fees............................................ (254,945)
Consulting fee............................................... (1,511)
-----------
$(1,825,658)
===========
</TABLE>
(o) Represents the elimination of $6,316,081 in the provision for income taxes
as a result of the acquisition. APF expects to continue to qualify as a
REIT and does not expect to incur federal income taxes.
(p) APF shares issued during the period required to fund acquisitions as if
they had been acquired on January 1, 1997 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 the
proposal to amend and restate APF's articles of incorporation to increase
the number of authorized APF Shares.
(q) Represents the payment of $338,472 in cash and the issuance of 14,934,169
APF shares in consideration for the purchase of the Income Fund, Advisor
and CNL Restaurant Financial Services Group at September 30, 1998 using the
Exchange Value of $10 per APF Share plus estimated transaction costs. The
acquisitions of the Income Fund and the CNL Restaurant Financial Services
Group have been accounted for under the purchase accounting method and
goodwill was recognized to the extent that the estimated value the
consideration paid exceeded the fair value of the net tangible assets
acquired. As for the acquisition of the Advisor from a related party, the
consideration paid in excess of the fair value of the net tangible assets
received has been accounted for as costs incurred in acquiring the Advisor
from a related party because the Advisor has not been deemed to qualify as
a "business" for purposes of applying APB Opinion No. 16 "Business
Combinations." Upon consummation of the Acquisition, this expense will be
recorded as an operating expense on APF's statement of earnings. APF will
not deduct this expense for purposes of calculating funds from operations
due to the nonrecurring and non-cash nature of the expense. As of September
30, 1998, $249,403 of transaction costs had been incurred by the APF.
<TABLE>
<S> <C>
Income Fund................................................ $ 26,680,162
Advisor.................................................... 76,000,000
CNL Restaurant Financial Services Group.................... 47,000,000
------------
Total Purchase Price (cash and shares).................... 149,680,162
Less cash paid to Income Fund.............................. (338,472)
------------
Share consideration....................................... 149,341,690
Transaction costs of APF................................... 8,933,000
------------
Total costs incurred...................................... $158,274,690
============
</TABLE>
In addition, APF i) used $8,933,000 in cash to pay the transaction costs
related to the Acquisition, ii) made an upward adjustment to the Income
Fund carrying value of land and building on operating leases by $6,638,872,
net investment in direct financing leases by $510,920, investment in joint
venture by $995,429, and made downward adjustments to the carrying value of
accrued
S-19
<PAGE>
rental income of $270,472, and made downward adjustments to other assets of
$3,685,893 to adjust historical values to fair value, iii) recorded
goodwill of $41,929,076 for the acquisition of the CNL Restaurant Financial
Services Group, iv) reduced retained earnings by $77,155,068 for the excess
consideration paid over the net assets of the Advisor and removed the
historical common stock balance of $12,000, additional paid in capital
balance of $9,602,287, retained earnings balance of $5,297,114 and partners
capital balance of $20,428,761 of the Income Fund, Advisor and CNL
Restaurant Financial Services Group.
(r) Represents the use of $26,901,936 in cash and cash equivalents at September
30, 1998 to acquire $26,052,741 in properties and issue $849,195 in
mortgage notes which occurred from October 1, 1998 through November 30,
1998.
(s) Represents the elimination by the Income Fund of $138,193 in related party
payables recorded as receivables by the Advisor, the elimination by the CNL
Restaurant Financial Services Group of $6,641,379 in related party payables
recorded as receivables by CNL Restaurant Financial Services Group and the
elimination by APF of $1,208,000 in related party payables recorded as
receivables by the Advisor.
(t) Represents the elimination of income taxes payable of $2,990,864 from
liabilities assumed in the acquisition of the CNL Restaurant Businesses
since the acquisition agreements require that the Advisor and CNL
Restaurant Financial Services Group have no accumulated or current earnings
and profits for federal income tax purposes at the time of the acquisition.
S-20
<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>
Nine Months Ended
September 30, Year Ended December 31,
----------------------- -----------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues (1)............ $ 1,634,203 $ 1,923,892 $ 2,531,385 $ 2,820,295 $ 2,871,572
Net income (2).......... 1,310,210 1,391,610 1,720,668 2,347,167 2,210,339
Cash distributions
declared (3)........... 3,033,748 2,070,000 2,760,000 2,760,000 2,760,000
Net income per Unit
(2).................... 21.71 22.96 28.42 38.75 36.48
Cash distributions
declared per
Unit (3)............... 50.56 34.50 46.00 46.00 46.00
Weighted average number
of Limited Partner
Units outstanding...... 60,000 60,000 60,000 60,000 60,000
<CAPTION>
September 30, December 31,
----------------------- -----------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total assets............ $21,331,281 $23,484,210 $23,309,888 $23,730,892 $24,057,829
Total partners'
capital................ 20,428,761 22,444,241 22,152,299 22,897,631 23,288,164
</TABLE>
- --------
(1) Revenues include equity in earnings of joint ventures
(2) Net income for the nine months ended September 30, 1998 includes $226,024
from gain on sale of land and building. Net income for the year ended
December 31, 1997, includes $6,652 from a loss on the sale of land and
$70,337 for a provision for loss on land and building. Net income for the
years ended December 31, 1996 and 1995 includes $221,390 and $128,547,
respectively, from gains on the sale of land and buildings.
(3) Distributions for the nine months ended September 30, 1998 included
$1,233,748 as a result of the distribution of net sales proceeds from the
sales of two properties.
S-21
<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 September 30, 1998, the Income Fund owned 37
restaurant properties, which included interests in six 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
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 1998 and 1997, 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 $1,794,173 and $1,746,810, respectively. The
increase in cash from operations for the nine months ended September 30, 1998,
is primarily a result of changes in the Income Fund's working capital.
Other sources and uses of capital included the following items during the
nine months ended September 30, 1998.
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 paid a total of $250,000 in renovation costs during the nine months
ended September 30, 1998, which had been incurred and accrued as construction
costs payable at December 31, 1997.
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. The Income Fund anticipates that it will distribute amounts
sufficient to enable the Limited Partners to pay federal and state income
taxes, if any (at a level reasonably assumed by us), resulting from the sale.
In addition, in March 1998, the Income Fund sold its restaurant property in
Union Township, Ohio, to an unrelated third party for $680,000 and received net
sales proceeds of $674,135, resulting in a loss of $104,987 for financial
reporting purposes. In connection with the sale of these restaurant properties,
the Income Fund incurred deferred, subordinated, real estate disposition fees
of $45,663. In April 1998, the Income Fund distributed $1,233,748 of the net
sales proceeds from these restaurant properties as a special distribution to
the Limited Partners.
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 $498,953 of the net sales proceeds from the
sale of the restaurant property in
S-22
<PAGE>
Leesburg, Florida, to a joint venture, Warren Joint Venture, to purchase and
hold one restaurant property. The Income Fund has an approximate 36% 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. The Income Fund intends to reinvest the net sales proceeds in a
replacement restaurant property. As of September 30, 1998, the net sales
proceeds were being held in an interest-bearing escrow account. We believe that
the transaction, or a portion thereof, relating to the sale of the restaurant
property in Naples, Florida will be structured to qualify as a like-kind
exchange transaction for federal income tax purposes. However, the Income Fund
will distribute amounts sufficient to enable the Limited Partners to pay
federal and state income taxes, if any, (at a level reasonably assumed by us)
resulting from the sale.
Currently, rental income from the Income Fund's restaurant properties and
net sales proceeds are invested in money market accounts and 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 the partners. At September 30,
1998, the Income Fund had $765,359 invested in such short-term investments as
compared to $876,452 at December 31, 1997. The decrease in cash and cash
equivalents during the nine months ended September 30, 1998 is primarily
attributable to the payment of construction costs accrued at December 31, 1997
relating to the Income Fund's restaurant properties located in Winchester and
Portland, Indiana, as described above. The decrease in cash and cash
equivalents was partially offset by an increase in rents paid in advance at
September 30, 1998, as compared to December 31, 1997. The funds remaining at
September 30, 1998 will be used toward the payment of distributions and other
liabilities.
Total liabilities of the Income Fund, including distributions payable,
decreased to $902,520 at September 30, 1998, from $1,157,589 at December 31,
1997, primarily as a result of the payment during the nine months ended
September 30, 1998 of construction costs accrued at December 31, 1997 relating
to the Income Fund's restaurant properties located in Winchester and Portland,
Indiana, as described above. Total liabilities at September 30, 1998, to the
extent they exceed cash and cash equivalents at September 30, 1998, will be
paid from future cash from operations, and in the event we elect to make
additional contributions, from future contributions from us.
During August 1998, the Income Fund entered into an agreement with an
unrelated third party to sell the Taco Bell property in Edgewood, Maryland. We
believe that the anticipated sales price will exceed the Income Fund's cost
attributable to the restaurant property; however, as of November 6, 1998, the
sale had not occurred.
Based on (i) current and anticipated future cash from operations (ii) for
the nine months ended September 30, 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 nine months ended September 30, 1997,
additional capital contributions from the corporate general partner received in
April, July and October 1997, the Income Fund declared distributions to Limited
Partners of $3,033,748 and $2,070,000 for the nine months ended September 30,
1998 and 1997, respectively ($600,000 and $690,000 for the quarters ended
September 30, 1998 and 1997, respectively). This represents distributions for
the nine months ended September 30, 1998 and 1997, of $50.56 and $34.50 per
unit, respectively ($10.00 and $11.50 per unit for the quarters ended September
30, 1998 and 1997, respectively). Distributions for the nine months ended
September 30, 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 agreement, it was applied to the Limited
Partners' unpaid preferred return. As a result of the sale of the restaurant
properties, the Income Fund's total
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revenue was reduced, while the majority of the Income Fund's operating expenses
remained fixed. Therefore, distributions of net cash flow were adjusted for the
nine months ended September 30, 1998. No distributions were made to us for the
quarters and nine months ended September 30, 1998 and 1997. No amounts
distributed to the Limited Partners for the nine months ended September 30,
1998 and 1997 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 generally leasing them under triple-net leases to operators who
generally meet specified financial standards minimizes the Income Fund's
operating expenses. We believe that the leases will continue to generate cash
flow in excess of operating expenses.
We have the right, but not the obligation, to make additional capital
contributions if we deem it appropriate in connection with the operations of
the Income Fund.
The Years Ended December 31, 1997, 1996 and 1995
The Income Fund's primary source of capital for the years ended December 31,
1997, 1996 and 1995, 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 $2,417,972, $2,713,964 and
$2,670,393 for the years ended December 31, 1997, 1996 and 1995, respectively.
The decrease in cash from operations for 1997, as compared to 1996, and the
increase in cash from operations for 1996, as compared to 1995, 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, 1997, 1996 and 1995, 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 items during the
years ended December 31, 1997, 1996 and 1995.
In December 1995, the Income Fund sold its restaurant property in Hastings,
Michigan, for $520,000 and received net sales proceeds of $518,650, resulting
in a gain of $128,547 for financial reporting purposes. This restaurant
property was originally acquired by the Income Fund in August 1988 and had a
cost of approximately $419,600, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Income Fund sold the restaurant property
for approximately $99,100 in excess of its original purchase price.
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, 1997, the Income Fund owned a 53.68% interest in this restaurant
property.
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<PAGE>
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 10% per
annum, and is being collected in 36 monthly installments. Receivables at
December 31, 1997 include $7,106 of such amounts. In July 1997, the Income Fund
entered into new leases for these 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, 1997, 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 (net of $2,546 which represents amounts due to the former
tenant for prorated rent). 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 will be 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 anticipates that it will distribute
amounts sufficient to enable the Limited Partners to pay federal and state
income taxes, if any (at a level reasonably assumed by us), resulting from the
sale.
During the years ended December 31, 1997 and 1996, the Income Fund received
$294,000 and $22,300, respectively, in capital contributions from CNL Realty
Corp., the corporate general partner, in connection with the operations of the
Income Fund. No such contributions were received during the year ended December
31, 1995.
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 the partners. At December 31, 1997, the
Income Fund had $876,452 invested in such short-term investments, as compared
to $554,593 at December 31, 1996. The
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<PAGE>
increase in the amount invested in short-term investments is primarily a result
of the receipt of net sales proceeds from the sale of the restaurant property
in Douglasville, Georgia, during 1997.
During 1997, 1996 and 1995, our affiliates, incurred on behalf of the Income
Fund $85,702, $114,409 and $101,876, respectively, for certain operating
expenses. As of December 31, 1997 and 1996, the Income Fund owed $88,854 and
$67,153, respectively, to affiliates for such amounts and accounting and
administrative services. Amounts payable to other parties, including
distributions payable, increased to $1,068,735 at December 31, 1997, from
$766,108 at December 31, 1996. The increase in liabilities at December 31,
1997, is primarily the result of the Income Fund accruing renovation costs
during 1997 for the restaurant properties in Portland and Winchester, Indiana,
in connection with the new leases entered into in July 1997. In addition, the
increase in liabilities is due to the Income Fund accruing current real estate
taxes for its restaurant property in Palm Bay, Florida, during 1997, due to the
fact that the tenant vacated the restaurant property in October 1997. In
addition, the increase in liabilities is due to an increase in rents paid in
advance at December 31, 1997. Total liabilities at December 31, 1997, to the
extent they exceed cash and cash equivalents at December 31, 1997, will be paid
from future cash from operations and, in the event we elect to make additional
contributions, from future General Partner contributions.
Based primarily on current and anticipated future cash from operations, and
for the years ended December 31, 1997 and 1996, additional capital
contributions received from us, the Income Fund declared distributions to the
Limited Partners of $2,760,000 for each of the years ended December 31, 1997,
1996 and 1995. This represents distributions of $46 per Unit for each of the
years ended December 31, 1997, 1996 and 1995. We expect to distribute some or
all of the net sales proceeds from the sale of the restaurant property in Fort
Myers, Florida, to the Limited Partners. In deciding whether to sell restaurant
properties, we will consider 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, is expected to reduce the Income Fund's revenues.
The decrease in Income Fund revenues, combined with the fact that a significant
portion of the Income Fund's expenses are fixed in nature, is expected to
result 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 31, 1997, 1996 and 1995, 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.
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
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 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 the nine
months ended September 30, 1998, the Income Fund owned and leased 34 wholly-
owned restaurant properties (including four restaurant properties, which were
sold during 1998), generally to
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<PAGE>
operators of fast-food and family-style restaurant chains. In connection
therewith, during the nine months ended September 30, 1998 and 1997, the Income
Fund earned $1,694,465 and $1,657,307, respectively, in rental income from
operating leases and earned income from direct financing leases from these
restaurant properties, $579,483 and $541,416 of which was earned during the
quarters ended September 30, 1998 and 1997, respectively. The increase in
rental and earned income for the quarter and nine months ended September 30,
1998, was partially due to the fact that during the quarter and nine months
ended September 30, 1997, the Income Fund increased its allowance for doubtful
accounts for the restaurant property located in Palm Bay, Florida due to
financial difficulties the tenant was experiencing. No such allowance was
established during the quarter and nine months ended September 30, 1998, due to
the fact that the Income Fund re-leased this restaurant property to a new
tenant for which rent commenced subsequent to September 30, 1997. In addition,
the Income Fund collected and recognized as income past due rental amounts for
which the Income Fund had previously established an allowance for doubtful
accounts during the quarter and nine months ended September 30, 1998.
In addition, the increase in rental and earned income for the quarter and
nine months ended September 30, 1998 was partially due to the fact that during
the quarter and nine months ended September 30, 1997, the Income Fund increased
its allowance for doubtful accounts for the restaurant properties located in
Portland and Winchester, Indiana due to financial difficulties the tenants were
experiencing. No such allowance was established during the quarter and nine
months ended September 30, 1998, due to the fact that the Income Fund re-leased
these restaurant properties to new tenants for which rent commenced subsequent
to September 30, 1997.
The increase in rental and earned income for the quarter and nine months
ended September 30, 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 nine months ended
September 30, 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, as described above in "Liquidity and Capital Resources."
For the nine months ended September 30, 1998 and 1997, the Income Fund also
earned $37,207 and $65,265, respectively, in contingent rental income, $20,661
of which was earned during the quarter ended September 30, 1997. The decrease
in contingent rental income during the nine months ended September 30, 1998, as
compared to the nine months ended September 30, 1997, is primarily attributable
to the Income Fund adjusting estimated contingent rental amounts accrued at
December 31, 1997, to actual amounts during the nine months ended September 30,
1998. The decrease in contingent rental income for the quarter ended September
30, 1998 was primarily due to the fact that no contingent rents were recorded
during the quarter ended September 30, 1998 as a result of the Income Fund
adopting EITF 98-9, a consensus reached by the Financial Accounting Standards
Board entitled "Accounting for Contingent Rent in the Interim Financial
Periods," which states that a lessor should defer recognition of contingent
rental income in interim periods until the specified target that triggers the
contingent rental income is achieved. Adoption of this consensus did not have a
material effect on the Income Fund's financial position or results of
operations.
In October 1998, the tenant of one Boston Market restaurant property filed
for bankruptcy. If the lease is eventually rejected, the Income Fund
anticipates that rental income relating to this restaurant property will
terminate 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. However, we do not anticipate that any decrease in rental
income due to lost revenues relating to this restaurant property will have a
material effect on the Income Fund's financial position or results of
operations.
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<PAGE>
During the nine months ended September 30, 1998 and 1997, the Income Fund
also owned and leased five restaurant properties indirectly through joint
venture arrangements and one restaurant property as tenants-in-common with
certain of our affiliates. In addition, during the nine months ended September
30, 1998, the Income Fund owned and leased one additional restaurant property
indirectly through a joint venture arrangement. In connection therewith, during
the nine months ended September 30, 1998 and 1997, the Income Fund recognized a
loss of $143,612 and income of $172,340, respectively, attributable to net
income and net loss earned by these joint ventures, income of $5,276 and
$52,359 of which was recognized during the quarters ended September 30, 1998
and 1997, respectively. The decrease in net income 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 nine months ended September 30, 1998. The
allowance represents the difference between the restaurant property's carrying
value at September 30, 1998 and the estimated net realizable value of the
restaurant property. In addition, the joint venture established an allowance
for doubtful accounts of approximately $21,900 and $87,800 during the quarter
and nine months ended September 30, 1998, respectively, in accordance with its
collection policy. No such allowance was established during the quarter and
nine months ended September 30, 1997. Kingsville Real Estate Joint Venture is
currently seeking either a new tenant or purchaser for this restaurant
property.
The decrease during the quarter and nine months ended September 30, 1998 in
net income earned by joint ventures is also due 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. During the quarter and
nine months ended September 30, 1998, Titusville Joint Venture (in which the
Income Fund owns a 26.60% interest) established an allowance for loss on the
land and building for its restaurant property, of approximately $139,300. The
allowance represents the difference between the restaurant property's net
carrying value at September 30, 1998 and the estimated net realizable value of
the restaurant property. Titusville Joint Venture is currently seeking either a
replacement tenant or purchaser for this restaurant property.
Operating expenses, including depreciation and amortization expense, were
$550,017 and $532,282 for the nine months ended September 30, 1998 and 1997,
respectively, of which $182,378 and $154,792 were incurred for the quarters
ended September 30, 1998 and 1997, respectively. The increase in operating
expenses during the quarter and nine months ended September 30, 1998, as
compared to the quarter and nine months ended September 30, 1997, is primarily
attributable to the fact that during the quarter and nine months ended
September 30, 1998, the Income Fund recorded approximately $21,600 in real
estate tax expense due to the fact that in October 1998, the tenant of the
Boston Market restaurant property in Richmond, Virginia filed for bankruptcy,
as described above. As a result, if the tenant decides to reject the lease the
Income Fund will continue to incur certain expenses, such as real estate taxes,
insurance and maintenance until a replacement tenant or buyer for the
restaurant property is located.
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 during
the quarters and nine months ended September 30, 1998 and 1997. The Income Fund
sold this restaurant property in July 1998, as described above, therefore the
Income Fund does not anticipate incurring such expenses in future periods.
As a result of the sales of the restaurant properties in Fort Myers,
Florida, Union Township, Ohio, and Leesburg, Florida the Income Fund recognized
a gain of $55,742 for financial reporting purposes during the nine months ended
September 30, 1998. In addition, during the quarter and nine months ended
September 30, 1998, the Income Fund recognized a gain of $170,281 for financial
reporting purposes as a result of the sale of its restaurant property in
Naples, Florida. No restaurant properties were sold during the quarter and nine
months ended September 30, 1997.
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<PAGE>
The Years Ended December 31, 1997, 1996 and 1995
During 1995, the Income Fund owned and leased 36 wholly-owned restaurant
properties (including one restaurant property in Hastings, Michigan, which was
sold in December 1995), 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) and 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).
In addition, during 1997, 1996 and 1995, the Income Fund was a co-venturer in
five separate joint ventures that each owned and leased one restaurant
property. During 1997 and 1996, the Income Fund also owned and leased one
restaurant property with certain of our affiliates as tenants-in-common. As of
December 31, 1997, the Income Fund owned, either directly or through joint
venture arrangements, 40 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, 1997, 1996 and 1995, the Income Fund
earned $2,189,386, $2,397,691 and $2,510,406, respectively, in rental income
from operating leases and earned income from direct financing leases from its
wholly-owned restaurant properties described above. Rental and earned income
decreased during 1997, as compared to 1996, as a result of the Income Fund
establishing an allowance for doubtful accounts totaling 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, and the Income Fund
re-leased the restaurant property in February 1998, as discussed above.
In addition, rental and earned income decreased approximately $76,300 and
$29,300 during the years ended 1997 and 1996, respectively, as a result of the
sale of the restaurant property in Tampa, Florida, in September 1996. The
decrease in rental income for 1997 is partially 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.
In addition, the decrease in rental and earned income during 1997 and 1996,
each as compared to the previous year, is partially attributable to the Income
Fund increasing its allowance for doubtful accounts by approximately $57,000
and $28,500, respectively, for rental income amounts relating to the Hardee's
restaurant properties located in Portland and Winchester, Indiana, which are
leased by the same tenant, due to financial difficulties the tenant was
experiencing. Rental and earned income also decreased by approximately $86,200
during 1997 due to the fact that the Income Fund terminated the lease with the
former tenant of the restaurant properties in Portland and Winchester, Indiana,
in June 1997, as described above in "Liquidity and Capital Resources." We have
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." 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 after it was renovated into an Arby's
restaurant property.
The decrease in rental and earned income during 1996, as compared to 1995,
is primarily attributable to a decrease of approximately $53,100 as a result of
the sale of the restaurant property in Hastings, Michigan, in December 1995.
For the years ended December 31, 1997, 1996 and 1995, the Income Fund earned
$117,031, $97,318 and $94,101, respectively, in contingent rental income from
the Income Fund's wholly owned restaurant properties.
S-29
<PAGE>
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 whose leases require the payment of contingent rental income.
In addition, for the years ended December 31, 1997, 1996 and 1995, the
Income Fund earned $189,747, $277,431 and $245,778, 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 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, during 1997, the joint
venture established an allowance for loss on land and building for its
restaurant property in Titusville, Florida, for approximately $147,000. The
allowance represents the difference between the restaurant property's carrying
value at December 31, 1997, and the property manager's estimate of the net
realizable value of the restaurant property. In addition, the joint venture
wrote off unamortized lease costs of $23,500 in 1997 due to the tenant vacating
the restaurant property.
Net income earned by joint ventures also decreased during 1997, as compared
to 1996, due to the restaurant property in Clinton, North Carolina, held as
tenants-in-common, adjusting estimated contingent rental amounts accrued at
December 31, 1996, to actual amounts during the year ended December 31, 1997.
The increase in net income earned by joint ventures during 1996, as compared to
1995, is primarily attributable to the fact that in January 1996, the Income
Fund reinvested the net sales proceeds it received from the sale in December
1995 of the restaurant property in Hastings, Michigan, along with additional
funds, in a Golden Corral restaurant property in Clinton, North Carolina, with
certain of our affiliates as tenants-in-common, as described above in
"Liquidity and Capital Resources."
During the years ended December 31, 1997, 1996 and 1995 two of the Income
Fund's lessees, Shoney's, Inc. and Tampa Foods, L.P., each contributed more
than 10% of the Income Fund's total rental income (including the Income Fund's
share of the rental income from five restaurant properties owned by joint
ventures and one restaurant property owned with certain of our affiliates as
tenant-in-common). As of December 31, 1997, Shoney's, Inc. was the lessee under
leases relating to six restaurants and Tampa Foods, L.P. was the lessee under
leases relating to two restaurants. It is anticipated that, based on the
minimum rental payments required by the leases, Shoney's, Inc. will continue to
contribute more than 10% of the Income Fund's total rental income during 1998
and subsequent years. In addition, three restaurant chains, Shoney's, Denny's
and Wendy's Old Fashioned Hamburger Restaurants, each accounted for more than
10% of the Income Fund's total rental income in 1997, 1996 and 1995 (including
the Income Fund's share of the rental income from five restaurant properties
owned by joint ventures and one restaurant property owned with affiliates as
tenants-in-common). During the year ended December 31, 1997, another of the
Income Fund's restaurant chains, Taco Bell, accounted for more than 10% of
total rental income. In subsequent years, it is anticipated that these four
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 the
leases. Any failure of these lessees or restaurant chains could materially
affect the Income Fund's income.
Operating expenses, including depreciation and amortization expense, were
$733,728, $694,518 and $789,780 for the years ended December 31, 1997, 1996 and
1995, respectively. 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 increase in operating expenses during 1997 was partially due to
the fact that the Income Fund recorded bad debt expense of $12,794 during 1997,
relating to the restaurant properties located in Portland and Winchester,
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<PAGE>
Indiana, for past due rental income amounts. The Income Fund does not intend to
continue to pursue the collection of such amounts unless the former tenant
defaults under the promissory note, as described above in "Liquidity and
Capital Resources."
The decrease in operating expenses in 1996, as compared to 1995, is
primarily a result of the fact that the Income Fund's former tenant of the
restaurant property in Maywood, Illinois, defaulted under the terms of its
promissory note with the Income Fund, as described above in "Liquidity and
Capital Resources," and the Income Fund recorded bad debt expense of $102,431
relating to this restaurant property during 1995. The decrease in operating
expenses during 1996, as compared to 1995, was partially offset by an increase
in accounting and administrative expenses associated with operating the Income
Fund and its restaurant properties and an increase in insurance expense as a
result of our obtaining contingent liability and property coverage for the
Income Fund beginning in May 1995.
As the result of the former tenant of the Maywood restaurant property
defaulting under the terms of its lease, the Income Fund re-leased this
restaurant property during 1993, to two new operators subject to two separate
leases. In connection with one of the two new leases for the restaurant
property in Maywood, Illinois, the Income Fund is responsible for the
proportionate share of real estate taxes and insurance expense. In addition,
during 1997, 1996 and 1995, 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 1997, 1996 and 1995. The Income Fund is
currently seeking a replacement tenant for the restaurant property in Leesburg,
Florida, and expects to incur these expenses until such time as a new lease is
executed for this restaurant property.
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. In addition, as a
result of the sale of the restaurant property in Tampa, Florida, in September
1996 and the sale of the restaurant property in Hastings, Michigan, in December
1995, the Income Fund recognized gains for financial reporting purposes of
$221,390 and $128,547, for the years ended December 31, 1996 and 1995,
respectively.
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 allowance represents 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.
General
The Income Fund's leases as of September 30, 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
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.
The Year 2000 problem is the result of information technology systems and
embedded systems (products which are made with microprocessor (computer) chips
such as HVAC systems, physical security systems and elevators) using a two-
digit format, as opposed to four digits, to indicate the year. Such information
technology and embedded systems may be unable to properly recognize and process
date-sensitive information beginning January 1, 2000.
S-31
<PAGE>
The Income Fund does not have any information technology systems. Certain of
our affiliates provide all services requiring the use of information technology
systems pursuant to a management agreement with the Income Fund. The
maintenance of embedded systems, if any, at the Income Fund's properties is the
responsibility of the tenants of the properties in accordance with the terms of
the Income Fund's leases. We and our affiliates have established a team
dedicated to reviewing the internal information technology systems used in the
operation of the Income Fund, and the information technology and embedded
systems and the Year 2000 compliance plans of the Income Fund's tenants,
significant suppliers, financial institutions and transfer agent.
The information technology infrastructure of our affiliates consists of a
network of personal computers and servers that were obtained from major
suppliers. The affiliates utilize various administrative and financial software
applications on that infrastructure to perform the business functions of the
Income Fund. Our inability and that of our affiliates to identify and timely
correct material Year 2000 deficiencies in the software and/or infrastructure
could result in an interruption in, or failure of, certain of the Income Fund's
business activities or operations. Accordingly, we and our affiliates have
requested and are evaluating documentation from the suppliers of the affiliates
regarding the Year 2000 compliance of their products that are used in the
business activities or operations of the Income Fund. The costs expected to be
incurred by us and our affiliates to become Year 2000 compliant will be
incurred by us and our affiliates; therefore, these costs will have no impact
on the Income Fund's financial position or results of operations.
The Income Fund has material third party relationships with its tenants,
financial institutions and 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. If
any of these third parties are unable to meet their obligations to the Income
Fund because of the Year 2000 deficiencies, such a failure may have a material
impact on the Income Fund. Accordingly, we have requested and are evaluating
documentation from the Income Fund's tenants, financial institutions, and
transfer agent relating to their Year 2000 compliance plans. At this time, we
have not yet received sufficient certifications to be assured that the tenants,
financial institutions, and transfer agent have fully considered and mitigated
any potential material impact of the Year 2000 deficiencies. Therefore, we do
not, at this time, know of the potential costs to the Income Fund of any
adverse impact or effect of any Year 2000 deficiencies by these third parties.
We currently expect that all Year 2000 compliance testing and any necessary
remedial measures on the information technology systems used in the business
activities and operations of the Income Fund will be completed prior to June
30, 1999. Based on the progress we and affiliates have made in identifying and
addressing the Income Fund's Year 2000 issues and the plan and timeline to
complete the compliance program, we do not foresee significant risks associated
with the Income Fund's Year 2000 compliance at this time. Because we and our
affiliates are still evaluating the status of the systems used in business
activities and operations of the Income Fund and the systems of the third
parties with which the Income Fund conducts its business, we have not yet
developed a comprehensive contingency plan and are unable to identify "the most
reasonably likely worst case scenario" at this time. As we identify significant
risks related to the Income Fund's Year 2000 compliance or if the Income Fund's
Year 2000 compliance program's progress deviates substantially from the
anticipated timeline, we will develop appropriate contingency plans.
S-32
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997... F-1
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997.............................................. F-2
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997.............. F-3
Condensed Statements of Cash Flows for the Nine Months Ended September 30,
1998 and 1997............................................................ F-4
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997........................................ F-5
Report of Independent Accountants......................................... F-8
Balance Sheets as of December 31, 1997 and 1996........................... F-9
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995..................................................................... F-10
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995............................................................ F-11
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995..................................................................... F-12
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and 1995................................................................. F-13
Unaudited Pro Forma Financial Information................................. F-21
Unaudited Pro Forma Balance Sheet as of September 30, 1998................ F-22
Unaudited Pro Forma Income Statement for the Nine Months Ended September
30, 1998................................................................. F-23
Unaudited Pro Forma Income Statement for the Year Ended December 31,
1997..................................................................... F-24
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements............................................................... F-25
</TABLE>
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 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.................................. $15,587,830 $18,097,997
Net investment in direct financing leases........... 1,241,326 1,269,389
Investment in joint ventures........................ 2,883,497 2,708,012
Cash and cash equivalents........................... 765,359 876,452
Restricted cash..................................... 533,019 --
Receivables, less allowance for doubtful accounts of
$258,741 and $295,580.............................. 18,718 37,669
Prepaid expenses.................................... 12,197 11,115
Lease costs, less accumulated amortization of
$20,681 and $17,956................................ 18,863 21,588
Accrued rental income............................... 270,472 287,466
Other Assets........................................ -- 200
----------- -----------
$21,331,281 $23,309,888
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable.................................... $ 6,687 $ 8,576
Accrued construction costs payable.................. -- 250,000
Accrued and escrowed real estate taxes payable...... 76,311 65,176
Distributions payable............................... 600,000 690,000
Due to related parties.............................. 138,193 93,854
Rents paid in advance and deposits.................. 81,329 49,983
----------- -----------
Total liabilities............................... 902,520 1,157,589
----------- -----------
Commitment (Note 7)
Partners' capital................................... 20,428,761 22,152,299
----------- -----------
$21,331,281 $23,309,888
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-1
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
----------------- ----------------------
1998 1997 1998 1997
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases............................ $547,853 $508,852 $1,598,854 $1,558,963
Earned income from direct financing
leases............................ 31,630 32,564 95,611 98,344
Contingent rental income........... -- 20,661 37,207 65,265
Interest and other income.......... 24,951 17,509 46,143 28,980
-------- -------- ---------- ----------
604,434 579,586 1,777,815 1,751,552
-------- -------- ---------- ----------
Expenses:
General operating and
Administrative.................... 46,096 33,940 121,811 113,606
Bad debt expense................... -- -- -- 12,794
Professional services.............. 5,999 4,110 38,644 18,200
Real estate taxes.................. 26,225 3,487 46,980 31,514
State and other taxes.............. -- 25 15,747 16,476
Depreciation and amortization...... 104,058 113,230 326,835 339,692
-------- -------- ---------- ----------
182,378 154,792 550,017 532,282
-------- -------- ---------- ----------
Income Before Equity in Earnings
(Loss) of Joint Ventures, Gain on
Sale of Land and Buildings and Real
Estate.............................. 422,056 424,794 1,227,798 1,219,270
Equity in Earnings (Loss) of Joint
Ventures............................ 5,276 52,359 (143,612) 172,340
Gain on Sale of Land and Buildings... 170,281 -- 226,024 --
-------- -------- ---------- ----------
Net Income........................... $597,613 $477,153 $1,310,210 $1,391,610
======== ======== ========== ==========
Allocation of Net Income:
General partners................... $ 5,195 $ 4,772 $ 7,612 $ 13,916
Limited partners................... 592,418 472,381 1,302,598 1,377,694
-------- -------- ---------- ----------
$597,613 $477,153 $1,310,210 $1,391,610
======== ======== ========== ==========
Net Income Per Limited Partner Unit.. $ 9.87 $ 7.87 $ 21.71 $ 22.96
======== ======== ========== ==========
Weighted Average Number of Limited
Partner Units Outstanding........... 60,000 60,000 60,000 60,000
======== ======== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1998 1997
----------------- ------------
<S> <C> <C>
General partners:
Beginning balance............................. $ 756,354 $ 446,657
Contribution.................................. -- 294,000
Net income.................................... 7,612 15,697
----------- -----------
763,966 756,354
----------- -----------
Limited partners:
Beginning balance............................. 21,395,945 22,450,974
Net income.................................... 1,302,598 1,704,971
Distributions ($50.56 and $46.00 per limited
partner unit, respectively).................. (3,033,748) (2,760,000)
----------- -----------
19,664,795 21,395,945
----------- -----------
Total partners' capital......................... $20,428,761 $22,152,299
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities.......... $ 1,794,173 $ 1,746,810
----------- -----------
Cash Flows from Investing Activities:
Additions to land and building on operating
leases.......................................... (275,000) --
Proceeds from sale of land and buildings......... 2,526,354 --
Investment in joint ventures..................... (499,274) --
Increase in restricted cash...................... (533,598) --
Other -- 7,338
----------- -----------
Net cash provided by investing Activities...... 1,218,482 7,338
----------- -----------
Cash Flows from Financing Activities:
Contributions from general partner................. -- 225,000
Distributions to limited partners.................. (3,123,748) (2,070,000)
----------- -----------
Net cash used in financing Activities.......... (3,123,748) (1,845,000)
----------- -----------
Net Decrease in Cash and Cash Equivalents............ (111,093) (90,852)
Cash and Cash Equivalents at Beginning of Period..... 876,452 554,593
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 765,359 $ 463,741
=========== ===========
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Deferred real estate disposition fees incurred and
unpaid at end of period........................... $ 45,663 $ --
=========== ===========
Distributions declared and unpaid at end of
period............................................ $ 600.000 $ 690,000
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, 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 Form 10-K of CNL Income
Fund IV, Ltd. (the "Partnership") for the year ended December 31, 1997.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2. Land and Building on Operating Leases
Land and buildings on operating leases consisted of the following at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land.......................................... $ 7,244,513 $ 8,328,572
Buildings..................................... 11,986,558 13,684,194
----------- -----------
19,231,071 22,012,766
Less accumulated depreciation................. (3,643,241) (3,844,432)
----------- -----------
15,587,830 18,168,334
Less allowance for loss on land and building.. -- (70,337)
----------- -----------
$15,587,830 $18,097,997
=========== ===========
</TABLE>
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 4).
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 total loss
for financial reporting purposes of $135,509. Due to the fact that
F-5
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Nine Months Ended September 30, 1998 and 1997
at 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.
3. Investment in Joint Ventures
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 September 30, 1998, the Partnership had contributed
$498,953 to the joint venture to acquire the restaurant property. As of
September 30, 1998, the Partnership owned approximately a 36 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.
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>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation and allowance for
loss on land and building.................... $4,418,423 $3,338,372
Net investment in direct financing lease, less
allowance for loss on building............... 631,673 842,633
Cash.......................................... 21,864 12,331
Receivables................................... 20,713 40,456
Accrued rental income......................... 162,507 177,567
Other assets.................................. 2,513 2,029
Liabilities................................... 37,488 16,283
Partners' capital............................. 5,220,205 4,397,105
Revenues...................................... 236,627 434,177
Provision for loss on land and buildings...... (455,379) (147,039)
Net income (loss)............................. (306,969) 126,271
</TABLE>
The Partnership recognized a loss totalling $143,612 and income totalling
$172,340 for the nine months ended September 30, 1998 and 1997, respectively,
from these joint ventures, and recognized income totalling $5,276 and $52,359
during the quarters ended September 30, 1998 and 1997, respectively.
4. Restricted Cash
As of September 30, 1998, the net sales proceeds of $533,598 from the sale
of the property in Naples, Florida, plus accrued interest of $1,371, less
escrow fees of $1,950, 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-6
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Nine Months Ended September 30, 1998 and 1997
5. 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, 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 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.
During the nine months ended September 30, 1998 and 1997, the Partnership
declared distributions to the limited partners of $3,033,748 and $2,070,000,
respectively ($600,000 and $690,000 for the quarters ended September 30, 1998
and 1997, respectively). This represents distributions for the nine months
ended September 30, 1998 and 1997, of $50.56 and $34.50 per unit, respectively
($10.00 and $11.50 per unit for the quarters ended September 30, 1998 and 1997,
respectively). Distributions for the nine months ended September 30, 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.
6. Related Party Transactions
An affiliate of the Partnership 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. 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 nine months ended September 30, 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 nine months ended September 30, 1997.
7. Commitment
During August 1998, the Partnership entered into an agreement with an
unrelated third party to sell the Taco Bell property in Edgewood, Maryland. The
general partners believe that the anticipated sales price will exceed the
Partnership's cost attributable to the property; however, as of November 6,
1998, the sale had not occurred.
F-7
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners
CNL Income Fund IV, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund IV, Ltd.
(a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. 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 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 Income Fund IV, Ltd. as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
January 26, 1998
F-8
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land and building.................................... $18,097,997 $18,737,516
Net investment in direct financing leases............. 1,269,389 1,303,604
Investment in joint ventures.......................... 2,708,012 2,783,738
Cash and cash equivalents............................. 876,452 554,593
Receivables, less allowance for doubtful accounts of
$295,580 and $156,933................................ 37,669 62,561
Prepaid expenses...................................... 11,115 10,935
Lease costs, less accumulated amortization of $17,956
and $15,458.......................................... 21,588 8,486
Accrued rental income................................. 287,466 269,359
Other assets.......................................... 200 100
----------- -----------
$23,309,888 $23,730,892
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 8,576 $ 10,831
Accrued construction costs payable.................... 250,000 --
Accrued and escrowed real estate taxes payable........ 65,176 32,729
Distributions payable................................. 690,000 690,000
Due to related parties................................ 93,854 67,153
Rents paid in advance and deposits.................... 49,983 32,548
----------- -----------
Total liabilities................................... 1,157,589 833,261
----------- -----------
Partners' capital..................................... 22,152,299 22,897,631
----------- -----------
$23,309,888 $23,730,892
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases........ $2,058,703 $2,263,677 $2,373,386
Earned income from direct financing
leases.................................... 130,683 134,014 137,020
Contingent rental income................... 117,031 97,318 94,101
Interest and other income.................. 35,221 47,855 21,287
---------- ---------- ----------
2,341,638 2,542,864 2,625,794
---------- ---------- ----------
Expenses:
General operating and administrative....... 149,808 161,714 140,374
Professional services...................... 33,439 29,289 31,287
Bad debt expense........................... 12,794 -- 102,431
Real estate taxes.......................... 65,316 37,589 37,745
State and other taxes...................... 16,476 21,694 19,006
Depreciation and amortization.............. 455,895 444,232 458,937
---------- ---------- ----------
733,728 694,518 789,780
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Ventures, Gain (Loss) on Sale of Land and
Buildings and Provision for Loss on Land and
Building.................................... 1,607,910 1,848,346 1,836,014
Equity in Earnings of Joint Ventures......... 189,747 277,431 245,778
Gain (Loss) on Sale of Land and Buildings.... (6,652) 221,390 128,547
Provision for Loss on Land and Building...... (70,337) -- --
---------- ---------- ----------
Net Income................................... $1,720,668 $2,347,167 $2,210,339
========== ========== ==========
Allocation of Net Income:
General partners........................... $ 15,697 $ 22,219 $ 21,590
Limited partners........................... 1,704,971 2,324,948 2,188,749
---------- ---------- ----------
$1,720,668 $2,347,167 $2,210,339
========== ========== ==========
Net Income Per Limited Partner Unit.......... $ 28.42 $ 38.75 $ 36.48
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding........................... 60,000 60,000 60,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<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,
1994................... $241,504 $139,044 $30,000,000 $(16,927,963) $13,825,240 $(3,440,000) $23,837,825
Distributions to
limited partners ($46
per limited partner
unit)................. -- -- -- (2,760,000) -- -- (2,760,000)
Net income............. -- 21,590 -- -- 2,188,749 -- 2,210,339
-------- -------- ----------- ------------ ----------- ----------- -----------
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
======== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-11
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants........... $ 2,345,612 $ 2,588,248 $ 2,586,716
Distributions from joint ventures.... 265,473 305,866 271,006
Cash paid for expenses............... (211,213) (206,059) (205,759)
Interest received.................... 18,100 25,909 18,430
----------- ----------- -----------
Net cash provided by operating
activities........................ 2,417,972 2,713,964 2,670,393
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and
building............................ 378,149 1,049,550 518,650
Additions to land and buildings on
operating leases.................... -- (1,035,516) (1,628)
Investment in joint venture.......... -- (437,489) --
Decrease (increase) in restricted
cash................................ -- 518,150 (518,150)
Payment of lease costs............... (17,384) (2,230) (1,800)
Other................................ 9,122 -- --
----------- ----------- -----------
Net cash provided by (used in)
investing activities.............. 369,887 92,465 (2,928)
----------- ----------- -----------
Cash Flows from Financing Activities:
Reimbursement of acquisition costs
paid by related parties on behalf of
the Partnership..................... -- -- (1,175)
Contributions from General Partners.. 294,000 22,300 --
Distributions to limited partners.... (2,760,000) (2,760,000) (2,760,000)
----------- ----------- -----------
Net cash used in financing
activities........................ (2,466,000) (2,737,700) (2,761,175)
----------- ----------- -----------
Net Increase (Decrease) in Cash and
Cash Equivalents...................... 321,859 68,729 (93,710)
Cash and Cash Equivalents at Beginning
of Year............................... 554,593 485,864 579,574
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year.................................. $ 876,452 $ 554,593 $ 485,864
=========== =========== ===========
Reconciliation of Net Income to Net
Cash Provided by Operating Activities:
Net income............................. $ 1,720,668 $ 2,347,167 $ 2,210,339
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation......................... 453,397 442,065 455,543
Amortization......................... 2,498 2,167 3,394
Equity in earnings of joint ventures,
net of distributions................ 75,726 28,435 25,228
Loss (gain) on sale of land and
buildings........................... 6,652 (221,390) (128,547)
Provision for loss on land and
building............................ 70,337 -- --
Decrease in receivables.............. 18,216 41,531 93,451
Increase in prepaid expenses......... (180) (1,202) (1,747)
Decrease in net investment in direct
financing leases.................... 34,215 30,885 27,879
Increase in accrued rental income.... (39,669) (21,520) (22,921)
Increase (decrease) in accounts
payable and accrued expenses........ 31,976 11,162 (3,532)
Increase in due to related parties... 26,701 39,987 27,166
Increase (decrease) in rents paid in
advance and deposits................ 17,435 14,677 (15,860)
----------- ----------- -----------
Total adjustments.................. 697,304 366,797 460,054
----------- ----------- -----------
Net Cash Provided by Operating
Activities........................ $ 2,417,972 $ 2,713,964 $ 2,670,393
=========== =========== ===========
Supplemental Schedule of Non-Cash
Financing Activities:
Distributions declared and unpaid at
December 31......................... $ 690,000 $ 690,000 $ 690,000
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-12
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
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.
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 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-13
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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 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.
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, 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.
F-14
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
3. Land and Buildings on Operating Leases
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Land............................................ $ 8,328,572 $ 8,694,357
Buildings....................................... 13,684,194 13,434,194
----------- -----------
22,012,766 22,128,551
Less accumulated depreciation................... (3,844,432) (3,391,035)
----------- -----------
18,168,334 18,737,516
Less allowance for loss on land and building.... (70,337) --
----------- -----------
$18,097,997 $18,737,516
=========== ===========
</TABLE>
In September 1996, the Partnership sold its 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 Property was originally
acquired by the Partnership in December 1988 and had a cost of approximately
$832,800, excluding acquisition fees and miscellaneous acquisition expenses;
therefore, the Partnership sold the Property for approximately $216,800 in
excess of its original purchase price. In December 1996, the Partnership
reinvested approximately $1,026,200 in a Boston Market property located in
Richmond, Virginia.
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.
At December 31, 1997, the Partnership established an allowance for loss on
land and building in the amount of $70,337 for financial reporting purposes for
the property in Leesburg, Florida. The allowance represents the difference
between the property's carrying value at December 31, 1997 and the estimated
net realizable value of this property based on an anticipated sales 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, 1997, 1996 and 1995, the Partnership recognized $39,669, $21,520 and
$22,921, respectively, of such rental income.
F-15
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1997:
<TABLE>
<S> <C>
1998............................. $ 1,996,330
1999............................. 2,007,362
2000............................. 2,009,453
2001............................. 1,979,003
2002............................. 1,983,101
Thereafter....................... 12,867,319
-----------
$22,842,568
===========
</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>
1997 1996
----------- -----------
<S> <C> <C>
Minimum lease payments receivable................ $ 1,825,690 $ 1,990,589
Estimated residual values........................ 527,829 527,829
Less unearned income............................. (1,084,130) (1,214,814)
----------- -----------
Net investment in direct financing leases........ $ 1,269,389 $ 1,303,604
=========== ===========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998.............................. $ 164,899
1999.............................. 164,899
2000.............................. 164,899
2001.............................. 164,899
2002.............................. 164,899
Thereafter........................ 1,001,195
----------
$1,825,690
==========
</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 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.
F-16
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
In January 1996, the Partnership acquired a property in Clinton, North
Carolina, 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, 1997, the Partnership owned a 53.68% interest in this property.
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.
The following presents the joint ventures' combined, condensed financial
information at December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land and building................................. $3,338,372 $3,565,440
Net investment in direct financing leases.......... 842,633 859,667
Cash............................................... 12,331 11,001
Receivables........................................ 40,456 34,308
Accrued rental income.............................. 177,567 168,784
Other assets....................................... 2,029 30,143
Liabilities........................................ 16,283 10,724
Partners' capital.................................. 4,397,105 4,658,619
Revenues........................................... 434,177 511,606
Net income......................................... 126,271 411,884
</TABLE>
The Partnership recognized income totalling $189,747, $277,431 and $245,778
for the years ended December 31, 1997, 1996 and 1995, respectively, from these
joint ventures.
6. 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. Receivables at December 31,
1997 included $7,106 of such amounts.
7. 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").
F-17
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
Generally, net sales proceeds from the sale of properties, 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 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.
During each of the years ended December 31, 1997, 1996 and 1995, the
Partnership declared distributions to the limited partners of $2,760,000. 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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................. $1,720,668 $2,347,167 $2,210,339
Depreciation for tax reporting
purposes in excess of depreciation
financial reporting purposes......... (9,203) (17,764) (16,933)
Allowance for loss on land and
building............................. 70,337 -- --
Direct financing leases recorded as
operating leases for tax reporting
purposes............................. 34,215 30,885 27,879
Gain on sale of land and buildings for
financial reporting purposes less
than (in excess of) gain for tax
reporting purposes................... 44,918 (140,228) (128,547)
Equity in earnings of joint ventures
for financial reporting purposes in
excess of equity in earnings of joint
ventures for tax reporting purposes.. 51,115 (25,853) (22,624)
Allowance for doubtful accounts....... 138,647 (9,933) 122,022
Accrued rental income................. (39,669) (21,520) (22,921)
Rents paid in advance................. 7,435 14,677 (15,860)
---------- ---------- ----------
Net income for federal income tax
purposes............................. $2,018,463 $2,177,431 $2,153,355
========== ========== ==========
</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 parent company of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, served
as president of CNL Fund Advisors, Inc. through October 1997. CNL Income Fund
Advisors, Inc. was a wholly owned subsidiary of CNL Group, Inc. until its
merger, effective January 1, 1996, with CNL Fund Advisors, Inc. During the
years ended December 31, 1997, 1996 and 1995, CNL Income Fund Advisors, Inc.
and CNL Fund Advisors, Inc. (hereinafter referred to collectively as the
"Affiliates") each performed certain services for the Partnership, as described
below.
F-18
<PAGE>
CNL INCOME FUND IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
During the years ended December 31, 1997, 1996 and 1995, certain 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 Affiliates 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, 1997, 1996 and 1995.
Certain Affiliates are 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 Affiliates provide 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, 1997, 1996 and 1995, the Affiliates
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $81,838, $85,899 and $79,776 for the years
ended December 31, 1997, 1996 and 1995, respectively, for such services.
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Due to Affiliates:
Expenditures incurred on behalf of the Partnership...... $48,126 $39,279
Accounting and administrative services.................. 40,728 27,874
Other................................................... 5,000 --
------- -------
$93,854 $67,153
======= =======
</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 joint ventures), for at least one of the
years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Shoney's, Inc. ................................. $427,238 $425,390 $423,124
Tampa Foods, L.P................................ 215,265 291,347 320,883
</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 IV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
the Partnership's share of total rental and earned income from joint ventures)
for at least one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Shoney's....................................... $557,303 $557,841 $559,710
Wendy's Old Fashioned Hamburger Restaurants.... 432,585 499,305 525,948
Denny's........................................ 345,749 360,080 358,467
Taco Bell...................................... 262,909 251,314 251,273
</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 of these lessees or restaurant chains could
significantly impact the results of operations of the Partnership. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
F-20
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to the
Company gives effect to the Acquisition, and is based on estimates and
assumptions set for the 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 the Company, the
historical combined financial information of CNL Income Fund IV, Ltd. (the "CNL
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 the Company, the CNL Income
Fund, Advisor and CNL Restaurant Financial Services Group. The pro forma
balance sheet assumes that the Acquisition occurred on September 30, 1998; the
pro forma consolidated statements of earnings assume that the Property
Acquisitions (as defined on page ) and the Acquisition occurred on January 1,
1997.
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.
UNAUDITED PRO FORMA BALANCE SHEET
September 30, 1998
<TABLE>
<CAPTION>
Historical Pro Forma
------------------------------------------------------------------------- -----------------------------
CNL
CNL Income Financial CNL
Fund IV, Services, Financial Combined
APF Ltd. Advisor Inc. Corp. Portfolios Adjustments Pro Forma
------------ ----------- ---------- ---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Land and
buildings on
operating
leases, net..... $298,967,972 $15,587,830 $ 0 $ 0 $ 0 $314,555,802 $ 6,638,872 (1)
26,052,741 (2) $347,247,415
Net investment in
direct financing
leases.......... 117,028,760 1,241,326 0 0 0 118,270,086 510,920 (1) 118,781,006
Mortgages and
notes
receivable...... 33,523,506 0 0 0 173,776,981 207,300,487 849,195 (2) 208,149,682
Other
Investments..... 16,200,316 0 200,000 0 6,561,628 22,961,944 -- 22,961,944
Investment in
joint ventures.. 631,374 2,883,497 0 0 0 3,514,871 995,429 (1) 4,510,300
Cash and cash
equivalents..... 90,674,289 1,298,378 283,300 599,997 5,098,033 97,953,997 (338,472)(1)
(8,933,000)(1)
(26,901,936)(2) 61,780,589
Receivables...... 575,104 18,718 7,544,985 6,824,632 517,471 15,480,910 (7,987,572)(3) 7,493,338
Accrued rental
income.......... 3,071,451 270,472 0 0 0 3,341,923 (270,472)(1) 3,071,451
Other assets..... 5,711,195 31,060 401,524 295,570 3,854,477 10,293,826 41,929,076 (1)
(3,685,893)(1) 48,537,009
------------ ----------- ---------- ---------- ------------ ------------ ------------ ------------
Total assets.... $566,383,967 $21,331,281 $8,429,809 $7,720,199 $189,808,590 $793,673,846 $ 28,858,888 $822,532,734
============ =========== ========== ========== ============ ============ ============ ============
LIABILITIES &
EQUITY:
Accounts payable
and accrued
liabilities..... $ 379,496 $ 82,998 $ 449,751 $ 193,949 $ 1,236,138 $ 2,342,332 $ -- $ 2,342,332
Accrued
construction
costs payable... 3,045,304 0 0 0 0 3,045,304 -- 3,045,304
Distributions
payable......... 0 600,000 2,220,000 0 0 2,820,000 -- 2,820,000
Due to related
parties......... 2,552,411 138,193 0 1,452,512 6,556,920 10,700,036 (7,987,572)(3) 2,712,464
Income tax
payable......... 0 0 1,989,003 0 1,001,861 2,990,864 (2,990,864)(4) 0
Line of credit... 6,765,575 0 0 0 0 6,765,575 -- 6,765,575
Notes payable.... 0 0 390,398 28,462 175,528,203 175,947,063 -- 175,947,063
Deferred income.. 1,015,758 0 0 0 0 1,015,758 -- 1,015,758
Rents paid in
advance......... 437,497 81,329 0 0 0 518,826 -- 518,826
Minority
interest........ 282,544 0 0 0 0 282,544 -- 282,544
Common Stock..... 621,187 0 9,800 2,000 200 633,187 137,342 (1) 770,529
Additional paid
in capital...... 556,830,578 0 482,964 5,231,827 3,887,496 566,432,865 139,590,061 (1) 706,022,926
Accumulated
distributions in
excess of net
earnings........ (5,546,383) 0 2,887,893 811,449 1,597,772 (249,269) (82,452,182)(1)
2,990,864 (4) (79,710,587)
Partners
capital......... 0 20,428,761 0 0 0 20,428,761 (20,428,761)(1) 0
------------ ----------- ---------- ---------- ------------ ------------ ------------ ------------
Total
liabilities and
equity......... $566,383,967 $21,331,281 $8,429,809 $7,720,199 $189,808,590 $793,673,846 $ 28,858,888 $822,532,734
============ =========== ========== ========== ============ ============ ============ ============
</TABLE>
F-22
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA INCOME STATEMENT
September 30, 1998
<TABLE>
<CAPTION>
Historical Pro Forma
----------------------------------------------------------------------- ----------------------------
CNL
CNL Income Financial CNL
Fund IV, Services, Financial Combined
APF Ltd. Advisor Inc. Corp. Portfolios Adjustments Pro Forma
----------- ---------- ----------- ---------- ---------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and earned
income............ $22,947,199 $1,731,672 $ 0 $ 0 $ 0 $24,678,871 $ 9,635,208 (a)
15,215 (b) $34,329,294
Fees............... 0 0 21,405,127 5,115,549 6,817 26,527,493 (21,008,296)(c)
(2,875,906)(d) 2,643,291
Interest and other
income............ 6,117,911 46,143 751 432,506 18,031,141 24,628,452 1,526,547 (e) 26,154,999
----------- ---------- ----------- ---------- ---------- ----------- ------------ -----------
Total revenue...... 29,065,110 1,777,815 21,405,878 5,548,055 18,037,958 75,834,816 (12,707,232) 63,127,584
Expenses:
General and
administrative.... 1,539,004 207,435 6,701,115 4,107,311 2,597,171 15,152,036 (1,304,519)(f)
(1,415,100)(g)
(31,799)(h) 12,400,618
Advisory fees...... 1,248,393 0 0 0 1,026,231 2,274,624 (2,274,624)(i) 0
Fees to Restaurant
Financial Services
Group............. 0 0 256,456 1,569,202 0 1,825,658 (1,825,658)(n) 0
Interest........... 0 0 105,668 3,534 14,230,999 14,340,201 (68,670)(m) 14,271,531
State taxes........ 397,569 15,747 15,226 18,564 201,616 648,722 37,283 (j) 686,005
Depreciation--
other............. 0 0 75,607 55,056 0 130,663 0 130,663
Depreciation--
property.......... 2,684,924 324,111 0 0 0 3,009,035 1,561,563 (k) 4,570,598
Amortization....... 8,096 2,724 55,932 138 945,299 1,012,189 1,572,340 (l) 2,584,529
----------- ---------- ----------- ---------- ---------- ----------- ------------ -----------
Total operating
expenses.......... 5,877,986 550,017 7,210,004 5,753,805 19,001,316 38,393,128 (3,749,184) 34,643,944
----------- ---------- ----------- ---------- ---------- ----------- ------------ -----------
Operating earnings
(losses)........... 23,187,124 1,227,798 14,195,874 (205,750) (963,358) 37,441,688 (8,958,048) 28,483,640
Equity in earnings
of joint
ventures/minority
interest.......... (23,271) (143,612) 0 12,452 0 (154,431) 0 (154,431)
Gain on sale of
properties........ 0 226,024 0 0 0 226,024 0 226,024
Gain on
securitization.... 0 0 0 0 3,018,268 3,018,268 0 3,018,268
----------- ---------- ----------- ---------- ---------- ----------- ------------ -----------
Net earnings
(losses) before
income taxes....... 23,163,853 1,310,210 14,195,874 (193,298) 2,054,910 40,531,549 (8,958,048) 31,573,501
Provision (credit)
for federal income
taxes............. 0 0 5,607,415 (81,229) 789,895 6,316,081 (6,316,081)(o) 0
----------- ---------- ----------- ---------- ---------- ----------- ------------ -----------
Net income.......... $23,163,853 $1,310,210 $ 8,588,459 $ (112,069) $1,265,015 $34,215,468 $ (2,641,967) $31,573,501
=========== ========== =========== ========== ========== =========== ============ ===========
Earnings per share.. $ 0.49 $ 0.44
=========== ===========
Shares outstanding:
Weighted average... 47,633,909 72,358,425(p)
=========== ===========
End of period...... 62,118,679 77,052,848
=========== ===========
</TABLE>
F-23
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA INCOME STATEMENT
For the year ended December 31, 1997
<TABLE>
<CAPTION>
Historical Pro Forma
----------------------------------------------------------------------- ---------------------------
CNL
CNL Income Financial CNL
Fund IV, Services, Financial Combined
APF Ltd. Advisor Inc. Corp. Portfolios Adjustments Pro Forma
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and earned
income............. $15,490,615 $2,306,417 $ 0 $ 0 $ 0 $17,797,032 $24,048,982 (a)
40,472 (b) $41,886,486
Fees................ 0 0 8,310,836 5,965,110 73,704 14,349,650 (9,072,165)(c)
(2,662,141)(d) 2,615,344
Interest and other
income............. 3,967,318 35,221 165,569 0 10,932,843 15,100,951 249,395 (e) 15,350,346
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Total Revenue....... 19,457,933 2,341,638 8,476,405 5,965,110 11,006,547 47,247,633 12,604,543 59,852,176
Expenses:
General and
administrative..... 1,010,725 261,357 4,266,169 1,889,904 828,848 8,257,003 (737,400)(f)
(1,619,238)(g)
(40,154)(h) 5,860,211
Advisory fees....... 804,879 0 0 0 1,802,532 2,607,411 (2,607,411)(i) 0
Fees to Restaurant
Financial Services
Group.............. 0 0 151,041 594,041 0 745,082 (745,082)(n) 0
Interest............ 0 0 162,153 183,315 8,320,000 8,665,468 (81,594)(m) 8,583,874
State taxes......... 251,358 16,476 12,084 1,294 1,600 282,812 14,453 (j) 297,265
Depreciation--
other.............. 0 0 48,490 14,637 0 63,127 -- 63,127
Depreciation--
property........... 1,784,269 453,397 0 0 0 2,237,666 3,230,497 (k) 5,468,163
Amortization........ 10,793 2,498 18,093 61,324 916,577 1,009,285 2,096,454 (l) 3,105,739
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Total operating
expenses........... 3,862,024 733,728 4,658,030 2,744,515 11,869,557 23,867,854 (489,475) 23,378,379
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Operating earnings
(losses)............ 15,595,909 1,607,910 3,818,375 3,220,595 (863,010) 23,379,779 13,094,018 36,473,797
Equity in earnings
of joint
ventures/minority
interest........... (31,453) 189,747 0 (126,627) 0 31,667 -- 31,667
(Loss) on sale of
properties......... 0 (6,652) 0 0 0 (6,652) -- (6,652)
Provision for loss
on properties...... 0 (70,337) 0 0 0 (70,337) -- (70,337)
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Net earnings before
income taxes........ 15,564,456 1,720,668 3,818,375 3,093,968 (863,010) 23,334,457 13,094,018 36,428,475
Provision (credit)
for federal income
taxes.............. 0 0 1,508,258 1,272,133 (317,785) 2,462,606 (2,462,606)(o) 0
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Net earnings
(losses)............ $15,564,456 $1,720,668 $2,310,117 $1,821,835 $ (545,225) $20,871,851 $15,556,624 $36,428,475
=========== ========== ========== ========== =========== =========== =========== ===========
Earnings per share... $ 0.66 $ 0.50
=========== ===========
Shares outstanding:
Weighted average.... 23,423,868 73,029,587(p)
=========== ===========
End of period....... 36,192,971 73,029,587
=========== ===========
</TABLE>
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of September 30, 1998 reflects the
transactions of the acquisition of the CNL Income Fund, Advisor and CNL
Restaurant Financial Services Group (the "Acquisition Proposal") as set forth
in this Proxy Statement. The Pro Forma Statements of Earnings for the nine
months ended September 30, 1998, and for the year ended December 31, 1997, have
been prepared to reflect a) the issuance of additional shares and the property
acquisitions completed from January 1, 1997 through November 30, 1998
("Offering and Property Transactions") and b) the transactions of the
Acquisition Proposal as set forth in this Proxy Statement. This unaudited pro
forma financial information has been prepared utilizing the historical
financial statements of the Company and the historical combined financial
information of the CNL Income Fund, Advisor and CNL Restaurant Financial
Services Group and should be read in conjunction with the selected historical
financial data and accompanying notes of the Company, the CNL Income Fund,
Advisor and the CNL Restaurant Financial Services Group. The Pro Forma Balance
Sheet was prepared as if the Offering and Property Transactions and the
Acquisition Proposal occurred on September 30, 1998. The Pro Forma Statements
of Earnings were prepared as if the Property Acquisitions and the Acquisition
Proposal occurred as of January 1, 1997. The pro forma information is unaudited
and is not necessarily indicative of the consolidated operating results which
would have occurred if the Offering and Acquisition Transaction and the
Acquisition Proposal 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 Acquisition
Proposal have been made. Capitalized terms have the meanings as defined in the
Proxy Statement.
2. Method of Accounting
The acquisition of the CNL Income Fund and the CNL Restaurant Financial
Services Group will be accounted for under the purchase accounting method. The
Company 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, the Company 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 operating expense on the Company's consolidated statements of
earnings, but the Company will not deduct this expense for purposes of
calculating funds from operations due to the non-recurring and non-cash nature
of the expense.
All significant intercompany balances and transactions between the Company,
CNL Income Fund, Advisor and CNL Restaurant Financial Services Group have been
eliminated in the pro forma financial statements.
3. Adjustments to Pro Forma Balance Sheet
The following describes the pro forma adjustments to the Pro Forma Balance
Sheet as of September 30, 1998, as if the Acquisition was consummated on such
date. For purposes of the pro forma financial statements, it is assumed that at
an annual meeting of stockholders, the stockholders of the Company approved an
amendment to increase the number of authorized shares to an amount necessary to
enable the Company to issue the shares for the Acquisition.
(1) Represents the payment of $338,472 in cash and the issuance of
14,934,169 common shares in consideration for the purchase of the CNL
Income Fund, Advisor and CNL Restaurant Financial Services Group at
September 30, 1998 at a share price of $10 plus estimated transaction
costs. The acquisition of the CNL Income Fund and the CNL Restaurant
Financial Services Group has been accounted for under the purchase
accounting method and goodwill was recognized to the extent that the
consideration paid
F-25
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
exceeded the fair value of the net tangible assets acquired. As for the
acquisition of the Advisor from a related party, the consideration paid in
excess of the fair value of the net tangible assets received has been
accounted for as costs incurred in acquiring the Advisor from a related
party because the Advisor has not been deemed to qualify as a "business"
for purposes of applying APB Opinion No. 16 "Business Combinations." Upon
consummation of the Acquisition, this expense will be recorded as an
operating expense on the Company's statement of earnings. The Company will
not deduct this expense for purposes of calculating funds from operations
due to the nonrecurring and non-cash nature of the expense. As of September
30, 1998, $249,403 of transaction costs had been incurred by the Company.
<TABLE>
<S> <C>
CNL Income Fund............................................ $ 26,680,162
Advisor.................................................... 76,000,000
CNL Restaurant Financial Services Group.................... 47,000,000
------------
Total Purchase Price (cash and shares)................... 149,680,162
Less cash paid to CNL Income Fund.......................... (338,472)
------------
Share consideration...................................... 149,341,690
Transaction costs of the Company........................... 8,933,000
------------
Total costs incurred..................................... $158,274,690
============
</TABLE>
In addition, the Company i) used $8,933,000 in cash to pay the
transaction costs related to the Acquisition, ii) made an upward adjustment
to the CNL Income Fund carrying value of land and building on operating
leases by $6,638,872, net investment in direct financing leases by
$510,920, investment in joint venture by $995,429, made downward
adjustments to the carrying value of accrued rental income of $270,472,
made downward adjustments to other assets of $3,685,893 to adjust
historical values to fair value, iii) recorded goodwill of $41,929,076 for
the acquisition of the CNL Restaurant Financial Services Group, iv) reduced
retained earnings by $77,155,068 for the excess consideration paid over the
net assets of the Advisor and removed the historical common stock balance
of $12,000, additional paid in capital balance of $9,602,287, retained
earnings balance of $5,297,114 and partners capital balance of $20,428,761
of the CNL Income Fund, Advisor and CNL Restaurant Financial Services
Group.
(2) Represents the use of $26,901,936 in cash and cash equivalents at
September 30, 1998 to acquire $26,052,741 in properties and issue $849,195
in mortgage notes which occurred from October 1, 1998 through November 30,
1998.
(3) Represents the elimination by the CNL Income Fund of $138,193 in
related party payables recorded as receivables by the Advisor, the
elimination by the CNL Restaurant Financial Services Group of $6,641,379 in
related party payables recorded as receivables by CNL Restaurant Financial
Services Group and the elimination by the Company of $1,208,000 in related
party payables recorded as receivables by the Advisor.
(4) Represents the elimination of income taxes payable of $2,990,864
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.
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
4. Adjustments to Pro Forma Income Statements
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the nine months ended September 30, 1998, as if
the Acquisition was consummated as of January 1, 1997.
(a) Represents rental and earned income as if 1) properties that had been
previously constructed and acquired from January 1, 1998 through
November 30, 1998 had been acquired and leased on January 1, 1997 and
2) properties that were developed by the Company from January 1, 1998
through November 30, 1998 had been placed in service on May 1, 1997
(assumes a four month development period).
<TABLE>
<S> <C>
Rental and earned income on Property Transactions by the
Company.................................................... $9,635,208
</TABLE>
(b) Represents $15,215 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms
for the leases acquired from the CNL Income Fund as if the leases had
been acquired on January 1, 1997.
(c) Represents the elimination of intercompany fees between the Company,
the CNL Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Origination fees.......................................... $ (1,569,202)
Secured equipment lease fee............................... (44,426)
Advisory fees............................................. (1,722,383)
Reimbursement of administrative costs..................... (290,402)
Acquisition fees.......................................... (15,392,193)
Underwriting fees......................................... (254,945)
Administrative fees....................................... (148,491)
Executive fee............................................. (310,000)
Guarantee fees............................................ (93,750)
Servicing fee............................................. (1,014,117)
Development fees.......................................... (166,876)
Consulting fee............................................ (1,511)
------------
Total................................................... $(21,008,296)
============
</TABLE>
(d) Represents the deferral of $2,875,906 in origination fees collected by
CNL Restaurant Financial Services Group that should be amortized over
the term of the loans originated (20 years) in accordance with the
Statement of Financial Accounting Standards #91 "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring
Loans and Initial Direct Costs of Leases."
(e) Represents interest income of $1,318,870 earned from Other Investments
acquired and mortgage notes issued from January 1, 1998 through
November 30, 1998 as if this had occurred on January 1, 1997 and the
amortization of $207,677 of deferred origination fees collected during
the year ended December 31, 1997 and during the nine months ended
September 30, 1998, which were capitalized and deferred in (d) above as
if they had been collected on January 1, 1997. These deferred fees are
being amortized and recorded as interest income.
F-27
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(f) Represents the elimination of intercompany expenses paid between the
Company, the CNL Income Fund, the Advisor and the CNL Restaurant
Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs...................... $ (290,402)
Servicing fee.............................................. (1,014,117)
-----------
$(1,304,519)
===========
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by the Company
were subject to capitalization during the entire period and 2) costs
relating to properties not developed by the Company were subject to
capitalization up through the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs........................... $(1,415,100)
</TABLE>
(h) Represents savings of $31,799 in professional services and
administrative expenses resulting from reporting on one combined
Company versus 22 separate entities.
(i) Represents the elimination of advisory fees between the Company, the
CNL Income Fund, the Advisor and the CNL Restaurant Financial Services
Group:
<TABLE>
<S> <C>
Advisory fees............................................... $(1,722,383)
Administrative fees......................................... (148,491)
Executive fee............................................... (310,000)
Guarantee fees.............................................. (93,750)
-----------
$(2,274,624)
===========
</TABLE>
(j) Represents additional income taxes of $37,283 resulting from assuming
that acquisitions from January 1, 1998 through November 30, 1998 had
been acquired on January 1, 1997 and assuming that the CNL Income Fund
had operated under a REIT structure.
(k) Represents an increase in depreciation of the building portion of the
properties acquired from January 1, 1998 through November 30, 1998 as
if they had been acquired on January 1, 1997 and the step up in basis
referred to in footnote (2) from acquiring the CNL Income Fund
portfolio using the straight-line method over the estimated useful
lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense.......................................... $1,561,563
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of the
CNL Restaurant Financial Services Group referred to in footnote (2)
<TABLE>
<S> <C>
Amortization of goodwill..................................... $1,572,340
</TABLE>
(m) Represents elimination of interest expense recorded for the
amortization of $350,000 in arrangement fees collected during the year
ended December 31, 1997 which were eliminated in II (d) below.
<TABLE>
<S> <C>
Interest expense............................................... $(68,670)
</TABLE>
F-28
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(n) Represents the elimination of fees paid to affiliates for fees incurred
between the Company, the CNL Income Fund, the Advisor and the CNL
Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees............................................ $(1,569,202)
Underwriting fees........................................... (254,945)
Consulting fee.............................................. (1,511)
-----------
$(1,825,658)
===========
</TABLE>
(o) Represents the elimination of $6,316,081 in the provision for income
taxes as a result of the Acquisition. The Company expects to continue
to qualify as a REIT and does not expect to incur federal income taxes.
(p) Common shares issued during the period required to fund acquisitions as
if they had been acquired on January 1, 1997 were assumed to have been
issued and outstanding as of January 1, 1998. For purposes of the
proforma financial statements, it is assumed that the stockholders
approved the proposal to increase the number of authorized common
shares of the Company.
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the year ended December 31, 1997, as if the
Acquisition was consummated as of January 1, 1997.
(a) Represents rental and earned income as if 1) properties that had been
previously constructed and acquired from January 1, 1998 through
November 30, 1998 had been acquired and leased on January 1, 1997 and
2) properties that were developed by the Company from January 1, 1997
through November 30, 1998 had been placed in service on May 1, 1997
(assumes a four month development period).
<TABLE>
<S> <C>
Rental and earned income on Property Transactions by the
Company................................................... $24,048,982
</TABLE>
(b) Represents $40,472 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms
for the leases acquired from the CNL Income Fund as if the leases had
been acquired on January 1, 1997.
(c) Represents the elimination of intercompany fees between the Company,
the CNL Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Origination fees........................................... $ (594,041)
Secured equipment lease fee................................ (375,219)
Advisory fees.............................................. (1,775,680)
Reimbursement of administrative costs...................... (138,412)
Acquisition fees........................................... (3,887,483)
Underwriting fees.......................................... (151,041)
Administrative fees........................................ (269,231)
Executive fee.............................................. (250,000)
Guarantee fees............................................. (312,500)
Arrangement fees........................................... (350,000)
Servicing fee.............................................. (598,988)
Development fees........................................... (369,570)
-----------
Total...................................................... $(9,072,165)
===========
</TABLE>
F-29
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(d) Represents the deferral of $2,662,141 in origination fees collected by
CNL Restaurant Financial Services Group that should be amortized over
the term of the loans originated (20 years) in accordance with the
Statement of Financial Accounting Standards #91 "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring
Loans and Initial Direct Costs of Leases."
(e) Represents the elimination of interest income of $1,931,331 earned
during the year ended December 31, 1997 assuming all monies raised
during 1997 and all cash held on January 1, 1997 was used to effect the
Acquisition on January 1, 1997, represents interest income of
$2,047,619 earned from Other Investments acquired and mortgage notes
issued from January 1, 1998 through November 30, 1998 as if this had
occurred on January 1, 1997 and the recognition of $133,107 of
origination fees collected during the year ended December 31, 1997
which were deferred in (d) and are being amortized and recorded as
interest income.
(f) Represents the elimination of intercompany expenses paid between the
Company, the CNL Income Fund, the Advisor and the CNL Restaurant
Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs........................ $(138,412)
Servicing fee................................................ (598,988)
---------
$(737,400)
=========
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by the Company
were subject to capitalization during the entire period and 2) costs
relating to properties not developed by the Company were subject to
capitalization up through the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs........................... $(1,619,238)
</TABLE>
(h) Represents savings of $40,154 in professional services and
administrative expenses resulting from reporting on one combined
Company versus 22 separate entities.
(i) Represents the elimination of advisory fees between the Company, the
CNL Income Fund, the Advisor and the CNL Restaurant Financial Services
Group:
<TABLE>
<S> <C>
Advisory fees............................................... $(1,775,680)
Administrative fees......................................... (269,231)
Executive fee............................................... (250,000)
Guarantee fees.............................................. (312,500)
-----------
$(2,607,411)
===========
</TABLE>
(j) Represents additional income taxes of $14,453 resulting from assuming
that acquisitions from January 1, 1997 through November 30, 1998 had
been acquired on January 1, 1997 and assuming that the CNL Income Fund
had operated under a REIT structure.
(k) Represents increase in depreciation of the building portion of the
properties acquired from January 1, 1997 through November 30, 1998 as
if they had been acquired on January 1, 1997 and the step
F-30
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
up in basis referred to in footnote (2) from acquiring the CNL Income Fund
portfolio using the straight-line method over the estimated useful lives of
generally 30 years.
<TABLE>
<S> <C>
Depreciation expense.......................................... $3,230,497
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of the
CNL Restaurant Financial Services Group referred to in footnote (2)
<TABLE>
<S> <C>
Amortization of goodwill..................................... $2,096,454
</TABLE>
(m) Represents elimination of yearly amortization of arrangement fees of
$350,000 capitalized as deferred costs and amortized as interest
expense and the capitalization of interest expense during the period
that properties were under development.
<TABLE>
<S> <C>
Amortization of arrangement fees.............................. $(24,144)
Capitalization of interest during development period.......... (57,450)
--------
$(81,594)
========
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees incurred
between the Company, the CNL Income Fund, the Advisor and the CNL
Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees.............................................. $(594,041)
Underwriting fees............................................. (151,041)
---------
(745,082)
=========
</TABLE>
(o) Represents the elimination of $2,462,606 in the provision for income
taxes as a result of the Acquisition. The Company expects to continue
to qualify as a REIT and does not expect to incur federal income taxes.
(p) Common shares issued during the period were assumed to have been issued
and outstanding as of January 1, 1997. For purposes of the proforma
financial statement, it is assumed that the stockholders approved the
proposal to increase the number of authorized common shares of the
Company.
F-31
<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 eighteen 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
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger is entered into as of this 11th day of
March, 1999, by and among CNL American Properties Fund, Inc., a Maryland
corporation ("APF"), CNL APF Partners, L.P., a Delaware limited partnership
(the "Operating Partnership"), CNL APF GP Corp., a Delaware corporation (the
"OP General Partner"), CNL Income Fund IV, Ltd., a Florida limited partnership
(the "Fund"), and Robert A. Bourne, James M. Seneff, Jr., and CNL Realty
Corporation, a Florida corporation (together with Messrs. Bourne and Seneff,
the "General Partners"). APF, the Operating Partnership, the OP General
Partner, the Fund and the General Partners are referred to collectively herein
as the "Parties" and individually as a "Party."
RECITALS:
WHEREAS, the Parties hereto desire to consummate a merger (the "Merger")
whereby the Fund will be merged with and into the Operating Partnership, and
the Operating Partnership will be the surviving limited partnership in the
Merger, upon the terms and subject to the conditions of this Agreement and in
accordance with the Delaware Revised Uniform Limited Partnership Act (the
"Delaware RULPA") and the Florida Revised Uniform Limited Partnership Act (the
"Florida RULPA");
WHEREAS, the Fund is one of 18 CNL Income Funds (collectively with the Fund,
the "CNL Income Funds") that APF is proposing to acquire (the "Proposed
Acquisitions");
WHEREAS, the Special Committee (the "Special Committee") of the independent
members of the Board of Directors of APF has received a fairness opinion (the
"Fairness Opinion") from Merrill Lynch & Co. as to the fairness to APF, from a
financial point of view, of the consideration to be paid in connection with the
Proposed Acquisitions;
WHEREAS, the Special Committee has recommended the Merger to the Board of
Directors of APF and the Board has approved the proposal to consummate the
Merger (the "Merger Proposal") and the related transactions;
WHEREAS, Legg Mason Wood Walker Incorporated has delivered a fairness
opinion (the "Fund Fairness Opinion") to the General Partners as to the
fairness to the Fund and its limited partners from a financial point of view,
of the APF Common Share consideration offered to the Fund and its limited
partners; and
WHEREAS, the Board of Directors of the OP General Partner has unanimously
approved the Merger Proposal;
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the receipt and sufficiency of which are
acknowledged, the Parties agree as follows:
ARTICLE I
Definitions
1.1 Terms Defined in this Agreement. As used in this Agreement, the
following terms shall have the respective meanings set forth below:
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
B-1
<PAGE>
"Affiliated Group" means any affiliated group within the meaning of Code
(S)1504, or any similar group defined under a similar provision of state, local
or foreign law.
"Agreement" means this Agreement, as amended from time to time.
"APF" has the meaning set forth in the preface above.
"APF Common Shares" shall mean the shares of common stock, par value $0.01,
of APF.
"APF Indemnity Claim" has the meaning set forth in Section 12.1 below.
"APF SEC Documents" has the meaning set forth in Section 6.7 below.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms the basis for any specified
consequence.
"Business Combination" has the meaning set forth in Section 4.1(b) below.
"Cash/Note Option" has the meaning set forth in Section 4.4 below.
"Closing" has the meaning set forth in Section 2.3 below.
"CNL Income Funds" has the meaning set forth in the second paragraph of the
Recitals above.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the businesses
and affairs of the Fund, the Operating Partnership or APF, if any, that is not
already generally available to the public.
"Delaware RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Disclosure Schedule" has the meaning set forth in the first paragraph of
Article VII below.
"Dissenting Partners" has the meaning set forth in Section 4.4 below.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
tax-qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) tax-qualified defined benefit retirement
plan or arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Fairness Opinion" has the meaning set forth in the third paragraph of the
Recitals above.
"Florida RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Fund" has the meaning set forth in the preface above.
"Fund Articles of Merger" has the meaning set forth in Section 2.2 below.
"Fund Fairness Opinion" has the meaning set forth in the fifth paragraph of
the recitals above.
B-2
<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-3
<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-4
<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.
B-5
<PAGE>
ARTICLE III
Certificate of Limited Partnership; Limited Partnership Agreement;and General
Partner of Surviving Partnership
3.1 Certificate of Limited Partnership. At the Effective Time, the
certificate of limited partnership of the Operating Partnership, as in effect
immediately prior to the Effective Time, shall be the certificate of limited
partnership of the Surviving Partnership until thereafter amended as provided
therein.
3.2 Limited Partnership Agreement. At the Effective Time, the limited
partnership agreement of the Operating Partnership, as in effect immediately
prior to the Effective Time, shall be the limited partnership agreement of the
Surviving Partnership.
3.3 General Partner. The general partner of the Operating Partnership
immediately prior to the Effective Time shall be the general partner of the
Surviving Partnership from and after the Effective Time until it is replaced or
it resigns in accordance with the limited partnership agreement of the
Surviving Partnership.
ARTICLE IV
Share Consideration; Payment of Share Consideration
4.1 Share Consideration; Conversion or Cancellation of Fund Interests in
Merger.
(a) At the Effective Time, by virtue of the Merger and without any action by
the Parties, all of the outstanding Fund Interests (i) shall be converted into
the right to receive up to 2,668,016 fully paid and nonassessable APF Common
Shares (1,334,008 APF Common Shares if the Reverse Split [defined below] occurs
before the Closing) (the "Share Consideration") pursuant to the terms of
Section 4.2 below, (ii) shall cease to be outstanding, and (iii) shall be
canceled and retired and shall cease to exist, and each Partner, as the holder
of such Fund Interests shall cease to have any rights with respect thereto,
except the right to receive either (A) APF Common Shares therefor in accordance
with this Section 4.1 and Section 4.3 or (B) the cash and Notes in accordance
with Section 4.4 below. Subject to the approval of the APF's shareholders of an
amendment to its article of incorporation, APF anticipates that prior to the
Closing it will effect a one for two reverse stock split (the "Reverse Split")
pursuant to which each two shares of APF Common Shares outstanding will be
exchanged for one share of APF Common Shares.
(b) Except for the Reverse Stock Split described in Section 4.1(a), prior to
the Effective Time, APF shall not split or combine the APF Common Shares, or
pay a stock dividend or other stock distribution in APF Common Shares, or in
rights or securities exchangeable for, convertible into or exercisable for APF
Common Shares, or otherwise change APF Common Shares into, or exchange APF
Common Shares for, any other securities (whether pursuant to or as part of a
merger, consolidation, acquisition of property or stock, separation,
reorganization, or liquidation of APF as a result of which APF stockholders
receive cash, stock, or other property in exchange for, or in connection with,
their APF Common Shares (a "Business Combination") or otherwise), or make any
other dividend or distribution on or of APF Common Shares (other than regular
quarterly cash dividends paid on APF Common Shares or any distribution pursuant
to APF's dividend reinvestment plan), without the parties hereto having first
entered into an amendment to this Agreement pursuant to which the Share
Consideration will be adjusted to reflect such split, combination, dividend,
distribution, Business Combination, or change.
(c) At the Effective Time, by virtue of the Merger and without any action by
holders thereof, all of the APF Common Shares issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding.
4.2 Payment of Share Consideration. At the Closing, subject to Section 4.4
below, the Partners shall receive the Share Consideration (less expenses paid
by APF on behalf of the Fund), distributed in accordance
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with the provisions of the Fund's limited partnership agreement as of the
Closing Date. For the purposes of this Agreement, the Share Consideration will
be reduced (i) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund and (ii) as provided
in Section 4.4 below.
4.3 Fractional APF Common Shares. No certificates representing fractional
APF Common Shares shall be issued upon conversion of any Fund Interests. Each
Partner of the Fund who would otherwise be entitled to fractional APF Common
Shares will receive one APF Common Share for a fractional interest representing
50% or more of one APF Common Share. No APF Common Shares will be issued for a
fractional interest representing less than 50% of one APF Common Share.
4.4 Cash/Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote against the
Merger and affirmatively elect the cash/note option (the "Cash/Note Option"),
such Dissenting Partners shall be entitled to receive, in lieu of the Share
Consideration, consideration based on such Dissenting Partners' percentage
interest (as determined by the Fund's partnership agreement) in the Fund's
asset liquidation value of $24,307,286, based on Valuation Associates'
appraisal. Such consideration shall be payable 10% in cash and 90% in Callable
Notes due in 2006 (the "Notes"). The Notes will bear interest at a fixed rate
equal to 120% of the applicable federal rate as of the date the consent
solicitation on Form S-4 is mailed to the limited partners. The Share
Consideration shall be reduced on a one-for-one basis for all APF Shares
otherwise distributable to Dissenting Partners had such Dissenting Partners not
elected the Cash/Note Option.
ARTICLE V
Representations and Warranties of The General Partners
Each General Partner severally represents and warrants to APF and the
Operating Partnership that the statements contained in this Article V are
correct and complete as of the date hereof and on the Closing Date:
5.1 Authorization of Transaction. The General Partner has full power and
authority (including, as applicable, full corporate power and authority) to
execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement constitutes the valid and legally binding obligation of the
General Partner, enforceable in accordance with its terms and conditions. The
General Partner does not need to give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or
governmental agency in order to consummate the transactions contemplated by
this Agreement, except in connection with federal securities laws and any
applicable "Blue Sky" or state securities laws.
5.2 Noncontravention. Except as set forth in Section 5.2 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, will violate any
constitution, statute, regulation, rule, injunction, judgment, order, decree,
ruling, charge, or other restriction of any government, governmental agency, or
court to which the General Partner is subject or, as applicable, any provision
of the General Partner's articles of incorporation, bylaws or other
organizational documents.
ARTICLE VI
Representations and Warranties of APF, The OPGeneral Partner and The Operating
Partnership
APF, the OP General Partner and the Operating Partnership jointly and
severally represent and warrant to the General Partners and the Fund that the
statements contained in this Article VI are correct and complete as of the date
hereof and the Closing Date:
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6.1 Organization. APF is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Maryland. APF is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where the failure to
so qualify or obtain authorization would not have a Material Adverse Effect on
APF. APF has full corporate power and authority and all licenses, permits, and
authorizations necessary to carry on the businesses in which it is engaged and
to own and use the properties owned and used by it. The OP General Partner is a
corporation duly organized, validly existing, and in good standing under the
laws of the state of Delaware. The Operating Partnership is a limited
partnership duly organized, validly existing, and in good standing under the
laws of the State of Delaware. The Operating Partnership is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction
where such qualification is required, except where the failure to so qualify or
obtain authorization would not have a Material Adverse Effect on the Operating
Partnership. The Operating Partnership has full limited partnership power and
authority and all licenses, permits, and authorizations necessary to carry on
the businesses in which it is engaged and to own and use the properties owned
and used by it. APF and the OP General Partner have delivered to the General
Partners and the Fund correct and complete copies of the certificate of
incorporation of APF and the OP General Partner and the certificate of limited
partnership and the limited partnership agreement of the Operating Partnership
(each as amended to date). The minute books (containing the records of meetings
of the stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of APF and
the OP General Partner and any organizational records of the Operating
Partnership have been made available to the General Partners and the Fund and
are correct and complete. APF is not in default under or in violation of any
provision of its certificate of incorporation, and the Operating Partnership is
not in default under or in violation of any provision of its certificate of
limited partnership or limited partnership agreement.
6.2 Capital Stock. The authorized capital stock of APF consists of
125,000,000 shares of common stock, $.01 par value (the "APF Common Shares"),
of which 74,696,927 shares are outstanding as of January 31, 1999. Since
January 31, 1999, APF has not issued any shares of capital stock. All
outstanding APF Common Shares are, and all APF Common Shares issuable under any
stock option plans of APF, will be when issued in accordance with the terms
thereof, duly authorized, validly issued, fully paid and nonassessable. Except
for the 58,331,984 APF Common Shares which may be issued in connection with
APF's acquisition of the other 17 CNL Income Funds in the Proposed Acquisitions
and the 12,300,000 APF Shares which may be issued in connection with APF's
acquisition of CNL Fund Advisors, Inc., CNL Financial Services, Inc. and CNL
Financial Corp., there are outstanding on the date hereof no options, warrants,
calls, rights, commitments or any other agreements of any character to which
APF is a party or by which it may be bound, requiring it to issue, transfer,
sell, purchase, register, redeem, or acquire any shares of capital stock or any
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for or acquire any shares of its capital stock. All of the
outstanding general partner interests of the Operating Partnership are owned by
the OP General Partner, and all of the outstanding limited partner interests of
the Operating Partnership are owned by the OP Limited Partnership, and there
are outstanding on the date hereof no options, warrants, rights, commitments or
any other agreements of any character to which the Operating Partnership or any
partner thereof is a party or which it may be bound requiring it to issue,
transfer, sell, purchase, register, redeem or acquire any interest in the
Operating Partnership.
6.3 Authorization for Common Stock. The Share Consideration will, when
issued, be duly authorized, validly issued, fully paid and nonassessable, and
no stockholder of APF will have any preemptive right or similar rights of
subscription or purchase in respect thereof. The Share Consideration will be
registered under the Securities Act and will be registered or exempt from
registration under all applicable state securities laws. The Share
Consideration will, when issued, be approved for listing on the NYSE, subject
to official notice of issuance.
6.4 Authorization of Transaction. APF, the OP General Partner and the
Operating Partnership have full power and authority (including full corporate
and limited partnership, as applicable, power and authority) to
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execute and deliver this Agreement and to perform their obligations hereunder.
The execution, delivery and performance by APF, the OP General Partner and the
Operating Partnership of this Agreement have been duly and validly authorized
by the boards of directors of APF and the OP General Partner. This Agreement
constitutes the valid and legally binding obligation of APF, the OP General
Partner and the Operating Partnership, enforceable in accordance with its terms
and conditions. None of APF, the OP General Partner or the Operating
Partnership needs to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
6.5 Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which, APF, the OP General Partner or the
Operating Partnership is subject or any provision of APF's or the OP General
Partner's articles of incorporation or by-laws or the Operating Partnership's
certificate of limited partnership or limited partnership agreement or (ii)
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice or consent under any agreement, contract, lease, license,
instrument, or other arrangement to which APF, the OP General Partner or the
Operating Partnership is a party or by which it is bound or to which any of its
assets is subject or (iii) result in the imposition of a Security Interest upon
any of its assets.
6.6 Title to Assets. APF has good title to, or a valid leasehold interest
in, the properties and assets used by it, located on its premises, or set forth
in its most recent quarterly report on Form 10-Q filed with the SEC or acquired
after the date thereof, free and clear of all Security Interests, except for
properties and assets disposed of in the Ordinary Course of Business since the
date of its most recent quarterly report on Form 10-Q.
6.7 Reports and Financial Statements. APF has filed all required reports,
schedules, forms, statements and other documents with the SEC since January 1,
1996 (along with any such documents filed subsequent to the date hereof, the
"APF SEC Documents"). All of the APF SEC Documents (other than preliminary
material), as of their respective filing dates, complied in all material
respects with all applicable requirements of the Securities Act and the
Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such APF SEC Documents. None of the APF SEC Documents
at the time of filing contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading, except to the extent such statements have
been modified or superseded by later filed APF SEC Documents. There is no
unresolved violation, criticism or exception by any governmental entity of
which APF has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to APF could have a Material Adverse
Effect on APF. The financial statements of APF included in the APF SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP (except, the case
of interim financial statements, as permitted by Forms 10-Q and 8-K of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly presented, in accordance with the
applicable requirements of GAAP, the financial position of APF as of the dates
thereof and the results of operations and cash flows of APF for the periods
then ended (subject, in the case of interim financial statements, to normal
year-end adjustments).
6.8 Events Subsequent to September 30, 1998. Since September 30, 1998,
nothing has occurred which has had or would reasonably be expected to have a
Material Adverse Effect on APF.
6.9 Litigation. Except as publicly disclosed by APF in its APF SEC Documents
or on Schedule 1, there is no suit, claim, action, proceeding or investigation
pending or, to the Knowledge of APF, threatened against APF or any of its
Subsidiaries or any of their respective properties or assets which (a) if
adversely determined, could reasonably be expected to have a Material Adverse
Effect on APF or (b) as of the date hereof, questions
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the validity of this Agreement or any action to be taken by APF in connection
with the consummation of the transactions contemplated hereby or could
otherwise prevent or delay the consummation of the transactions contemplated by
this Agreement. Except as publicly disclosed by APF in any APF SEC Document,
none of APF or its Subsidiaries is subject to any outstanding order, writ,
injunction or decree which, insofar as can be reasonably foreseen in the
future, could reasonably be expected to have a Material Adverse Effect on APF
or would prevent or delay the consummation of the transactions contemplated
hereby.
6.10 Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by APF for inclusion or incorporation by reference
in (i) the Registration Statement to be filed by APF with the SEC in connection
with the Merger will, at the time the Registration Statement becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading and (ii) the proxy statement sent by APF to its
shareholders pertaining to the Merger will, at the date mailed to shareholders
and at the times of the meeting of shareholders to be held in connection with
the Merger, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event with
respect to APF, its officers and directors or any of its Subsidiaries should
occur which is required to be described in an amendment of, or a supplement to,
the Registration Statement or the proxy statement, APF shall promptly so advise
the General Partners and such event shall be so described, and such amendment
or supplement (which the General Partners shall have a reasonable opportunity
to review) shall be promptly filed with the SEC. The Registration Statement
will comply as to form in all material respects with the provisions of the
Securities Act and the rules and regulations thereunder.
6.11 No Undisclosed Liabilities; Absence of Changes. Except as and to the
extent publicly disclosed by APF in its APF SEC Documents or disclosed in
Schedule 1, as of December 31, 1998, to APF's Knowledge, none of APF or its
Subsidiaries had any liabilities or obligations of any nature, whether or not
accrued, contingent or otherwise, and whether due or to become due or asserted
or unasserted, which are not fully reflected in, reserved against or otherwise
described in the consolidated balance sheet of APF and its consolidated
Subsidiaries (including the notes thereto) as of such date or which could
reasonably be expected to have a Material Adverse Effect on APF. Except as
publicly disclosed by APF in any reports filed by it with the APF SEC
Documents, since December 31, 1998, the business of APF and its Subsidiaries
has been carried on only in the ordinary and usual course, to APF's Knowledge,
none of APF or its Subsidiaries has incurred any liabilities of any nature,
whether or not accrued, contingent or otherwise, and whether due or to become
due or asserted or unasserted, which could reasonably be expected to have, and
there have been no events, changes or effects with respect to APF or its
Subsidiaries Known to APF having or which could reasonably be expected to have,
a Material Adverse Effect on APF.
6.12 Brokers' Fees. Except for the fees and expenses paid to Merrill Lynch &
Co. with respect to the delivery of the Fairness Opinion to the Special
Committee and in connection with the financial services provided by Salomon
Smith Barney, none of APF, the OP General Partner or the Operating Partnership
has any Liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this
Agreement.
6.13 Qualification as a REIT. APF is a "real estate investment trust" for
federal income tax purposes. The consummation of the transactions contemplated
by this Agreement will not cause APF to cease to qualify as a "real estate
investment trust" for federal income tax purposes.
6.14 Compliance with Applicable Law. Except as publicly disclosed by APF in
its APF SEC Documents, to APF's Knowledge, it and its Subsidiaries hold all
permits, licenses, variances, exemptions, order and approvals of all
governmental entities necessary for the lawful conduct of their respective
businesses, except for failures to hold such permits, licenses, variances,
exemptions, orders and approvals which could not reasonably be expected to have
a Material Adverse Effect on APF. Except as publicly disclosed by APF in its
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APF SEC Documents, to APF's Knowledge, APF and its Subsidiaries are in
compliance with the material terms of its permits, except where the failure so
to comply could not reasonably be expected to have a Material Adverse Effect on
APF. Except as publicly disclosed by APF, the businesses of APF and its
Subsidiaries are not, to APF's Knowledge, being conducted in violation of any
law, ordinance or regulation of any governmental entity except that no
representation or warranty is made in this Section 6.14 with respect to
environmental laws and except for violations or possible violations which do
not, and, insofar as reasonably can be foreseen, in the future will not, have a
Material Adverse Effect on APF. Except as publicly disclosed by APF in its APF
SEC Documents, no investigation or review by any governmental entity with
respect to APF or its Subsidiaries is pending or, to the Knowledge of APF,
threatened, nor, to the Knowledge of APF, has any government entity indicated
an intention to conduct the same, other than, in each case, those which APF
reasonably believes will not have a Material Adverse Effect on APF.
6.15 Intellectual Property.
(a) APF owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of APF as presently conducted. Each item of Intellectual Property
owned or used by APF immediately prior to the Closing hereunder will be owned
or available for use by APF on identical terms and conditions immediately
subsequent to the Closing hereunder. APF has taken all necessary action to
maintain and protect each item of Intellectual Property that it owns or uses.
(b) APF has not interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of third
parties, and none of APF's directors or officers (or employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that APF must
license or refrain from using any Intellectual Property rights of any third
party). No third party has interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of APF which
are material to the operation of APF's business.
(c) APF has no patent or registration which has been issued to APF with
respect to any of its Intellectual Property.
(d) Nothing will interfere with, infringe upon, misappropriate, or otherwise
come into conflict with, any Intellectual Property rights of third parties as a
result of the continued operation of APF's business as presently conducted.
6.16 Insurance. With respect to each current insurance policy to which APF
is a party, a named insured or is otherwise the beneficiary of coverage, to the
knowledge of APF: (i) the policy is legal, valid, binding, enforceable, and in
full force and effect; (ii) the policy will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the consummation of the transactions contemplated hereby; (iii) neither APF nor
any other party to the policy is in breach or default (including with respect
to the payment of premiums or the giving of notices), and no event has occurred
which, with notice or the lapse of time, would constitute such a breach or
default, or permit termination, modification, or acceleration, under the
policy; and (iv) no party to the policy has repudiated any provision thereof.
6.17 Tenants. To the Knowledge of APF and except as set forth on Schedule
1, no current tenant of a property owned by APF, which as of the date of APF's
most recent quarterly report on Form 10-Q represented more than 5% of APF's
total revenues, presently intends to materially change its relationship with
the owner of the property, either due to the transactions contemplated hereby
or otherwise.
6.18 Disclosure. APF is in compliance in all material respects with its
obligation under the Securities Exchange Act to publicly disclose material
information in a timely fashion.
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ARTICLE VII
Representations and Warranties Concerning the Fund
The General Partners and the Fund jointly and severally represent and
warrant to APF and the Operating Partnership that the statements contained in
this Article VII are correct and complete as of the date hereof, except as set
forth in the disclosure schedule delivered by the General Partners and the Fund
to APF and the Operating Partnership in accordance with the provisions of
Section 8.14 (the "Disclosure Schedule"). Nothing in the Disclosure Schedule
shall be deemed adequate to disclose an exception to a representation or
warranty made herein, however, unless the Disclosure Schedule identifies the
exception with particularity and describes the relevant facts in reasonable
detail. Without limiting the generality of the foregoing, the mere listing (or
inclusion of a copy) of a document or other item shall not be deemed adequate
to disclose an exception to a representation or warranty made herein (unless
the representation or warranty has to do with the existence of the document or
other item itself). The Disclosure Schedule will be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in this Article
VII.
7.1 Organization, Qualification, and Corporate Power. The Fund is a limited
partnership duly organized, validly existing, and in good standing under the
laws of Florida. The Fund is duly authorized to conduct business and is in good
standing under the laws of each jurisdiction where such qualification is
required, except where the failure to so qualify or obtain authorization would
not have a Material Adverse Effect on the Fund. Except as set forth in Section
7.1(a) of the Disclosure Schedule, the Fund has full limited partnership power
and authority and all licenses, permits, and authorizations necessary to carry
on the businesses in which it is engaged and to own and use the properties
owned and used by it, except where the failure to so qualify or obtain
authorization would not have a Material Adverse Effect on the Fund. Section
7.1(b) of the Disclosure Schedule lists the directors and officers of the
corporate General Partner. The General Partners have been made available to APF
and the Operating Partnership correct and complete copies of the certificate of
limited partnership and the limited partnership agreement of the Fund (as
amended to date). The minute books (containing the records of meetings of the
stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of the
corporate General Partner and any organizational records of the Fund have been
made available to APF and the Operating Partnership and are correct and
complete in all material respects. The Fund is not in default under or in
violation of any provision of its certificate of limited partnership or limited
partnership agreement.
7.2 Capitalization. All of the outstanding ownership interests in the Fund
(the "Fund Interests") consist of (i) one percent in general partnership
interests and (ii) 60,000 units of limited partnership interests. All of the
outstanding Fund Interests have been duly authorized, are validly issued, fully
paid, and nonassessable. There are no outstanding or authorized options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights, or other contracts or commitments that could require the Fund to issue,
sell, or otherwise cause to become outstanding any additional ownership
interests. There are no outstanding or authorized stock appreciation, phantom
stock, profit participation, or similar rights with respect to the Fund.
7.3 Authorization of Transaction. The Fund has full power and authority
(including full limited partnership power and authority) to execute and deliver
this Agreement and, upon the affirmative vote of a majority of the outstanding
limited partnership Fund Interests, will have full power and authority
(including limited partnership power and authority) to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of the Fund, enforceable in accordance with its terms and conditions, subject
to bankruptcy, insolvency, moratorium and rights of creditors generally. The
Fund is not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
7.4 Noncontravention. Except as set forth in Section 7.4 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby,
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will (i) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which the Fund is subject or any
provision of the certificate of limited partnership or limited partnership
agreement of the Fund or (ii) result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice or consent
under any agreement, contract, lease, license, instrument, or other arrangement
to which the Fund is a party or by which it is bound or to which any of its
assets is subject (or result in the imposition of any Security Interest upon
any of its assets).
7.5 Title to Assets. The Fund has good title to, or a valid leasehold
interest in, the properties and assets used by it, located on its premises, or
set forth in its most recent quarterly report on Form 10-Q filed with the SEC
(the "Most Recent 10-Q") or acquired after the date thereof, free and clear of
all Security Interests, except for properties and assets disposed of in the
Ordinary Course of Business since the date of the Most Recent 10-Q.
7.6 Subsidiaries. The Fund does not have any Subsidiaries, operating or
otherwise.
7.7 Reports and Financial Statements. The Fund has filed all required
reports, schedules, forms, statements and other documents with the SEC since
January 1, 1996 (along with any such documents filed subsequent to the date
hereof, the "Fund SEC Documents"). All of the Fund SEC Documents (other than
preliminary material), as of their respective filing dates, complied in all
material respects with all applicable requirements of the Securities Act and
the Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such Fund SEC Documents. None of the Fund SEC
Documents at the time of filing contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the extent
such statements have been modified or superseded by later filed Fund SEC
Documents. There is no unresolved violation by any governmental entity of which
the Fund has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to the Fund could have a Material
Adverse Effect on the Fund. The financial statements of the Fund included in
the Fund SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with GAAP
(except, the case of interim financial statements, as permitted by Forms 10-Q
and 8-K of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly presented, in
accordance with the applicable requirements of GAAP, the financial position of
the Fund as of the dates thereof and the results of operations and cash flows
of the Fund for the periods then ended (subject, in the case of interim
financial statements, to normal year-end adjustments).
7.8 Events Subsequent to the Most Recent 10-Q. Since the date of the Most
Recent 10-Q nothing has had a Material Adverse Effect on the Fund. Without
limiting the generality of the foregoing, since that date, except as set forth
in the appropriately lettered paragraph of Section 7.8 of the Disclosure
Schedule:
(a) the Fund has not sold, leased, transferred, or assigned any of its
assets, tangible or intangible, other than for a fair consideration (as
reasonably determined by the General Partners) in the Ordinary Course of
Business;
(b) the Fund has not entered into any agreement, contract, lease, or license
(or series of related agreements, contracts, leases, and licenses) involving
more than $50,000 except in the Ordinary Course of Business;
(c) no party (including the Fund) has accelerated, terminated, modified, or
canceled any agreement, contract, lease, or license (or series of related
agreements, contracts, leases, and licenses) to which the Fund is a party or by
which it is bound except in the Ordinary Course of Business;
(d) the Fund has not imposed any Security Interest upon any of its assets,
tangible or intangible except in the Ordinary Course of Business;
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(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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<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 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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<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
SUPPLEMENT DATED , 1999
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED , 1999
FOR CNL INCOME FUND V, LTD.
This Supplement is being furnished to you, as a Limited Partner of CNL
Income Fund V, Ltd., which we refer to as the Income Fund, for the purpose of
enabling you to evaluate the proposed acquisition of your Income Fund by CNL
American Properties Fund, Inc., a Maryland corporation, which is a real estate
investment trust. This Supplement is designed to summarize only the risks,
effects, fairness and other considerations of the proposed acquisition that are
unique to you and the other Limited Partners of your Income Fund. This
Supplement does not purport to provide an overall summary of the proposed
acquisition and should be read in conjunction with the accompanying
Prospectus/Consent Solicitation Statement, which includes detailed discussions
regarding APF and the other Income Funds being acquired by APF. Accordingly,
the discussions in this Supplement are qualified by the more expanded treatment
of these matters appearing in the Prospectus/Consent Solicitation Statement.
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.
OVERVIEW
Pursuant to the Prospectus/Consent Solicitation Statement and this
Supplement, you are being asked to approve the Acquisition of your Income Fund
by APF. Your Income Fund is one of 18 limited partnerships (which we refer to
collectively as the Funds) that APF is seeking to acquire. Supplements have
also been prepared for each of the other Funds, copies of which may be obtained
without charge to 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 (or a REIT), formed in
1994, whose primary business, like that of the Funds, is the ownership of
restaurant properties leased to operators of national and regional restaurant
chains on a triple-net lease basis. As a full-service REIT, 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 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 shares of common stock (or APF Shares) will I receive if my Income
Fund is acquired by APF?
Your Income Fund will receive 2,049,031 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 $10.00 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
approximately 75 million APF Shares through three public offerings at offering
prices per APF share equal to the Exchange Value. At December 31, 1998, of the
approximately $750 million raised
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by APF, APF has used approximately $550 million to acquire restaurant
properties and to make mortgage loans and had approximately $120 million in
uninvested proceeds which APF expects to invest during the first quarter of
1999. The remaining proceeds were used to pay fees and other offering expenses.
Did you receive a fairness opinion in connection with APF's acquisition of my
Fund?
Yes. Legg Mason Wood Walker, Incorporated 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 Funds, and (c) the method of allocating the APF
Shares among the 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 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.
Do you, as the general partners of my Income Fund, recommend that I vote in
favor 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 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 how you want to vote, and sign
and mail it in the enclosed postage-paid return envelope as soon as possible,
so that at the Special Meeting of Limited Partners, your Units may be voted
"For" or "Against" APF's acquisition of your Income Fund. If you sign and send
in your consent form and do not indicate how you want to vote, your consent
form will be counted as a vote "For" the Acquisition. If you do not vote or you
abstain from voting, it will count as a vote "Against" the Acquisition.
In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to certain limitations. If you vote "Against" the Acquisition,
but your Income Fund is nevertheless acquired by APF, you may elect to receive
a payment (which we call the Cash/Notes Option) that is 10% in cash and 90% in
% Callable Notes due , 2006 (or Notes) based on the liquidation value of
your Income Fund, as determined by Valuation Associates, the appraisal firm
that we engaged in connection with the Acquisition. Such liquidation value will
be lower than the aggregate Exchange Value of the APF Shares offered to your
Income Fund in the Acquisition. The Notes will bear interest at a rate equal to
%, which was determined based on 120% of the applicable federal rate as of
, 1999. Please note that you may only receive the Cash/Notes Option if you
have voted "Against" the Acquisition and you elect to receive the Cash/Notes
Option on your consent form. You will receive APF Shares if your Income Fund
elects to be acquired in the Acquisition and you voted "For" the Acquisition,
or you voted "Against" the Acquisition and did not affirmatively select the
Cash/Notes Option. 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 (for example, 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 be based on the difference between the
value of the APF Shares or the tax basis of your Units. If
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<PAGE>
you elect the Cash/Notes Option, 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 and cash received by your Income Fund over the tax basis of your Fund's
net assets. Some of the gain may be subject to the 25% rate of tax applicable
to certain 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 $410. To review
the tax consequences to the Limited Partners of the Funds in greater detail,
see pages through of the Prospectus/Consent Solicitation Statement 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 Funds acquired by APF.
Although the majority of APF's assets and the assets of the other Funds
acquired by APF are substantially similar to those of your Income Fund, the
restaurant properties owned by APF and the other 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 Funds' restaurant properties,
see "APF's Business and The Restaurant Properties--Business Objectives and
Strategies" and "--The Restaurant Properties--General" and "Business of the
Funds--Description of Restaurant Properties" in the Prospectus/Consent
Solicitation Statement.
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 Prospectus/Consent Solicitation Statement.
Investment Risks
. Uncertainty Regarding the Exchange Value and Trading Price of APF Shares
Following Listing. Your Income Fund will be receiving 2,049,031 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 is 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 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.
. Decrease in Distributions. In each of the years ended December 31, 1995,
1996 and 1997, your Income Fund made $920 in distributions, per $10,000
investment to you. Based on APF's pro forma financial information, and
assuming APF acquires only your Income Fund and that each Limited Partner
of your Income receives only APF Shares, you would have received, for the
year ended December 31, 1997, $461 in distributions per $10,000 of
original investment, which is 49.9% less than the $920 distributed to you
as Limited Partner during the same period. The pro forma distributions
for APF exclude the anticipated increase in revenues that is expected as
a result of APF's acquisitions of the
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<PAGE>
CNL Restaurant Businesses during 1999. Thus, the pro forma information
regarding the distributions to APF stockholders for the year ended
December 31, 1997 and for the nine months ended September 30, 1998 is not
necessarily indicative of the distributions you will receive as a
stockholder of APF after the Acquisition. See "Cash Distributions to
Limited Partners of Your Fund."
. Conflicts of Interest in the Acquisition; Substantial Benefits to Related
Parties. There are certain conflicts of interest inherent in the
structure of the Acquisition of your Income Fund. 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 that may or may not be aligned with your
interests 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.
. Fundamental Change in Nature of 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 September 30, 1998), 382 restaurant properties. The risks inherent
in investing in an operating company such as APF include APF's ability to
invest in new restaurant properties that are not as profitable as APF
anticipated, the incurrence of substantial indebtedness to make future
acquisitions of restaurant properties which it may be unable to repay and
making mortgage loans to prospective operators of national and regional
restaurant chains which may not have the ability to repay.
As an APF stockholder, you will receive the benefits of your investment
through (i) dividend distributions on, and (ii) increases in the value of,
your APF Shares. In addition, 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 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 Cash/Notes Option). An
investment in APF may not outperform your investment in the Income Fund.
. Original Investment Timeframe. 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, 2018. 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 1996 and 2001. Because
your Income Fund is in the anticipated termination timeframe, we could
elect to liquidate your Income Fund. However, we have no current plans to
dispose of your Income Fund's restaurant properties if the Limited
Partners do not approve the Acquisition.
Real Estate/Business Risks
. Risk of Default on Mortgage Loans and Market Risks associated with
Securitizations. 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
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<PAGE>
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.
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,) and 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 may 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.
. Risks Associated with Leverage. 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. At the time of the consummation of the
Acquisition, as a general policy, APF's Board of Directors will 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 funds from
operations and its ability to make distributions to its stockholders.
. Acquisition and Development Risks. APF plans to pursue its growth
strategy through the acquisition and development of additional restaurant
properties. To the extent that APF does pursue this growth strategy, we
do not know that it 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.
Tax Risks
. Failure of APF to Qualify as a REIT for Tax Purposes. 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
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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.
. Risks Associated with Distribution Requirements. 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 Tax Law. 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 Prospectus/Consent Solicitation Statement.
CONSIDERATION PAID TO INCOME FUND
The following table sets forth, for your Income Fund (i) the aggregate
amount of original Limited Partner investments in each Fund less any
distributions of net sales proceeds paid to the Limited Partners of that Fund,
(ii) the original amount of Limited Partner investments in each Fund less any
distributions of net sales proceeds per average $10,000 investment, (iii) the
number of APF Shares to be paid to your Income Fund, (iv) the estimated value
of the APF Shares paid to your Income Fund, (v) the estimated Acquisition
expenses allocated to your Income Fund, (vi) the estimated value, based on the
Exchange Value, of APF Shares paid to your Income Fund after deducting
Acquisition expenses, and (vii) the estimated value, based on the Exchange
Value, of APF Shares you will receive for each $10,000 of your original
investment:
<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) Fund(2) Fund(3) Expenses Expenses(3) Investment(3)
- ------------- ------------- ---------- ------------ ----------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$23,161,673 $9,265 $2,049,031 $20,490,310 $232,046 $20,258,264 $8,103
</TABLE>
- --------
(1) The original Limited Partner investment was $25,000,000. These columns
reflect, as of September 30, 1998, an adjustment to the Limited Partners'
original investments based on distributions of net sales proceeds received
from sales of properties made pursuant to the partnership agreements.
(2) The APF Shares payable to each Fund as set forth in this chart will not
change if APF acquires fewer than all of the Funds in the Acquisition. This
number assumes that none of the Limited Partners of the Fund has elected
the Cash/Notes Option.
(3) 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-6
<PAGE>
Upon completion of the Acquisition of your Income Fund, the operations and
existence of your Income Fund will cease. For more detailed information, see
"The Acquisition" in the Prospectus/Consent Solicitation Statement. If your
Income Fund does not approve the Acquisition, we do not contemplate that your
Income Fund would be liquidated in the near future. The Acquisition, however,
does not result in an all-cash payment to you in the liquidation of your
investment. For example, if you are eligible for and choose the Cash/Notes
Option, you become a Noteholder of APF. You will have exchanged your Units for
unsecured debt obligations of APF which may not be retired in full until ,
2006, a date approximately seven years after the date the Acquisition of your
Income Fund occurs. On the other hand, if you exchange your Units for APF
Shares, you will receive an equity interest in APF whose marketability will
depend upon the market that may develop with respect to the APF Shares, which
will be listed on the NYSE.
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.
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......................................................... $ 9,993
Appraisals and Valuation........................................... 3,997
Fairness Opinions.................................................. 17,987
Registration, Listing and Filing Fees.............................. --
Soliciting Dealer Fee.............................................. 46,914
Financial Consulting Fees.......................................... --
Environmental Fees................................................. 24,982
Accounting and Other Fees.......................................... 29,082
--------
Subtotal......................................................... 132,955
Closing Transaction Costs
Transfer Fees and Taxes............................................ 76,610
Legal Fees......................................................... 48,961
Recording Costs.................................................... --
Other.............................................................. 33,520
--------
Subtotal......................................................... 159,091
--------
Total.............................................................. $292,046
========
</TABLE>
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 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.
S-7
<PAGE>
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 as, in our opinion,
market conditions permit), as contemplated by the terms of the partnership
agreement.
Special Meeting to Discuss the Acquisition
We have scheduled a special meeting of the Limited Partners of your Income
Fund to discuss the solicitation materials, which include the
Prospectus/Consent Solicitation Statement, 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 (as defined below) and to explain in
person our reasons for recommending that you vote "For" the Acquisition.
VOTING PROCEDURE
The Prospectus/Consent Solicitation Statement, 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.
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 Prospectus/Consent Solicitation
Statement. A copy of the Agreement and Plan of Merger dated March 11, 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 December 31,
1999. 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.
The consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and certain 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
(including the Acquisition), you will be deemed to have voted "For" such
matter.
S-8
<PAGE>
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints James M. Seneff, Jr. and Robert A.
Bourne as your attorneys-in-fact for the purpose of executing all other
documents and instruments advisable or necessary to complete the Acquisition.
The power of attorney is intended solely to ease the administrative burden of
completing the Acquisition without requiring your signatures on multiple
documents.
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNERS AND THEIR AFFILIATES
The following information has been prepared to compare the amounts of
compensation paid and cash distributions made, by your Income Fund to us and
our affiliates to the amounts that would have been paid if the compensation and
distribution structure, which will be in effect after the Acquisition, had been
in effect during the years presented below.
Under your Income Fund's partnership agreement, we and our affiliates are
entitled to receive fees in connection with managing the affairs of each Income
Fund. The partnership agreement also provide 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
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, 1995, 1996 and 1997 and the nine months
ended September 30, 1998, the aggregate amounts accrued or paid by your Income
Fund 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 years presented, are shown below under "Pro Forma":
<TABLE>
<CAPTION>
Nine
Months
Year Ended December 31, Ended
--------------------------- September 30,
1995 1996 1997 1998
------- ---------- ------- -------------
<S> <C> <C> <C> <C>
Historical:
General Partner Distributions...... -- -- -- --
Broker/Dealer Commissions(1)....... -- -- -- --
Due Diligence and Marketing Support
Fees.............................. -- -- -- --
Acquisition Fees................... -- -- -- --
Asset Management Fees.............. -- -- -- --
Real Estate Disposition Fees(2).... -- $ 34,500 -- $65,400
------ ---------- ------ -------
Total historical................. -- $ 34,500 -- $65,400
Pro Forma:
Cash Distributions on APF Shares... -- -- -- --
Salary Compensation................ -- -- -- --
------ ---------- ------ -------
Total pro forma.................. -- -- -- --
</TABLE>
- --------
(1) A majority of the fees paid as broker-dealer commissions and due diligence
and marketing support fees were reallowed to other broker-dealers
participating in the offering of the Income Fund's Units.
(2) 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-9
<PAGE>
CASH DISTRIBUTIONS TO LIMITED PARTNERS OF YOUR 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 the Acquisition--Prices for 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>
Nine Months Ended
Sept. 30, 1998
--------------------
1993 1994 1995 1996 1997 Historical Pro Forma
---- ---- ---- ---- ---- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income....... $711 $690 $665 $566 $688 $ 482 $355
Distributions from Sales of
Properties..................... -- -- -- -- -- 735 --
Distributions from Return of
Capital(1)..................... 209 230 255 354 232 118 10
---- ---- ---- ---- ---- ------ ----
Total......................... $920 $920 $920 $920 $920 $1,335 $366
==== ==== ==== ==== ==== ====== ====
</TABLE>
- --------
(1) Cash distributions presented above as a return of capital on a GAAP basis
represent the amount of cash distributions in excess of accumulated net
income on a GAAP basis. Accumulated net income includes deductions for
depreciation and amortization expense and income from 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 nine months ended September 30,
1998 is not necessarily indicative of the distributions you will receive as a
stockholder of APF after the Acquisition.
Assuming APF maintains it current level of debt for acquiring future
restaurant properties, the expected distribution rate per APF Share will be
8.8% (assuming a $10.00 per APF Share price based on the Exchange Value, the
annualized dividend per year is expected to be $0.88 per APF Share). Based on
the number of APF Shares that you would receive in the Acquisition per your
average $10,000 original investment and this distribution rate, you would
receive an annual distribution of approximately $713.
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 certain 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-10
<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 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 Cash/Note Option.
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, our relief 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 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 Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the Cash/Notes Option, constitutes 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 and is the best way to maximize the return on your
investment in light of the values of such consideration.
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 of Valuation Associates and
Legg Mason received fees for its services and notwithstanding that Legg Mason
has previously provided investment banking services to the Funds and to
Commercial Net Lease Realty, Inc., a former affiliate of ours. See "Reports,
Opinions and Appraisals" in the Prospectus/Consent Solicitation Statement.
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 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 cash and promissory 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
S-11
<PAGE>
. 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 Cash/Notes Option.
3. Valuation of Alternatives. Based on the appraisal of the Income Fund's
restaurant properties, we estimated the value of your Income Fund as an ongoing
concern and if liquidated. 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 Fund to 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
September 30, 1998 per $10,000 original investment. Since the calculation of
the book value was done on a GAAP basis, it is not indicative of the true fair
market value of your Income Fund. This figure was compared to the (i) value of
the Fund if it commenced an orderly liquidation of its investment portfolio on
December 31, 1998, (ii) value of the Fund if it continued to operate in
accordance with its existing partnership agreement and business plans, and
(iii) estimated value of the APF Shares, based on the Exchange Value, paid to
each Fund per average $10,000 invested.
Summary of Valuations
(per $10,000 original investment)
<TABLE>
<CAPTION>
Estimated Value
of APF Shares
per Average
$10,000
Going Original
GAAP Book Liquidation Concern Limited Partner
Value Value(1) Value(1) Investment(2)
--------- ----------- -------- ---------------
<S> <C> <C> <C> <C>
CNL Income Fund V, Ltd.......... $6,558 $7,520 $8,085 $8,103
</TABLE>
- --------
(1) 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.
(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.
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have an independent
obligation to assess whether the terms of the Acquisition are fair and
equitable to the Limited Partners of your Income Fund without regard
S-12
<PAGE>
to whether the Acquisition is fair and equitable to any of the other
participants (including the Limited Partners in other Funds). James M. Seneff,
Jr. and Robert A. Bourne act as the individual general partners of all of the
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.
Benefits to General Partners
As a result of the Acquisition (assuming only your Income Fund is acquired),
we are expected to receive certain benefits, including that we will be relieved
from certain ongoing liabilities with respect to the funds that are acquired by
APF.
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 Funds if the Acquisition does not occur.
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 the Cash/Notes Option, in which case you will
receive cash and 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.
S-13
<PAGE>
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
Prospectus/Consent Solicitation Statement.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, the
assets (and any liabilities) of your Income Fund (if your Income Fund is
acquired by APF) will be transferred to APF in return for APF Shares and/or
cash and 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. .......................... $410
</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 Code, no gain or loss is recognized if (i)
property is transferred to a corporation by one more individuals or entities in
exchange for the stock of that corporation, and (ii) 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 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 the
Cash/Notes Option, 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 (1) 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 (2) 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 Cash/Notes Option, your Income Fund will receive APF
Shares, cash and Notes in exchange for your Income Fund's assets. Because the
principal portion of the Notes will not be due until , 2006, 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
S-14
<PAGE>
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 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 (without reduction for
any selling expenses) 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 are 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, cash 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" (i.e., real property and
depreciable assets used in a trade or business and held for more than one
year). Your share of gains or losses from the sale of section 1231 assets of
your Income Fund would be combined with any other section 1231 gains and losses
that you recognize in that year. If the result is a net loss, such loss is
characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property will be taxed as ordinary income to the extent of all
prior depreciation deductions taken by your Income Fund prior to sale. In
general, you may only use up to $3,000 of capital losses in excess of capital
gains to offset ordinary income in any taxable year. Any excess loss is carried
forward to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your Income Fund recognizes will be allocated to you and the other
Limited Partners in accordance with the terms of your Income Fund's partnership
agreement. Each Limited Partner will be allocated and must report his, her or
its allocable share of such gain, if any, pursuant to these terms, regardless
of the Limited Partner's decision to receive 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 Cash/Notes Option may
recognize gain in the year of the Acquisition despite the fact that they will
receive only a small amount of cash and no publicly-traded instruments 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 the Cash/Notes Option. See "--Tax Consequences of
Liquidation and Termination of Your Fund" below.
Tax Consequences of the Liquidation and Termination of Your Fund. If your
Fund is acquired by APF, your Fund will be deemed to have liquidated and
distributed APF Shares and/or cash and 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 cash and 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 pro rata based on your respective capital account
balances. If you receive APF Shares in the Acquisition, you will recognize gain
or loss equal to
S-15
<PAGE>
the difference between the fair market value of the APF Shares that you receive
(determined on the closing date of the Acquisition) and your adjusted tax basis
in your Units (adjusted by your distributive share of income, gain, loss,
deduction and credit for the final taxable year of your Income Fund (including
any such items recognized by your Income Fund as a result of the Acquisition)
as well as any distributions you receive in such final taxable year (other than
the distribution of the APF Shares)). 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 cash and Notes in the Acquisition, you will recognize gain to
the extent that the amount of cash you receive in the Acquisition exceeds your
adjusted basis in your Units (adjusted by your distributive share of income,
gain, loss, deduction and credit for the final taxable year of your Income Fund
(including any such items recognized by your Income Fund as a result of the
Acquisition) as well as any distributions you receive in such final taxable
year (other than the distributions of the cash and Notes)). Your basis in the
Notes distributed to you will equal your adjusted basis in your Units, reduced
(but not below zero) by the amount of any cash distributed to you 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 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.
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 cash and 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 Prospectus/Consent Solicitation
Statement.
S-16
<PAGE>
SUMMARY SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
APF, FUNDS, ADVISOR AND CNL RESTAURANT FINANCIAL SERVICES GROUP
Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
Historical Pro Forma
-------------------------------------------------- --------------------------------
CNL
CNL Restaurant
Income Financial
Fund V, Services Combined Pro Forma Combined
APF Ltd. Advisor Group Historical Adjustments Pro Forma
------------ ----------- ---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data
Revenues:
Rental and earned
income................ $ 22,947,199 $ 1,062,001 $ -- $ -- $ 24,009,200 $ 9,635,208 (a)
15,531 (b) $ 33,659,939
Management fees........ -- -- 21,405,127 5,122,366 26,527,493 (21,006,906)(c)
(2,875,906)(d) 2,644,681
Interest and other
income................ 6,117,911 223,647 751 18,463,647 24,805,956 1,526,547 (e) 26,332,503
------------ ----------- ---------- ------------ ------------ ------------ ------------
Total revenue......... 29,065,110 1,285,648 21,405,878 23,586,013 75,342,649 (12,705,526) 62,637,123
Expenses:
General and
administrative........ 1,539,004 158,764 6,701,115 6,704,482 15,103,365 (1,303,129)(f)
(1,415,100)(g)
(24,803)(h) 12,360,333
Advisory fees.......... 1,248,393 -- -- 1,026,231 2,274,624 (2,274,624)(i) --
State taxes............ 397,569 9,658 15,226 220,180 642,633 26,677 (j) 669,310
Depreciation and
amortization.......... 2,693,020 201,720 131,539 1,000,493 4,026,772 3,077,538 (k)(l) 7,104,310
Interest expense....... -- -- 105,668 14,234,533 14,340,201 (68,670)(m) 14,271,531
Paid to affiliates..... -- -- 256,456 1,569,202 1,825,658 (1,825,658)(n) --
------------ ----------- ---------- ------------ ------------ ------------ ------------
Total expenses........ 5,877,986 370,142 7,210,004 24,755,121 38,213,253 (3,807,769) 34,405,484
------------ ----------- ---------- ------------ ------------ ------------ ------------
Net earnings (loss)
before equity in
earnings of joint
ventures/minority
interests, gain (loss)
on sale of properties,
gain on
securitization, and
provision (credit) for
federal income taxes.. 23,187,124 915,506 14,195,874 (1,169,108) 37,129,396 (8,897,757) 28,231,639
------------ ----------- ---------- ------------ ------------ ------------ ------------
Equity in earnings of
joint
ventures/minority
interests............. (23,271) 125,823 -- 12,452 115,004 -- 115,004
Gain on sales of
properties............ -- 443,443 -- -- 443,443 -- 443,443
Gain on
securitization........ -- -- -- 3,018,268 3,018,268 -- 3,018,268
Provision for loss on
land and building..... -- (273,141) -- -- (273,141) -- (273,141)
Provision for federal
income taxes.......... -- -- 5,607,415 708,666 6,316,081 (6,316,081)(o) --
------------ ----------- ---------- ------------ ------------ ------------ ------------
Net earnings........... $ 23,163,853 $ 1,211,631 $8,588,459 $ 1,152,946 $ 34,116,889 $ (2,581,676) $ 31,535,213
============ =========== ========== ============ ============ ============ ============
Other Data:
Weighted average number
of shares of common
stock outstanding
during period......... 47,633,909 N/A N/A N/A N/A -- 47,633,909(p)
Total properties owned
at end of period...... 357 28 N/A N/A N/A -- $ 385
Funds from operations.. $ 26,408,569 $ 999,128 N/A N/A N/A -- $ 35,761,727
Total cash
distributions
declared*............. $ 26,460,446 $ 1,500,000 N/A N/A N/A -- $ 35,761,727
Cash distributions
declared per $10,000
investment............ $ 572 $ 1,335 N/A N/A N/A -- $ 751
<CAPTION>
Historical Combined Pro Forma
September 30, 1998 Historical September 30, 1998
-------------------------------------------------- ------------ --------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data
Real estate assets,
net................... $407,663,180 $12,573,441 $ -- $ -- $420,236,621 $ 4,855,580 (q)
26,052,741 (r) $451,144,942
Mortgages/notes
receivable............ 33,523,506 1,742,233 -- 173,776,981 209,042,720 849,195 (r) 209,891,915
Accounts receivable,
net................... 575,104 61,221 7,544,985 7,342,103 15,523,413 (8,065,774)(s) 7,457,639
Investment in/due from
joint ventures........ 631,374 2,231,902 -- -- 2,863,276 801,314 (q) 3,664,590
Total assets........... 566,383,967 17,374,774 8,429,809 197,528,789 789,717,339 26,476,527 816,193,866
Total
liabilities/minority
interest.............. 14,478,585 980,936 5,049,152 185,998,045 206,506,718 (11,056,638)(s)(t) 195,450,080
Total equity........... 551,905,382 16,393,838 3,380,657 11,530,744 583,210,621 37,533,165 (q)(t) 620,743,786
</TABLE>
- --------
* Distributions for the nine months ended September 30, 1998 included
$1,838,327 as a result of the distribution of net sales proceeds from the
sales of two properties.
S-17
<PAGE>
(a) Represents rental and earned income as if 1) properties that had been
previously constructed and acquired from January 1, 1998 through November
30, 1998 had been acquired and leased on January 1, 1997 and 2) properties
that were developed by APF from January 1, 1998 through November 30, 1998
had been placed in service on May 1, 1997 (assumes a four month development
period).
<TABLE>
<S> <C>
Rental and earned income on Property Transactions by APF....... $9,635,208
</TABLE>
(b) Represents $15,531 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, 1997.
(c) Represents the elimination of intercompany fees between APF, the Income
Fund, the Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees............................................ $ (1,569,202)
Secured equipment lease fee................................. (44,426)
Advisory fees............................................... (1,722,383)
Reimbursement of administrative costs....................... (289,012)
Acquisition fees............................................ (15,392,193)
Underwriting fees........................................... (254,945)
Administrative fees......................................... (148,491)
Executive fee............................................... (310,000)
Guarantee fees.............................................. (93,750)
Servicing fee............................................... (1,014,117)
Development fees............................................ (166,876)
Consulting fee.............................................. (1,511)
------------
Total...................................................... $(21,006,906)
============
</TABLE>
(d) Represents the deferral of $2,875,906 in origination fees collected by CNL
Restaurant Financial Services Group that should be amortized over the term
of the loans originated (20 years) in accordance with the Statement of
Financial Accounting Standards #91 "Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases."
(e) Represents interest income of $1,318,870 earned from Other Investments
acquired and mortgage notes issued from January 1, 1998 through November
30, 1998 as if this had occurred on January 1, 1997 and the amortization of
$207,677 of deferred origination fees collected during the year ended
December 31, 1997 and during the nine months ended September 30, 1998,
which were capitalized and deferred in (d) above as if they had been
collected on January 1, 1997. These deferred fees are being amortized and
recorded as interest income.
(f) Represents the elimination of intercompany expenses paid between APF, the
Income Fund, the Advisor and the CNL Restaurant Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs........................ $ (289,012)
Servicing fee................................................ (1,014,117)
-----------
$(1,303,129)
===========
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by APF were subject
to capitalization during the entire period and 2) costs relating to
properties not developed by APF were subject to capitalization up through
the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs............................. $(1,415,100)
</TABLE>
(h) Represents savings of $24,803 in professional services and administrative
expenses resulting from reporting on one combined company versus 22
separate entities.
(i) Represents the elimination of fees between APF, the Income Fund, the
Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Advisory fees................................................. $(1,722,383)
Administrative fees........................................... (148,491)
Executive fee................................................. (310,000)
Guarantee fees................................................ (93,750)
-----------
$(2,274,624)
===========
</TABLE>
(j) Represents additional state taxes of $26,677 resulting from assuming that
acquisitions from January 1, 1998 through November 30, 1998 had been
acquired on January 1, 1997 and assuming that the Income Fund had operated
under a REIT structure.
S-18
<PAGE>
(k) Represents an increase in depreciation of the building portion of the
properties acquired from January 1, 1998 through November 30, 1998 as if
they had been acquired on January 1, 1997 and the step up in basis referred
to in footnote (q) from acquiring the Income Fund portfolio using the
straight-line method over the estimated useful lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense............................................ $1,500,660
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of the CNL
Restaurant Financial Services Group referred to in footnote (q).
<TABLE>
<S> <C>
Amortization of goodwill....................................... $1,576,878
</TABLE>
(m) Represents elimination of interest expense recorded for the amortization of
$350,000 in arrangement fees collected during the year ended December 31,
1997 which were eliminated in footnote (4), II (d) in the Notes to the Pro
Forma Financial Statements attached to this Supplement.
<TABLE>
<S> <C>
Interest expense.............................................. $ (68,670)
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees incurred
between APF, the Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Origination fees.............................................. $(1,569,202)
Underwriting fees............................................. (254,945)
Consulting fee................................................ (1,511)
-----------
$(1,825,658)
===========
</TABLE>
(o) Represents the elimination of $6,316,081 in the provision for income taxes
as a result of the acquisition. APF expects to continue to qualify as a
REIT and does not expect to incur federal income taxes.
(p) APF Shares issued during the period required to fund acquisitions as if
they had been acquired on January 1, 1997 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 the
proposal to amend and restate APF's articles of incorporation to increase
the number of authorized APF Shares.
(q) Represents the payment of $292,046 in cash and the issuance of 14,319,827
APF Shares in consideration for the purchase of the Income Fund, Advisor
and CNL Restaurant Financial Services Group at September 30, 1998 using the
Exchange Value of $10 per APF Share plus estimated transaction costs. The
acquisition of the Income Fund and the CNL Restaurant Financial Services
Group have been accounted for under the purchase accounting method and
goodwill was recognized to the extent that the estimated value of the
consideration paid exceeded the fair value of the net tangible assets
acquired. As for the acquisition of the Advisor from a related party, the
consideration paid in excess of the fair value of the net tangible assets
received has been accounted for as costs incurred in acquiring the Advisor
from a related party because the Advisor has not been deemed to qualify as
a "business" for purposes of applying APB Opinion No. 16 "Business
Combinations." Upon consummation of the Acquisition, this expense will be
recorded as an operating expense on APF's statement of earnings. APF will
not deduct this expense for purposes of calculating funds from operations
due to the nonrecurring and non-cash nature of the expense. As of September
30, 1998, $249,403 of transaction costs had been incurred by APF.
<TABLE>
<S> <C>
Income Fund................................................. $ 20,490,315
Advisor..................................................... 76,000,000
CNL Restaurant Financial Services Group..................... 47,000,000
------------
Total Purchase Price (cash and shares)..................... 143,490,315
Less cash paid to Income Fund............................... (292,046)
------------
Share consideration........................................ 143,198,269
Transaction costs of APF.................................... 8,933,000
------------
Total costs incurred....................................... $152,131,269
============
</TABLE>
In addition to issuing the 14,319,800 APF Shares upon deduction of the
$292,046 advanced, APF i) used $8,933,000 in cash to pay the transaction
costs related to the Acquisition, ii) made an upward adjustment to the
Income Fund carrying value of land and building on operating leases by
$4,178,886, net investment in direct financing leases by $676,694,
investment in joint venture by $801,314, made downward adjustments to the
carrying value of accrued rental income of $221,988, and made downward
adjustments to other assets of $3,717,637 to adjust historical values to
fair value, iii) recorded goodwill of $42,050,078 for the acquisition of the
CNL Restaurant Financial Services Group, iv) reduced retained earnings by
$77,350,729 for the excess consideration paid over the net assets of the
Advisor and removed the historical common stock balance of $12,000,
additional paid in capital balance of $9,602,287, retained earnings balance
of $5,297,114 and partners capital balance of $16,393,838 of the Income
Fund, Advisor and CNL Restaurant Financial Services Group.
S-19
<PAGE>
(r) Represents the use of $26,901,936 in cash and cash equivalents at September
30, 1998 to acquire $26,052,741 in properties and issue $849,195 in
mortgage notes which occurred from October 1, 1998 through November 30,
1998.
(s) Represents the elimination by the Income Fund of $216,395 in related party
payables recorded as receivables by the Advisor, the elimination by the CNL
Restaurant Financial Services Group of $6,641,379 in related party payables
recorded as receivables by CNL Restaurant Financial Services Group and the
elimination by APF of $1,208,000 in related party payables recorded as
receivables by the Advisor.
(t) Represents the elimination of income taxes payable of $2,990,864 from
liabilities assumed in the acquisition of the CNL Restaurant Businesses
since the acquisition agreements require that the Advisor and CNL
Restaurant Financial Services Group have no accumulated or current earnings
and profits for federal income tax purposes at the time of the acquisition.
S-20
<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>
Nine Months Ended
September 30, Year Ended December 31,
----------------------- -----------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues(1)............. $ 1,411,471 $ 1,505,683 $ 2,147,770 $ 2,279,880 $ 2,314,818
Net income(2)........... 1,211,631 1,283,411 1,731,915 1,428,159 1,679,820
Cash distributions
declared(3)............ 3,338,327 1,725,000 2,300,000 2,300,000 2,300,000
Net income per Unit(2).. 24.10 25.46 34.40 28.31 33.26
Cash distributions
declared per Unit(3)... 66.77 34.50 46.00 46.00 46.00
Weighted average number
of Limited Partner
Units outstanding...... 50,000 50,000 50,000 50,000 50,000
<CAPTION>
September 30, December 31,
----------------------- -----------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total assets............ $17,374,774 $19,686,277 $19,718,430 $20,133,002 $20,760,182
Total partners'
capital................ 16,393,838 18,541,030 18,520,534 18,982,619 19,694,760
</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 nine months ended September 30, 1998 and 1997 includes
$443,443 and $369,570, respectively, from gain on sale of land and
building. Net income for the nine months ended September 30, 1998 and 1997
also includes $273,141 and $142,990, respectively, from 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 nine months ended September 30, 1998 included
1,838,327 as a result of the distribution of net sales proceeds from the
sales of two properties.
S-21
<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 September 30, 1998, the Income Fund owned 28 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
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 1998 and 1997, 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 $1,230,725 and $1,297,828, respectively. The
decrease in cash from operations for the nine months ended September 30, 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 items during the
nine months ended September 30, 1998.
In July 1997, the Income Fund entered into a new lease for the restaurant
property in Connersville, Indiana, with a new tenant to operate the restaurant
property as an Arby's restaurant. In connection therewith, during the nine
months ended September 30, 1998, the Income Fund paid $125,000 in renovation
costs, which had been incurred and accrued as construction costs payable at
December 31, 1997.
During the nine months ended September 30, 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 of $2,125,220,
resulting in a total gain of $440,822 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 connection with the sales, the Income Fund
incurred deferred, subordinated, real estate disposition fees of $65,400. The
Income Fund distributed $1,838,327 of the net sales proceeds from the 1997 and
1998 sales of the restaurant properties in Tampa and Port Orange, Florida,
respectively, as a special distribution to the Limited Partners in April 1998.
In addition, in May 1998, the Income Fund contributed the remainder of 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 anticipates that
it will distribute amounts sufficient to enable the Limited Partners to pay
federal and state income taxes, if any (at a level reasonably assumed by us),
resulting from the sale of the restaurant properties in Port Orange, Florida
and Tyler, Texas. The Income Fund will use the remaining net sales proceeds to
fund additional amounts to RTO Joint Venture, as described below, and to meet
the Income Fund's working capital and other Income Fund purposes.
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 September 30, 1998, the
Income Fund had contributed $713,480 to purchase land and pay for construction
relating to the joint venture. As of September 30, 1998, the Income Fund has
agreed to contribute approximately $40,900 in
S-22
<PAGE>
construction costs to the joint venture. When construction is completed, the
Income Fund expects to have an approximate 53% 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 the Income Fund's use of such funds to pay Income Fund
expenses or to make distributions to the partners. At September 30, 1998, the
Income Fund had $481,185 invested in such short-term investments as compared to
$1,361,290 at December 31, 1997. The decrease in cash and cash equivalents 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 the nine months ended September 30,
1998, as described below. The funds remaining at September 30, 1998, will be
used to pay distributions and other liabilities.
Total liabilities of the Income Fund decreased to $771,412 at September 30,
1998, from $974,967 at December 31, 1997, partially due to a decrease in
construction costs payable as a result of the payment during the nine months
ended September 30, 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 September 30, 1998 as compared to December 31, 1997. Total
liabilities at September 30, 1998, to the extent they exceed cash and cash
equivalents at September 30, 1998, will be paid from future cash from
operations.
Based on current and anticipated future cash from operations, and for the
nine months ended September 30, 1998, proceeds received from the sales of
restaurant properties, the Income Fund declared distributions to Limited
Partners of $3,338,327 and $1,725,000 for the nine months ended September 30,
1998 and 1997, respectively ($500,000 and $575,000 for the quarters ended
September 30, 1998 and 1997, respectively). This represents distributions for
the nine months ended September 30, 1998 and 1997 of $66.77 and $34.50 per
unit, respectively ($10.00 and $11.50 per unit for the quarters ended September
30, 1998 and 1997, respectively). Distributions for the nine months ended
September 30, 1998, included $1,838,327 as a result of the distribution of net
sales proceeds from the sale of restaurant properties, as described above. 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
cumulative preferred return. As a result of the sale of the restaurant
properties, the Income Fund's total revenue was reduced, while the majority of
the Income Fund's operating expenses remained fixed. Therefore, distributions
of net cash flow were adjusted for the quarter and nine months ended September
30, 1998. No distributions were made to us for the quarters and nine months
ended September 30, 1998 and 1997. No amounts distributed to the Limited
Partners for the nine months ended September 30, 1998 and 1997, 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.
The Years Ended December 31, 1997, 1996 and 1995
The Income Fund's primary source of capital for the years ended December 31,
1997, 1996 and 1995, was cash from operations (which includes cash received
from tenants, distributions from joint ventures and
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interest received, less cash paid for expenses). Cash from operations was
$1,813,231, $2,103,745 and $2,142,918 for the years ended December 31, 1997,
1996 and 1995, respectively. The decrease in cash from operations during 1997
and 1996, 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 items during the
years ended December 31, 1997, 1996 and 1995.
During the years ended December 31, 1997, 1996 and 1995, the Income Fund
received $106,000, $159,700 and $31,500, respectively, in capital contributions
from the corporate General Partner in connection with the operations of the
Income Fund. 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.
In August 1995, the Income Fund sold its restaurant property in Myrtle
Beach, South Carolina, to the tenant of the restaurant property for $1,040,000,
and in connection therewith, accepted a promissory note in the principal sum of
$1,040,000, collateralized by a mortgage on the restaurant property. The note
bears interest at a rate of 10.25% per annum and is being collected in 59 equal
monthly installments of $9,319, with a balloon payment of $1,006,004 due in
July 2000. Collections commenced August 1, 1995. In accordance with Statement
of Financial Accounting Standards No. 66, "Accounting for Sales of Real
Estate," the Income Fund recorded the sale of the restaurant property using the
installment sales method. 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 $1,024, $924 and $1,571 for financial reporting purposes
for the years ended December 31, 1997, 1996 and 1995, respectively. The
mortgage note receivable balance relating to this restaurant property at
December 31, 1997 and 1996, was $883,417 and $889,891, respectively, including
accrued interest of $8,665 and $8,729, respectively, and net of the remaining
deferred gain of $139,693 and $140,717, respectively. We anticipate that
payments collected under the mortgage note will be reinvested in additional
restaurant properties or used for other Income Fund purposes.
In addition, 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 $338 and
$18,445 for financial reporting purposes for the years ended December 31, 1997
and 1996, respectively, and had a deferred gain in the amount of $183,465 and
$183,802 at December 31, 1997 and 1996. The mortgage note receivable balance
relating to this restaurant property at December 31, 1997 and 1996, was
$874,443 and $882,967, including accrued interest of $2,747 and $9,471, and net
of the remaining deferred gain of $183,465 and $183,802. Payments collected
under the mortgage note totaling $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
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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 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 fund additional renovation costs relating to the
restaurant property in South Haven, Michigan, described above, and to pay
liabilities of the Income Fund, including quarterly distributions to the
Limited Partners.
In May 1997, the Income Fund sold its restaurant 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 restaurant property was originally acquired by the Income Fund in March
1989 and had a cost of approximately $569,500, 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. The Income Fund used approximately $82,500 of the net sales
proceeds to pay liabilities of the Income Fund, including quarterly
distributions to the Limited Partners. In addition, in October 1997, the Income
Fund reinvested approximately $460,900 of the net sales proceeds in a
restaurant property in Mesa, Arizona, as tenants-in-common with one of our
affiliates. In December 1997, the Income Fund reinvested remaining net sales
proceeds in a restaurant property located in Vancouver, Washington, as tenants-
in-common with certain of our affiliates, as described below. The Income Fund
anticipates that it will distribute amounts sufficient to enable the Limited
Partners to pay federal and state taxes, if any (at a level reasonably assumed
by us), resulting from the sale.
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 10% per annum and is being
collected in 36 monthly installments. Receivables at December 31, 1997 included
$37,099 of such amounts, including accrued interest of $1,802. 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 which were paid in 1998.
In September 1997, the Income Fund sold its restaurant property in Salem,
New Hampshire, to the tenant for $1,295,172 and received net sales proceeds
(net of $1,773 which represents prorated rent returned to the tenant) of
$1,270,365, resulting in a gain of approximately $141,508 for financial
reporting purposes. This restaurant property was originally acquired by the
Income Fund in May 1989 and had a cost of approximately $1,085,100, excluding
acquisition fees and miscellaneous acquisition expenses; therefore, the Income
Fund sold the restaurant property for approximately $187,000 in excess of its
original purchase price. In December 1997, the Income Fund reinvested the net
sales proceeds in a restaurant property located in Sandy, Utah, as described
below. We believe that the transaction, or a portion thereof, relating to the
sale of the restaurant property in Salem, New Hampshire, and the reinvestment
of the proceeds qualified as a like-kind exchange transaction for federal
income tax purposes. However, 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 addition, in September 1997, the Income Fund sold its restaurant property
in Port St. Lucie, Florida, to the tenant for $1,220,000 and received net sales
proceeds of $1,216,750, resulting in a gain of approximately $125,309 for
financial reporting purposes. This restaurant property was originally acquired
by
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the Income Fund in November 1989 and had a cost of approximately $1,176,100,
excluding acquisition fees and miscellaneous acquisition expenses; therefore,
the Income Fund sold the restaurant property for approximately $40,700 in
excess of its original purchase price. In November 1997, the Income Fund
reinvested the majority of the net sales proceeds in an IHOP restaurant
property located in Houston, Texas. We believe that the transaction, or a
portion thereof, relating to the sale of the restaurant property in Port St.
Lucie, Florida, and the reinvestment of the proceeds qualified as a like-kind
exchange transaction for federal income tax purposes. However, 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.
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 property manager's 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 located in Vancouver, Washington, as tenants-in-common with certain of
our affiliates, as described below.
In addition, in December 1997, the Income Fund sold its restaurant property
in Tampa, Florida, to a third party for $850,000 and received net sales
proceeds (net of $724 which represents prorated rent returned to the tenant) of
$804,451 resulting in a gain of $180,704 for financial reporting purposes. This
restaurant property was originally acquired by the Income Fund in February 1989
and had a cost of approximately $673,200, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Income Fund sold the
restaurant property for approximately $132,000 in excess of its original
purchase price. The Income Fund intends to use $50,000 of the net sales
proceeds to pay liabilities of the Income Fund, including quarterly
distributions to the Limited Partners. The Income Fund intends to distribute
some or all of the remaining net sales proceeds to the Limited Partners. 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 remaining net sales proceeds, if any, will be
used for other Income Fund purposes.
As described above, in December 1997, the Income Fund used the majority of
the net sales proceeds from the sale of the restaurant properties in Franklin,
Tennessee and Salem, New Hampshire, to acquire a restaurant property located in
Sandy, Utah. In addition, in December 1997, the Income Fund used the majority
of the net sales proceeds from the sale of the restaurant properties in
Franklin and Smyrna, Tennessee and Richmond, Indiana, in a restaurant property
located in Vancouver, Washington, as tenants-in-common with certain of our
affiliates.
In January 1998, the Income Fund sold its restaurant property in Port
Orange, Florida, to the tenant, for $1,330,000 and received net sales proceeds
(net of $2,909 which represents prorated rent returned to the tenant) of
$1,283,096, resulting in a gain of approximately $350,300 for financial
reporting purposes. The Income Fund intends to distribute some or all of the
net sales proceeds to the Limited Partners. The remaining net sales proceeds,
if any, will be used for other Income Fund purposes. In addition, in February
1998, the Income Fund sold its restaurant property in Tyler, Texas, to the
tenant, for $850,000 and received net sales proceeds of $844,229, resulting in
a gain of approximately $155,900 for financial reporting purposes. The Income
Fund intends to reinvest the sales proceeds in an additional restaurant
property during 1998, or use the net sales proceeds 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.
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<PAGE>
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 the partners. At December 31, 1997, the
Income Fund had $1,361,290 invested in such short-term investments as compared
to $362,922 at December 31, 1996. The increase in cash and cash equivalents
during 1997, is primarily attributable to the receipt of net sales proceeds
relating to the sales of several restaurant properties, as described above.
During 1997, 1996 and 1995, certain of our affiliates incurred on behalf of
the Income Fund $77,353, $113,560 and $114,204, respectively, for certain
operating expenses. As of December 31, 1997 and 1996, the Income Fund owed
$109,367 and $121,464, respectively, to affiliates for such amounts and
accounting and administrative services. In addition, as of December 31, 1997,
the Income Fund had incurred $34,500 in a real estate disposition fee due to an
affiliate as a result of its services in connection with the sale during 1996,
of the restaurant property in St. Cloud, Florida. Amounts payable to other
parties, including distributions payable, increased to $817,621 at December 31,
1997, from $705,130 at December 31, 1996, primarily as a result of incurring
$125,000 in renovation costs relating to the Income Fund's restaurant property
located in Connorsville, Indiana, which were paid in the nine months ended
September 30, 1998. Liabilities at December 31, 1997, to the extent they exceed
cash and cash equivalents (excluding the net sales proceeds held at December
31, 1997 from the sale of restaurant properties, as described above), at
December 31, 1997, 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 primarily on current and anticipated future cash from operations, a
portion of the sales proceeds received from the sales of the restaurant
properties and additional capital contributions from us, the Income Fund
declared distributions to the Limited Partners of $2,300,000 for each of the
years ended December 31, 1997, 1996 and 1995. This represents distributions of
$46 per Unit for each of the years ended December 31, 1997, 1996 and 1995. As
noted above, we distributed some of the net sales proceeds from the sales of
the restaurant properties in Tampa and Port Orange, Florida, to the Limited
Partners in April 1998. In deciding whether to sell restaurant properties, we
will consider 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, is expected to reduce the Income Fund's revenues. The
decrease in Income Fund revenues, combined with the fact that a significant
portion of the Income Fund's expenses are fixed in nature, is expected to
result 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 1997, 1996 and 1995, 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.
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 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.
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<PAGE>
Results of Operations
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 1997, the Income Fund and its
consolidated joint venture, CNL/Longacre Joint Venture, owned and leased 26
wholly-owned restaurant properties (including six restaurant properties which
were sold during 1997) and during the nine months ended September 30, 1998, the
Income Fund and CNL/Longacre Joint Venture owned and leased 25 wholly-owned
restaurant properties (including two restaurant properties sold in 1998), to
operators of fast-food and family-style restaurant chains. In connection
therewith, during the nine months ended September 30, 1998 and 1997, the Income
Fund and CNL/Longacre Joint Venture earned $1,028,589 and $1,160,634,
respectively, in rental income from operating leases and earned income from
direct financing leases, $338,068 and $378,168 of which was earned during the
quarters ended September 30, 1998 and 1997, respectively. Rental and earned
income decreased approximately $142,600 and $481,600 during the quarter and
nine months ended September 30, 1998, respectively, as compared to the quarter
and nine months ended September 30, 1997, as a result of the sales of
restaurant properties during 1997 and 1998. The decrease in rental and earned
income was partially offset by an increase of approximately $81,200 and
$243,600 during the quarter and nine months ended September 30, 1998,
respectively, due to the reinvestment of a portion of net sales proceeds from
the 1997 sales, in two restaurant properties in Houston, Texas and Sandy, Utah,
in November 1997 and December 1997, respectively.
The decrease in rental income was partially offset by the fact that during
the nine months ended September 30, 1997, the Income Fund increased its
allowance for doubtful accounts for the restaurant properties located in
Connorsville and Richmond, Indiana, due to financial difficulties the tenant
was experiencing. No such allowance was established during the nine months
ended September 30, 1998, due to the fact that the Income Fund re-leased the
restaurant property located in Connorsville, Indiana, to a new tenant for which
rent commenced subsequent to September 30, 1997 and sold the restaurant
property located in Richmond, Indiana in November 1997.
Rental and earned income also decreased during the quarter and nine months
ended September 30, 1998, by approximately $9,000 and $26,300, respectively,
due to the fact that in August 1998, the Income Fund retroactively terminated
the lease with the tenant of the restaurant property in Daleville, Indiana. The
Income Fund is currently seeking a new tenant or purchaser for this restaurant
property. Rental and earned income are expected to remain at reduced amounts
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.
Rental and earned income during the nine months ended September 30, 1998 and
1997, 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. We are currently seeking
purchasers or new tenants for these restaurant properties. Rental and earned
income are expected to remain at reduced amounts until such time as the Income
Fund executes new leases for these restaurant properties or until the
restaurant properties are sold and the proceeds from such sales are reinvested
in additional restaurant properties.
For the nine months ended September 30, 1998 and 1997, the Income Fund also
earned $33,412 and $68,056, respectively, in contingent rental income, $10,084
and $15,404 which were earned during the quarters ended September 30, 1998 and
1997, respectively. The decrease in contingent rental income during the quarter
and nine months ended September 30, 1998, as compared to the quarter and nine
months ended September 30, 1997, is primarily attributable to restaurant
property sales during 1997 and 1998 and decreases in restaurant sales of
restaurant properties, the leases of which require the payment of contingent
rental income.
During the nine months ended September 30, 1997, the Income Fund owned and
leased two restaurant properties indirectly through other joint venture
arrangements. During the nine months ended September 30, 1998, the Income Fund
owned and leased two restaurant properties as tenants-in-common with certain of
our
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affiliates and three restaurant properties indirectly through joint venture
arrangements. In connection therewith, during the nine months ended September
30, 1998 and 1997, the Income Fund earned $112,418 and $33,549, respectively,
attributable to net income earned by unconsolidated joint ventures in which the
Income Fund is a co-venturer, $40,315 and $11,144 of which were earned during
the quarters ended September 30, 1998 and 1997, respectively. The increase in
net income earned by these joint ventures during the quarter and nine months
ended September 30, 1998, as compared to the quarter and nine months ended
September 30, 1997, is primarily attributable to the fact that subsequent to
September 30, 1997, the Income Fund reinvested a portion of the net sales
proceeds it received from the 1997 and 1998 sales of several restaurant
properties in two restaurant properties in Mesa, Arizona and Vancouver,
Washington, 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."
During at least one of the nine months ended September 30, 1998 and 1997,
five lessees of the Income Fund and its consolidated joint venture, Golden
Corral Corporation, Slaymaker Group, Inc., DenAmerica, Inc., Shoney's, Inc.,
and Tampa Foods, L.P., each contributed more than 10% of the Income Fund's
total rental income (including rental income from the Income Fund's
consolidated joint venture, the Income Fund's share of the rental income from
restaurant properties owned by unconsolidated joint ventures in which the
Income Fund is a co-venturer and restaurant properties owned with affiliates as
tenants-in-common). As of September 30, 1998, Golden Corral Corporation was the
lessee under the leases relating to two restaurants, Slaymaker Group, Inc. was
the lessee under a lease relating to one restaurant, DenAmerica, Inc. was the
lessee under leases relating to two restaurants, Shoney's, Inc. was the lessee
under the leases relating to two restaurants, and Tampa Foods, L.P. was the
lessee under the leases relating to one restaurant. It is anticipated that
based on the minimum rental payments required by the leases, Slaymaker Group,
Inc. and Golden Corral Corporation each will continue to contribute more than
10% of the Income Fund's total rental income during the remainder of 1998 and
subsequent years. In addition, during at least one of the nine months ended
September 30, 1998 and 1997, five restaurant chains, Golden Corral Family
Steakhouse Restaurants ("Golden Corral"), Wendy's Old Fashioned Hamburger
Restaurants ("Wendy's"), Tony Roma's Famous for Ribs Restaurant ("Tony
Roma's"), Denny's, and Perkins each accounted for more than 10% of the Income
Fund's total rental income. It is anticipated that, based on the minimum rental
payments required by the leases, Golden Corral and Tony Roma's each will
continue to contribute more than 10% of the Income Fund's total rental income
during the remainder of 1998 and subsequent years. Any failure of these lessees
or restaurant chains could materially affect the Income Fund's income.
Interest and other income was $223,647 and $227,320 for the nine months
ended September 30, 1998 and 1997, respectively, $58,791 and $93,169 of which
was earned during the quarters ended September 30, 1998 and 1997, respectively.
The decrease in interest and other income during the quarter ended September
30, 1998, as compared to the quarter ended September 30, 1997, is primarily
attributable to interest earned on the sales proceeds received during the
quarter ended September 30, 1997, from the 1997 sales of restaurant properties
which had not been reinvested as of September 30, 1997.
Operating expenses, including depreciation expense, were $370,142 and
$448,852 for the nine months ended September 30, 1998 and 1997, respectively,
of which $120,809 and $150,248 were incurred for the quarters ended September
30, 1998 and 1997, respectively. The decrease in operating expenses during the
quarter and nine months ended September 30, 1998, as compared to the quarter
and nine months ended September 30, 1997, was primarily attributable to a
decrease in depreciation expense due to the sales of several restaurant
properties during 1997 and 1998.
Due to the tenant defaults under the leases for the restaurant properties in
Belding, Michigan, and Lebanon, New Hampshire, the Income Fund and its
consolidated joint venture, CNL/Longacre Joint Venture, expect 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 August 1995 and October 1996, respectively,
and recording the gains from such sales using the installment
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method, the Income Fund recognized gains for financial reporting purposes of
$2,621 and $758, during the nine months ended September 30, 1998 and 1997,
respectively, $838 and $259 of which were recognized during the quarters ended
September 30, 1998 and 1997, respectively.
As a result of the sales of two restaurant properties during the nine months
ended September 30, 1998, as described above in "Liquidity and Capital
Resources," the Income Fund recognized total gains of $440,822 for financial
reporting purposes. As a result of the sale of three restaurant properties
during the nine months ended September 30, 1997, the Income Fund recognized a
gain of $368,812 for financial reporting purposes, $266,817 of which was
recognized during the quarter ended September 30, 1997.
During the nine months ended September 30, 1997, the Income Fund recorded an
allowance for loss on land and building of $142,990 for financial reporting
purposes, relating to the restaurant property in Richmond, Indiana. The loss
represented the difference between the restaurant property's net carrying value
at September 30, 1997 and the estimated net realizable value. This restaurant
property was sold in November 1997.
In addition, during the quarter and nine months ended September 30, 1998,
the Income Fund established an allowance for loss on land and buildings of
$120,508 and $273,141, respectively, for financial reporting purposes relating
to the restaurant properties in Daleville, Indiana and Belding, Michigan,
respectively. The allowances represent the aggregate difference between the net
carrying value at September 30, 1998 and the current estimated net realizable
value at September 30, 1998 for each restaurant property.
The Years Ended December 31, 1997, 1996 and 1995
During 1995, the Income Fund owned and leased 27 wholly-owned restaurant
properties (including one restaurant property in Myrtle Beach, South Carolina,
which was sold in August 1995), during 1996, the Income Fund owned and leased
26 wholly-owned restaurant properties (including one restaurant property in St.
Cloud, Florida, which was sold in October 1996) and during 1997, the Income
Fund owned 27 wholly-owned restaurant properties (including six restaurant
properties, one in each of Franklin and Smyrna, Tennessee; Salem, New
Hampshire; Port St. Lucie and Tampa, Florida and Richmond, Indiana, which were
sold during the year ended December 31, 1997). In addition, during 1997, 1996
and 1995, the Income Fund was a co-venturer in three separate joint ventures
that each owned and leased one restaurant property and during 1997, the Income
Fund owned and leased two restaurant properties, with certain of our
affiliates, as tenants-in-common. As of December 31, 1997, the Income Fund
owned, either directly or through joint venture arrangements, 26 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 $37,800 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, 1997, 1996 and 1995, the Income Fund and
its consolidated joint venture, CNL/Longacre Joint Venture, earned $1,500,967,
$1,931,573 and $2,068,342, 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, 1997, as compared to 1996, was
partially attributable to a decrease of approximately $322,300 as a result of
the sale of its restaurant properties in St. Cloud, Florida (in October 1996),
Franklin, Tennessee (in January 1997), Smyrna, Tennessee (in May 1997), Salem,
New Hampshire (in September 1997), Port St. Lucie, Florida (in September 1997)
and Tampa, Florida (in December 1997), as described above in "Liquidity and
Capital Resources." During 1997, the decrease in rental income was partially
offset by an increase of approximately $24,700 due to the reinvestment of a
portion of these net sales proceeds in a restaurant property in Houston, Texas
and Sandy, Utah, in November 1997 and December 1997, respectively, as described
above in "Liquidity and Capital Resources."
S-30
<PAGE>
Rental and earned income also decreased in 1997 and 1996, each as compared
to the previous year, as a result of the Income Fund increasing its allowance
for doubtful accounts by approximately $57,700 and $29,500, respectively, for
rental and other amounts relating to the Hardee's restaurant properties located
in Connorsville and Richmond, Indiana, which were leased by the same tenant,
due to financial difficulties the tenant was experiencing. Rental and earned
income decreased by approximately $79,200 during 1997 due to the fact that the
Income Fund terminated the lease with the former tenant of these restaurant
properties in June 1997, 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 these restaurant properties pays all
amounts due under the promissory note for past due real estate taxes described
above in "Liquidity and Capital Resources." The decrease in rental and earned
income was slightly offset by an increase of $8,500 in rental income from the
new tenant of the restaurant property in Connorsville, Indiana, who began
operating the restaurant property after it was renovated into an Arby's
restaurant property. In November 1997, the Income Fund sold its restaurant
property in Richmond, Indiana, as described above in "Liquidity and Capital
Resources."
The decrease in rental and earned income during 1996, as compared to 1995,
was partially attributable to a decrease of approximately $95,000 as a result
of the sale of its restaurant properties in Myrtle Beach, South Carolina and
St. Cloud, Florida, in August 1995 and October 1996, respectively, as described
above in "Liquidity and Capital Resources." As a result of accepting promissory
notes in conjunction with each of these sales of restaurant properties, as
described above in "Liquidity and Capital Resources," interest income increased
during 1997 and 1996 as described below.
Rental and earned income also decreased by approximately $8,100 during 1996,
as compared to 1995, due to the fact that in October 1995, the tenant ceased
operations of the restaurant property in South Haven, Michigan. 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 for this
restaurant property with an operator, as described above in "Liquidity and
Capital Resources," and earned approximately $5,100 in rental income during
1997 from the operator of the restaurant property.
Rental and earned income in 1997, 1996 and 1995, 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 and South Haven,
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. During 1997, the Income Fund located a
new tenant for the restaurant property in South Haven, Michigan, as described
above. We are still seeking replacement tenants or purchasers for the
restaurant properties in Belding, Michigan and Lebanon, New Hampshire.
For the years ended December 31, 1997, 1996 and 1995, the Income Fund earned
$233,633, $130,167 and $104,455, respectively, in contingent rental income. The
increase in contingent rental income during 1997, as compared to 1996, is
primarily attributable to amounts collected under the operating agreement with
the new operator of the restaurant property located in South Haven, Michigan.
The operating agreement provides for payment to the Income Fund of reduced base
rents and a percentage of the net operating income generated by the restaurant.
The Income Fund expects to continue to receive such amounts until a lease is
entered into with the current operator, at which time contingent rental income
is expected to decrease, but at which time base rent is expected to increase.
The increase in contingent rental income during 1996, as compared to 1995, is
partially attributable to increased gross sales of certain restaurant
properties requiring the payment of contingent rent.
During the years ended December 31, 1997, 1996 and 1995, the Income Fund
earned $288,637, $137,385 and $55,785, respectively, in interest income. The
increase in interest income during 1997 and 1996, each as compared to the
previous year, was primarily attributable to the interest earned on the
mortgage notes receivable accepted in connection with the sale of the
restaurant properties in St. Cloud, Florida and Myrtle Beach, South Carolina in
October 1996 and August 1995, respectively. In addition, interest income
increased during 1997 due to interest earned on the net sales proceeds received
relating to the sales of the restaurant properties in Smyrna, Tennessee; Salem,
New Hampshire; Port St. Lucie, Florida; Richmond, Indiana and
S-31
<PAGE>
Tampa, Florida. Interest income is expected to decrease during 1998 as net
sales proceeds held at December 31, 1997, are reinvested in additional
restaurant properties, distributed to the Limited Partners or used for other
Income Fund purposes.
In addition, for the years ended December 31, 1997, 1996 and 1995, the
Income Fund earned $56,015, $46,452 and $47,018, 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 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 in Mesa,
Arizona, with affiliates as tenants-in-common, as described above in "Liquidity
and Capital Resources." Net income earned by this joint venture is expected to
increase during 1998 as a result of the Income Fund acquiring an interest in a
restaurant property in Vancouver, Washington, in December 1997, with certain of
our affiliates, as described above in "Liquidity and Capital Resources."
During the years ended December 31, 1997, 1996 and 1995, two lessees of the
Income Fund and its consolidated joint venture, Shoney's, Inc. and Golden
Corral Corporation, 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 the rental income from two
restaurant properties owned by unconsolidated joint ventures and two restaurant
properties owned with affiliates as tenants-in-common). As of December 31,
1997, Shoney's, Inc. was the lessee under leases relating to four restaurants
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 two lessees will continue to contribute more than
10% of the Income Fund's total rental income during 1998 and subsequent years.
In addition, three restaurant chains, Perkins, Denny's and Wendy's Old
Fashioned Hamburger Restaurants, each accounted for more than 10% of the Income
Fund's total rental and mortgage interest income during 1997, 1996 and 1995
(including rental income from the Income Fund's consolidated joint venture and
the Income Fund's share of the rental income from two restaurant properties
owned by unconsolidated joint ventures and two restaurant properties owned with
affiliates as tenants-in-common). In subsequent years, it is anticipated that
these three restaurant chains each will continue to account for more than 10%
of the total rental and mortgage interest income to which the Income Fund is
entitled under the terms of the leases and mortgage note. Any failure of these
lessees or restaurant chains could materially affect the Income Fund's income.
Operating expenses, including depreciation and amortization expense, were
$574,472, $631,565 and $640,922 for the years ended December 31, 1997, 1996 and
1995, respectively. The decrease in operating expenses during 1997 and 1996,
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
1997, 1996 and 1995, as described above in "Liquidity and Capital Resources."
Operating expenses also decreased during 1996, as compared to 1995, due to
the fact that the Income Fund and its consolidated joint venture, CNL/Longacre
Joint Venture, recorded approximately $35,100, $40,700 and $47,200 during the
years ended December 31, 1997, 1996 and 1995, respectively, for real estate
taxes relating to the restaurant properties in Lebanon, New Hampshire and
Belding and South Haven, Michigan, as a result of lease terminations. The
Income Fund entered into an operating agreement with an operator for the
restaurant property in South Haven, Michigan, as described above in "Liquidity
and Capital Resources," and is currently seeking either a replacement tenant or
a purchaser for the restaurant properties in Lebanon, New Hampshire and
Belding, Michigan, as described above in "Liquidity and Capital Resources." The
Income Fund expects to continue to incur real estate taxes, insurance and
maintenance expense for its restaurant properties in Lebanon, New Hampshire and
Belding, Michigan, until such time as a new lease is executed for each
restaurant property or until each restaurant property is sold.
The decrease in operating expenses during 1996, as compared to 1995, is
partially offset by an increase in accounting and administrative expenses
associated with operating the Income Fund and its restaurant properties and an
increase in insurance expense as a result of our obtaining contingent liability
and property coverage for the Income Fund beginning in May 1995.
S-32
<PAGE>
In connection with the sale of its restaurant properties in St. Cloud,
Florida and Myrtle Beach, South Carolina, during 1996 and 1995, respectively,
as described above in "Liquidity and Capital Resources," the Income Fund
recognized a gain for financial reporting purposes of $1,362, $19,369 and
$1,571 for the years ended December 31, 1997, 1996 and 1995, 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 $323,157 at
December 31, 1997, 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 the restaurant properties in Smyrna, Tennessee;
Salem, New Hampshire; and Port St. Lucie and Tampa, Florida, as described above
in "Liquidity and Capital Resources," the Income Fund recognized gains totaling
$549,516 during 1997, 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." In October
1995, the Income Fund also sold a portion of the land relating to its
restaurant property in Dalesville, Indiana, as the result of a right of way
taking and recognized a gain for financial reporting purposes of $4,353 during
the year ended December 31, 1995.
During 1997, the Income Fund established an allowance for loss on land and
building of $151,671 for financial reporting purposes relating to the
restaurant property in Belding, Michigan. The allowance represents the
difference between the restaurant property's carrying value at December 31,
1997 and the estimated net realizable value for this restaurant property. In
addition, an allowance was established for loss on land and building of $99,023
for financial reporting purposes relating to the restaurant property in
Lebanon, New Hampshire, owned by the Income Fund's consolidated joint venture.
The allowance represents the difference between the restaurant property's
carrying value at December 31, 1997 and the estimated new realizable value,
based on an anticipated sales price for the restaurant property.
At December 31, 1996, the Income Fund established an allowance for loss on
land and building in the amount of $169,463 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)
the net realizable value of $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."
General
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Income Fund's financial position or results of operations.
The Income Fund's leases as of September 30, 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
S-33
<PAGE>
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.
The Year 2000 problem is the result of information technology systems and
embedded systems (products which are made with microprocessor (computer) chips
such as HVAC systems, physical security systems and elevators) using a two-
digit format, as opposed to four digits, to indicate the year. Such information
technology and embedded systems may be unable to properly recognize and process
date-sensitive information beginning January 1, 2000.
The Income Fund does not have any information technology systems. Certain of
our affiliates provide all services requiring the use of information technology
systems pursuant to a management agreement with the Income Fund. The
maintenance of embedded systems, if any, at the Income Fund's properties is the
responsibility of the tenants of the properties in accordance with the terms of
the Income Fund's leases. We and our affiliates have established a team
dedicated to reviewing the internal information technology systems used in the
operation of the Income Fund, and the information technology and embedded
systems and the Year 2000 compliance plans of the Income Fund's tenants,
significant suppliers, financial institutions and transfer agent.
The information technology infrastructure of our affiliates consists of a
network of personal computers and servers that were obtained from major
suppliers. The affiliates utilize various administrative and financial software
applications on that infrastructure to perform the business functions of the
Income Fund. Our inability and that of our affiliates to identify and timely
correct material Year 2000 deficiencies in the software and/or infrastructure
could result in an interruption in, or failure of, certain of the Income Fund's
business activities or operations. Accordingly, we and affiliates have
requested and are evaluating documentation from the suppliers of the affiliates
regarding the Year 2000 compliance of their products that are used in the
business activities or operations of the Income Fund. The costs expected to be
incurred by us and our affiliates to become Year 2000 compliant will be
incurred by us and our affiliates; therefore, these costs will have no impact
on the Income Fund's financial position or results of operations.
The Income Fund has material third party relationships with its tenants,
financial institutions and 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. If
any of these third parties are unable to meet their obligations to the Income
Fund because of the Year 2000 deficiencies, such a failure may have a material
impact on the Income Fund. Accordingly, we have requested and are evaluating
documentation from the Income Fund's tenants, financial institutions, and
transfer agent relating to their Year 2000 compliance plans. At this time, we
have not yet received sufficient certifications to be assured that the tenants,
financial institutions, and transfer agent have fully considered and mitigated
any potential material impact of the Year 2000 deficiencies. Therefore, we do
not, at this time, know of the potential costs to the Income Fund of any
adverse impact or effect of any Year 2000 deficiencies by these third parties.
We currently expect that all Year 2000 compliance testing and any necessary
remedial measures on the information technology systems used in the business
activities and operations of the Income Fund will be completed prior to June
30, 1999. Based on the progress we and our affiliates have made in identifying
and addressing the Income Fund's Year 2000 issues and the plan and timeline to
complete the compliance program, we do not foresee significant risks associated
with the Income Fund's Year 2000 compliance at this time. Because we and our
affiliates are still evaluating the status of the systems used in business
activities and operations of the Income Fund and the systems of the third
parties with which the Income Fund conducts its business, we have not yet
developed a comprehensive contingency plan and are unable to identify "the most
reasonably likely worst case scenario" at this time. As we identify significant
risks related to the Income Fund's Year 2000 compliance or if the Income Fund's
Year 2000 compliance program's progress deviates substantially from the
anticipated timeline, we will develop appropriate contingency plans.
S-34
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997... F-1
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997.............................................. F-2
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997.............. F-3
Condensed Statements of Cash Flows for the Nine Months Ended September 30,
1998 and 1997............................................................ F-4
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997........................................ F-5
Report of Independent Accountants......................................... F-9
Balance Sheets as of December 31, 1997 and 1996........................... F-10
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995..................................................................... F-11
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995............................................................ F-12
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995..................................................................... F-13
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and 1995................................................................. F-14
Unaudited Pro Forma Financial Information................................. F-26
Unaudited Pro Forma Balance Sheet as of September 30, 1998................ F-26
Unaudited Pro Forma Income Statement for the Nine Months Ended September
30, 1998................................................................. F-27
Unaudited Pro Forma Income Statement for the Year Ended December 31,
1997..................................................................... F-28
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements............................................................... F-29
</TABLE>
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 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................................. $10,855,678 $12,421,143
Net investment in direct financing leases........... 1,717,763 2,277,481
Investment in joint ventures........................ 2,231,902 1,558,709
Mortgage note receivable, less deferred gain of
$320,536 and $323,157.............................. 1,742,233 1,758,167
Cash and cash equivalents........................... 481,185 1,361,290
Receivables, less allowance for doubtful accounts of
$150,102 and $137,892.............................. 61,221 108,261
Prepaid expenses.................................... 8,458 9,307
Accrued rental income............................... 221,988 169,726
Other assets........................................ 54,346 54,346
----------- -----------
$17,374,774 $19,718,430
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable.................................... $ 2,315 $ 24,229
Accrued construction costs payable.................. -- 125,000
Accrued and escrowed real estate taxes payable...... 17,217 93,392
Distributions payable............................... 500,000 575,000
Due to related parties.............................. 216,395 143,867
Rents paid in advance............................... 35,485 13,479
----------- -----------
Total liabilities............................... 771,412 974,967
Minority interest................................... 209,524 222,929
Partners' capital................................... 16,393,838 18,520,534
----------- -----------
$17,374,774 $19,718,430
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-1
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
------------------- ----------------------
1998 1997 1998 1997
--------- -------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases.......................... $ 287,742 $344,772 $ 875,920 $1,042,771
Earned income from direct
financing leases................ 50,326 33,396 152,669 117,863
Contingent rental income......... 10,084 15,404 33,412 68,056
Interest and other income........ 58,791 93,169 223,647 227,320
--------- -------- ---------- ----------
406,943 486,741 1,285,648 1,456,010
--------- -------- ---------- ----------
Expenses:
General operating and
administrative.................. 35,693 52,181 113,010 128,730
Bad debt expense................. -- -- 5,882 9,007
Professional services............ 3,235 4,866 13,314 17,695
Real estate taxes................ 10,138 10,776 26,558 32,298
State and other taxes............ -- -- 9,658 11,897
Depreciation..................... 71,743 82,425 201,720 249,225
--------- -------- ---------- ----------
120,809 150,248 370,142 448,852
--------- -------- ---------- ----------
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......................... 286,134 336,493 915,506 1,007,158
Minority Interest in Loss of
Consolidated Joint Venture........ 3,955 6,092 13,405 16,124
Equity in Earnings of
Unconsolidated Joint Ventures..... 40,315 11,144 112,418 33,549
Gain on Sale of Land and
Buildings......................... 838 267,076 443,443 369,570
Provision for Loss on Land and
Buildings......................... (120,508) -- (273,141) (142,990)
--------- -------- ---------- ----------
Net Income......................... $ 210,734 $620,805 $1,211,631 $1,283,411
--------- -------- ---------- ----------
Allocation of Net Income:
General partners................. $ 179 $ 6,060 $ 6,534 $ 10,548
Limited partners................. 210,555 614,745 1,205,097 1,272,863
--------- -------- ---------- ----------
$ 210,734 $620,805 $1,211,631 $1,283,411
========= ======== ========== ==========
Net Income Per Limited Partner
Unit.............................. $ 4.21 $ 12.29 $ 24.10 $ 25.46
========= ======== ========== ==========
Weighted Average Number of Limited
Partner Units Outstanding......... 50,000 50,000 50,000 50,000
========= ======== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1998 1997
----------------- ------------
<S> <C> <C>
General partners:
Beginning balance............................. $ 493,982 $ 376,173
Contributions................................. -- 106,000
Net income.................................... 6,534 11,809
----------- -----------
500,516 493,982
----------- -----------
Limited partners:
Beginning balance............................. 18,026,552 18,606,446
Net income.................................... 1,205,097 1,720,106
Distributions ($66.77 and $46.00 per limited
partner unit, respectively).................. (3,338,327) (2,300,000)
----------- -----------
15,893,322 18,026,552
----------- -----------
Total partners' capital......................... $16,393,838 $18,520,534
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities........... $ 1,230,725 $ 1,297,828
----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and building............ 2,125,220 4,082,166
Additions to land and buildings on operating
leases............................................ (125,000) (120,365)
Investment in joint ventures....................... (713,480) --
Collections on mortgage notes receivable........... 15,757 5,503
Increase in restricted cash........................ -- (2,487,115)
----------- -----------
Net cash provided by investing activities......... 1,302,497 1,480,189
----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners.................. (3,413,327) (1,725,000)
----------- -----------
Net cash used in financing activities............. (3,413,327) (1,725,000)
----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents......................................... (880,105) 1,053,017
Cash and Cash Equivalents at Beginning of Period..... 1,361,290 362,922
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 481,185 $ 1,415,939
=========== ===========
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Net investment in direct financing lease
reclassified to land and building on operating
lease as a result of lease termination............. $ 530,498 $ --
=========== ===========
Deferred real estate disposition fees incurred and
unpaid at end of period............................ $ 65,400 $ --
=========== ===========
Distributions declared and unpaid at end of period.. $ 500,000 $ 575,000
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, 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, 1997.
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.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2. Land and Buildings on Operating Leases
Land and buildings on operating leases consisted of the following at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land.......................................... $ 5,340,524 $ 6,069,665
Buildings..................................... 7,869,209 8,546,530
----------- -----------
13,209,733 14,616,195
Less accumulated depreciation................. (1,830,220) (1,944,358)
----------- -----------
11,379,513 12,671,837
Less allowance for loss on land and build-
ings......................................... (523,835) (250,694)
----------- -----------
$10,855,678 $12,421,143
=========== ===========
</TABLE>
During the nine months ended September 30, 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 of $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 6).
F-5
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Nine Months Ended September 30, 1998 and 1997
As of December 31, 1997, the Partnership had 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.
During the nine months ended September 30, 1998, the Partnership increased the
allowance by $152,633 for the property in Belding, Michigan. In addition,
during the nine months ended September 30, 1998, the Partnership established an
allowance for loss on land and building of $120,508, relating to the property
located in Daleville, Indiana. The allowances represent the difference between
the net carrying values of the properties at September 30, 1998 and current
estimates of net realizable values for these properties.
3. Net Investment in Direct Financing Leases
During the nine months ended September 30, 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.
4. Investment in Joint Ventures
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 September 30, 1998, the Partnership had
contributed $713,480 to purchase land and pay for construction relating to the
joint venture. As of September 30, 1998, the Partnership has agreed to
contribute approximately $40,900 in additional construction costs to the joint
venture. When construction is completed, the Partnership will have an
approximate 53 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.
The following presents the combined, condensed financial information for all
of the Partnership's joint ventures and properties held as tenants-in-common
at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation.................... $4,817,939 $4,277,972
Net investment in direct financing leases.... 802,097 --
Cash......................................... 14,653 24,994
Receivables.................................. 527 4,417
Prepaid expenses............................. 458 270
Accrued rental income........................ 97,074 68,819
Liabilities.................................. 105,316 1,250
Partners' capital............................ 5,627,432 4,375,222
Revenues..................................... 386,391 151,242
Net income................................... 305,686 121,605
</TABLE>
The Partnership recognized income totaling $112,418 and $33,549 for the nine
months ended September 30, 1998 and 1997, respectively, from these joint
ventures, $40,315 and $11,144 of which was earned during the quarters ended
September 30, 1998 and 1997, respectively.
F-6
<PAGE>
CNL INCOME FUND V. LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Nine Months Ended September 30, 1998 and 1997
5. 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, noncompounded annual return on their
adjusted capital contributions (the "10% Preferred Return") on a cumulative
basis.
Generally, net sales proceeds from the sale of properties, to the extent
distributed, will be distributed first to the limited partners in an amount
sufficient to provide them with the 10% Preferred Return, on a cumulative
basis, 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 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.
During the nine months ended September 30, 1998 and 1997, the Partnership
declared distributions to the limited partners of $3,338,327 and $1,725,000,
respectively, ($500,000 and $575,000 for the quarters ended September 30, 1998
and 1997, respectively). This represents distributions for the nine months
ended September 30, 1998 and 1997, of $66.77 and $34.50 per unit, respectively
($10.00 and $11.50 per unit for the quarters ended September 30, 1998 and 1997,
respectively). Distributions for the nine months ended September 30, 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' cumulative 10% Preferred
Return. No distributions have been made to the general partners to date.
6. Related Party Transactions
An affiliate of the Partnership 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. 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 nine months ended September 30, 1998, the Partnership
incurred $65,400 in deferred, subordinated, real estate disposition fees as a
result of the sale of properties (see Note 2). No deferred, subordinated, real
estate disposition fees were incurred for the nine months ended September 30,
1997.
7. 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, earned and interest income (including the
Partnership's
F-7
<PAGE>
CNL INCOME FUND V. LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Nine Months Ended September 30, 1998 and 1997
share of total rental and earned income from joint ventures and the properties
held as tenants-in-common), for at least one of the nine months ended September
30:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Golden Corral Corporation............................... $146,633 $146,633
Slaymaker Group, Inc.................................... 139,005 --
DenAmerica, Inc......................................... 95,713 127,484
Shoney's, Inc........................................... 83,051 180,044
Tampa Foods, L.P........................................ 70,219 133,923
</TABLE>
In addition, the following schedule presents total rental, earned and
interest income from individual restaurant chains, each representing more than
ten percent of the Partnership's total rental, earned income and interest
income from its properties (including the Partnership's share of total rental
and earned income from joint ventures and the properties held as tenants-in-
common) and mortgage notes for at least one of the nine months ended September
30:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Golden Corral Family Steakhouse Restaurants............. $146,633 $146,633
Tony Roma's Famous for Ribs............................. 139,005 --
Wendy's Old Fashioned Hamburger Restaurants............. 128,616 193,319
Denny's................................................. 103,736 228,498
Perkins................................................. 77,728 280,805
</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 could significantly impact the
results of operations of the Partnership. However, the general partners believe
that the risk of such a default is reduced due to the essential or important
nature of these properties for the on-going operations of the lessees.
F-8
<PAGE>
Report of Independent Accountants
To the Partners
CNL Income Fund V, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund V, Ltd.
(a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. 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 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 Income Fund V, Ltd. as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
January 29, 1998
F-9
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land and buildings.................................... $12,421,143 $15,190,278
Net investment in direct financing leases.............. 2,277,481 1,941,406
Investment in joint ventures........................... 1,558,709 465,808
Mortgage notes receivable, less deferred gain.......... 1,758,167 1,772,858
Cash and cash equivalents.............................. 1,361,290 362,922
Receivables, less allowance for doubtful accounts of
$137,892 and $37,743.................................. 108,261 57,934
Prepaid expenses....................................... 9,307 10,416
Accrued rental income.................................. 169,726 277,034
Other.................................................. 54,346 54,346
----------- -----------
$19,718,430 $20,133,002
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable....................................... $ 24,229 $ 25,366
Accrued construction costs payable..................... 125,000 --
Accrued real estate taxes payable...................... 93,392 104,764
Distributions payable.................................. 575,000 575,000
Due to related parties................................. 143,867 155,964
Rents paid in advance.................................. 13,479 11,738
----------- -----------
Total liabilities................................ 974,967 872,832
Minority interest...................................... 222,929 277,551
Partners' capital...................................... 18,520,534 18,982,619
----------- -----------
$19,718,430 $20,133,002
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases....... $1,343,833 $1,746,021 $1,878,584
Earned income from direct financing
leases................................... 157,134 185,552 189,758
Contingent rental income.................. 233,663 130,167 104,455
Interest income........................... 288,637 137,385 55,785
Other income.............................. 13,866 10,419 27,395
---------- ---------- ----------
2,037,133 2,209,544 2,255,977
---------- ---------- ----------
Expenses:
General operating and administrative...... 166,346 178,991 157,741
Professional services..................... 23,172 22,605 20,741
Bad debt expense.......................... 9,007 -- 1,541
Real estate taxes......................... 39,619 40,711 47,182
State and other taxes..................... 11,897 12,492 15,982
Depreciation and amortization............. 324,431 376,766 397,735
---------- ---------- ----------
574,472 631,565 640,922
---------- ---------- ----------
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... 1,462,661 1,577,979 1,615,055
Minority Interest in Loss of Consolidated
Joint Venture.............................. 54,622 23,884 11,823
Equity in Earnings of Unconsolidated Joint
Ventures................................... 56,015 46,452 47,018
Gain on Sale of Land and Buildings.......... 409,311 19,369 5,924
Provision for Loss on Land and Buildings.... (250,694) (239,525) --
---------- ---------- ----------
Net Income.................................. $1,731,915 $1,428,159 $1,679,820
========== ========== ==========
Allocation of Net Income:
General partners.......................... $ 11,809 $ 12,513 $ 16,754
Limited partners.......................... 1,720,106 1,415,646 1,663,066
---------- ---------- ----------
$1,731,915 $1,428,159 $1,679,820
========== ========== ==========
Net Income Per Limited Partner Unit......... $ 34.40 $ 28.31 $ 33.26
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding.......................... 50,000 50,000 50,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-11
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<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,
1994................... $ 46,000 $109,706 $25,000,000 $(12,868,240) $10,860,974 $(2,865,000) $20,283,440
Contributions from
general partner........ 31,500 -- -- -- -- -- 31,500
Distributions to limited
partners ($46 per
limited partner unit).. -- -- -- (2,300,000) -- -- (2,300,000)
Net income.............. -- 16,754 -- -- 1,663,066 -- 1,679,820
-------- -------- ----------- ------------ ----------- ----------- -----------
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
======== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-12
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants................ $1,771,467 $2,083,722 $2,216,111
Distributions from unconsolidated joint
ventures................................. 53,176 53,782 53,405
Cash paid for expenses.................... (305,341) (161,730) (173,597)
Interest received......................... 293,929 127,971 46,999
---------- ---------- ----------
Net cash provided by operating
activities.............................. 1,813,231 2,103,745 2,142,918
---------- ---------- ----------
Cash Flows from Investing Activities:
Proceeds from sale of land and buildings.. 5,271,796 100,000 --
Proceeds from sale of portion of land for
right of way purposes.................... -- -- 7,625
Collections on mortgage note receivable... 9,265 6,712 11,409
Additions to land and buildings on
operating leases......................... (1,900,790) -- --
Investment in direct financing lease...... (911,072) -- --
Investment in joint venture............... (1,090,062) -- --
Other..................................... -- (26,287) --
---------- ---------- ----------
Net cash provided by investing
activities.............................. 1,379,137 80,425 19,034
---------- ---------- ----------
Cash Flows from Financing Activities:
Contributions from general partner........ 106,000 159,700 31,500
Distributions to limited partners......... (2,300,000) (2,300,000) (2,300,000)
---------- ---------- ----------
Net cash used in financing activities.... (2,194,000) (2,140,300) (2,268,500)
---------- ---------- ----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................... 998,368 43,870 (106,548)
Cash and Cash Equivalents at Beginning of
Year...................................... 362,922 319,052 425,600
---------- ---------- ----------
Cash and Cash Equivalents at End of Year... $1,361,290 $ 362,922 $ 319,052
========== ========== ==========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income................................ $1,731,915 $1,428,159 $1,679,820
---------- ---------- ----------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation.............................. 324,431 376,766 397,735
Minority interest in loss of consolidated
joint venture............................ (54,622) (23,884) (11,823)
Equity in earnings of unconsolidated joint
ventures, net of distributions........... (2,839) 7,330 6,387
Gain on sale of land and buildings........ (409,311) (19,369) (5,924)
Provisions for loss on land and
buildings................................ 250,694 239,525 --
Decrease (increase) in accrued interest on
mortgage note receivable................. 6,788 (9,414) (8,786)
Decrease (increase) in receivables........ (33,999) 10,270 13,527
Decrease (increase) in prepaid expenses... 1,109 1,505 (534)
Decrease in net investment in direct
financing leases......................... 42,682 46,387 42,180
Increase in accrued rental income......... (19,527) (27,875) (30,484)
Increase (decrease) in accounts payable
and accrued expenses..................... (12,509) 32,032 9,730
Increase (decrease) in due to related
parties.................................. (13,322) 59,945 41,585
Increase (decrease) in rents paid in
advance.................................. 1,741 (17,632) 9,505
---------- ---------- ----------
Total adjustments........................ 81,316 675,586 463,098
---------- ---------- ----------
Net Cash Provided by Operating Activities.. $1,813,231 $2,103,745 $2,142,918
========== ========== ==========
Supplemental Schedule of Non-Cash Investing
and Financing Activities:
Mortgage note accepted in connection with
sale of land and buildings............... $ -- $1,057,299 $1,040,000
========== ========== ==========
Distributions declared and unpaid at
December 31.............................. $ 575,000 $ 575,000 $ 575,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-13
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
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.
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 are
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-14
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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 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 1997 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; 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
F-15
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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>
1997 1996
----------- -----------
<S> <C> <C>
Land............................................ $ 6,069,665 $ 7,284,070
Buildings....................................... 8,546,530 10,431,908
----------- -----------
14,616,195 17,715,978
Less accumulated depreciation................... (1,944,358) (2,346,374)
----------- -----------
12,671,837 15,369,604
Less allowance for loss on land and buildings... (250,694) (179,326)
----------- -----------
$12,421,143 $15,190,278
=========== ===========
</TABLE>
In August 1995, the Partnership sold its property in Myrtle Beach, South
Carolina, to the tenant for $1,040,000 and accepted the sales proceeds in the
form of a promissory note (Note 6). The total carrying value of the property
was $896,788, including acquisition fees and miscellaneous acquisition expenses
and net of accumulated depreciation. 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 $1,024 and $924 for
the years ended December 31, 1997 and 1996, respectively, and had a deferred
gain in the amount of $139,693 and $140,717 at December 31, 1997 and 1996,
respectively (Note 6).
In October 1996, the Partnership sold its property in St. Cloud, Florida, to
the tenant for $1,150,000. In connection therewith, the Partnership received
$100,000 in cash and accepted the remaining sales proceeds in the form of a
promissory note (Note 6). The total carrying value of the property was
$894,265, including acquisition fees and miscellaneous acquisition expenses and
net of accumulated depreciation. As a result of this sale being accounted for
under the installment sales method for financial reporting purposes, as
described above, the Partnership recognized a gain of $338 and $18,445 for the
years ended December 31, 1997 and 1996, respectively, and had a deferred gain
in the amount of $183,464 and $183,802 at December 31, 1997 and 1996,
respectively (Note 6).
In 1996, the Partnership established an allowance for loss on land and
building in the amount of $109,264 and wrote off accrued rental income of
$60,199 for financial reporting purposes for the property in Franklin,
Tennessee. The allowance represented the difference between (i) the property's
carrying value at December 31, 1996, plus 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 minus (ii) the net
realizable value based on sales proceeds received in January 1997 from the sale
of this Property. The Partnership sold the property in January 1997, to the
tenant for $980,000 and received net sales proceeds of $960,741. Since the
Partnership had previously 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
F-16
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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.
In December 1997, the Partnership reinvested approximately $244,800 of the
net sales proceeds from the sale of the Property in Franklin, Tennessee, in a
property located in Sandy, Utah, as described below, and approximately $150,000
of the net sales proceeds in a property located in Vancouver, Washington, as
tenants-in-common with affiliates of the general partners (see Note 5).
In September 1997, the Partnership sold its property in Salem, New
Hampshire, to the tenant for $1,295,172 and received net sales proceeds (net of
$1,773 which represents prorated rent returned to the tenant) of $1,270,365,
resulting in a gain of $141,508 for financial reporting purposes. This property
was originally acquired by the Partnership in May 1989 and had a cost of
approximately $1,085,100, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $187,000 in excess of its original purchase price. In December
1997, the Partnership reinvested the net sales proceeds in a property located
in Sandy, Utah, as described below.
In addition, in September 1997, the Partnership sold its property in Port
St. Lucie, Florida, to the tenant for $1,220,000 and received net sales
proceeds of $1,216,750, resulting in a gain of $125,309 for financial reporting
purposes. This property was originally acquired by the Partnership in November
1989 and had a cost of approximately $1,176,100, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Partnership sold the
property for approximately $40,700 in excess of its original purchase price. In
November 1997, the Partnership reinvested the majority of the net sales
proceeds in a property located in Houston, Texas.
In 1996, the Partnership established an allowance for loss on land for the
property in Richmond, Indiana, in the amount of $70,062, which represented the
difference between the property's carrying value at December 31, 1996, and the
property manager's estimate of the net realizable value of the property based
on an anticipated sales price. In November 1997, the Partnership sold this
property 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).
Also, in December 1997, the Partnership sold its property in Tampa, Florida,
to a third party for $850,000 and received net sales proceeds (net of $724
which represents prorated rent returned to the tenant) of $804,451 resulting in
a gain of $180,704 for financial reporting purposes. This property was
originally acquired by the Partnership in February 1989 and had a cost of
approximately $673,200, excluding acquisition fees and miscellaneous
acquisition expenses; therefore the Partnership sold the property for
approximately $132,000 in excess of its original purchase price.
At December 31, 1997, the Partnership established an allowance for loss on
land and building of $151,671, for financial reporting purposes, relating to
the property in Belding, Michigan. The allowance represents the difference
between the property's carrying value at December 31, 1997 and the estimated
net realizable value for this property. In addition, at December 31, 1997, an
allowance was established for loss on land and building of $99,023, for
financial reporting purposes, relating to the property in Lebanon, New
Hampshire, owned by the Partnership's consolidated joint venture, CNL/Longacre
Joint Venture. The
F-17
<PAGE>
CNL INCOME FUND V. LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
allowance represents the difference between the property's carrying value at
December 31, 1997 and the estimated new realizable value based on an
anticipated sales price for this property.
As described above, in December 1997, the Partnership used the majority of
the net sales proceeds from the sale of the Properties in Franklin, Tennessee
and Salem, New Hampshire, in a Property located in Sandy, Utah.
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, 1997, 1996 and 1995, the Partnership recognized $19,526, $27,875 and
$30,484, 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, 1997:
<TABLE>
<S> <C>
1998........................................................... $ 1,049,074
1999........................................................... 1,052,663
2000........................................................... 1,063,699
2001........................................................... 1,028,379
2002........................................................... 939,819
Thereafter..................................................... 8,440,061
-----------
$13,573,695
===========
</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.
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>
1997 1996
----------- -----------
<S> <C> <C>
Minimum lease payments receivable................ $ 4,213,033 $ 2,811,323
Estimated residual values........................ 806,792 828,783
Less unearned income............................. (2,742,344) (1,698,700)
----------- -----------
Net investment in direct financing leases........ $ 2,277,481 $ 1,941,406
=========== ===========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998............................................................ $ 286,518
1999............................................................ 286,518
2000............................................................ 286,518
2001............................................................ 286,518
2002............................................................ 286,518
Thereafter...................................................... 2,780,443
----------
$4,213,033
==========
</TABLE>
F-18
<PAGE>
CNL INCOME FUND V. LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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, in October 1997, the Partnership reinvested approximately $460,900 of
the net sales proceeds in a property in Mesa, Arizona, as tenants-in-common
with an affiliate of the general partners. In December 1997, the Partnership
reinvested the remaining net sales proceeds in a property located in Vancouver,
Washington, as tenants-in-common with affiliates of the general partners (Note
5).
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 43 percent and a 49 percent 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.
In October 1997, the Partnership used a portion of the net sales proceeds
from the sale of the Property in Smyrna, Tennessee (see Note 4) 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, 1997, the Partnership owned a 42.23% 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; and
Richmond, Indiana (see Note 3), and Smyrna, Tennessee (see Note 4) 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, 1997, the Partnership owned a 27.78% interest in
this property.
Cocoa Joint Venture, Halls 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.
F-19
<PAGE>
CNL INCOME FUND V. LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
The following presents the combined condensed financial information for the
joint ventures and the two properties held as two separate tenants-in-common
with affiliates at December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation......................... $4,277,972 $ 946,406
Cash.............................................. 24,994 561
Receivables....................................... 4,417 --
Prepaid expenses.................................. 270 251
Accrued rental income............................. 68,819 63,806
Liabilities....................................... 1,250 880
Partners' capital................................. 4,375,222 1,010,144
Revenues.......................................... 151,242 123,689
Net income........................................ 121,605 98,949
</TABLE>
The Partnership recognized income totalling $56,015, $46,452 and $47,018 for
the years ended December 31, 1997, 1996 and 1995, respectively, from these
joint ventures.
6. Mortgage Note 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
installments of $9,319, including interest, with a balloon payment of
$1,006,004 due in July 2000.
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 is being
collected in 12 monthly installments of interest only, and thereafter in
168 equal monthly installments of principal and interest.
The mortgage notes receivable consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Principal balance................................ $2,069,912 $2,079,177
Accrued interest receivable...................... 11,412 18,200
Less deferred gains on sale of land and
buildings....................................... (323,157) (324,519)
---------- ----------
$1,758,167 $1,772,858
========== ==========
</TABLE>
The general partners believe that the estimated fair values of mortgage
notes receivable at December 31, 1997 and 1996, 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.
F-20
<PAGE>
CNL INCOME FUND V. LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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, 1997,
included $37,099 of such amounts, including accrued interest of $1,802.
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, 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 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.
During each of the years ended December 31, 1997, 1996 and 1995, the
Partnership declared distributions to the limited partners of $2,300,000. No
distributions have been made to the general partners to date.
F-21
<PAGE>
CNL INCOME FUND V, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................. $1,731,915 $1,428,159 $1,679,820
Depreciation for tax reporting
purposes in excess of depreciation
for financial reporting purposes..... (23,618) (28,058) (26,980)
Gain on disposition of land and
buildings for financial reporting
purposes in excess of gain for tax
reporting purposes................... (354,648) (1,606) (69)
Allowance for loss on land and
buildings............................ 250,694 239,525 --
Direct financing leases recorded as
operating leases for tax reporting
purposes............................. 42,682 46,387 42,180
Equity in earnings of unconsolidated
joint ventures for tax reporting
purposes less than equity in earnings
of unconsolidated joint ventures for
financial reporting purposes......... (1,914) (1,900) (2,926)
Allowance for doubtful accounts....... 100,149 33,254 (150,480)
Accrued rental income................. (19,527) (27,875) (30,484)
Rents paid in advance................. 1,241 (17,632) 9,505
Minority interest in timing
differences of consolidated joint
venture.............................. (41,515) (343) (370)
Disallowed real estate tax deduction.. 36,721 -- --
---------- ---------- ----------
Net income for federal income tax
purposes............................. $1,722,180 $1,669,911 $1,520,196
========== ========== ==========
</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 parent company of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, served
as president of CNL Fund Advisors, Inc. through October 1997. CNL Income Fund
Advisors, Inc. was a wholly owned subsidiary of CNL Group, Inc. until its
merger, effective January 1, 1996, with CNL Fund Advisors, Inc. During the
years ended December 31, 1997, 1996 and 1995, CNL Income Fund Advisors, Inc.
and CNL Fund Advisors, Inc. (hereinafter referred to collectively as the
"Affiliates") each performed certain services for the Partnership, as described
below.
During the years ended December 31, 1997, 1996 and 1995, certain 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 Affiliates 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 1997, 1996 and 1995.
F-22
<PAGE>
CNL INCOME FUND V. LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
Certain Affiliates are 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 Affiliates provide 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 a deferred, subordinated real estate disposition
fee of $34,500 as the result of the sale of the Property in St. Cloud, Florida.
No deferred, subordinated real estate disposition fees were incurred for the
years ended December 31, 1997 and 1995 due to the reinvestment of net sales
proceeds in additional Properties.
During the years ended December 31, 1997, 1996 and 1995, the Affiliates
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $80,145, $83,563 and $83,882 for the years
ended December 31, 1997, 1996 and 1995, respectively, for such services.
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Due to Affiliates:
Expenditures incurred on behalf of the Partnership... $ 67,106 $ 78,407
Accounting and administrative services............... 42,261 43,057
Deferred, subordinated real estate disposition fee... 34,500 34,500
-------- --------
$143,867 $155,964
======== ========
</TABLE>
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.
11. 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 share of total rental and earned income from unconsolidated
joint ventures and the properties held as tenants-in-common with affiliates),
for at least one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Shoney's, Inc.................................. $229,795 $241,119 $247,353
Golden Corral Corporation...................... 195,511 195,511 195,511
</TABLE>
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
F-23
<PAGE>
CNL INCOME FUND V. LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
earned income from joint ventures and the properties held as tenants-in-common
with affiliates) for at least one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Denny's........................................ $312,510 $310,021 $314,057
Wendy's Old Fashioned Hamburger Restaurant..... 302,253 293,817 278,127
Perkins........................................ 228,492 268,939 226,898
</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. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
12. Subsequent Events
In January 1998, the Partnership sold its property in Port Orange, Florida
to the tenant, for $1,330,000 and received net sales proceeds (net of $2,909
which represents prorated rent returned to the tenant) of $1,283,096, resulting
in a gain of approximately $350,300 for financial reporting purposes.
F-24
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to the
Company gives effect to the Acquisition, and is based on estimates and
assumptions set for the 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 the Company, the
historical combined financial information of CNL Income Fund V, Ltd., (the "CNL
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 the Company, the CNL Income
Fund, Advisor and CNL Restaurant Financial Services Group. The pro forma
balance sheet assumes that the Acquisition occurred on September 30, 1998; the
pro forma consolidated statements of earnings assume that the Property
Acquisitions (as defined on page ) and the Acquisition occurred on January 1,
1997.
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-25
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA BALANCE SHEET
September 30, 1998
<TABLE>
<CAPTION>
Historical
---------------------------------------------------- --------------------------
CNL Income CNL Financial CNL Financial Combined
APF Fund V, Ltd. Advisor Services, Inc. Corp. Portfolio
------------ ------------ ---------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Land and
buildings on
operating
leases, net..... $298,967,972 $10,855,678 $ 0 $ 0 $ 0 $309,823,650
Net investment in
direct financing
leases.......... 117,028,760 1,717,763 0 0 0 118,746,523
Mortgages and
notes
receivable...... 33,523,506 1,742,233 0 0 173,776,981 209,042,720
Other
Investments..... 16,200,316 0 200,000 0 6,561,628 22,961,944
Investment in
joint ventures.. 631,374 2,231,902 0 0 0 2,863,276
Cash and cash
equivalents..... 90,674,289 481,185 283,300 599,997 5,098,033 97,136,804
Receivables...... 575,104 61,221 7,544,985 6,824,632 517,471 15,523,413
Accrued rental
income.......... 3,071,451 221,988 0 0 0 3,293,439
Other assets..... 5,711,195 62,804 401,524 295,570 3,854,477 10,325,570
------------ ----------- ---------- ---------- ------------ ------------
Total assets.... $566,383,967 $17,374,774 $8,429,809 $7,720,199 $189,808,590 $789,717,339
============ =========== ========== ========== ============ ============
Liabilities &
Equity:
Accounts payable
and accrued
liabilities..... $ 379,496 $ 19,532 $ 449,751 $ 193,949 $1,236,138 $ 2,278,866
Accrued
construction
costs payable... 3,045,304 0 0 0 0 3,045,304
Distributions
payable......... 0 500,000 2,220,000 0 0 2,720,000
Due to related
parties......... 2,552,411 216,395 0 1,452,512 6,556,920 10,778,238
Income tax
payable......... 0 0 1,989,003 0 1,001,861 2,990,864
Line of credit... 6,765,575 0 0 0 0 6,765,575
Notes payable.... 0 0 390,398 28,462 175,528,203 175,947,063
Deferred income.. 1,015,758 0 0 0 0 1,015,758
Rents paid in
advance......... 437,497 35,485 0 0 0 472,982
Minority
interest........ 282,544 209,524 0 0 0 492,068
Common Stock..... 621,187 0 9,800 2,000 200 633,187
Additional paid
in capital...... 556,830,578 0 482,964 5,231,827 3,887,496 566,432,865
Accumulated
distributions in
excess of net
earnings........ (5,546,383) 0 2,887,893 811,449 1,597,772 (249,269)
Partners
capital......... 0 16,393,838 0 0 0 16,393,838
------------ ----------- ---------- ---------- ------------ ------------
Total
liabilities and
equity......... $566,383,967 $17,374,774 $8,429,809 $7,720,199 $189,808,590 $789,717,339
============ =========== ========== ========== ============ ============
<CAPTION>
Pro Forma
------------------------------
Adjustments Pro Forma
---------------- -------------
<S> <C> <C>
Assets:
Land and
buildings on
operating
leases, net..... $ 4,178,886 (1)
26,052,741 (2) $340,055,277
Net investment in
direct financing
leases.......... 676,694 (1) 119,423,217
Mortgages and
notes
receivable...... 849,195 (2) 209,891,915
Other
Investments..... -- 22,961,944
Investment in
joint ventures.. 801,314 (1) 3,664,590
Cash and cash
equivalents..... (292,046)(1)
(8,933,000)(1)
(26,901,936)(2) 61,009,822
Receivables...... (8,065,774)(3) 7,457,639
Accrued rental
income.......... (221,988)(1) 3,071,451
Other assets..... 42,050,078 (1)
(3,717,637)(1) 48,658,011
---------------- -------------
Total assets.... $ 26,476,527 $816,193,866
================ =============
Liabilities &
Equity:
Accounts payable
and accrued
liabilities..... $ -- $ 2,278,866
Accrued
construction
costs payable... -- 3,045,304
Distributions
payable......... -- 2,720,000
Due to related
parties......... (8,065,774)(3) 2,712,464
Income tax
payable......... (2,990,864)(4) 0
Line of credit... -- 6,765,575
Notes payable.... -- 175,947,063
Deferred income.. -- 1,015,758
Rents paid in
advance......... -- 472,982
Minority
interest........ -- 492,068
Common Stock..... 131,198 (1) 764,385
Additional paid
in capital...... 133,452,784 (1) 699,885,649
Accumulated
distributions in
excess of net
earnings........ (82,647,843)(1)
2,990,864 (4) (79,906,248)
Partners
capital......... (16,393,838)(1) 0
---------------- -------------
Total
liabilities and
equity......... $ 26,476,527 $816,193,866
================ =============
</TABLE>
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA INCOME STATEMENT
September 30, 1998
<TABLE>
<CAPTION>
Historical Pro Forma
---------------------------------------------------- ----------------------------
CNL Income CNL Financial CNL Financial Combined
APF Fund V, Ltd. Advisor Services, Inc. Corp. Portfolios Adjustments Pro Forma
----------- ------------ ----------- -------------- ------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and
earned income.. $22,947,199 $1,062,001 $ 0 $ 0 $ 0 $24,009,200 $ 9,635,208 (a)
15,531 (b) $33,659,939
Fees............ 0 0 21,405,127 5,115,549 6,817 26,527,493 (21,006,906)(c)
(2,875,906)(d) 2,644,681
Interest and
other income... 6,117,911 223,647 751 432,506 18,031,141 24,805,956 1,526,547 (e) 26,332,503
----------- ---------- ----------- ---------- ----------- ----------- ------------ -----------
Total revenue... 29,065,110 1,285,648 21,405,878 5,548,055 18,037,958 75,342,649 (12,705,526) 62,637,123
Expenses:
General and
administrative.. 1,539,004 158,764 6,701,115 4,107,311 2,597,171 15,103,365 (1,303,129)(f)
(1,415,100)(g)
(24,803)(h) 12,360,333
Advisory fees... 1,248,393 0 0 0 1,026,231 2,274,624 (2,274,624)(i) 0
Fees to
Restaurant
Financial
Services
Group.......... 0 0 256,456 1,569,202 0 1,825,658 (1,825,658)(n) 0
Interest........ 0 0 105,668 3,534 14,230,999 14,340,201 (68,670)(m) 14,271,531
State taxes..... 397,569 9,658 15,226 18,564 201,616 642,633 26,677 (j) 669,310
Depreciation
other ......... 0 0 75,607 55,056 0 130,663 0 130,663
Depreciation
property ...... 2,684,924 201,720 0 0 0 2,886,644 1,500,660 (k) 4,387,304
Amortization.... 8,096 0 55,932 138 945,299 1,009,465 1,576,878 (l) 2,586,343
----------- ---------- ----------- ---------- ----------- ----------- ------------ -----------
Total operating
expenses....... 5,877,986 370,142 7,210,004 5,753,805 19,001,316 38,213,253 (3,807,769) 34,405,484
----------- ---------- ----------- ---------- ----------- ----------- ------------ -----------
Operating
earnings
(losses)........ 23,187,124 915,506 14,195,874 (205,750) (963,358) 37,129,396 (8,897,757) 28,231,639
Equity in
earnings of
joint
ventures/minority
interest....... (23,271) 125,823 0 12,452 0 115,004 0 115,004
Gain on sale of
properties..... 0 443,443 0 0 0 443,443 0 443,443
Gain on
securitization.. 0 0 0 0 3,018,268 3,018,268 0 3,018,268
Provision for
loss on
properties..... 0 (273,141) 0 0 0 (273,141) 0 (273,141)
----------- ---------- ----------- ---------- ----------- ----------- ------------ -----------
Net earnings
(losses) before
income taxes.... 23,163,853 1,211,631 14,195,874 (193,298) 2,054,910 40,432,970 (8,897,757) 31,535,213
Provision
(credit) for
federal income
taxes.......... 0 0 5,607,415 (81,229) 789,895 6,316,081 (6,316,081)(o) 0
----------- ---------- ----------- ---------- ----------- ----------- ------------ -----------
Net income....... $23,163,853 $1,211,631 $ 8,588,459 $ (112,069) $ 1,265,015 $34,116,889 $ (2,581,676) $31,535,213
=========== ========== =========== ========== =========== =========== ============ ===========
Earnings per
share........... $ 0.49 $ 0.44
=========== ===========
Shares
outstanding:
Weighted
average........ 47,633,909 71,739,604(p)
=========== ===========
End of period... 62,118,679 76,438,506
=========== ===========
</TABLE>
F-27
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA INCOME STATEMENT
For the year ended December 31, 1997
<TABLE>
<CAPTION>
Historical Pro Forma
----------------------------------------------------------------------------- ---------------------------
CNL Income CNL Financial CNL Financial Combined
APF Fund V, Ltd. Advisor Services, Inc. Corp. Portfolios Adjustments Pro Forma
----------- ------------ ---------- -------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and
earned income.. $15,490,615 $1,734,630 $ 0 $ 0 $ 0 $17,225,245 $24,048,982 (a)
14,899 (b) $41,289,126
Fees............ 0 0 8,310,836 5,965,110 73,704 14,349,650 (9,069,522)(c)
(2,662,141)(d) 2,617,987
Interest and
other income... 3,967,318 302,503 165,569 0 10,932,843 15,368,233 249,395 (e) 15,617,628
----------- ---------- ---------- ---------- ---------- ----------- ----------- -----------
Total Revenue... 19,457,933 2,037,133 8,476,405 5,965,110 11,006,547 46,943,128 12,581,613 59,524,741
Expenses:
General and
administrative.. 1,010,725 238,144 4,266,169 1,889,904 828,848 8,233,790 (734,757)(f)
(1,619,238)(g)
(33,890)(h) 5,845,905
Advisory fees... 804,879 0 0 0 1,802,532 2,607,411 (2,607,411)(i) 0
Fees to
Restaurant
Financial
Services
Group.......... 0 0 151,041 594,041 0 745,082 (745,082)(n) 0
Interest........ 0 0 162,153 183,315 8,320,000 8,665,468 (81,594)(m) 8,583,874
State taxes..... 251,358 11,897 12,084 1,294 1,600 278,233 10,574 (j) 288,807
Depreciation--
other ......... 0 0 48,490 14,637 0 63,127 -- 63,127
Depreciation--
property ...... 1,784,269 324,431 0 0 0 2,108,700 3,149,293 (k) 5,257,993
Amortization.... 10,793 0 18,093 61,324 916,577 1,006,787 2,102,504 (l) 3,109,291
----------- ---------- ---------- ---------- ---------- ----------- ----------- -----------
Total operating
expenses....... 3,862,024 574,472 4,658,030 2,744,515 11,869,557 23,708,598 (559,601) 23,148,997
----------- ---------- ---------- ---------- ---------- ----------- ----------- -----------
Operating
earnings
(losses)........ 15,595,909 1,462,661 3,818,375 3,220,595 (863,010) 23,234,530 13,141,214 36,375,744
Equity in
earnings of
joint
ventures/minority
interest....... (31,453) 110,637 0 (126,627) 0 (47,443) -- (47,443)
Gain on sale of
properties..... 0 409,311 0 0 0 409,311 -- 409,311
Provision for
loss on
properties..... 0 (250,694) 0 0 0 (250,694) -- (250,694)
----------- ---------- ---------- ---------- ---------- ----------- ----------- -----------
Net earnings
before income
taxes........... 15,564,456 1,731,915 3,818,375 3,093,968 (863,010) 23,345,704 13,141,214 36,486,918
Provision
(credit) for
federal income
taxes.......... 0 0 1,508,258 1,272,133 (317,785) 2,462,606 (2,462,606)(o) 0
----------- ---------- ---------- ---------- ---------- ----------- ----------- -----------
Net earnings
(losses)........ $15,564,456 $1,731,915 $2,310,117 $1,821,835 $(545,225) $20,883,098 $15,603,820 $36,486,918
=========== ========== ========== ========== ========== =========== =========== ===========
Earnings per
share........... $ 0.66 $ 0.50
=========== ===========
Shares
outstanding:
Weighted
average........ 23,423,868 72,410,028(p)
=========== ===========
End of period... 36,192,971 72,410,028
=========== ===========
</TABLE>
F-28
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of September 30, 1998 reflects the
transactions of the acquisition of the CNL Income Fund, Advisor and CNL
Restaurant Financial Services Group (the "Acquisition Proposal") as set forth
in this Proxy Statement. The Pro Forma Statements of Earnings for the nine
months ended September 30, 1998, and for the year ended December 31, 1997, have
been prepared to reflect a) the issuance of additional shares and the property
acquisitions completed from January 1, 1997 through November 30, 1998
("Offering and Property Transactions") and b) the transactions of the
Acquisition Proposal as set forth in this Proxy Statement. This unaudited pro
forma financial information has been prepared utilizing the historical
financial statements of the Company and the historical combined financial
information of the CNL Income Fund, Advisor and CNL Restaurant Financial
Services Group and should be read in conjunction with the selected historical
financial data and accompanying notes of the Company, the CNL Income Fund,
Advisor and the CNL Restaurant Financial Services Group. The Pro Forma Balance
Sheet was prepared as if the Offering and Property Transactions and the
Acquisition Proposal occurred on September 30, 1998. The Pro Forma Statements
of Earnings were prepared as if the Property Acquisitions and the Acquisition
Proposal occurred as of January 1, 1997. The pro forma information is unaudited
and is not necessarily indicative of the consolidated operating results which
would have occurred if the Offering and Acquisition Transaction and the
Acquisition Proposal 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 Acquisition
Proposal have been made. Capitalized terms have the meanings as defined in the
Proxy Statement.
2. Method of Accounting
The acquisition of the CNL Income Fund and the CNL Restaurant Financial
Services Group will be accounted for under the purchase accounting method. The
Company 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, the Company 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 operating expense on the Company's consolidated statements of
earnings, but the Company will not deduct this expense for purposes of
calculating funds from operations due to the non-recurring and non-cash nature
of the expense.
All significant intercompany balances and transactions between the Company,
CNL Income Fund, Advisor and CNL Restaurant Financial Services Group have been
eliminated in the pro forma financial statements.
3. Adjustments to Pro Forma Balance Sheet
The following describes the pro forma adjustments to the Pro Forma Balance
Sheet as of September 30, 1998, as if the Acquisition was consummated on such
date. For purposes of the pro forma financial statements, it is assumed that at
an annual meeting of stockholders, the stockholders of the Company approved an
amendment to increase the number of authorized shares to an amount necessary to
enable the Company to issue the shares for the Acquisition.
(1) Represents the payment of $292,046 in cash and the issuance of
14,319,827 common shares in consideration for the purchase of the CNL
Income Fund, Advisor and CNL Restaurant Financial Services Group at
September 30, 1998 at a share price of $10 plus estimated transaction
costs. The acquisition of the CNL Income Fund and the CNL Restaurant
Financial Services Group has been accounted for under the purchase
accounting method and goodwill was recognized to the extent that the
consideration paid exceeded the fair value of the net tangible assets
acquired. As for the acquisition of the Advisor from a
F-29
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
related party, the consideration paid in excess of the fair value of the
net tangible assets received has been accounted for as costs incurred in
acquiring the Advisor from a related party because the Advisor has not been
deemed to qualify as a "business" for purposes of applying APB Opinion No.
16 "Business Combinations." Upon consummation of the Acquisition, this
expense will be recorded as an operating expense on the Company's statement
of earnings. The Company will not deduct this expense for purposes of
calculating funds from operations due to the nonrecurring and non-cash
nature of the expense. As of September 30, 1998, $249,403 of transaction
costs had been incurred by the Company.
<TABLE>
<S> <C>
CNL Income Fund........................................... $ 20,490,315
Advisor................................................... 76,000,000
CNL Restaurant Financial Services Group................... 47,000,000
------------
Total Purchase Price (cash and shares).................... 143,490,315
Less cash paid to CNL Income Fund......................... (292,046)
------------
Share consideration..................................... 143,198,269
Transaction costs of the Company.......................... 8,933,000
------------
Total costs incurred.................................... $152,131,269
============
</TABLE>
In addition to issuing the 14,319,800 shares upon deduction of the
$292,046 advanced, the Company i) used $8,933,000 in cash to pay the
transaction costs related to the Acquisition, ii) made an upward adjustment
to the CNL Income Fund carrying value of land and building on operating
leases by $4,178,886, net investment in direct financing leases by
$676,694, investment in joint venture by $801,314, made downward
adjustments to the carrying value of accrued rental income of $221,988,
made downward adjustments to other assets of $3,717,637 to adjust
historical values to fair value, iii) recorded goodwill of $42,050,078 for
the acquisition of the CNL Restaurant Financial Services Group, iv) reduced
retained earnings by $77,350,729 for the excess consideration paid over the
net assets of the Advisor and removed the historical common stock balance
of $12,000, additional paid in capital balance of $9,602,287, retained
earnings balance of $5,297,114 and partners capital balance of $16,393,838
of the CNL Income Fund, Advisor and CNL Restaurant Financial Services
Group.
(2) Represents the use of $26,901,936 in cash and cash equivalents at
September 30, 1998 to acquire $26,052,741 in properties and issue $849,195
in mortgage notes which occurred from October 1, 1998 through November 30,
1998.
(3) Represents the elimination by the CNL Income Fund of $216,395 in
related party payables recorded as receivables by the Advisor, the
elimination by the CNL Restaurant Financial Services Group of $6,641,379 in
related party payables recorded as receivables by CNL Restaurant Financial
Services Group and the elimination by the Company of $1,208,000 in related
party payables recorded as receivables by the Advisor.
(4) Represents the elimination of income taxes payable of $2,990,864
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.
F-30
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
4. Adjustments to Pro Forma Income Statements
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the nine months ended September 30, 1998, as
if the Acquisition was consummated as of January 1, 1997.
(a) Represents rental and earned income as if 1) properties that had
been previously constructed and acquired from January 1, 1998
through November 30, 1998 had been acquired and leased on January
1, 1997 and 2) properties that were developed by the Company from
January 1, 1998 through November 30, 1998 had been placed in
service on May 1, 1997 (assumes a four month development period).
<TABLE>
<S> <C>
Rental and earned income on Property
Transactions by the Company............... $9,635,208
</TABLE>
(b) Represents $15,531 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the CNL Income Fund as if the
leases had been acquired on January 1, 1997.
(c) Represents the elimination of intercompany fees between the
Company, the CNL Income Fund, the Advisor and the CNL Restaurant
Financial Services Group:
<TABLE>
<S> <C>
Origination fees......................... $ (1,569,202)
Secured equipment lease fee.............. (44,426)
Advisory fees............................ (1,722,383)
Reimbursement of administrative costs.... (289,012)
Acquisition fees......................... (15,392,193)
Underwriting fees........................ (254,945)
Administrative fees...................... (148,491)
Executive fee............................ (310,000)
Guarantee fees........................... (93,750)
Servicing fee............................ (1,014,117)
Development fees......................... (166,876)
Consulting fee........................... (1,511)
------------
Total.................................. $(21,006,906)
============
</TABLE>
(d) Represents the deferral of $2,875,906 in origination fees collected
by CNL Restaurant Financial Services Group that should be amortized
over the term of the loans originated (20 years) in accordance with
the Statement of Financial Accounting Standards #91 "Accounting for
Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases."
(e) Represents interest income of $1,318,870 earned from Other
Investments acquired and mortgage notes issued from January 1, 1998
through November 30, 1998 as if this had occurred on January 1,
1997 and the amortization of $207,677 of deferred origination fees
collected during the year ended December 31, 1997 and during the
nine months ended September 30, 1998, which were capitalized and
deferred in (d) above as if they had been collected on January 1,
1997. These deferred fees are being amortized and recorded as
interest income.
(f) Represents the elimination of intercompany expenses paid between
the Company, the CNL Income Fund, the Advisor and the CNL
Restaurant Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs..... $ (289,012)
Servicing fee............................. (1,014,117)
-----------
$(1,303,129)
===========
</TABLE>
F-31
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during
the period as if 1) costs relating to properties developed by the
Company were subject to capitalization during the entire period and
2) costs relating to properties not developed by the Company were
subject to capitalization up through the time that EITF 97-11
became effective.
<TABLE>
<S> <C>
General and administrative costs.......................... $(1,415,100)
</TABLE>
(h) Represents savings of $24,803 in professional services and
administrative expenses resulting from reporting on one combined
Company versus 22 separate entities.
(i) Represents the elimination of advisory fees between the Company,
the CNL Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Advisory fees.............................................. $(1,722,383)
Administrative fees........................................ (148,491)
Executive fee.............................................. (310,000)
Guarantee fees............................................. (93,750)
-----------
$(2,274,624)
===========
</TABLE>
(j) Represents additional income taxes of $26,677 resulting from
assuming that acquisitions from January 1, 1998 through November
30, 1998 had been acquired on January 1, 1997 and assuming that the
CNL Income Fund had operated under a REIT structure.
(k) Represents an increase in depreciation of the building portion of
the properties acquired from January 1, 1998 through November 30,
1998 as if they had been acquired on January 1, 1997 and the step
up in basis referred to in footnote (2) from acquiring the CNL
Income Fund portfolio using the straight-line method over the
estimated useful lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense......................................... $1,500,660
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of
the CNL Restaurant Financial Services Group referred to in footnote
(2)
<TABLE>
<S> <C>
Amortization of goodwill.................................... $1,576,878
</TABLE>
(m) Represents elimination of interest expense recorded for the
amortization of $350,000 in arrangement fees collected during the
year ended December 31, 1997 which were eliminated in II (d )
below.
<TABLE>
<S> <C>
Interest expense.............................................. $(68,670)
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees
incurred between the Company, the CNL Income Fund, the Advisor and
the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees........................................... $(1,569,202)
Underwriting fees.......................................... (254,945)
Consulting fee............................................. (1,511)
-----------
$(1,825,658)
===========
</TABLE>
F-32
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(o) Represents the elimination of $6,316,081 in the provision for
income taxes as a result of the Acquisition. The Company expects to
continue to qualify as a REIT and does not expect to incur federal
income taxes.
(p) Common shares issued during the period required to fund
acquisitions as if they had been acquired on January 1, 1997 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 the proposal to increase the number
of authorized common shares of the Company.
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the year ended December 31, 1997, as if the
Acquisition was consummated as of January 1, 1997.
(a) Represents rental and earned income as if 1) properties that had
been previously constructed and acquired from January 1, 1998
through November 30, 1998 had been acquired and leased on January
1, 1997 and 2) properties that were developed by the Company from
January 1, 1997 through November 30, 1998 had been placed in
service on May 1, 1997 (assumes a four month development period).
<TABLE>
<S> <C>
Rental and earned income on Property Transactions by the
Company................................................. $24,048,982
</TABLE>
(b) Represents $14,899 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the CNL Income Fund as if the
leases had been acquired on January 1, 1997.
(c) Represents the elimination of intercompany fees between the
Company, the CNL Income Fund, the Advisor and the CNL Restaurant
Financial Services Group:
<TABLE>
<S> <C>
Origination fees.......................................... $ (594,041)
Secured equipment lease fee............................... (375,219)
Advisory fees............................................. (1,775,680)
Reimbursement of administrative costs..................... (135,769)
Acquisition fees.......................................... (3,887,483)
Underwriting fees......................................... (151,041)
Administrative fees....................................... (269,231)
Executive fee............................................. (250,000)
Guarantee fees............................................ (312,500)
Arrangement fees.......................................... (350,000)
Servicing fee............................................. (598,988)
Development fees.......................................... (369,570)
-----------
Total................................................... $(9,069,522)
===========
</TABLE>
(d) Represents the deferral of $2,662,141 in origination fees collected
by CNL Restaurant Financial Services Group that should be amortized
over the term of the loans originated (20 years) in accordance with
the Statement of Financial Accounting Standards #91 "Accounting for
Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases."
F-33
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(e) Represents the elimination of interest income of $1,931,331 earned
during the year ended December 31, 1997 assuming all monies raised
during 1997 and all cash held on January 1, 1997 was used to effect
the Acquisition on January 1, 1997, represents interest income of
$2,047,619 earned from Other Investments acquired and mortgage
notes issued from January 1, 1998 through November 30, 1998 as if
this had occurred on January 1, 1997 and the recognition of
$133,107 of origination fees collected during the year ended
December 31, 1997 which were deferred in (d) and are being
amortized and recorded as interest income.
(f) Represents the elimination of intercompany expenses paid between
the Company, the CNL Income Fund, the Advisor and the CNL
Restaurant Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs....................... $(135,769)
Servicing fee............................................... (598,988)
---------
$(734,757)
=========
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during
the period as if 1) costs relating to properties developed by the
Company were subject to capitalization during the entire period and
2) costs relating to properties not developed by the Company were
subject to capitalization up through the time that EITF 97-11
became effective.
<TABLE>
<S> <C>
General and administrative costs.......................... $(1,619,238)
</TABLE>
(h) Represents savings of $33,890 in professional services and
administrative expenses resulting from reporting on one combined
Company versus 22 separate entities.
(i) Represents the elimination of advisory fees between the Company,
the CNL Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Advisory fees.............................................. $(1,775,680)
Administrative fees........................................ (269,231)
Executive fee.............................................. (250,000)
Guarantee fees............................................. (312,500)
-----------
$(2,607,411)
===========
</TABLE>
(j) Represents additional income taxes of $10,574 resulting from
assuming that acquisitions from January 1, 1997 through November
30, 1998 had been acquired on January 1, 1997 and assuming that the
CNL Income Fund had operated under a REIT structure.
(k) Represents increase in depreciation of the building portion of the
properties acquired from January 1, 1997 through November 30, 1998
as if they had been acquired on January 1, 1997 and the step up in
basis referred to in footnote (2) from acquiring the CNL Income
Fund portfolio using the straight-line method over the estimated
useful lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense......................................... $3,149,293
</TABLE>
F-34
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(l) Represents the amortization of the goodwill on the acquisition of
the CNL Restaurant Financial Services Group referred to in footnote
(2).
<TABLE>
<S> <C>
Amortization of goodwill.................................... $2,102,504
</TABLE>
(m) Represents elimination of yearly amortization of arrangement fees
of $350,000 capitalized as deferred costs and amortized as interest
expense and the capitalization of interest expense during the
period that properties were under development.
<TABLE>
<S> <C>
Amortization of arrangement fees............................. $(24,144)
Capitalization of interest during development period......... (57,450)
--------
$(81,594)
========
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees
incurred between the Company, the CNL Income Fund, the Advisor and
the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees............................................. $(594,041)
Underwriting fees............................................ (151,041)
---------
(745,082)
=========
</TABLE>
(o) Represents the elimination of $2,462,606 in the provision for
income taxes as a result of the Acquisition. The Company expects to
continue to qualify as a REIT and does not expect to incur federal
income taxes.
(p) Common shares issued during the period were assumed to have been
issued and outstanding as of January 1, 1997. For purposes of the
proforma financial statement, it is assumed that the stockholders
approved the proposal to increase the number of authorized common
shares of the Company.
F-35
<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 eighteen 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
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.
B-1
<PAGE>
"Affiliated Group" means any affiliated group within the meaning of Code
(S)1504, or any similar group defined under a similar provision of state, local
or foreign law.
"Agreement" means this Agreement, as amended from time to time.
"APF" has the meaning set forth in the preface above.
"APF Common Shares" shall mean the shares of common stock, par value $0.01,
of APF.
"APF Indemnity Claim" has the meaning set forth in Section 12.1 below.
"APF SEC Documents" has the meaning set forth in Section 6.7 below.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms the basis for any specified
consequence.
"Business Combination" has the meaning set forth in Section 4.1(b) below.
"Cash/Note Option" has the meaning set forth in Section 4.4 below.
"Closing" has the meaning set forth in Section 2.3 below.
"CNL Income Funds" has the meaning set forth in the second paragraph of the
Recitals above.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the businesses
and affairs of the Fund, the Operating Partnership or APF, if any, that is not
already generally available to the public.
"Delaware RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Disclosure Schedule" has the meaning set forth in the first paragraph of
Article VII below.
"Dissenting Partners" has the meaning set forth in Section 4.4 below.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
tax-qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) tax-qualified defined benefit retirement
plan or arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Fairness Opinion" has the meaning set forth in the third paragraph of the
Recitals above.
"Florida RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Fund" has the meaning set forth in the preface above.
"Fund Articles of Merger" has the meaning set forth in Section 2.2 below.
"Fund Fairness Opinion" has the meaning set forth in the fifth paragraph of
the recitals above.
B-2
<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-3
<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-4
<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.
B-5
<PAGE>
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
B-6
<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 $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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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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<PAGE>
(iv) no action, suit, or proceeding is pending or, to their Knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation, or
(C) affect adversely the right of the Surviving Partnership to own its
assets and to operate its businesses (and no such injunction, judgment,
order, decree, ruling, or charge is in effect);
Notwithstanding the foregoing, APF's obligation to close as a result of a
breach of the representations and warranties contained in Section 7.24 shall
be governed solely by Section 10.2(e) below.
(b) since December 31, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of the Fund, such determination to be made in the
reasonable discretion of APF;
(c) APF and the Operating Partnership shall have received an opinion dated
as of the Closing Date from Baker and Hostetler LLP, counsel to the General
Partners and the Fund, taken as a whole, in form and substance reasonably
satisfactory to APF and the Operating Partnership;
(d) APF shall have received the Disclosure Schedule and approved it in
accordance with Section 8.14;
(e) There shall not exist an unlawful environmental condition on one or
more properties owned by the Fund, which in the opinion of a mutually
acceptable environmental engineer or consultant, would require APF to expend
in excess of $2,049,031 in order to remediate such unlawful environmental
condition and cause the subject property or properties to comply with
applicable environmental laws, ordinances, regulations or orders; and
(f) If each of the CNL Income Funds approves its respective Proposed
Acquisition, Merrill Lynch & Co. shall not have withdrawn its Fairness Opinion
issued in connection with the Merger. If a Proposed Acquisition is not
approved by the applicable CNL Income Fund, then the Special Committee of the
Board of Directors of APF shall have received a fairness opinion addressed to
APF and its stockholders from Merrill Lynch & Co. as to the fairness of the
Proposed Acquisitions that were approved by the respective CNL Income Fund,
including the consideration to be paid in connection therewith, to APF and its
stockholders from a financial point of view.
APF, the OP General Partner and the Operating Partnership may waive any
condition specified in this Section 10.2 if they execute a writing so stating
at or prior to the Closing.
10.3 Conditions to Obligation of the General Partners and the Fund. The
obligations of the General Partners and the Fund to consummate the
transactions to be performed by them in connection with the Closing are
subject to satisfaction on or prior to December 31, 1999 of the following
conditions:
(a) APF, the OP General Partner and the Operating Partnership shall have
delivered to the General Partners and the Fund a certificate to the effect
that:
(i) the representations and warranties set forth in Article VI above are
true and correct in all material respects at and as of the Closing Date;
(ii) APF, the OP General Partner and the Operating Partnership have
performed and complied with all of their covenants hereunder in all
material respects through the Closing; and
(iii) no action, suit, or proceeding is pending or, to their knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement or (B) cause any of the
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<PAGE>
transactions contemplated by this Agreement to be rescinded following
consummation (and no such injunction, judgment, order, decree, ruling, or
charge is in effect);
(b) APF shall have delivered to the Fund for distribution to the Partners
the Share Consideration pursuant to Section 4.2 and, as applicable, the cash
and Notes pursuant to Section 4.4;
(c) since September 30, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of APF;
(d) APF shall have acquired the CNL Restaurant Services Group;
(e) the General Partners shall have received Schedule 1 and approved it in
accordance with Section 8.14;
(f) the APF Common Shares shall have been approved for listing on the NYSE
subject to official notice of issuance;
(g) the General Partners shall have received an opinion dated as of the
Closing Date from Shaw Pittman Potts & Trowbridge, counsel to APF and the
Operating Partnership, in form and substance reasonably satisfactory to the
General Partners; and
(h) Legg Mason Wood Walker Incorporated shall not have withdrawn the Fund
Fairness Opinion.
The General Partners and the Fund may waive any condition specified in this
Section 10.3 if they execute a writing so stating at or prior to the Closing.
ARTICLE XI
Termination
11.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by the General Partners, the limited partners of the Fund,
the OP General Partner or the stockholders of APF, respectively, either by the
mutual written consent of APF, the OP General Partner and the General Partners
or by mutual action of the General Partners and the Boards of Directors of
each of the corporate General Partner and the OP General Partner and the
Special Committee.
11.2 Termination by Individual Parties. This Agreement may be terminated
and the Merger may be abandoned (a) by action of the Special Committee and the
Board of Directors of the OP General Partner in the event of a failure of a
condition to the obligations of APF and the Operating Partnership set forth in
Section 10.2 of this Agreement; (b) by the General Partners in the event of a
failure of a condition to the obligations of General Partners or the Fund set
forth in Section 10.3 of this Agreement; (c) any Party if the Merger shall not
have occurred by December 31, 1999 or (d) if a United States federal or state
court of competent jurisdiction or United States federal or state governmental
agency shall have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other action
shall have become final and non-appealable; provided, in the case of a
termination pursuant to clause (a) or (b) above, that the terminating party
shall not have breached in any material respect its obligations under this
Agreement in any manner that shall have proximately contributed to the
occurrence of the failure referred to in said clause.
11.3 Effect of Termination and Abandonment. In the event of termination of
this Agreement and abandonment of the Merger pursuant to this Article XI, no
Party hereto (or any of its directors or officers) shall have any liability or
further obligation to any other Party to this Agreement, except that nothing
herein will relieve any Party from liability for any breach of this Agreement
or the obligations set forth in Sections 9.4 and 13.11.
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ARTICLE XII
Indemnification
12.1 Indemnity Obligations of the General Partners and the Fund. Subject to
Sections 12.5 and 12.6 hereof, each of the General Partners severally, in
accordance with its percentage interest in the Share Consideration and limited
in amount to the value of the APF Common Shares received by it, based upon the
average per share closing price of the APF Common Shares for the first twenty
trading days after the APF Common Shares are listed on NYSE (the "20 Day
Average Price"), agree to indemnify and hold APF, the OP General Partner and
the Surviving Partnership harmless from, and to reimburse APF, the OP General
Partner and the Surviving Partnership for, any APF Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "APF Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, obligation, suit, action, fee, cost, or expense
of any nature whatsoever resulting from (i) any breach of any representation
and warranty of any of the General Partners or the Fund which is contained in
this Agreement or any Schedule, Exhibit, or certificate delivered pursuant
hereto; (ii) any breach or non-fulfillment of, or any failure to perform, any
of the covenants, agreements, or undertakings of any of the General Partners or
the Fund which are contained in or made pursuant to this Agreement; and (iii)
all interest, penalties, costs, and expenses (including, without limitation,
all reasonable fees and disbursements of counsel) arising out of or related to
any indemnification made under this Section 12.1.
12.2 Indemnity Obligations of APF, the OP General Partner and the Operating
Partnership. Subject to Sections 12.5 and 12.6 hereof, APF, the OP General
Partner and the Operating Partnership (including in its capacity as the
Surviving Partnership) hereby jointly and severally agree to indemnify and hold
each of the General Partners and the Fund harmless from, and to reimburse each
of the General Partners and the Fund for, any Fund Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "Fund Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, suit, action, fee, cost, or expense of any nature
whatsoever incurred by any of the General Partners or the Fund resulting from
(i) any breach of any representation and warranty of APF, the OP General
Partner or the Operating Partnership which is contained in this Agreement or
any Schedule, Exhibit, or certificate delivered pursuant hereto; (ii) any
breach or non-fulfillment of, or failure to perform, any of the covenants,
agreements, or undertakings of APF, the OP General Partner and the Operating
Partnership which are contained in or made pursuant to the terms and conditions
of this Agreement; and (iii) all interest, penalties, costs, and expenses
(including, without limitation, all reasonable fees and disbursements of
counsel) arising out of or related to any indemnification made under this
Section 12.2.
12.3 Appointment of Representative. James M. Seneff, Jr. is hereby appointed
as the exclusive agent of the General Partners and the Fund to act on their
behalf with respect to any and all Fund Indemnity Claims and any and all APF
Indemnity Claims arising under this Agreement or such other representative as
may be hereafter appointed by the General Partners. Such agent is herein
referred to as the "Representative." The Representative shall take, and the
General Partners agree that the Representative shall take, any and all actions
which the Representative believes are necessary or appropriate under this
Agreement for and on behalf of the General Partners and the Fund, as fully as
if such parties were acting on their own behalf, including, without limitation,
asserting Fund Indemnity Claims against APF, the OP General Partner and the
Operating Partnership, defending all APF Indemnity Claims, consenting to,
compromising, or settling all Fund Indemnity Claims and APF Indemnity Claims,
conducting negotiations with APF, the OP General Partner and the Operating
Partnership and their representatives regarding such claims, taking any and all
other actions specified in or contemplated by this Agreement and engaging
counsel, accountants, or other representatives in connection with the foregoing
matters. APF, the OP General Partner and the Operating Partnership shall have
the right to rely upon all actions taken or omitted to be taken by the
Representative pursuant to this Agreement, all of which actions or omissions
shall be legally binding upon each of the General Partners and the Fund. The
Representative, acting pursuant to this Section 12.3, shall not be liable to
any of the General Partners or the Fund for any act or omission, except in
connection with any act or omission that was the result of the Representative's
bad faith or gross negligence.
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12.4 Notification of Claims. Subject to the provisions of Section 12.5, in
the event of the occurrence of an event which any Party asserts constitutes an
APF Indemnity Claim or a Fund Indemnity Claim, as applicable, such Party shall
provide the indemnifying party with prompt notice of such event and shall
otherwise make available to the indemnifying party all relevant information
which is material to the claim and which is in the possession of the
indemnified party. If such event involves the claim of any third party (a
"Third-Party Claim"), the indemnifying party shall have the right to elect to
join in the defense, settlement, adjustment, or compromise of any such Third-
Party Claim, and to employ counsel to assist such indemnifying party in
connection with the handling of such claim, at the sole expense of the
indemnifying party, and no such claim shall be settled, adjusted or
compromised, or the defense thereof terminated, without the prior consent of
the indemnifying party unless and until the indemnifying party shall have
failed, after the lapse of a reasonable period of time, but in no event more
than 30 days after written notice to it of the Third-Party Claim, to join in
the defense, settlement, adjustment, or compromise of the same. An indemnified
party's failure to give timely notice or to furnish the indemnifying party with
any relevant data and documents in connection with any Third-Party Claim shall
not constitute a defense (in part or in whole) to any claim for indemnification
by such Party, except and only to the extent that such failure shall result in
any material prejudice to the indemnifying party. Any indemnifying party may
elect, at such Party's sole expense, to assume control of the defense,
settlement, adjustment, or compromise of any Third-Party Claim, with counsel
reasonably acceptable to the indemnified parties, insofar as such claim relates
to the liability of the indemnifying party, provided that such indemnifying
party shall obtain the consent of all indemnified parties before entering into
any settlement, adjustment, or compromise of such claims, or ceasing to defend
against such claims, unless such settlement is a cash settlement and contains
an unconditional release of the indemnified party from all existing and future
claims with respect to the matter being contested. In connection with any
Third-Party Claim, the indemnified party, or the indemnifying party if it has
assumed the defense of such claim pursuant to the preceding sentence, shall
diligently pursue the defense of such Third-Party Claim.
12.5 Survival. All representations and warranties, and, except as otherwise
provided in this Agreement, all covenants and agreements of the parties
contained in or made pursuant to this Agreement, and the rights of the parties
to seek indemnification with respect thereto, shall survive until eighteen
months from the Closing Date; provided, however, the representations and
warranties contained in Sections 6.2, 6.3 and 7.11 shall survive until the
expiration of the applicable statute of limitations with respect to the matters
covered thereby. No claim shall be made after the applicable survival period.
12.6 Limitations. Notwithstanding the foregoing, any claim by an indemnified
party against any indemnifying party under this Agreement shall be payable by
the indemnifying party only in the event, and to the extent, that the
accumulated amount of the claims in respect of such indemnifying party's
obligations to indemnify under this Agreement shall and the other claims
described in Article XIII exceed in the aggregate the dollar amount specified
in Article XIII. As to APF Indemnity Claims, the liability of each General
Partner shall be limited as provided in Article XIII.
12.7 Exclusive Provisions; No Rescission. Except as set forth in this
Agreement, no Party hereto is making any representation, warranty, covenant, or
agreement with respect to the matters contained herein. Anything herein to the
contrary notwithstanding, no breach of any representation, warranty, covenant,
or agreement contained herein or in any certificate or other document delivered
pursuant hereto relating to the Merger shall give rise to any right on the part
of any Party hereto, after the consummation of the Merger, to rescind this
Agreement or the transactions contemplated by this Agreement. Following the
consummation of the Merger, the rights of the Parties under the provisions of
this Article XII shall be the sole and exclusive remedy available to the
Parties with respect to claims, assertions, events, or proceedings arising out
of or relating to the Merger.
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ARTICLE XIII
Limitation of Liability
13.1 Threshold. Notwithstanding anything to the contrary stated in this
Agreement, in no event (i) shall the General Partners or any of them have any
liability to APF and/or the OP General Partner and the Surviving Partnership on
account of any APF Indemnity Claim or for any claim for breach of warranty or
for misrepresentation, or any other claim whatsoever arising under this
Agreement or in connection with the transaction contemplated herein
(individually a "Claim" and collectively, "Claims") or for any loss, damage,
deficiency, liability, obligation, suit, action, judgment, fee, cost or expense
of any nature whatsoever directly resulting from Claims (collectively,
"Losses") unless, until and only to the extent that the accumulated amount of
all Losses exceeds the amount of $204,903 in the aggregate (the "Threshold")
nor (ii) shall the individual or aggregate liability of the General Partners on
account of Claims and Losses exceed the value of APF Common Shares actually
issued to the General Partners in the Merger valued at the 20 Day Average
Price. To the extent that any Claim is asserted against more than one General
Partner, each General Partner shall be liable only for such General Partner's
proportionate share of the Claim based on the percentage that the APF Common
Shares received by such General Partner in the Merger is of the total APF
Commons Shares comprising the Share Consideration. Any Claim against a General
Partner, including an APF Indemnity Claim, may be satisfied by such General
Partner, in its sole discretion, by surrendering to the claimant(s) APF Common
Shares at a value equal to the closing price per share of such shares on the
NYSE on the last trading day preceding the date such APF Common Shares are
surrendered.
13.2 Special Indemnification. APF agrees to indemnify, defend and hold
harmless the General Partners against any loss, damage, deficiency, liability,
obligation, suit, action, judgment, fee, cost or expense of any nature
whatsoever, including reasonable attorneys' fees, arising after the Effective
Time that would have arisen in their capacity as General Partners of the Fund
had the Merger not been consummated and that are the result of APF's alleged
actions or inactions. The Threshold described in Section 13.1 above shall not
apply to APF obligations to indemnify the General Partners pursuant to this
Section 13.2.
ARTICLE XIV
Miscellaneous
14.1 Press Releases and Public Announcements. No Party shall issue any press
release or make any public announcement relating to the subject matter of this
Agreement prior to the Closing without the prior written approval of APF and
the General Partners; provided, however, that any Party may make any public
disclosure it believes in good faith is required by applicable law or any
listing or trading agreement concerning its publicly-traded securities (in
which case the disclosing Party will use its best efforts to advise the other
Parties prior to making the disclosure).
14.2 No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
14.3 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
14.4 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior
written approval of APF and the General Partners.
14.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
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14.6 Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.7 Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given, as of the
date two business days after mailing, if it is sent by registered or certified
mail, return receipt requested, postage prepaid, and addressed to the intended
recipient as set forth below:
If to the Fund or the General Partners:
c/o James M. Seneff, Jr.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 423-2894
With copy to:
Baker & Hostetler LLP
Sun Trust Center, Suite 2300
200 South Orange Avenue
Orlando, Florida 32801
Attn: Kenneth C. Wright, Esq.
Telecopy: (407) 841-0168
If to APF or the Operating Partnership:
Curtis B. McWilliams
Executive Vice President
CNL American Properties, Inc.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 650-1000
With copy to:
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Attn: John M. McDonald, Esq.
Telecopy: (202) 663-8007
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth
above using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving the other Parties notice in the manner herein set forth.
14.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of Florida
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
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<PAGE>
14.9 Amendments and Waivers. No amendment of any provision of this Agreement
shall be valid unless the same shall be in writing and signed by APF, the OP
General Partner and the General Partners. No waiver by any Party of any
default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or
subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
14.10 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
14.11 Expenses. If the Closing occurs, APF will bear all costs and expenses
of the Parties incurred in connection with this Agreement and the transactions
contemplated hereby to the extent not already paid by the Fund or the General
Partners. If the Closing does not occur, APF, the OP General Partner and the
Operating Partnership will bear their own costs and expenses (including legal
fees and expenses) incurred in connection with this Agreement and the
transactions contemplated hereby, and the General Partners and the Fund will
divide their costs and expenses (including legal fees and expenses) as follows:
(i) the Fund shall bear that percentage of the costs and expenses equal to the
percentage obtained by dividing the number of Fund votes in favor of the Merger
by the sum of the total number of votes cast and the total number of
abstentions and (ii) the General Partners shall bear the remainder of the costs
and expenses.
14.12 Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.
14.13 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
14.14 Specific Performance. Each of the Parties acknowledges and agrees that
the other Parties would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Parties shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter (subject to the provisions set
forth in Section 13.15 below), in addition to any other remedy to which they
may be entitled, at law or in equity.
14.15 Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in and for Orange County,
Florida, in any action or proceeding arising out of or relating to this
Agreement and agrees that all claims in respect of the action or proceeding may
be heard and determined in any such court.
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<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 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 Prospectus/Consent Solicitation Statement.
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.
OVERVIEW
Pursuant to the Prospectus/Consent Solicitation Statement and this
Supplement, you are being asked to approve the Acquisition of your Income Fund
by APF. Your Income Fund is one of 18 limited partnerships (which we refer to
collectively as the Funds) that APF is seeking to acquire. Supplements have
also been prepared for each of the other Funds, copies of which may be obtained
without charge to 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 (or a REIT), formed in
1994, whose primary business, like that of the Funds, is the ownership of
restaurant properties leased to operators of national and regional restaurant
chains on a triple-net lease basis. As a full-service REIT, 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 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 shares of common stock (or APF Shares) will I receive if my Income
Fund is acquired by APF?
Your Income Fund will receive 3,730,388 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 $10.00 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
approximately 75 million APF Shares through three public offerings at offering
prices
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per APF share equal to the Exchange Value. At December 31, 1998, of the
approximately $750 million raised by APF, APF has used approximately $550
million to acquire restaurant properties and to make mortgage loans and had
approximately $120 million in uninvested proceeds which APF expects to invest
during the first quarter of 1999. The remaining proceeds were used to pay fees
and other offering expenses.
What is the required vote necessary to approve the Acquisition?
Pursuant to the terms of your Income Fund's partnership agreement, APF's
acquisition of your Income Fund may not be consummated without the approval of
greater than 50% of the outstanding 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
Fund?
Yes. Legg Mason Wood Walker, Incorporated 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 Funds, and (c) the method of allocating the APF
Shares among the Funds.
Do you, as the general partners of my Income Fund, recommend that I vote in
favor 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 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 how you want to vote, and sign
and mail it in the enclosed postage-paid return envelope as soon as possible,
so that at the Special Meeting of Limited Partners, your Units may be voted
"For" or "Against" APF's acquisition of your Income Fund. If you sign and send
in your consent form and do not indicate how you want to vote, your consent
form will be counted as a vote "For" the Acquisition. If you do not vote or you
abstain from voting, it will count as a vote "Against" the Acquisition.
In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to certain limitations. If you vote "Against" the Acquisition,
but your Income Fund is nevertheless acquired by APF, you may elect to receive
a payment (which we call the Cash/Notes Option) that is 10% in cash and 90% in
% Callable Notes due , 2006 (or Notes) based on the liquidation value
of your Income Fund, as determined by Valuation Associates, the appraisal firm
that we engaged in connection with the Acquisition. Such liquidation value will
be lower than the aggregate Exchange Value of the APF Shares offered to your
Income Fund in the Acquisition. The Notes will bear interest at a rate equal to
%, which was determined based on 120% of the applicable federal rate as of
, 1999. Please note that you may only receive the Cash/Notes Option if
you have voted "Against" the Acquisition and you elect to receive the
Cash/Notes Option on your consent form. You will receive APF Shares if your
Income Fund elects to be acquired in the Acquisition and you voted "For" the
Acquisition, or you voted "Against" the Acquisition and did not affirmatively
select the Cash/Notes Option. 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 (for example, 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 be based on the difference between the
value of the APF Shares or the tax basis of your Units. If you elect the
Cash/Notes Option, your tax will be based upon your allocable share of the gain
which will be
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<PAGE>
recognized by your Income Fund; your Income Fund's gain will generally equal
the excess, if any, of the value of the APF Shares and cash received by your
Income Fund over the tax basis of your Fund's net assets. Some of the gain may
be subject to the 25% rate of tax applicable to certain 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 $1,730. To
review the tax consequences to the Limited Partners of the Funds in greater
detail, see pages through of the Prospectus/Consent Solicitation
Statement 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 Funds acquired by APF.
Although the majority of APF's assets and the assets of the other Funds
acquired by APF are substantially similar to those of your Income Fund, the
restaurant properties owned by APF and the other 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 Funds' restaurant properties,
see "APF's Business and The Restaurant Properties--Business Objectives and
Strategies" and "--The Restaurant Properties--General" and "Business of the
Funds--Description of Restaurant Properties" in the Prospectus/Consent
Solicitation Statement.
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 Prospectus/Consent Solicitation Statement.
Investment Risks
. Uncertainty Regarding the Exchange Value and Trading Price of APF Shares
Following Listing. Your Income Fund will be receiving 3,730,388 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 is 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 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.
. Decrease in Distributions. In each of the years ended December 31, 1995, 1996
and 1997, your Income Fund made $900, $920, and $900, respectively, in
distributions per $10,000 investment to you. Based on APF's pro forma
financial information, and assuming APF acquires only your Income Fund and
that each Limited Partner of your Income receives only APF Shares, you would
have received, for the year ended December 31, 1997, $599 in distributions
per $10,000 of original investment, which is 33.4% less than the $900
distributed to you as Limited Partner during the same period. 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
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<PAGE>
stockholders for the year ended December 31, 1997 and for the nine months
ended September 30, 1998 is not necessarily indicative of the distributions
you will receive as a stockholder of APF after the Acquisition. See "Cash
Distributions to Limited Partners of Your Fund."
. Conflicts of Interest in the Acquisition; Substantial Benefits to Related
Parties. There are certain conflicts of interest inherent in the structure of
the Acquisition of your Income Fund. 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 that may or
may not be aligned with your interests as a Limited Partner of the Income
Fund or with their own positions as the general partners of your Income Fund.
Assuming only your Income Fund is acquired in the Acquisition, we will
receive 37,724 APF Shares. 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.
. Fundamental Change in Nature of 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 September 30, 1998), 399 restaurant
properties. The risks inherent in investing in an operating company such as
APF include APF's ability to invest in new restaurant properties that are not
as profitable as APF anticipated, the incurrence of substantial indebtedness
to make future acquisitions of restaurant properties which it may be unable
to repay and making mortgage loans to prospective operators of national and
regional restaurant chains which may not have the ability to repay.
As an APF stockholder, you will receive the benefits of your investment
through (i) dividend distributions on, and (ii) increases in the value of,
your APF Shares. In addition, 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
the Cash/Notes Option). An investment in APF may not outperform your
investment in the Income Fund.
. Original Investment Timeframe. 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,
2018. 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 1997 and 2002. Because your Income Fund is in the
anticipated termination timeframe, we could elect to liquidate your Income
Fund. However, we have no current plans to dispose of your Income Fund's
restaurant properties if the Limited Partners do not approve the Acquisition.
Real Estate/Business Risks
. Risk of Default on Mortgage Loans and Market Risks associated with
Securitizations. 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
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<PAGE>
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.
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), and 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 may 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.
. Risks Associated with Leverage. 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. At the time of the consummation of the Acquisition, as a
general policy, APF's Board of Directors will 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 funds from operations and its ability to make
distributions to its stockholders.
. Acquisition and Development Risks. APF plans to pursue its growth strategy
through the acquisition and development of additional restaurant properties.
To the extent that APF does pursue this growth strategy, we do not know that
it 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.
Tax Risks
. Failure of APF to Qualify as a REIT for Tax Purposes. 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
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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.
. Risks Associated with Distribution Requirements. 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 Tax Law. 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 Prospectus/Consent
Solicitation Statement.
CONSIDERATION PAID TO INCOME FUND
The following table sets forth, for your Income Fund (i) the aggregate
amount of original Limited Partner investments in each Fund less any
distributions of net sales proceeds paid to the Limited Partners of that Fund,
(ii) the original amount of Limited Partner investments in each Fund less any
distributions of net sales proceeds per average $10,000 investment, (iii) the
number of APF Shares to be paid to your Income Fund, (iv) the estimated value
of the APF Shares paid to your Income Fund, (v) the estimated Acquisition
expenses allocated to your Income Fund, (vi) the estimated value, based on the
Exchange Value, of APF Shares paid to your Income Fund after deducting
Acquisition expenses, and (vii) the estimated value, based on the Exchange
Value, of APF Shares you will receive for each $10,000 of your original
investment:
<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 Estimated Value per Average
Distributions $10,000 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) Fund(2) Fund(3) Expenses Expenses(3) Investment(3)
- ------------- ------------- ---------- ---------- ----------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$35,000,000 $10,000 $3,730,388 $37,303,880 $426,713 $36,877,167 $10,429
</TABLE>
- --------
(1) Income Fund has had no distributions of net sales proceeds.
(2) The APF Shares payable to each Fund as set forth in this chart will not
change if APF acquires fewer than all of the Funds in the Acquisition. This
number assumes that none of the Limited Partners of the Fund has elected
the Cash/Notes Option.
(3) 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.
Upon completion of the Acquisition of your Income Fund, the operations and
existence of your Income Fund will cease. For more detailed information, see
"The Acquisition" in the Prospectus/Consent Solicitation Statement. If your
Income Fund does not approve the Acquisition, we do not contemplate that your
Income
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Fund would be liquidated in the near future. The Acquisition, however, does not
result in an all-cash payment to you in the liquidation of your investment. For
example, if you are eligible for and choose the Cash/Notes Option, you become a
Noteholder of APF. You will have exchanged your Units for unsecured debt
obligations of APF which may not be retired in full until , 2006, a
date approximately seven years after the date the Acquisition of your Income
Fund occurs. On the other hand, if you exchange your Units for APF Shares, you
will receive an equity interest in APF whose marketability will depend upon the
market that may develop with respect to the APF Shares, which will be listed on
the NYSE.
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...................................................... $ 17,376
Appraisals and Valuation........................................ 6,950
Fairness Opinions............................................... 31,276
Registration, Listing and Filing Fees........................... --
Soliciting Dealer Fee........................................... 74,291
Financial Consulting Fees....................................... --
Environmental Fees.............................................. 43,439
Accounting and Other Fees....................................... 49,637
--------
Subtotal.................................................... 222,969
Closing Transaction Costs
Transfer Fees and Taxes......................................... 81,563
Legal Fees...................................................... 63,952
Recording Costs................................................. --
Other........................................................... 58,229
--------
Subtotal.................................................... 203,744
--------
Total........................................................... $426,713
========
</TABLE>
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
S-7
<PAGE>
80% or more in value of 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 as, in our opinion,
market conditions permit), as contemplated by the terms of the partnership
agreement.
Special Meeting to Discuss the Acquisition
We have scheduled a special meeting of the Limited Partners of your Income
Fund to discuss the solicitation materials, which include the
Prospectus/Consent Solicitation Statement, 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 (as defined below) and to explain in person our reasons
for recommending that you vote "For" the Acquisition.
VOTING PROCEDURE
The Prospectus/Consent Solicitation Statement, 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.
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 Prospectus/Consent Solicitation
Statement. A copy of the Agreement and Plan of Merger dated March 11, 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 December 31, 1999. 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.
The consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and certain 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."
S-8
<PAGE>
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 (including the
Acquisition), 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. The partnership agreement also provide 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
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, 1995, 1996 and 1997 and the nine months
ended September 30, 1998, the aggregate amounts accrued or paid by your Income
Fund 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 years presented, are shown below under "Pro Forma":
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended
----------------------- September 30,
1995 1996 1997 1998
------- ------- ------- -------------
<S> <C> <C> <C> <C>
Historical:
General Partner Distributions.......... -- -- -- --
Broker/Dealer Commissions(1)........... -- -- -- --
Due Diligence and Marketing Support
Fees.................................. -- -- -- --
Acquisition Fees....................... -- -- -- --
Asset Management Fees.................. -- -- -- --
Real Estate Disposition Fees(2)........
------- ------- ------- -------
Total historical..................... -- -- -- --
Pro Forma:
Cash Distributions on APF Shares....... $69,971 $40,555 $21,663 $17,338
Salary Compensation.................... -- -- -- --
------- ------- ------- -------
Total pro forma...................... $69,971 $40,555 $21,663 $17,338
</TABLE>
- --------
(1) A majority of the fees paid as broker-dealer commissions and due deligince
and marketing support fees were reallowed to other broker-dealers
participating in the offering of the Income Fund's Units.
(2) 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-9
<PAGE>
CASH DISTRIBUTIONS TO LIMITED PARTNERS OF YOUR 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 the Acquisition--Prices for 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>
Nine Months
Ended Sept. 30,
1998
----------------
Pro
1993 1994 1995 1996 1997 Historical Forma
---- ---- ---- ---- ---- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income............ $836 $876 $809 $793 $821 $632 $462
Distributions from Return of
Capital(1).......................... 64 24 91 127 79 43 18
---- ---- ---- ---- ---- ---- ----
Total............................ $900 $900 $900 $920 $900 $675 $480
==== ==== ==== ==== ==== ==== ====
</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 nine months ended September 30,
1998 is not necessarily indicative of the distributions you will receive as a
stockholder of APF after the Acquisition.
Assuming APF maintains its current level of debt for acquiring future
restaurant properties, the expected distribution rate per APF Share will be
8.8% (assuming a $10.00 per APF Share price based on the Exchange Value, the
annualized dividend per year is expected to be $0.88 per APF Share). Based on
the number of APF Shares that you would receive in the Acquisition per your
average $10,000 original investment and this distribution rate, you would
receive an annual distribution of approximately $918.
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 certain 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-10
<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 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 Cash/Note Option.
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, our relief 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 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 Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the Cash/Notes Option, constitutes 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 and is the best way to maximize the return on your
investment in light of the values of such consideration.
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 of Valuation Associates and
Legg Mason received fees for its services and notwithstanding that Legg Mason
has previously provided investment banking services to the Funds and to
Commercial Net Lease Realty, Inc., a former affiliate of ours. See "Reports,
Opinions and Appraisals" in the Prospectus/Consent Solicitation Statement.
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 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 cash and promissory 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.
S-11
<PAGE>
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 Cash/Notes Option.
3. Valuation of Alternatives. Based on the appraisal of the Income Fund's
restaurant properties, we estimated the value of your Income Fund as an ongoing
concern and if liquidated. 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 Fund to 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
September 30, 1998 per $10,000 original investment. Since the calculation of
the book value was done on a GAAP basis, it is not indicative of the true fair
market value of your Income Fund. This figure was compared to the (i) value of
the Fund if it commenced an orderly liquidation of its investment portfolio on
December 31, 1998, (ii) value of the Fund if it continued to operate in
accordance with its existing partnership agreement and business plans, and
(iii) estimated value of the APF Shares, based on the Exchange Value, paid to
each Fund per average $10,000 invested.
Summary of Valuations
(per $10,000 original investment)
<TABLE>
<CAPTION>
Estimated
Values of APF
Shares per
Going Average Original
GAAP Book Liquidation Concern Limited Partner
Value Value(1) Value(1) Investment(2)
--------- ----------- -------- ----------------
<S> <C> <C> <C> <C>
CNL Income Fund VI, Ltd......... $8,190 $9,727 $10,386 $10,429
</TABLE>
- --------
(1) 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.
(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.
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have an independent
obligation 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 Funds). James M. Seneff, Jr. and
Robert A. Bourne act as the individual general partners of all of the
S-12
<PAGE>
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.
Benefits to General Partners
As a result of the Acquisition (assuming only your Income Fund is acquired),
we are expected to receive certain benefits, including that we will be relieved
from certain ongoing liabilities with respect to the Funds that are acquired by
APF.
With respect to our ownership in your Income Fund, we may be issued up to
37,724 APF Shares in accordance with the terms of your Income Fund's
partnership agreement. The 37,724 APF Shares issued to us will have an
estimated value, based on the Exchange Value, of approximately $377,240
thousand.
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 Funds if the Acquisition does not occur.
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 the Cash/Notes Option, in which case you will
receive cash and 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
S-13
<PAGE>
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
Prospectus/Consent Solicitation Statement.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, the
assets (and any liabilities) of your Income Fund (if your Income Fund is
acquired by APF) will be transferred to APF in return for APF Shares and/or
cash and 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........................... $1,730
</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 Code, no gain or loss is recognized if (i)
property is transferred to a corporation by one more individuals or entities in
exchange for the stock of that corporation, and (ii) 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 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 the
Cash/Notes Option, 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 (1) 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 (2) 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 Cash/Notes Option, your Income Fund will receive APF
Shares, cash and Notes in exchange for your Income Fund's assets. Because the
principal portion of the Notes will not be due until , 2006, the
S-14
<PAGE>
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 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 (without reduction for
any selling expenses) 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 are 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, cash 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" (i.e., real property and
depreciable assets used in a trade or business and held for more than one
year). Your share of gains or losses from the sale of section 1231 assets of
your Income Fund would be combined with any other section 1231 gains and losses
that you recognize in that year. If the result is a net loss, such loss is
characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property will be taxed as ordinary income to the extent of all
prior depreciation deductions taken by your Income Fund prior to sale. In
general, you may only use up to $3,000 of capital losses in excess of capital
gains to offset ordinary income in any taxable year. Any excess loss is carried
forward to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your Income Fund recognizes will be allocated to you and the other
Limited Partners in accordance with the terms of your Income Fund's partnership
agreement. Each Limited Partner will be allocated and must report his, her or
its allocable share of such gain, if any, pursuant to these terms, regardless
of the Limited Partner's decision to receive 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 Cash/Notes Option may
recognize gain in the year of the Acquisition despite the fact that they will
receive only a small amount of cash and no publicly-traded instruments 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 the Cash/Notes Option. See "--Tax Consequences of
Liquidation and Termination of Your Fund" below.
Tax Consequences of the Liquidation and Termination of Your Fund. If your
Fund is acquired by APF, your Fund will be deemed to have liquidated and
distributed APF Shares and/or cash and 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.
S-15
<PAGE>
The APF Shares or cash and 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 pro rata 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 (determined on the closing date of the Acquisition) and your
adjusted tax basis in your Units (adjusted by your distributive share of
income, gain, loss, deduction and credit for the final taxable year of your
Income Fund (including any such items recognized by your Income Fund as a
result of the Acquisition) as well as any distributions you receive in such
final taxable year (other than the distribution of the APF Shares)). 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 cash and Notes in the Acquisition, you will recognize gain to
the extent that the amount of cash you receive in the Acquisition exceeds your
adjusted basis in your Units (adjusted by your distributive share of income,
gain, loss, deduction and credit for the final taxable year of your Income Fund
(including any such items recognized by your Income Fund as a result of the
Acquisition) as well as any distributions you receive in such final taxable
year (other than the distributions of the cash and Notes)). Your basis in the
Notes distributed to you will equal your adjusted basis in your Units, reduced
(but not below zero) by the amount of any cash distributed to you 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 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.
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 cash and 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 Prospectus/Consent Solicitation
Statement.
S-16
<PAGE>
SUMMARY SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
APF, FUNDS, ADVISOR AND CNL RESTAURANT FINANCIAL SERVICES GROUP
Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
Historical Pro Forma
--------------------------------------------------- ----------------------------------------------------
CNL
Restaurant
CNL Income Financial
Fund VI, Services Combined Pro Forma Combined Pro
APF Ltd. Advisor Group Historical Adjustments Forma
------------ ----------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating Data
Revenues:
Rental and earned
income............ $ 22,947,199 $ 2,131,665 $ -- $ -- $ 25,078,864 $ 9,635,208 (a)
36,891 (b) $ 34,750,963
Management fees.... -- -- 21,405,127 5,122,366 26,527,493 (21,010,857)(c)
(2,875,906)(d) 2,640,730
Interest and other
income............ 6,117,911 92,998 751 18,463,647 24,675,307 1,526,547 (e) 26,201,854
------------ ----------- ------------ ------------ ------------ ------------ ------------
Total revenue... 29,065,110 2,224,663 21,405,878 23,586,013 76,281,664 (12,688,117) 63, 593,547
Expenses:
General and
administrative.... 1,539,004 165,170 6,701,115 6,704,482 15,109,771 (1,307,080)(f)
(1,415,100)(g)
(38,076)(h) 12,349,515
Advisory fees...... 1,248,393 -- -- 1,026,231 2,274,624 (2,274,624)(i) --
State taxes........ 397,569 10,392 15,226 220,180 643,367 51,687 (j) 695,054
Depreciation and
amortization...... 2,693,020 344,306 131,539 1,000,493 4,169,358 3,144,465 (k)(l) 7,313,823
Interest expense... -- -- 105,668 14,234,533 14,340,201 (68,670)(m) 14,271,531
Paid to
affiliates........ -- -- 256,456 1,569,202 1,825,658 (1,825,658)(n) --
------------ ----------- ------------ ------------ ------------ ------------ ------------
Total expenses.. 5,877,986 519,868 7,210,004 24,755,121 38,362,979 (3,733,056) 34,629, 923
------------ ----------- ------------ ------------ ------------ ------------ ------------
Net earnings (loss)
before equity in
earnings of joint
ventures/minority
interests, gain
(loss) on sale of
properties, gain
on securitization
and provision
(credit) for
federal income
taxes............. 23,187,124 1,704,795 14,195,874 (1,169,108) 37,918,685 (8,955,061) 28,963,624
------------ ----------- ------------ ------------ ------------ ------------ ------------
Equity in earnings
of joint
ventures/minority
interests......... (23,271) 183,735 -- 12,452 172,916 -- 172,916
Gain (loss) on
sales of
properties........ -- 345,122 -- -- 345,122 -- 345,122
Gain on
securitization.... -- -- -- 3,018,268 3,018,268 -- 3,018,268
Provision (credit)
for federal income
taxes............. -- -- 5,607,415 708,666 6,316,081 (6,316,081)(o) --
------------ ----------- ------------ ------------ ------------ ------------ ------------
Net earnings....... $ 23,163,853 $ 2,233,652 $ 8,588,459 $ 1,152,946 $ 35,138,910 $ (2,638,980) $ 32,499,930
============ =========== ============ ============ ============ ============ ============
Other Data:
Weighted average
number of shares
of common stock
outstanding during
period............ 47,633,909 N/A N/A N/A N/A -- 73,420,519(p)
Total properties
owned at end of
period............ 357 41 N/A N/A N/A -- 398
Funds from
operations........ $ 26,408,569 $ 2,281,584 N/A N/A N/A -- $ 37,053,806
Total cash
distributions
declared.......... $ 26,460,446 $ 2,362,500 N/A N/A N/A -- $ 37,053,806
Cash distributions
declared per
$10,000
investment........ $ 572 $ 675 N/A N/A N/A -- $ 505
<CAPTION>
Historical Combined Pro Forma
September 30, 1998 Historical September 30, 1998
--------------------------------------------------- ------------ --------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data
Real estate assets,
net............... $407,663,180 $22,617,955 $ -- $ -- $430,281,135 $ 9,699,804 (q)
26,052,741 (r) $466,033,680
Mortgages/notes
receivable........ 33,523,506 -- $ -- 173,776,981 207,300,487 849,195 (r) 208,149,682
Accounts
receivable, net... 575,104 31,765 7,544,985 7,342,103 15,493,957 (7,854,629)(s) 7,639,328
Investment in/due
from joint
ventures.......... 631,374 4,848,127 -- -- 5,479,501 1,822,278 (q) 7,301,779
Total assets....... 566,383,967 29,656,542 8,429,809 197,528,789 801,999,107 31,591,260 833,590,367
Total
liabilities/minority
interest.......... 14,478,585 991,141 5,049,152 185,998,045 206,516,923 (10,845,493)(s)(t) 195,671,430
Total equity....... 551,905,382 28,665,401 3,380,657 11,530,744 595,482,184 42,436,753 (q)(t) 637,918,937
</TABLE>
- --------
S-17
<PAGE>
(a) Represents rental and earned income as if 1) properties that had been
previously constructed and acquired from January 1, 1998 through November
30, 1998 had been acquired and leased on January 1, 1997 and 2) properties
that were developed by APF from January 1, 1998 through November 30, 1998
had been placed in service on May 1, 1997 (assumes a four month development
period).
<TABLE>
<S> <C>
Rental and earned income on Property Transactions by APF...... $9,635,208
</TABLE>
(b) Represents $36,891 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, 1997.
(c) Represents the elimination of intercompany fees between APF, the Income
Fund, the Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees........................................... $ (1,569,202)
Secured equipment lease fee................................ (44,426)
Advisory fees.............................................. (1,722,383)
Reimbursement of administrative costs...................... (292,963)
Acquisition fees........................................... (15,392,193)
Underwriting fees.......................................... (254,945)
Administrative fees........................................ (148,491)
Executive fee.............................................. (310,000)
Guarantee fees............................................. (93,750)
Servicing fee.............................................. (1,014,117)
Development fees........................................... (166,876)
Consulting fee............................................. (1,511)
------------
Total.................................................. $(21,010,857)
============
</TABLE>
(d) Represents the deferral of $2,875,906 in origination fees collected by CNL
Restaurant Financial Services Group that should be amortized over the term
of the loans originated (20 years) in accordance with the Statement of
Financial Accounting Standards #91 "Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases."
(e) Represents interest income of $1,318,870 earned from Other Investments
acquired and mortgage notes issued from January 1, 1998 through November
30, 1998 as if this had occurred on January 1, 1997 and the amortization of
$207,677 of deferred origination fees collected during the year ended
December 31, 1997 and during the nine months ended September 30, 1998,
which were capitalized and deferred in (d) above as if they had been
collected on January 1, 1997. These deferred fees are being amortized and
recorded as interest income.
(f) Represents the elimination of intercompany expenses paid between APF, the
Income Fund, the Advisor and the CNL Restaurant Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs....................... $ (292,963)
Servicing fee............................................... (1,014,117)
-----------
$(1,307,080)
===========
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by APF were subject
to capitalization during the entire period and 2) costs relating to
properties not developed by APF were subject to capitalization up through
the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs............................ $(1,415,100)
</TABLE>
(h) Represents savings of $38,076 in professional services and administrative
expenses resulting from reporting on one combined company versus 22
separate entities.
(i) Represents the elimination of fees between APF, the Income Fund, the
Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Advisory fees................................................ $(1,722,383)
Administrative fees.......................................... (148,491)
Executive fee................................................ (310,000)
Guarantee fees............................................... (93,750)
-----------
$(2,274,624)
===========
</TABLE>
(j) Represents additional state taxes of $51,687 resulting from assuming that
acquisitions from January 1, 1998 through November 30, 1998 had been
acquired on January 1, 1997 and assuming that the Income Fund had operated
under a REIT structure.
S-18
<PAGE>
(k) Represents an increase in depreciation of the building portion of the
properties acquired from January 1, 1998 through November 30, 1998 as if
they had been acquired on January 1, 1997 and the step up in basis referred
to in footnote (q) from acquiring the Income Fund portfolio using the
straight-line method over the estimated useful lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense........................................... $1,579,096
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of the CNL
Restaurant Financial Services Group referred to in footnote (q).
<TABLE>
<S> <C>
Amortization of goodwill....................................... $1,565,369
</TABLE>
(m) Represents elimination of interest expense recorded for the amortization of
$350,000 in arrangement fees collected during the year ended December 31,
1997 which were eliminated in footnote (4), II (d ) in the Notes to the Pro
Forma Financial Statements attached to this Supplement.
<TABLE>
<S> <C>
Interest expense............................................... $ (68,670)
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees incurred
between APF, the Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Origination fees............................................. $(1,569,202)
Underwriting fees............................................ (254,945)
Consulting fee............................................... (1,511)
-----------
$(1,825,658)
===========
</TABLE>
(o) Represents the elimination of $6,316,081 in the provision for income taxes
as a result of the acquisition. APF expects to continue to qualify as a
REIT and does not expect to incur federal income taxes.
(p) APF Shares issued during the period required to fund acquisitions as if
they had been acquired on January 1, 1997 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 the
proposal to amend and restate APF's articles of incorporation to increase
the number of authorized APF Shares.
(q) Represents the payment of $426,713 in cash and the issuance of 15,987,717
APF Shares in consideration for the purchase of the Income Fund, Advisor
and CNL Restaurant Financial Services Group at September 30, 1998 using the
Exchange Value of $10 per APF Share plus estimated transaction costs. The
acquisitions of the Income Fund and the CNL Restaurant Financial Services
Group have been accounted for under the purchase accounting method and
goodwill was recognized to the extent that the estimated value of the
consideration paid exceeded the fair value of the net tangible assets
acquired. As for the acquisition of the Advisor from a related party, the
consideration paid in excess of the fair value of the net tangible assets
received has been accounted for as costs incurred in acquiring the Advisor
from a related party because the Advisor has not been deemed to qualify as
a "business" for purposes of applying APB Opinion No. 16 "Business
Combinations." Upon consummation of the Acquisition, this expense will be
recorded as an operating expense on APF's statement of earnings. APF will
not deduct this expense for purposes of calculating funds from operations
due to the nonrecurring and non-cash nature of the expense. As of September
30, 1998, $249,403 of transaction costs had been incurred by APF.
<TABLE>
<S> <C>
Income Fund................................................. $ 37,303,878
Advisor..................................................... 76,000,000
CNL Restaurant Financial Services Group..................... 47,000,000
------------
Total Purchase Price (cash and shares).................. 160,303,878
Less cash paid to Income Fund............................... (426,713)
------------
Share consideration..................................... 159,877,165
Transaction costs of the APF................................ 8,933,000
------------
Total costs incurred.................................... $168,810,165
============
</TABLE>
In addition, APF i) used $8,933,000 in cash to pay the transaction costs
related to the Acquisition, ii) made an upward adjustment to the Income
Fund carrying value of land and building on operating leases by $8,126,954,
net investment in direct financing leases by $1,572,850, investment in
joint venture by $1,822,278, made downward adjustments to the carrying
value of accrued rental income of $762,705, and made downward adjustments
to other assets of $3,696,959 to adjust historical values to fair value,
iii) recorded goodwill of $41,743,184 for the acquisition of the CNL
Restaurant Financial Services Group, iv) reduced retained earnings by
$76,854,474 for the excess consideration paid over the net assets of the
Advisor and removed the historical common stock balance of $12,000,
additional paid in capital balance of $9,602,287, retained earnings balance
of $5,297,114 and partners capital balance of $28,665,401 of the Income
Fund, Advisor and CNL Restaurant Financial Services Group.
S-19
<PAGE>
(r) Represents the use of $26,901,936 in cash and cash equivalents at September
30, 1998 to acquire $26,052,741 in properties and issue $849,195 in
mortgage notes which occurred from October 1, 1998 through November 30,
1998.
(s) Represents the elimination by the Income Fund of $5,250 in related party
payables recorded as receivables by the Advisor, the elimination by the CNL
Restaurant Financial Services Group of $6,641,379 in related party payables
recorded as receivables by CNL Restaurant Financial Services Group and the
elimination by APF of $1,208,000 in related party payables recorded as
receivables by the Advisor.
(t) Represents the elimination of income taxes payable of $2,990,864 from
liabilities assumed in the acquisition of the CNL Restaurant Businesses
since the acquisition agreements require that the Advisor and CNL
Restaurant Financial Services Group have no accumulated or current earnings
and profits for federal income tax purposes at the time of the acquisition.
S-20
<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>
Nine Months Ended
September 30, Year Ended December 31,
----------------------- -----------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues (1)............ $ 2,408,398 $ 2,570,652 $ 3,456,406 $ 3,565,493 $ 3,438,286
Net income (2).......... 2,233,652 2,593,029 2,899,882 2,803,601 2,861,381
Cash distributions
declared (3)........... 2,362,500 2,362,500 3,150,000 3,220,000 3,150,000
Net income per Unit (2). 31.62 36.74 41.06 39.65 40.47
Cash distributions
declared per
Unit (2)............... 33.75 33.75 45.00 46.00 45.00
Weighted average number
of Limited Partner
Units outstanding...... 70,000 70,000 70,000 70,000 70,000
<CAPTION>
September 30, December 31,
----------------------- -----------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total assets............ $29,656,542 $30,418,874 $29,993,069 $30,129,286 $30,442,314
Total partners' capital. 28,665,401 29,274,896 28,794,249 29,044,367 29,460,766
</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 nine months ended September 30, 1998 and 1997 includes
$345,122 and $626,804, respectively, from gain on sale of land and
building. Net income for the nine months ended September 30, 1997 also
includes $79,777 from loss on sale of land and building. Net income for the
year 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, 1997 and 1995, also includes
$626,804 and $103,283, respectively, from gains on sale of land and
buildings.
(3) Distributions for the year ended December 31, 1996, include a special
distribution to the Limited Partners of $70,000, which represented
cumulative excess operating reserves.
S-21
<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 September 30, 1998, the Income Fund owned 41
restaurant properties, which included 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
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 1998 and 1997, 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 $2,445,813 and $2,375,171. The increase in cash from
operations for the nine months ended September 30, 1998, is primarily a result
of changes in the Income Fund's working capital.
Other sources and uses of capital included the following items during the
nine months ended September 30, 1998.
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 paid
$125,000 during the nine months ended September 30, 1998, in renovation costs,
which had been incurred and accrued as construction costs payable at December
31, 1997.
In January 1998, the Income Fund used the net sales proceeds from the 1997
sale of several restaurant properties to acquire a restaurant property in
Overland Park, Kansas, and a restaurant property in Memphis, Tennessee, as
tenants-in-common with certain of our affiliates. In connection therewith, the
Income Fund and the affiliates entered into separate agreements whereby each
co-venturer will share in the profits and losses of each restaurant property in
proportion to its applicable percentage interest. As of September 30, 1998, the
Income Fund had contributed $558,064 and $694,806 to own a 34.74% and 46.2%
interest, respectively, in the restaurant properties in Overland Park, Kansas,
and Memphis, Tennessee, respectively.
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 $1,250,350 of the net
sales proceeds in a restaurant property in Fort Myers, Florida, with one of our
affiliates as tenants-in-common. We believe that the transaction, or a portion
thereof, relating to the sale of the restaurant property in Deland, Florida,
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.
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
S-22
<PAGE>
reporting purposes in February 1998, relating to the sale. In April 1998, the
Income Fund contributed a portion of the net sales proceeds in Melbourne Joint
Venture, with one of our affiliates, to construct and hold one restaurant
property. As of September 30, 1998, the Income Fund had contributed $314,011 to
purchase land and pay construction costs relating to the property owned by the
joint venture. The Income Fund has agreed to contribute approximately $212,300
in additional construction costs to 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 $898,094 of the net sales proceeds in Warren
Joint Venture. The Income Fund has an approximate 64% 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.
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 the partners. At September 30, 1998, the
Income Fund had $1,353,864 invested in such short-term investments as compared
to $1,614,759 at December 31, 1997. The decrease in cash and cash equivalents
during the nine months ended September 30, 1998, is primarily attributable to
the payment of construction costs accrued at December 31, 1997, relating to the
Income Fund's restaurant property located in Greensburg, Indiana, as described
above. The funds remaining at September 30, 1998, after payment of
distributions and other liabilities, will be used to meet the Income Fund's
working capital and other needs and to acquire additional restaurant
properties.
Total liabilities of the Income Fund, including distributions payable,
decreased to $847,595 at September 30, 1998, from $1,054,345 at December 31,
1997, primarily as the result of a decrease in construction costs payable as a
result of the payment during the nine months ended September 30, 1998 of
construction costs accrued at December 31, 1997, relating to the Income Fund's
restaurant property in Greensburg, Indiana, as described above. The decrease in
liabilities was also partially due to a decrease in rents paid in advance and
amounts due to related parties at September 30, 1998, as compared to December
31, 1997. We believe the Income Fund has sufficient cash on hand to meet the
Income Fund's current working capital needs.
Based on cash from operations, the Income Fund declared distributions to the
Limited Partners of $2,362,500 for each of the nine months ended September 30,
1998 and 1997 ($787,500 for each of the quarters ended September 30, 1998 and
1997). This represents distributions for each applicable nine months of $33.75
per unit ($11.25 per unit for each of the quarters ended September 30, 1998 and
1997). No distributions were made to us for the quarters and nine months ended
September 30, 1998 and 1997. No amounts distributed to the Limited Partners for
the nine months ended September 30, 1998 and 1997, 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.
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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.
We have the right, but not the obligation, to make additional capital
contributions if we deem it appropriate in connection with the operations of
the Income Fund.
The Years Ended December 31, 1997, 1996 and 1995
The Income Fund's primary source of capital for the years ended December 31,
1997, 1996 and 1995, 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 $3,156,041, $3,310,762 and
$3,222,430 for the years ended December 31, 1997, 1996 and 1995, respectively.
The decrease in cash from operations during 1997, as compared to 1996, and the
increase during 1996, as compared to 1995, are 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 items during the
years ended December 31, 1997, 1996 and 1995.
In June 1995, the Income Fund sold its restaurant property in Little Canada,
Minnesota, for $904,000 and received net sales proceeds of $899,503, resulting
in a gain of $103,283 for financial reporting purposes. This restaurant
property was originally acquired by the Income Fund in October 1989 and had a
cost of approximately $823,900, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Income Fund sold the restaurant property
for approximately $75,600 in excess of its original purchase price. In August
1995, the Income Fund reinvested $724,612 in a restaurant property in Broken
Arrow, Oklahoma. In addition, in August 1995, the Income Fund sold a small
parcel of vacant land adjacent to its restaurant property in Orlando, Florida,
for $7,500, resulting in a loss of $7,370 for financial reporting purposes. In
connection therewith, the Income Fund accepted a promissory note for $6,000.
The promissory note was collateralized by a mortgage on the restaurant
property, bore interest at a rate of nine percent per annum and was scheduled
to be collected in six monthly installments of $1,026, with collections
commencing September 1995. Receivables include $3,056 from the note at December
31, 1995. The receivable was collected in full during 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 of 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, 1997, the
Income Fund owned a 17.93% 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 and March 1997 in
accordance with the terms of the agreement, and has agreed to pay the Income
Fund the remaining balance due of approximately $90,900 in six 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
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approximately $2,100 in excess of its original purchase price. Due to the fact
that the Income Fund had recognized accrued rental income since the inception
of the lease relating to the straight-lining of future scheduled rent increases
in accordance with generally accepted accounting principles, the Income Fund
wrote off the cumulative balance of such accrued rental income at the time of
the sale of this restaurant property, resulting in a loss on land and building
of $1,706 for financial reporting purposes. Due to the fact that the straight-
lining of future rent increases over the term of the lease is a non-cash
accounting adjustment, the write-off of these amounts is a loss for financial
statement purposes only. As of December 31, 1996, the net sales proceeds of
$977,017, plus accrued interest of $739, 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 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. We believe that the transaction, or a portion thereof, relating to
the sale of the restaurant property in Dallas, Texas and the reinvestment of
the net sales proceeds qualified as a like-kind exchange transaction for
federal income tax purposes. However, 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 1997, Show Low Joint Venture, in which the Income Fund owns a 36%
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, 1997, 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 (net of $2,981 which represents amounts due to the former tenant for
prorated rent) 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 as
described above.
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 (net of $9,945 which represents amounts due to the former tenant
for prorated rent) 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. We believe that the
transaction, or a portion thereof, relating to the sale of the restaurant
property in Naples, Florida, and the reinvestment of the net sales proceeds
qualified as a like-kind exchange transaction for federal income tax purposes.
However, 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 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 (net of escrow fees of $1,750) 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. As
described above, 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. We believe that the transaction, or a
portion thereof, relating to the sale of the
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restaurant property in Plattsmouth, Nebraska, and the reinvestment of the net
sales proceeds qualified as a like-kind exchange transaction for federal income
tax purposes. However, 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 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 10% per annum, and is being
collected in 36 monthly installments. Receivables at December 31, 1997,
included $13,631 of such amounts, including accrued interest of $554. As
described above, 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 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 (net of $5,048 which represents amounts due to the former tenant for
prorated rent) 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. We believe that the
transaction, or a portion thereof, relating to the sale of the restaurant
property in Venice, Florida, and the reinvestment of the net sales proceeds
qualified as a like-kind exchange transaction for federal income tax purposes.
However, 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 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. 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 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.
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 the partners. At December 31, 1997, the
Income Fund had
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$1,614,759 invested in such short-term investments as compared to $1,127,930 at
December 31, 1996. The increase in cash and cash equivalents during 1997, is
primarily due to the receipt of $626,907 in net sales proceeds form the sale of
the restaurant property in Whitehall, Michigan in July 1997. This increase is
partially offset by a decrease in cash and cash equivalents due to the Income
Fund investing approximately $134,900 in a Bertucci's restaurant property, as
described above.
During 1997, 1996 and 1995, certain of our affiliates, incurred on behalf of
the Income Fund $82,503, $96,112 and $95,898, respectively, for certain
operating expenses. As of December 31, 1997 and 1996, the Income Fund owed
$32,019 and $2,633, respectively, to affiliates for such amounts and accounting
and administrative services. As of February 28, 1998, the Income Fund had
reimbursed the affiliates all such amounts. Other liabilities of the Income
Fund, including distributions payable, increased to $1,022,326 at December 31,
1997, from $917,704 at December 31, 1996. The increase in other liabilities is
partially attributable to the Income Fund accruing renovation costs for the
restaurant property in Greensburg, Indiana, in connection with the new lease
entered into in July 1997, as described above. In addition, the increase in
other liabilities for 1997 was due to an increase in accrued and escrowed real
estate taxes payable due to the Income Fund accruing current real estate taxes
relating to its restaurant property in Melbourne, Florida, due to the fact that
the tenant vacated the restaurant property in October 1997. Other liabilities
also increased due to an increase in rents paid in advance. The increase in
other liabilities is partially offset by a decrease 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, 1996, which was paid in January
1997 from excess operating reserves.
Based on cash from operations, and cumulative excess operating reserves for
the year ended December 31, 1996, the Income Fund declared distributions to the
Limited Partners of $3,150,000, $3,220,000 and $3,150,000 for the years ended
December 31, 1997, 1996 and 1995, respectively. This represents distributions
of $45, $46 and $45 per Unit for the years ended December 31, 1997, 1996 and
1995, respectively. No amounts distributed to the Limited Partners for the
years ended December 31, 1997, 1996 and 1995, 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.
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
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 1997, the Income Fund and its
consolidated joint venture, Caro Joint Venture, owned and leased 38 wholly-
owned restaurant properties (including four restaurant properties which were
sold in 1997), and during the nine months ended September 30, 1998, the Income
Fund and Caro Joint Venture owned and leased 35 wholly-owned restaurant
properties (including four restaurant properties which were sold in 1998) to
operators of fast-food and family-style restaurant chains. In connection
therewith, the Income Fund and Caro Joint Venture earned $2,092,304 and
$2,259,488 during the nine months ended September 30, 1998 and 1997,
respectively, in rental income from operating leases (net of adjustments to
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accrued rental income) and earned income from direct financing leases from
these restaurant properties, $708,045 and $701,591 of which was earned during
the quarters ended September 30, 1998 and 1997, respectively. The decrease in
rental and earned income for the nine months ended September 30, 1998 was
partially due to a decrease in rental and earned income as a result of the
sales of four restaurant properties during 1997 and the sales of four
restaurant properties during 1998. During the nine months ended September 30,
1998, the decrease in rental income was partially offset by an increase in
rental income, 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 and the reinvestment of the net sales
proceeds from the 1997 sales of two restaurant properties in two additional
restaurant properties, one in each of Elgin, Illinois and Manassas, Virginia,
in 1997.
The decrease in rental and earned income for the nine months ended September
30, 1998 was partially offset by an increase in rental income due to the fact
that during the nine months ended September 30, 1997, the Income Fund increased
its allowance for doubtful accounts for the restaurant property located in
Greensburg, Indiana, due to financial difficulties the tenant was experiencing.
No such allowance was recorded during the nine months ended September 30, 1998,
due to the fact that in October 1997 a new tenant began operating this
restaurant property for which rent commenced in October 1997. In addition, the
decrease in rental and earned income for the nine months ended September 30,
1998 was partially offset by the fact that during the nine months ended
September 30, 1998, the Income Fund's consolidated joint venture collected and
recognized as income past due rental amounts for which the Income Fund had
previously established an allowance for doubtful accounts.
For the nine months ended September 30, 1997, the Income Fund owned and
leased four restaurant properties indirectly through joint venture arrangements
(including one restaurant property in Show Low Joint Venture, which was sold in
January 1997) and two restaurant properties as tenants-in-common with one of
our affiliates. For the nine months ended September 30, 1998, the Income Fund
owned and leased five restaurant properties indirectly through joint venture
arrangements and five restaurant properties as tenants-in-common with certain
of our affiliates. In connection therewith, during the nine months ended
September 30, 1998 and 1997, the Income Fund earned $212,408 and $194,079,
respectively, attributable to net income earned by these joint ventures,
$94,509 and $24,723 of which was earned for the quarters ended September 30,
1998 and 1997, respectively. The increase in net income earned by joint
ventures during the quarter and nine months ended September 30, 1998, as
compared to the quarter and nine months ended September 30, 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 the restaurant properties in
Whitehall, Michigan; Plattsmouth, Nebraska and Deland, Florida, 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 the nine months ended
September 30, 1998, as compared to the nine months ended September 30, 1997, is
partially offset by the fact that in January 1997, Show Low Joint Venture, in
which the Income Fund owns a 36% 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.
During at least one of the nine months ended September 30, 1998 and 1997,
four of the Income Fund's lessees, Golden Corral Corporation, Restaurant
Management Services, Inc., Mid-America Corporation and IHOP Restaurant
Properties, 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 the rental income from restaurant
properties owned by unconsolidated joint ventures in which the Income Fund is a
co-venturer and restaurant properties owned with affiliates as tenants-in-
common). As of September 30, 1998, Golden Corral Corporation and IHOP
Restaurant Properties Inc., were each 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
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contribute more than 10% of the Income Fund's total rental income during the
remainder of 1998 and subsequent years. In addition, three restaurant chains,
Golden Corral Family Steakhouse Restaurants, IHOP and Burger King, each
accounted for more than 10% of the Income Fund's total rental income during at
least one of the nine months ended September 30, 1998 and 1997 (including the
Income Fund's consolidated joint venture and the Income Fund's share of the
rental income from the restaurant properties owned by unconsolidated joint
ventures in which the Income Fund is a co-venturer and restaurant properties
owned with affiliates as tenants-in-common). During the remainder of 1998 and
in subsequent years, it is anticipated that these three restaurant chains each
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 lessees or restaurant chains could materially affect the
Income Fund's income.
Operating expenses, including depreciation and amortization expense, were
$519,868 and $524,650 for the nine months ended September 30, 1998 and 1997,
respectively, $163,736 and $166,380 of which were incurred for the quarters
ended September 30, 1998 and 1997.
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 nine months ended September 30, 1998,
for financial reporting purposes. As a result of the sales of the restaurant
properties in Naples, Florida; Plattsmouth, Nebraska, and Venice, Florida, the
Income Fund recognized a gain of $626,804 during the quarter and nine months
ended September 30, 1997, for financial reporting purposes. The gain for the
nine months ended September 30, 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.
The Years Ended December 31, 1997, 1996 and 1995
During 1995, the Income Fund owned and leased 38 wholly-owned restaurant
properties (including one restaurant property in Little Canada, Minnesota,
which was sold in June 1995), during 1996, the Income Fund owned and leased 37
wholly-owned restaurant properties (including one restaurant property in
Dallas, Texas, which was sold in December 1996), and during 1997, the Income
Fund owned and leased 39 wholly-owned restaurant properties (including three
restaurant properties, one in each of Naples, Florida; Plattsmouth, Nebraska
and Whitehall, Michigan, which were sold in July 1997 and one restaurant
property in Venice, Florida, which was sold in September 1997). In addition,
during 1995 and 1996, the Income Fund was a co-venturer in four separate joint
ventures that each owned and leased one restaurant property, and during 1997,
the Income Fund was a co-venturer in four 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). During 1995,
the Income Fund owned and leased one restaurant property with an affiliate as
tenants-in-common, during 1996, the Income Fund owned and leased two properties
with affiliates as tenants-in-common and 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). As of December 31, 1997, the Income Fund owned, either directly, as
tenants-in-common with affiliates, 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 $38,100 to
$185,700. 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, 1997, 1996 and 1995, the Income Fund and
its consolidated joint venture, Caro Joint Venture, earned $2,897,402,
$3,333,665 and $3,207,860, 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, 1997, as compared to 1996, was
partially attributable to a decrease of approximately $159,400 during 1997, as
a result of the sales during 1997 of the restaurant properties in
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Whitehall, Michigan; Naples, Florida; Plattsmouth, Nebraska and Venice,
Florida. The decrease in rental and earned income during 1997, as compared to
1996, was partially attributable to, and the increase in rental and earned
income during 1996, as compared to 1995, was partially offset by, a decrease of
$103,100 and $6,800, respectively, of rental and earned income from the sale of
the restaurant property in Dallas, Texas in December 1996. The decrease in
rental income during 1997 was partially offset by an increase of approximately
$109,400 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 1997 was partially offset by an increase of approximately $1,600 in
rental and earned income due to the fact that the Income Fund reinvested the
net sales proceeds from the sales of the restaurant properties in Naples and
Venice, Florida in two IHOP restaurant properties in Elgin, Illinois and
Manassas, Virginia in December 1997.
The decrease in rental income during 1997, as compared to 1996, is also
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 totaling
approximately $84,500 due to financial difficulties the tenant is experiencing.
No such allowance was established during 1996. The Income Fund's consolidated
joint venture will continue to pursue collection of past due rental amounts
relating to this restaurant property and will recognize such amounts as income
if collected.
In addition, 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 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. 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 estate taxes described above in "Liquidity and Capital Resources." The
decrease in rental and earned income was slightly offset by an increase of
$14,200 in rental income from the new tenant of this restaurant property who
began operating the restaurant property after it was renovated into an Arby's
restaurant property.
In addition, rental and earned income decreased during 1997, as a result of
the Income Fund establishing an allowance for doubtful accounts during 1997
totaling 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, and the increase in rental and earned income for 1996, was
partially attributable to, 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 collect the remaining balance of the rental payment deferral
amounts as discussed above in "Liquidity and Capital Resources." The increase
in rental and earned income during 1996, as compared to 1995, was partially
attributable to the fact that during the year ended December 31, 1995, the
Income Fund established an allowance for doubtful accounts of approximately
$52,900, for rental payment deferral amounts relating to
S-30
<PAGE>
these restaurant properties deemed uncollectible. No such allowance was
established during the year ended December 31, 1996 or 1997.
Rental and earned income increased during 1996, as compared to 1995, by
approximately $43,700 due to the acquisition of a restaurant property located
in Broken Arrow, Oklahoma, in August 1995 with the net sales proceeds from the
sale of the restaurant property in Little Canada, Minnesota, in June 1995. The
increase in rental income was partially offset by a decrease of approximately
$6,800 during the year ended December 31, 1996, due to the sale of the
restaurant property in Little Canada, Minnesota, in June 1995.
In addition, the increase in rental income during 1996, as compared to 1995,
was partially attributable to an increase of approximately $35,300 during 1996,
due to the fact that in April 1995, the Income Fund entered into a new lease
for the restaurant property in Hermitage, Tennessee, for which rent commenced
in June 1995.
For the years ended December 31, 1997, 1996 and 1995, the Income Fund also
earned $147,434, $110,073 and $115,946, respectively, in contingent rental
income. The increase in contingent rental income during 1997 is primarily
attributable to increases in gross sales relating to certain restaurant
properties. The decrease in contingent rental income for 1996, as compared to
1995, is primarily attributable to the decreases in gross sales relating to
certain restaurant properties.
In addition, for the years ended December 31, 1997, 1996 and 1995, the
Income Fund earned $280,331, $97,381 and $83,483, 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 in 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 36% interest, recognized a gain
of approximately $360,000 for financial reporting purposes, as a result of the
sale of its restaurant property in January 1997, as described above in
"Liquidity and Capital Resources." 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." The increase in
net income earned by these joint ventures during 1996, as compared to 1995, is
primarily attributable to the fact that in January 1996, the Income Fund
acquired an interest in a Golden Corral restaurant property in Clinton, North
Carolina, with affiliates as tenants-in-common, as described above in
"Liquidity and Capital Resources."
During the years ended December 31, 1997, 1996 and 1995, three of the Income
Fund's lessees, Golden Corral Corporation, Restaurant Management Services, Inc.
and Mid-America Corporation, 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 the rental income
from the three restaurant properties owned by unconsolidated joint ventures in
which the Income Fund is a co-venturer and two restaurant properties owned with
affiliates as tenants-in-common). As of December 31, 1997, 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 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 three lessees each will
continue to contribute more than 10% of the Income Fund's total rental income
during 1998 and subsequent years. In addition, three restaurant chains, Golden
Corral, Hardee's and Burger King, and in 1997, an additional restaurant chain,
Denny's, each accounted for more than 10% of the Income Fund's total rental
income in 1997, 1996 and 1995 (including the Income Fund's consolidated joint
venture and the Income Fund's share of the rental income from the three
restaurant properties owned by unconsolidated joint ventures in which the
Income Fund is a co-venturer and two restaurant properties owned with
affiliates as tenants-in-common). In subsequent years, it is anticipated that
these four restaurant chains
S-31
<PAGE>
each 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 lessees or restaurant chains could materially
affect the Income Fund's income.
For the years ended 1997, 1996 and 1995, the Income Fund also earned
$119,961, $49,056 and $51,130, respectively, in interest and other income. The
increase in interest and other income during the year ended December 31, 1997,
was primarily attributable to interest earned on the net sales proceeds
received and held in escrow relating to the sales of the restaurant properties
in Dallas, Texas; Naples, Florida; Plattsmouth, Nebraska and Venice, Florida.
Operating expenses, including depreciation and amortization expense, were
$840,365, $683,163 and $672,818 for the years ended December 31, 1997, 1996 and
1995, respectively. 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 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, 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. The joint venture partners intend to continue to pursue the
collection of such amounts relating to the restaurant property in Caro,
Michigan. The increase in operating expenses during 1996, as compared to 1995,
was partially a result of an increase in accounting and administrative expenses
associated with operating the Income Fund and its restaurant properties and an
increase in insurance expense as a result of our obtaining contingent liability
and restaurant property coverage for the Income Fund beginning in May 1995.
The increase in operating expenses during 1997 was partially offset by the
decrease in depreciation expense which resulted from the sale of the restaurant
property in Dallas, Texas in December 1996, the sale of the restaurant property
in Whitehall, Michigan, in July 1997, and the sale of the restaurant property
in Venice, Florida, in September 1997. 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.
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." In addition, as a result of the sale of the
restaurant property in Little Canada, Minnesota, during 1995 the Income Fund
recognized a gain of $103,283, and as a result of the sale during 1995 of a
portion of the land of the restaurant property in Orlando, Florida, the Income
Fund recognized a loss of $7,370 for the year ended December 31, 1995, as
described 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. 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 an interested third party. The
allowance at December 31, 1997, represents 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.
S-32
<PAGE>
During the year ended December 31, 1997, the Income Fund established an
allowance for loss on land and on allowance for impairment in carrying value of
net investment in direct financing lease for its restaurant property in
Melbourne, Florida, in the amount of $158,239. The allowance represents 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."
General
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Income Fund's financial position or results of operations.
The Income Fund's leases as of September 30, 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.
The Year 2000 problem is the result of information technology systems and
embedded systems (products which are made with microprocessor (computer) chips
such as HVAC systems, physical security systems and elevators) using a two-
digit format, as opposed to four digits, to indicate the year. Such information
technology and embedded systems may be unable to properly recognize and process
date-sensitive information beginning January 1, 2000.
The Income Fund does not have any information technology systems. Certain of
our affiliates provide all services requiring the use of information technology
systems pursuant to a management agreement with the Income Fund. The
maintenance of embedded systems, if any, at the Income Fund's restaurant
properties is the responsibility of the tenants of the properties in accordance
with the terms of the Income Fund's leases. We and our affiliates have
established a team dedicated to reviewing the internal information technology
systems used in the operation of the Income Fund, and the information
technology and embedded systems and the Year 2000 compliance plans of the
Income Fund's tenants, significant suppliers, financial institutions and
transfer agent.
The information technology infrastructure of our affiliates consists of a
network of personal computers and servers that were obtained from major
suppliers. The affiliates utilize various administrative and financial software
applications on that infrastructure to perform the business functions of the
Income Fund. Our inability and that of our affiliates to identify and timely
correct material Year 2000 deficiencies in the software and/or infrastructure
could result in an interruption in, or failure of, certain of the Income Fund's
business activities or operations. Accordingly, we and our affiliates have
requested and are evaluating documentation from the suppliers of the affiliates
regarding the Year 2000 compliance of their products that are used in the
business activities or operations of the Income Fund. The costs expected to be
incurred by us and our affiliates to become Year 2000 compliant will be
incurred by us and our affiliates; therefore, these costs will have no impact
on the Income Fund's financial position or results of operations.
The Income Fund has material third party relationships with its tenants,
financial institutions and 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. If
any of these third parties are unable to meet their obligations to the Income
Fund because of the Year 2000 deficiencies, such a failure may have a material
impact on the Income Fund. Accordingly, we have requested and are evaluating
documentation from the Income Fund's tenants, financial institutions, and
transfer agent relating to their Year 2000 compliance plans. At this time, we
have not yet received sufficient certifications to be assured that the tenants,
financial
S-33
<PAGE>
institutions, and transfer agent have fully considered and mitigated any
potential material impact of the Year 2000 deficiencies. Therefore, we do not,
at this time, know of the potential costs to the Income Fund of any adverse
impact or effect of any Year 2000 deficiencies by these third parties.
We currently expect that all Year 2000 compliance testing and any necessary
remedial measures on the information technology systems used in the business
activities and operations of the Income Fund will be completed prior to June
30, 1999. Based on the progress we and our affiliates have made in identifying
and addressing the Income Fund's Year 2000 issues and the plan and timeline to
complete the compliance program, we do not foresee significant risks associated
with the Income Fund's Year 2000 compliance at this time. Because we and
affiliates are still evaluating the status of the systems used in business
activities and operations of the Income Fund and the systems of the third
parties with which the Income Fund conducts its business, we have not yet
developed a comprehensive contingency plan and are unable to identify "the most
reasonably likely worst case scenario" at this time. As we identify significant
risks related to the Income Fund's Year 2000 compliance or if the Income Fund's
Year 2000 compliance program's progress deviates substantially from the
anticipated timeline, we will develop appropriate contingency plans.
S-34
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997... F-1
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997.............................................. F-2
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997.............. F-3
Condensed Statements of Cash Flows for the Nine Months Ended September 30,
1998 and 1997............................................................ F-4
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997........................................ F-5
Report of Independent Accountants......................................... F-8
Balance Sheets as of December 31, 1997 and 1996........................... F-9
Statements of Income for the Years Ended December 31, 1997, 1996 and 1995. F-10
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995............................................................ F-11
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995..................................................................... F-12
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and 1995................................................................. F-14
Unaudited Pro Forma Financial Information................................. F-24
Unaudited Pro Forma Balance Sheet as of September 30, 1998................ F-25
Unaudited Pro Forma Income Statement for the Nine Months Ended September
30, 1998................................................................. F-26
Unaudited Pro Forma Income Statement for the Year Ended December 31, 1997. F-27
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements............................................................... F-28
</TABLE>
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $3,472,247 and
$3,327,334......................................... $18,673,683 $20,785,684
Net investment in direct financing leases........... 3,944,272 4,708,841
Investment in joint ventures........................ 4,848,127 1,130,139
Cash and cash equivalents........................... 1,353,864 1,614,759
Restricted cash..................................... -- 709,227
Receivables, less allowance for doubtful accounts of
$341,604 and $363,410.............................. 31,765 157,989
Prepaid expenses.................................... 4,463 4,235
Lease costs, less accumulated amortization of $6,768
and $5,581......................................... 10,932 12,119
Accrued rental income, less allowance for doubtful
accounts of $9,697 in 1998 and 1997................ 762,705 843,345
Other assets........................................ 26,731 26,731
----------- -----------
$29,656,542 $29,993,069
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable.................................... $ 9,130 $ 14,138
Accrued construction costs payable.................. -- 125,000
Accrued and escrowed real estate taxes payable...... 18,117 38,025
Due to related parties.............................. 5,250 32,019
Distributions payable............................... 787,500 787,500
Rents paid in advance............................... 27,598 57,663
----------- -----------
Total liabilities............................... 847,595 1,054,345
Minority interest................................... 143,546 144,475
Partners' capital................................... 28,665,401 28,794,249
----------- -----------
$29,656,542 $29,993,069
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-1
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
-------------------- ----------------------
1998 1997 1998 1997
-------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases......................... $601,109 $ 603,263 $1,884,112 $1,889,623
Adjustments to accrued rental
income......................... -- -- (155,528) --
Earned income from direct
financing leases............... 106,936 98,328 363,720 369,865
Contingent rental income........ 4,882 7,946 39,361 34,554
Interest and other income....... 25,316 43,483 92,998 76,748
-------- ---------- ---------- ----------
738,243 753,020 2,224,663 2,370,790
-------- ---------- ---------- ----------
Expenses:
General operating and
administrative................. 42,989 41,177 129,031 113,543
Bad debt expense................ -- -- 12,854 13,102
Professional services........... 6,494 6,030 23,285 17,569
Real estate taxes............... -- 1,790 -- 11,754
State and other taxes........... -- -- 10,392 8,968
Depreciation and amortization... 114,253 117,383 344,306 359,714
-------- ---------- ---------- ----------
163,736 166,380 519,868 524,650
-------- ---------- ---------- ----------
Income Before Minority Interest in
Loss (Income) of Consolidated
Joint Venture, Equity in Earnings
of Unconsolidated Joint Ventures
and Gain on Sale of Land and
Buildings........................ 574,507 586,640 1,704,795 1,846,140
Minority Interest in Loss (Income)
of Consolidated Joint Venture.... (4,133) 1,715 (28,673) 5,783
Equity in Earnings of
Unconsolidated Joint Ventures.... 94,509 24,723 212,408 194,079
Gain on Sale of Land and
Buildings........................ -- 626,804 345,122 547,027
-------- ---------- ---------- ----------
Net Income........................ $664,883 $1,239,882 $2,233,652 $2,593,029
======== ========== ========== ==========
Allocation of Net Income:
General partners.................. $ 6,649 $ 7,692 $ 20,455 $ 21,492
Limited partners.................. 658,234 1,232,190 2,213,197 2,571,537
-------- ---------- ---------- ----------
$664,883 $1,239,882 $2,233,652 $2,593,029
======== ========== ========== ==========
Net Income Per Limited Partner
Unit............................. $ 9.40 $ 17.60 $ 31.62 $ 36.74
======== ========== ========== ==========
Weighted Average Number of Limited
Partner Units Outstanding........ 70,000 70,000 70,000 70,000
======== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
September December
30, 1998 31, 1997
----------- -----------
<S> <C> <C>
General partners:
Beginning balance.................................. $ 229,363 $ 204,010
Net income......................................... 20,455 25,353
----------- -----------
249,818 229,363
----------- -----------
Limited partners:
Beginning balance.................................. 28,564,886 28,840,357
Net income......................................... 2,213,197 2,874,529
Distributions ($33.75 and $45.00 per limited
partner unit, respectively)....................... (2,362,500) (3,150,000)
----------- -----------
28,415,583 28,564,886
----------- -----------
Total partners' capital.............................. $28,665,401 $28,794,249
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Net Cash Provided by Operating Activities........ $ 2,445,813 $ 2,375,171
----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and buildings....... 2,832,253 4,003,985
Additions to land and buildings on operating
leases........................................ (125,000) (1,112,647)
Investment in joint ventures................... (3,716,209) --
Return of capital from joint venture........... -- 69,997
Decrease (increase) in restricted cash......... 697,650 (2,400,061)
Payment of lease costs......................... (3,300) (3,300)
----------- -----------
Net cash provided by (used in) investing
activities.................................. (314,606) 557,974
----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners.............. (2,362,500) (2,432,500)
Distributions to holder of minority interest... (29,602) (8,832)
----------- -----------
Net cash used in financing activities........ (2,392,102) (2,441,332)
----------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents. (260,895) 491,813
Cash and Cash Equivalents at Beginning of Period..... 1,614,759 1,127,930
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 1,353,864 $ 1,619,743
----------- -----------
Supplemental Schedule of Non-Cash Financing
Activities:
Distributions declared and unpaid at end of period. $ 787,500 $ 787,500
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, 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, 1997.
The Partnership accounts for its 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.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2. Land and Buildings
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 February 1998, the Partnership sold its property in Melbourne, Florida,
for $590,000 and received net sales proceeds of $552,910. Due to the fact that
during 1997, the Partnership recorded an allowance for loss of $158,239 for
this property, no gain or loss was recognized for financial reporting purposes
in February 1998, relating to the sale.
In February 1998, the Partnership sold its 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 Partnership recorded an allowance for loss of $181,970 for
this property, no gain or loss was recognized for financial reporting purposes
in February 1998, relating to the sale.
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 a portion
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.
F-5
<PAGE>
3. Net Investment in Direct Financing Leases
In February and June 1998, the Partnership sold its properties in Melbourne,
Florida and Bellevue, Nebraska, respectively, for which the building portions
had been classified as direct financing leases. In connection therewith, the
gross investments (minimum lease payments receivable and estimated residual
values) and unearned income relating to these properties were removed from the
accounts (see Note 2).
4. Investment in Joint Ventures
In January 1998, the Partnership contributed $558,064 and $694,806 to
acquire a 34.74% interest and a 46.2% interest, respectively, in a property in
Overland Park, Kansas, and a property in Memphis, Tennessee, respectively, as
tenants-in-common with affiliates of the general partners. In June 1998, the
Partnership contributed $1,250,350 to acquire an 85.07% interest in a property
in Fort Myers, Florida, as tenants-in-common with an affiliate 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.
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 September 30, 1998, the
Partnership had contributed $314,011 to purchase land and pay construction
costs relating to the property owned by the joint venture. The Partnership has
agreed to contribute approximately $212,300 in additional construction costs to
the joint venture. The Partnership will 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 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 September 30, 1998, the Partnership had contributed
$898,092 to the joint venture to acquire the restaurant property. As of
September 30, 1998, the Partnership owned approximately a 64 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.
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 five properties
held as tenants-in-common with affiliates at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation.................... $8,793,422 $4,568,842
Net investment in direct financing leases.... 3,338,134 911,559
Cash......................................... 31,598 7,991
Receivables.................................. 20,370 22,230
Accrued rental income........................ 215,813 160,197
Other assets................................. 1,178 414
Liabilities.................................. 181,530 7,557
Partners' capital............................ 12,218,985 5,663,676
Revenues..................................... 771,965 471,627
Gain on sale of land and building............ -- 488,372
Net income................................... 672,525 889,883
</TABLE>
The Partnership recognized income totalling $212,048 and $194,079 for the
nine months ended September 30, 1998 and 1997, respectively, from these joint
ventures, $94,509 and $24,723 of which was earned during the quarters ended
September 30, 1998 and 1997, respectively.
F-6
<PAGE>
5. 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 at least one of the nine month
periods ended September 30:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Golden Corral Corporation.............................. $515,995 $513,408
Mid-America Corporation................................ 329,639 329,639
IHOP Properties, Inc................................... 325,863 --
Restaurant Management Services, Inc.................... 312,956 376,597
</TABLE>
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 at least one of the nine month
periods ended September 30:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Golden Corral Family Steakhouse Restaurants............. $515,995 $513,408
Burger King............................................. 341,006 382,532
IHOP.................................................... 325,863 --
</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. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
F-7
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners
CNL Income Fund VI, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund VI, Ltd.
(a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. 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 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 Income Fund VI, Ltd. as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
January 24, 1998, except as to Notes 3 and 12
for which the date is February 9, 1998.
F-8
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation and allowance for loss on
land and building..................................... $20,785,684 $21,105,355
Net investment in direct financing leases, less
allowance for impairment in carrying value............ 4,708,841 4,659,024
Investment in joint ventures........................... 1,130,139 997,016
Cash and cash equivalents.............................. 1,614,759 1,127,930
Restricted cash........................................ 709,227 977,756
Receivables, less allowance for doubtful accounts of
$363,410 and $115,892................................. 157,989 174,983
Prepaid expenses....................................... 4,235 1,163
Lease costs, less accumulated amortization of $5,581
and $3,691............................................ 12,119 14,009
Accrued rental income, less allowance for doubtful
accounts of $9,697 in 1997 and 1996................... 843,345 1,045,319
Other assets........................................... 26,731 26,731
----------- -----------
$29,993,069 $30,129,286
=========== ===========
</TABLE>
<TABLE>
<S> <C> <C>
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable....................................... $ 14,138 $ 18,161
Accrued construction costs payable..................... 125,000 --
Accrued and escrowed real estate taxes payable......... 38,025 11,338
Due to related parties................................. 32,019 2,633
Distributions payable.................................. 787,500 857,500
Rents paid in advance.................................. 57,663 30,705
----------- -----------
Total liabilities.................................. 1,054,345 920,337
Minority interest...................................... 144,475 164,582
Partners' capital...................................... 28,794,249 29,044,367
----------- -----------
$29,993,069 $30,129,286
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases..... $2,448,269 $2,776,239 $2,738,218
Earned income from direct financing
leases................................. 449,133 557,426 469,642
Contingent rental income................ 147,437 110,073 115,946
Interest and other income............... 119,961 49,056 51,130
---------- ---------- ----------
3,164,800 3,492,794 3,374,936
---------- ---------- ----------
Expenses:
General operating and administrative.... 156,847 159,388 147,902
Professional services................... 25,861 32,272 27,741
Bad debt expense........................ 131,184 -- --
Real estate taxes....................... 43,676 -- --
State and other taxes................... 8,969 7,930 6,789
Depreciation and amortization........... 473,828 483,573 490,386
---------- ---------- ----------
840,365 683,163 672,818
---------- ---------- ----------
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 Buildings.................... 2,324,435 2,809,631 2,702,118
Minority Interest in Income of
Consolidated Joint Venture............... 11,275 (24,682) (20,133)
Equity in Earnings of Unconsolidated Joint
Ventures................................. 280,331 97,381 83,483
Gain (Loss) on Sale of Land and Buildings
and Net Investment in Direct Financing
Leases................................... 547,027 (1,706) 95,913
Provision for Loss on Land and Building
and Impairment in Carrying Value of Net
Investment in Direct Financing Lease..... (263,186) (77,023) --
---------- ---------- ----------
Net Income................................ $2,899,882 $2,803,601 $2,861,381
========== ========== ==========
Allocation of Net Income:
General partners........................ $ 25,353 $ 28,337 $ 28,411
Limited partners........................ 2,874,529 2,775,264 2,832,970
---------- ---------- ----------
$2,899,882 $2,803,601 $2,861,381
========== ========== ==========
Net Income Per Limited Partner Unit....... $ 41.06 $ 39.65 $ 40.47
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding........................ 70,000 70,000 70,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
General Partners Limited Partners
----------------------- --------------------------------------------------
Accumulated Accumulated Syndication
Contritions Earnings Contritions Distributions Earnings Costs Total
----------- ----------- ----------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994................... $1,000 $146,262 $35,000,000 $(16,064,226) $14,681,349 $(4,015,000) $29,749,385
Distributions to
limited partners
($45.00 per limited
partner unit)......... -- -- -- (3,150,000) -- -- (3,150,000)
Net income............. -- 28,411 -- -- 2,832,970 -- 2,861,381
------ -------- ----------- ------------ ----------- ----------- -----------
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
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-11
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants............. $ 3,097,751 $ 3,363,188 $ 3,264,527
Distributions from unconsolidated joint
ventures.............................. 144,016 114,163 95,931
Cash paid for expenses................. (180,530) (203,432) (181,153)
Interest received...................... 94,804 36,843 43,125
----------- ----------- -----------
Net cash provided by operating
activities........................... 3,156,041 3,310,762 3,222,430
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and
buildings............................. 4,003,985 982,980 899,503
Additions to land and buildings on
operating leases...................... (2,666,258) -- (25,646)
Investment in direct financing leases.. (1,057,282) -- (723,237)
Investment in joint ventures........... (521,867) (146,090) --
Return of capital from joint ventures.. 524,975 -- --
Collections on mortgage note
receivable............................ -- 3,033 2,967
Decrease (increase) in restricted cash. 279,367 (977,017) --
Payment of lease costs................. (3,300) (3,300) (3,300)
----------- ----------- -----------
Net cash provided by (used in)
investing activities................. 559,620 (140,394) 150,287
----------- ----------- -----------
Cash Flows from Financing Activities:
Reimbursement of acquisition costs paid
by related parties on behalf of the
Partnership........................... -- -- (1,375)
Distributions to limited partners...... (3,220,000) (3,150,000) (3,150,000)
Distributions to holder of minority
interest.............................. (8,832) (13,437) (26,824)
----------- ----------- -----------
Net cash used in financing activities. (3,228,832) (3,163,437) (3,178,199)
----------- ----------- -----------
Net Increase in Cash and Cash
Equivalents............................ 486,829 6,931 194,518
Cash and Cash Equivalents at Beginning
of Year................................ 1,127,930 1,120,999 926,481
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 1,614,759 $ 1,127,930 $ 1,120,999
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................. $ 2,899,882 $ 2,803,601 $ 2,861,381
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation........................... 471,938 481,683 489,480
Amortization........................... 1,890 1,890 906
Minority interest in income of
consolidated joint venture............ (11,275) 24,682 20,133
Equity in earnings of unconsolidated
joint ventures, net of distributions.. (136,315) 16,782 12,448
Loss (gain) on sale of land and
building.............................. (547,027) 1,706 (95,913)
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..... 25,880 (90,360) 44,096
Decrease (increase) in prepaid
expenses.............................. (3,072) 4,087 (2,042)
Decrease in net investment in direct
financing leases...................... 67,389 68,177 53,944
Decrease (increase) in accrued rental
income................................ 41,173 (103,935) (131,428)
Increase in accounts payable and
accrued expenses...................... 25,964 2,529 215
Increase (decrease) in due to related
parties............................... 29,470 (3,391) 5,909
Increase (decrease) in rents paid in
advance and deposits.................. 26,958 26,288 (36,699)
----------- ----------- -----------
Total adjustments..................... 256,159 507,161 361,049
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. $ 3,156,041 $ 3,310,762 $ 3,222,430
=========== =========== ===========
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Acquisition costs paid by affiliates on
behalf of the Partnership............. $ -- $ -- $ 1,375
=========== =========== ===========
Mortgage note accepted in connection
with sale of land..................... $ -- $ -- $ 6,000
=========== =========== ===========
Distributions declared and unpaid at
December 31........................... $ 787,500 $ 857,500 $ 787,500
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-12
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
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.
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. 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. 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 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.
F-13
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Investment in Joint Ventures--The Partnership accounts for its 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 and Asheville Joint Venture, and a property in Yuma, Arizona, a
property in Clinton, North Carolina, and a property in Vancouver, Washington,
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.
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.
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
F-14
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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>
1997 1996
----------- -----------
<S> <C> <C>
Land............................................ $10,046,309 $10,364,275
Buildings....................................... 14,344,114 13,983,253
----------- -----------
24,390,423 24,347,528
Less accumulated depreciation................... (3,327,334) (3,165,150)
----------- -----------
21,063,089 21,182,378
Less allowance for loss on land and building.... (277,405) (77,023)
----------- -----------
$20,785,684 $21,105,355
=========== ===========
</TABLE>
In December 1996, the Partnership sold its property in Dallas, Texas, to a
third party for $1,016,000 and received net sales proceeds of $982,980. This
property was originally acquired by the Partnership in June 1994 and had a cost
of approximately $980,900, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $2,100 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 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 Partnership reinvested the net sales
proceeds from the sale of the 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 (net of $2,981 which
represents amounts due to the former tenant for prorated rent) 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 (net
of $9,945 which represents amounts due to the former tenant for prorated rent)
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.
F-15
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
In September 1997, the Partnership sold its property in Venice, Florida, to
a third party, for $1,245,000 and received net sales proceeds (net of $5,048
which represents amounts due to the former tenant for prorated rent) 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 1996 and 1997, the Partnership recorded provisions for losses on land and
building in the amounts of $77,023 and $104,947, respectively, for financial
reporting purposes for the property in Liverpool, New York. The allowance at
December 31, 1996, represented the difference between the property's carrying
value at December 31, 1996 and the estimated net realizable value for this
property based on an anticipated sales price to an interested third party. The
allowance at December 31, 1997, represents 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 received in February 1998
from the sale of the property (see Note 12).
At December 31, 1997, the Partnership established an allowance for loss on
land in the amount of $95,435 for its property in Melbourne, Florida. 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 received in February 1998 from the sale of the
property (see Note 12).
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, 1997, 1996 and 1995, the Partnership recognized $87,094, $103,935 and
$131,428, 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, 1997:
<TABLE>
<S> <C>
1998.......................................................... $ 2,393,528
1999.......................................................... 2,396,060
2000.......................................................... 2,487,704
2001.......................................................... 2,538,767
2002.......................................................... 2,541,122
Thereafter.................................................... 14,362,769
-----------
$26,719,950
===========
</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-16
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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>
1997 1996
---------- ----------
<S> <C> <C>
Minimum lease payments receivable................. $9,313,752 $8,955,426
Estimated residual values......................... 1,655,911 1,704,299
Less unearned income.............................. (6,198,018) (6,000,701)
---------- ----------
4,771,645 4,659,024
Less allowance for impairment in carrying value... (62,804) --
---------- ----------
Net investment in direct financing leases......... $4,708,841 $4,659,024
========== ==========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998........................................................... $ 622,540
1999........................................................... 622,540
2000........................................................... 624,680
2001........................................................... 637,400
2002........................................................... 637,400
Thereafter..................................................... 6,169,192
----------
$9,313,752
==========
</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).
In addition, in July 1997, the Partnership sold its property in Plattsmouth,
Nebraska, to the tenant, for $700,000 and received net sales proceeds (net of
escrow fees paid of $1,750) 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 the (i)
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 12).
5. Investment in Joint Ventures
The Partnership has a 3.9%, a 36 percent and a 14 percent interest in the
profits and losses of Auburn Joint Venture, Show Low Joint Venture and
Asheville 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 VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
In January 1996, the Partnership acquired a property in Clinton, North
Carolina, as tenants-in-common with affiliates of the general partners. In
connection therewith, the Partnership contributed $146,090 for a 17.93%
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.
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 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 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. As of December 31,
1997, the Partnership owned a 36 percent interest in the profits and losses of
the joint venture.
As of December 31, 1996, the Partnership had a 51.67% 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, 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, 1997, the Partnership owned a 23.04% interest in the Vancouver,
Washington, property owned with affiliates as tenants-in-common.
Auburn Joint Venture, Show Low Joint Venture, Asheville 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 and 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>
1997 1996
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation......................... $4,568,842 $3,463,093
Net investment in direct financing leases......... 911,559 401,650
Cash.............................................. 7,991 11,177
Receivables....................................... 22,230 21,826
Accrued rental income............................. 160,197 191,594
Other assets...................................... 414 44,380
Liabilities....................................... 7,557 10,221
Partners' capital................................. 5,663,676 4,123,499
Revenues.......................................... 471,627 528,092
Gain on sale of land and building................. 488,372 --
Net income........................................ 889,883 436,981
</TABLE>
F-18
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Partnership recognized income totalling $280,331, $97,381, and $83,483
for the years ended December 31, 1997, 1996 and 1995, respectively, from these
joint ventures.
6. Restricted Cash
As of December 31, 1996, net sales proceeds of $977,017 from the sale of the
property in Dallas, Texas, plus accrued interest of $739, were being held in an
interest-bearing escrow account pending the release of funds by the escrow
agent to acquire an additional property. In February 1997, the escrow agent
released these funds to acquire the property in Marietta, Georgia (see Note 3).
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.
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, 1997,
included $13,631 of such amounts, including accrued interest of $554.
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, 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 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.
During the years ended December 31, 1997, 1996 and 1995 the Partnership
declared distributions to the limited partners of $3,150,000, $3,220,000 and
$3,150,000, 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)
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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................. $2,899,882 $2,803,601 $2,861,381
Depreciation for tax reporting
purposes in excess of depreciation
for financial reporting purposes..... (92,303) (104,412) (94,987)
Allowance for loss on land and
building............................. 263,186 77,023 --
Direct financing leases recorded as
operating leases for tax reporting
purposes............................. 67,392 68,177 53,944
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... (335,658) 1,706 (2,914)
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............................. (147,256) (49) (5,299)
Allowance for doubtful accounts....... 369,935 (78,517) 16,154
Accrued rental income................. (81,244) (103,935) (131,428)
Rents paid in advance................. 26,458 26,288 (36,699)
Minority interest in timing
differences of consolidated joint
venture.............................. (30,778) 1,781 (200)
---------- ---------- ----------
Net income for federal income tax
purposes............................. $2,939,614 $2,691,663 $2,659,952
========== ========== ==========
</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 parent company of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, served
as president of CNL Fund Advisors, Inc. through October 1997. CNL Income Fund
Advisors, Inc. was a wholly owned subsidiary of CNL Group, Inc. until its
merger, effective January 1, 1996, with CNL Fund Advisors, Inc. During the
years ended December 31, 1997, 1996 and 1995, CNL Income Fund Advisors, Inc.
and CNL Fund Advisors, Inc. (hereinafter referred to collectively as the
"Affiliates") each performed certain services for the Partnership, as described
below.
During the years ended December 31, 1997, 1996 and 1995, certain 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 Affiliates 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 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, 1997, 1996 and 1995.
Certain Affiliates are 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 Affiliates provide a substantial amount
of services in connection with
F-20
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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, 1997, 1996 and 1995, Affiliates provided
accounting and administrative services to the Partnership on a day-to-day
basis. The Partnership incurred $85,714, $95,420 and $81,847 for the years
ended December 31, 1997, 1996 and 1995, respectively, for such services.
The due to related parties at December 31, 1997 and 1996, totalled $32,019
and $2,633, 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 two properties
held as tenants-in-common with affiliates), for at least one of the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Corporation..................... $751,866 $758,348 $725,908
Restaurant Management Services, Inc........... 478,750 511,040 440,987
Mid-America Corporation....................... 439,519 439,519 439,519
</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 two
properties held as tenants-in-common with affiliates), for at least one of the
years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Family Steakhouse Restaurants... $751,866 $758,348 $725,908
Burger King................................... 496,487 455,764 455,820
Denny's....................................... 317,041 336,269 276,547
Hardee's...................................... 270,129 410,951 431,465
</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. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
12. Subsequent Events
In January 1998, the Partnership used the net sales proceeds from the sale
of the property in Whitehall, Michigan, to acquire a property in Overland Park,
Kansas, as tenants-in-common with affiliates of the general partners. In
connection therewith, the Partnership contributed approximately $558,900 for a
34.74% interest in such property. The Partnership will account for its
investment in this property using the equity method since the Partnership will
share control with affiliates.
F-21
<PAGE>
CNL INCOME FUND VI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
In January 1998, the Partnership used the net sales proceeds from the sale
of the property in Plattsmouth, Nebraska, to acquire a property in Memphis,
Tennessee, as tenants-in-common with affiliates of the general partners. In
connection therewith, the Partnership contributed approximately $694,800 for a
46.2% interest in such property. The Partnership will account for its
investment in this property using the equity method since the Partnership will
share control with affiliates.
In addition, in January 1998, the Partnership sold its property in Deland,
Florida, to the tenant, for $1,250,000 and received net sales proceeds of
$1,234,617, resulting in a gain of approximately $345,100 for financial
reporting purposes.
In February 1998, the Partnership sold its property in Melbourne, Florida,
for $590,000 and received net sales proceeds of $542,477, resulting in a loss
of $158,239 for financial reporting purposes which the Partnership recorded in
1997 (See Notes 3 and 4).
In February 1998, the Partnership sold its property in Liverpool, New York,
for $157,500 and received net sales proceeds of approximately $150,700,
resulting in a loss of $181,970 for financial reporting purposes which the
Partnership recorded in 1996 and in 1997 (See Note 3).
F-22
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to the
Company gives effect to the Acquisition, and is based on estimates and
assumptions set for the 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 the Company, the
historical combined financial information of CNL Income Fund VI, Ltd., (the
"CNL 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 the Company, the
CNL Income Fund, Advisor and CNL Restaurant Financial Services Group. The pro
forma balance sheet assumes that the Acquisition occurred on September 30,
1998; the pro forma consolidated statements of earnings assume that the
Property Acquisitions (as defined on page ) and the Acquisition occurred on
January 1, 1997.
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.
UNAUDITED PRO FORMA BALANCE SHEET
September 30, 1998
<TABLE>
<CAPTION>
Historical
--------------------------------------------------------------------------------
CNL Income CNL Financial CNL Financial Combined
APF Fund VI, Ltd. Advisor Services, Inc. Corp. Portfolios
------------ ------------- ---------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Land and buildings
on operating
leases, net....... $298,967,972 $18,673,683 $ 0 $ 0 $ 0 $317,641,655
Net investment in
direct financing
leases............ 117,028,760 3,944,272 0 0 0 120,973,032
Mortgages and notes
receivable........ 33,523,506 0 0 0 173,776,981 207,300,487
Other Investments.. 16,200,316 0 200,000 0 6,561,628 22,961,944
Investment in joint
ventures.......... 631,374 4,848,127 0 0 0 5,479,501
Cash and cash
equivalents....... 90,674,289 1,353,864 283,300 599,997 5,098,033 98,009,483
Receivables........ 575,104 31,765 7,544,985 6,824,632 517,471 15,493,957
Accrued rental
income............ 3,071,451 762,705 0 0 0 3,834,156
Other assets....... 5,711,195 42,126 401,524 295,570 3,854,477 10,304,892
------------ ----------- ---------- ---------- ------------ ------------
Total assets.... $566,383,967 $29,656,542 $8,429,809 $7,720,199 $189,808,590 $801,999,107
============ =========== ========== ========== ============ ============
IABILITIESL& EQUITY:
Accounts payable
and accrued
liabilities....... $ 379,496 $ 27,247 $ 449,751 $ 193,949 $ 1,236,138 $ 2,286,581
Accrued
construction costs
payable........... 3,045,304 0 0 0 0 3,045,304
Distributions
payable........... 0 787,500 2,220,000 0 0 3,007,500
Due to related
parties........... 2,552,411 5,250 0 1,452,512 6,556,920 10,567,093
Income tax payable. 0 0 1,989,003 0 1,001,861 2,990,864
Line of credit..... 6,765,575 0 0 0 0 6,765,575
Notes payable...... 0 0 390,398 28,462 175,528,203 175,947,063
Deferred income.... 1,015,758 0 0 0 0 1,015,758
Rents paid in
advance........... 437,497 27,598 0 0 0 465,095
Minority interest.. 282,544 143,546 0 0 0 426,090
Common Stock....... 621,187 0 9,800 2,000 200 633,187
Additional paid in
capital........... 556,830,578 0 482,964 5,231,827 3,887,496 566,432,865
Accumulated
distributions in
excess of net
earnings.......... (5,546,383) 0 2,887,893 811,449 1,597,772 (249,269)
Partners capital... 0 28,665,401 0 0 0 28,665,401
------------ ----------- ---------- ---------- ------------ ------------
Total
liabilities and
equity......... $566,383,967 $29,656,542 $8,429,809 $7,720,199 $189,808,590 $801,999,107
============ =========== ========== ========== ============ ============
<CAPTION>
Pro Forma
-----------------------------
Adjustments Pro Forma
--------------- -------------
<S> <C> <C>
ASSETS:
Land and buildings
on operating
leases, net....... $ 8,126,954 (1)
26,052,741 (2) $351,821,350
Net investment in
direct financing
leases............ 1,572,850 (1) 122,545,882
Mortgages and notes
receivable........ 849,195 (2) 208,149,682
Other Investments.. -- 22,961,944
Investment in joint
ventures.......... 1,822,278 (1) 7,301,779
Cash and cash
equivalents....... (426,713)(1)
(8,933,000)(1)
(26,901,936)(2) 61,747,834
Receivables........ (7,854,629)(3) 7,639,328
Accrued rental
income............ (762,705)(1) 3,071,451
Other assets....... 41,743,184 (1)
(3,696,959)(1) 48,351,117
--------------- -------------
Total assets.... $31,591,260 $833,590,367
=============== =============
IABILITIESL& EQUITY:
Accounts payable
and accrued
liabilities....... $ -- $ 2,286,581
Accrued
construction costs
payable........... -- 3,045,304
Distributions
payable........... -- 3,007,500
Due to related
parties........... (7,854,629)(3) 2,712,464
Income tax payable. (2,990,864)(4) 0
Line of credit..... -- 6,765,575
Notes payable...... -- 175,947,063
Deferred income.... -- 1,015,758
Rents paid in
advance........... -- 465,095
Minority interest.. -- 426,090
Common Stock....... 147,877 (1) 781,064
Additional paid in
capital........... 150,115,001 (1) 716,547,866
Accumulated
distributions in
excess of net
earnings.......... (82,151,588)(1)
2,990,864 (4) (79,409,993)
Partners capital... (28,665,401)(1) 0
--------------- -------------
Total
liabilities and
equity......... $31,591,260 $833,590,367
=============== =============
</TABLE>
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA INCOME STATEMENT
September 30, 1998
<TABLE>
<CAPTION>
Historical Pro Forma
----------------------------------------------------------------------- ---------------------------
CNL
CNL Income Financial CNL
Fund VI, Services, Financial Combined
APF Ltd. Advisor Inc. Corp. Portfolios Adjustments Pro Forma
----------- ---------- ----------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and earned
income............. $22,947,199 $2,131,665 $ 0 $ 0 $ 0 $25,078,864 $ 9,635,208 (a)
36,891 (b) $34,750,963
Fees............... 0 0 21,405,127 5,115,549 6,817 26,527,493 (21,010,857)(c)
(2,875,906)(d) 2,640,730
Interest and other
income............. 6,117,911 92,998 751 432,506 18,031,141 24,675,307 1,526,547 (e) 26,201,854
----------- ---------- ----------- ---------- ----------- ----------- ----------- -----------
Total revenue...... 29,065,110 2,224,663 21,405,878 5,548,055 18,037,958 76,281,664 (12,688,117) 63,593,547
Expenses:
General and
administrative..... 1,539,004 165,170 6,701,115 4,107,311 2,597,171 15,109,771 (1,307,080)(f)
(1,415,100)(g)
(38,076)(h) 12,349,515
Advisory fees...... 1,248,393 0 0 0 1,026,231 2,274,624 (2,274,624)(i) 0
Fees to Restaurant
Financial Services
Group.............. 0 0 256,456 1,569,202 0 1,825,658 (1,825,658)(n) 0
Interest........... 0 0 105,668 3,534 14,230,999 14,340,201 (68,670)(m) 14,271,531
State taxes........ 397,569 10,392 15,226 18,564 201,616 643,367 51,687 (j) 695,054
Depreciation--
other.............. 0 0 75,607 55,056 0 130,663 0 130,663
Depreciation--
property........... 2,684,924 343,117 0 0 0 3,028,041 1,579,096 (k) 4,607,137
Amortization....... 8,096 1,189 55,932 138 945,299 1,010,654 1,565,369 (l) 2,576,023
----------- ---------- ----------- ---------- ----------- ----------- ----------- -----------
Total operating
expenses........... 5,877,986 519,868 7,210,004 5,753,805 19,001,316 38,362,979 (3,733,056) 34,629,923
----------- ---------- ----------- ---------- ----------- ----------- ----------- -----------
Operating earnings
(losses)........... 23,187,124 1,704,795 14,195,874 (205,750) (963,358) 37,918,685 (8,955,061) 28,963,624
Equity in earnings
of joint
ventures/minority
interest........... (23,271) 183,735 0 12,452 0 172,916 0 172,916
Gain on sale of
properties......... 0 345,122 0 0 0 345,122 0 345,122
Gain on
securitization..... 0 0 0 0 3,018,268 3,018,268 0 3,018,268
----------- ---------- ----------- ---------- ----------- ----------- ----------- -----------
Net earnings
(losses) before
income taxes....... 23,163,853 2,233,652 14,195,874 (193,298) 2,054,910 41,454,991 (8,955,061) 32,499,930
Provision (credit)
for federal income
taxes.............. 0 0 5,607,415 (81,229) 789,895 6,316,081 (6,316,081)(o) 0
----------- ---------- ----------- ---------- ----------- ----------- ----------- -----------
Net income.......... $23,163,853 $2,233,652 $ 8,588,459 $ (112,069) $ 1,265,015 $35,138,910 $(2,638,980) $32,499,930
=========== ========== =========== ========== =========== =========== =========== ===========
Earnings per share.. $ 0.49 $ 0.44
=========== ===========
Shares outstanding:
Weighted average... 47,633,909 73,420,519(p)
=========== ===========
End of period...... 62,118,679 78,106,396
=========== ===========
</TABLE>
F-25
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA INCOME STATEMENT
For the year ended December 31, 1997
<TABLE>
<CAPTION>
Historical Pro Forma
----------------------------------------------------------------------- ---------------------------
CNL
CNL Income Financial CNL
Fund VI, Services, Financial Combined
APF Ltd. Advisor Inc. Corp. Portfolios Adjustments Pro Forma
----------- ---------- ---------- ---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and earned
income................ $15,490,615 $3,044,839 $ 0 $ 0 $ 0 $18,535,454 $24,048,982(a)
35,585 (b) $42,620,021
Fees.................. 0 0 8,310,836 5,965,110 73,704 14,349,650 (9,074,807)(c)
(2,662,141)(d) 2,612,702
Interest and other
income................ 3,967,318 119,961 165,569 0 10,932,843 15,185,691 249,395 (e) 15,435,086
----------- ---------- ---------- ---------- ---------- ----------- ----------- -----------
Total revenue......... 19,457,933 3,164,800 8,476,405 5,965,110 11,006,547 48,070,795 12,597,014 60,667,809
Expenses:
General and
administrative........ 1,010,725 357,568 4,266,169 1,889,904 828,848 8,353,214 (740,042)(f)
(1,619,238)(g)
(43,006)(h) 5,950,928
Advisory fees......... 804,879 0 0 0 1,802,532 2,607,411 (2,607,411)(i) 0
Fees to Restaurant
Financial Services
Group................. 0 0 151,041 594,041 0 745,082 (745,082)(n) 0
Interest.............. 0 0 162,153 183,315 8,320,000 8,665,468 (81,594)(m) 8,583,874
State taxes........... 251,358 8,969 12,084 1,294 1,600 275,305 20,641 (j) 295,946
Depreciation--other... 0 0 48,490 14,637 0 63,127 -- 63,127
Depreciation--
property.............. 1,784,269 471,938 0 0 0 2,256,207 3,253,874 (k) 5,510,081
Amortization.......... 10,793 1,890 18,093 61,324 916,577 1,008,677 2,087,159 (l) 3,095,836
----------- ---------- ---------- ---------- ---------- ----------- ----------- -----------
Total operating
expenses.............. 3,862,024 840,365 4,658,030 2,744,515 11,869,557 23,974,491 (474,699) 23,499,792
----------- ---------- ---------- ---------- ---------- ----------- ----------- -----------
Operating earnings
(losses).............. 15,595,909 2,324,435 3,818,375 3,220,595 (863,010) 24,096,304 13,071,713 37,168,017
Equity in earnings of
joint
ventures/minority
interest.............. (31,453) 291,606 0 (126,627) 0 133,526 -- 133,526
Gain on sale of
properties............ 0 547,027 0 0 0 547,027 -- 547,027
Provision for loss on
properties............ 0 (263,186) 0 0 0 (263,186) -- (263,186)
----------- ---------- ---------- ---------- ---------- ----------- ----------- -----------
Net earnings before
income taxes.......... 15,564,456 2,899,882 3,818,375 3,093,968 (863,010) 24,513,671 13,071,713 37,585,384
Provision (credit) for
federal income taxes.. 0 0 1,508,258 1,272,133 (317,785) 2,462,606 (2,462,606)(o) 0
----------- ---------- ---------- ---------- ---------- ----------- ----------- -----------
Net earnings (losses).. $15,564,456 $2,899,882 $2,310,117 $1,821,835 $(545,225) $22,051,065 $15,534,319 $37,585,384
=========== ========== ========== ========== ========== =========== =========== ===========
Earnings per share..... $ 0.66 $ 0.51
=========== ===========
Shares outstanding:
Weighted average...... 23,423,868 74,093,050(p)
=========== ===========
End of period......... 36,192,971 74,093,050
=========== ===========
</TABLE>
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of September 30, 1998 reflects the
transactions of the acquisition of the CNL Income Fund, Advisor and CNL
Restaurant Financial Services Group (the "Acquisition Proposal") as set forth
in this Proxy Statement. The Pro Forma Statements of Earnings for the nine
months ended September 30, 1998, and for the year ended December 31, 1997, have
been prepared to reflect a) the issuance of additional shares and the property
acquisitions completed from January 1, 1997 through November 30, 1998
("Offering and Property Transactions") and b) the transactions of the
Acquisition Proposal as set forth in this Proxy Statement. This unaudited pro
forma financial information has been prepared utilizing the historical
financial statements of the Company and the historical combined financial
information of the CNL Income Fund, Advisor and CNL Restaurant Financial
Services Group and should be read in conjunction with the selected historical
financial data and accompanying notes of the Company, the CNL Income Fund,
Advisor and the CNL Restaurant Financial Services Group. The Pro Forma Balance
Sheet was prepared as if the Offering and Property Transactions and the
Acquisition Proposal occurred on September 30, 1998. The Pro Forma Statements
of Earnings were prepared as if the Property Acquisitions and the Acquisition
Proposal occurred as of January 1, 1997. The pro forma information is unaudited
and is not necessarily indicative of the consolidated operating results which
would have occurred if the Offering and Acquisition Transaction and the
Acquisition Proposal 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 Acquisition
Proposal have been made. Capitalized terms have the meanings as defined in the
Proxy Statement.
2. Method of Accounting
The acquisition of the CNL Income Fund and the CNL Restaurant Financial
Services Group will be accounted for under the purchase accounting method. The
Company 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, the Company 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 operating expense on the Company's consolidated statements of
earnings, but the Company will not deduct this expense for purposes of
calculating funds from operations due to the non-recurring and non-cash nature
of the expense.
All significant intercompany balances and transactions between the Company,
CNL Income Fund, Advisor and CNL Restaurant Financial Services Group have been
eliminated in the pro forma financial statements.
3. Adjustments to Pro Forma Balance Sheet
The following describes the pro forma adjustments to the Pro Forma Balance
Sheet as of September 30, 1998, as if the Acquisition was consummated on such
date. For purposes of the pro forma financial statements, it is assumed that at
an annual meeting of stockholders, the stockholders of the Company approved an
amendment to increase the number of authorized shares to an amount necessary to
enable the Company to issue the shares for the Acquisition.
(1) Represents the payment of $426,713 in cash and the issuance of
15,987,717 common shares in consideration for the purchase of the CNL
Income Fund, Advisor and CNL Restaurant Financial Services Group at
September 30, 1998 at a share price of $10 plus estimated transaction
costs. The acquisition of the CNL Income Fund and the CNL Restaurant
Financial Services Group has been accounted for under the purchase
accounting method and goodwill was recognized to the extent that the
consideration paid
F-27
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
exceeded the fair value of the net tangible assets acquired. As for the
acquisition of the Advisor from a related party, the consideration paid in
excess of the fair value of the net tangible assets received has been
accounted for as costs incurred in acquiring the Advisor from a related
party because the Advisor has not been deemed to qualify as a "business"
for purposes of applying APB Opinion No. 16 "Business Combinations." Upon
consummation of the Acquisition, this expense will be recorded as an
operating expense on the Company's statement of earnings. The Company will
not deduct this expense for purposes of calculating funds from operations
due to the nonrecurring and non-cash nature of the expense. As of September
30, 1998, $249,403 of transaction costs had been incurred by the Company.
<TABLE>
<S> <C>
CNL Income Fund............................................. $ 37,303,878
Advisor..................................................... 76,000,000
CNL Restaurant Financial Services Group..................... 47,000,000
------------
Total Purchase Price (cash and shares).................... 160,303,878
Less cash paid to CNL Income Fund........................... (426,713)
------------
Share consideration....................................... 159,877,165
Transaction costs of the Company............................ 8,933,000
------------
Total costs incurred...................................... $168,810,165
============
</TABLE>
In addition, the Company i) used $8,933,000 in cash to pay the transaction
costs related to the Acquisition, ii) made an upward adjustment to the CNL
Income Fund carrying value of land and building on operating leases by
$8,126,954, net investment in direct financing leases by $1,572,850, investment
in joint venture by $1,822,278, made downward adjustments to the carrying value
of accrued rental income of $762,705, made downward adjustments to other assets
of $3,696,959 to adjust historical values to fair value, iii) recorded goodwill
of $41,743,184 for the acquisition of the CNL Restaurant Financial Services
Group, iv) reduced retained earnings by $76,854,474 for the excess
consideration paid over the net assets of the Advisor and removed the
historical common stock balance of $12,000, additional paid in capital balance
of $9,602,287, retained earnings balance of $5,297,114 and partners capital
balance of $28,665,401 of the CNL Income Fund, Advisor and CNL Restaurant
Financial Services Group.
(2) Represents the use of $26,901,936 in cash and cash equivalents at
September 30, 1998 to acquire $26,052,741 in properties and issue $849,195
in mortgage notes which occurred from October 1, 1998 through November 30,
1998.
(3) Represents the elimination by the CNL Income Fund of $5,250 in
related party payables recorded as receivables by the Advisor, the
elimination by the CNL Restaurant Financial Services Group of $6,641,379 in
related party payables recorded as receivables by CNL Restaurant Financial
Services Group and the elimination by the Company of $1,208,000 in related
party payables recorded as receivables by the Advisor.
(4) Represents the elimination of income taxes payable of $2,990,864
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.
4. Adjustments to Pro Forma Income Statements
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the nine months ended September 30, 1998, as
if the Acquisition was consummated as of January 1, 1997.
F-28
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(a) Represents rental and earned income as if 1) properties that had
been previously constructed and acquired from January 1, 1998
through November 30, 1998 had been acquired and leased on January
1, 1997 and 2) properties that were developed by the Company from
January 1, 1998 through November 30, 1998 had been placed in
service on May 1, 1997 (assumes a four month development period).
<TABLE>
<S> <C>
Rental and earned income on Property
Transactions
by the Company............................. $9,635,208
</TABLE>
(b) Represents $36,891 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the CNL Income Fund as if the
leases had been acquired on January 1, 1997.
(c) Represents the elimination of intercompany fees between the
Company, the CNL Income Fund, the Advisor and the CNL Restaurant
Financial Services Group:
<TABLE>
<S> <C>
Origination fees......................... $ (1,569,202)
Secured equipment lease fee.............. (44,426)
Advisory fees............................ (1,722,383)
Reimbursement of administrative costs.... (292,963)
Acquisition fees......................... (15,392,193)
Underwriting fees........................ (254,945)
Administrative fees...................... (148,491)
Executive fee............................ (310,000)
Guarantee fees........................... (93,750)
Servicing fee............................ (1,014,117)
Development fees......................... (166,876)
Consulting fee........................... (1,511)
------------
Total................................ $(21,010,857)
============
</TABLE>
(d) Represents the deferral of $2,875,906 in origination fees collected
by CNL Restaurant Financial Services Group that should be amortized
over the term of the loans originated (20 years) in accordance with
the Statement of Financial Accounting Standards #91 "Accounting for
Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases."
(e) Represents interest income of $1,318,870 earned from Other
Investments acquired and mortgage notes issued from January 1, 1998
through November 30, 1998 as if this had occurred on January 1,
1997 and the amortization of $207,677 of deferred origination fees
collected during the year ended December 31, 1997 and during the
nine months ended September 30, 1998, which were capitalized and
deferred in (d) above as if they had been collected on January 1,
1997. These deferred fees are being amortized and recorded as
interest income.
(f) Represents the elimination of intercompany expenses paid between
the Company, the CNL Income Fund, the Advisor and the CNL
Restaurant Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs..... $ (292,963)
Servicing fee............................. (1,014,117)
-----------
$(1,307,080)
===========
</TABLE>
F-29
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during
the period as if 1) costs relating to properties developed by the
Company were subject to capitalization during the entire period and
2) costs relating to properties not developed by the Company were
subject to capitalization up through the time that EITF 97-11
became effective.
<TABLE>
<S> <C>
General and administrative costs.......... $(1,415,100)
</TABLE>
(h) Represents savings of $38,076 in professional services and
administrative expenses resulting from reporting on one combined
Company versus 22 separate entities.
(i) Represents the elimination of advisory fees between the Company,
the CNL Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Advisory fees............................. $(1,722,383)
Administrative fees....................... (148,491)
Executive fee............................. (310,000)
Guarantee fees............................ (93,750)
-----------
$(2,274,624)
===========
</TABLE>
(j) Represents additional income taxes of $51,687 resulting from
assuming that acquisitions from January 1, 1998 through November
30, 1998 had been acquired on January 1, 1997 and assuming that the
CNL Income Fund had operated under a REIT structure.
(k) Represents an increase in depreciation of the building portion of
the properties acquired from January 1, 1998 through November 30,
1998 as if they had been acquired on January 1, 1997 and the step
up in basis referred to in footnote (2) from acquiring the CNL
Income Fund portfolio using the straight-line method over the
estimated useful lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense........................ $1,579,096
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of
the CNL Restaurant Financial Services Group referred to in footnote
(2)
<TABLE>
<S> <C>
Amortization of goodwill.................... $1,565,369
</TABLE>
(m) Represents elimination of interest expense recorded for the
amortization of $350,000 in arrangement fees collected during the
year ended December 31, 1997 which were eliminated in II (d) below.
<TABLE>
<S> <C>
Interest expense............................ $ (68,670)
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees
incurred between the Company, the CNL Income Fund, the Advisor and
the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees.......................... $(1,569,202)
Underwriting fees......................... (254,945)
Consulting fee............................ (1,511)
-----------
$(1,825,658)
===========
</TABLE>
F-30
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(o) Represents the elimination of $6,316,081 in the provision for
income taxes as a result of the Acquisition. The Company expects to
continue to qualify as a REIT and does not expect to incur federal
income taxes.
(p) Common shares issued during the period required to fund
acquisitions as if they had been acquired on January 1, 1997 were
assumed to have been issued and outstanding as of January 1, 1998.
For purposes of the proforma financial statements, it is assumed
that the stockholders approved the proposal to increase the number
of authorized common shares of the Company.
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the year ended December 31, 1997, as if the
Acquisition was consummated as of January 1, 1997.
(a) Represents rental and earned income as if 1) properties that had
been previously constructed and acquired from January 1, 1998
through November 30, 1998 had been acquired and leased on January
1, 1997 and 2) properties that were developed by the Company from
January 1, 1997 through November 30, 1998 had been placed in
service on May 1, 1997 (assumes a four month development period.
<TABLE>
<S> <C>
Rental and earned income on Property
Transactions by the Company............... $24,048,982
</TABLE>
(b) Represents $35,585 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the CNL Income Fund as if the
leases had been acquired on January 1, 1997.
(c) Represents the elimination of intercompany fees between the
Company, the CNL Income Fund, the Advisor and the CNL Restaurant
Financial Services Group:
<TABLE>
<S> <C>
Origination fees.......................... $ (594,041)
Secured equipment lease fee............... (375,219)
Advisory fees............................. (1,775,680)
Reimbursement of administrative costs..... (141,054)
Acquisition fees.......................... (3,887,483)
Underwriting fees......................... (151,041)
Administrative fees....................... (269,231)
Executive fee............................. (250,000)
Guarantee fees............................ (312,500)
Arrangement fees.......................... (350,000)
Servicing fee............................. (598,988)
Development fees.......................... (369,570)
-----------
Total................................. $(9,074,807)
===========
</TABLE>
(d) Represents the deferral of $2,662,141 in origination fees collected
by CNL Restaurant Financial Services Group that should be amortized
over the term of the loans originated (20 years) in accordance with
the Statement of Financial Accounting Standards #91 "Accounting for
Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases."
(e) Represents the elimination of interest income of $1,931,331 earned
during the year ended December 31, 1997 assuming all monies raised
during 1997 and all cash held on January 1, 1997 was used to effect
the Acquisition on January 1, 1997, represents interest income of
$2,047,619 earned from
F-31
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
Other Investments acquired and mortgage notes issued from January 1,
1998 through November 30, 1998 as if this had occurred on January 1,
1997 and the recognition of $133,107 of origination fees collected
during the year ended December 31, 1997 which were deferred in (d)
and are being amortized and recorded as interest income.
(f) Represents the elimination of intercompany expenses paid between the
Company, the CNL Income Fund, the Advisor and the CNL Restaurant
Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs....... $(141,054)
Servicing fee............................... (598,988)
---------
$(740,042)
=========
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during
the period as if 1) costs relating to properties developed by the
Company were subject to capitalization during the entire period and
2) costs relating to properties not developed by the Company were
subject to capitalization up through the time that EITF 97-11 became
effective.
<TABLE>
<S> <C>
General and administrative costs.......... $(1,619,238)
</TABLE>
(h) Represents savings of $43,006 in professional services and
administrative expenses resulting from reporting on one combined
Company versus 22 separate entities.
(i) Represents the elimination of advisory fees between the Company, the
CNL Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Advisory fees............................. $(1,775,680)
Administrative fees....................... (269,231)
Executive fee............................. (250,000)
Guarantee fees............................ (312,500)
-----------
$(2,607,411)
===========
</TABLE>
(j) Represents additional income taxes of $20,641 resulting from
assuming that acquisitions from January 1, 1997 through November 30,
1998 had been acquired on January 1, 1997 and assuming that the CNL
Income Fund had operated under a REIT structure.
(k) Represents increase in depreciation of the building portion of the
properties acquired from January 1, 1997 through November 30, 1998
as if they had been acquired on January 1, 1997 and the step up in
basis referred to in footnote (2) from acquiring the CNL Income Fund
portfolio using the straight-line method over the estimated useful
lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense........................ $3,253,874
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of
the CNL Restaurant Financial Services Group referred to in footnote
(2)
<TABLE>
<S> <C>
Amortization of goodwill.................... $2,087,159
</TABLE>
F-32
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(m) Represents elimination of yearly amortization of arrangement fees
of $350,000 capitalized as deferred costs and amortized as interest
expense and the capitalization of interest expense during the
period that properties were under development.
<TABLE>
<S> <C>
Amortization of arrangement fees............. $(24,144)
Capitalization of interest during development
period...................................... (57,450)
--------
$(81,594)
========
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees
incurred between the Company, the CNL Income Fund, the Advisor and
the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees............................ $(594,041)
Underwriting fees........................... (151,041)
---------
(745,082)
=========
</TABLE>
(o) Represents the elimination of $2,462,606 in the provision for
income taxes as a result of the Acquisition. The Company expects to
continue to qualify as a REIT and does not expect to incur federal
income taxes.
(p) Common shares issued during the period were assumed to have been
issued and outstanding as of January 1, 1997. For purposes of the
proforma financial statement, it is assumed that the stockholders
approved the proposal to increase the number of authorized common
shares of the Company.
F-33
<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 eighteen Florida limited partnerships (the "CNL
Income Funds") served by Messrs. Seneff, Bourne and CNL Realty Corporation as
general partners (the "General Partners"). Each CNL Income Fund has executed a
merger agreement with the Acquiror on terms similar to the Merger Agreement.
The transactions to occur under such merger agreements are referred to as the
"Merger Transactions."
In connection with our opinion, we have, among other things:
(i) reviewed the Merger Agreement and the merger agreements for each of
the Merger Transactions;
(ii) reviewed the Registration Statement on Form S-4 with respect to the
Merger Transactions as filed on March 12, 1999;
(iii) reviewed the financial statements and the related filings of the
Partnership and the other CNL Income Funds on Form 10-K for the year ended
December 31, 1997 and Form 10-Q for the nine months ended September 30,
1998;
(iv) reviewed the financial statements and the related filings of the
Acquiror on Form 10-K for the year ended December 31, 1997 and Form 10-Q
for the nine months ended September 30, 1998;
(v) reviewed certain internal information concerning the business and
operations of the Partnership and the other CNL Income Funds furnished to
us by the General Partners, including a draft of the Partnership's and the
other CNL Income Funds' Form 10-K for the year ended December 31, 1998,
cash flow projections and operating budgets;
A-1
<PAGE>
(vi) reviewed certain internal information concerning the business and
operations of the Acquiror furnished to us by management of the Acquiror,
including a draft of the Acquiror's Form 10-K for the year ended December
31, 1998, cash flow projections and operating budgets;
(vii) reviewed certain financial data and operating statistics relating
to the Partnership, the other CNL Income Funds and the Acquiror provided by
the General Partners and the Acquiror and compared them with similar
information of selected public companies that we deemed relevant to our
inquiry;
(viii) reviewed the appraisal (the "Appraisal") of the properties of the
Partnership and the other CNL Income Funds prepared by Valuation Associates
and dated January 6, 1999;
(ix) held meetings and discussions with certain directors, officers and
employees of the General Partners and the Acquiror concerning the
operations, financial condition and future prospects of the Partnership,
the other CNL Income Funds and the Acquiror; and
(x) conducted such other financial studies, analyses and investigations
and considered such other information as we deemed appropriate.
In connection with our review, we relied, without independent verification,
on the accuracy and completeness of all information that was publicly
available, supplied or otherwise communicated to Legg Mason by or on behalf of
the Partnership, the other CNL Income Funds and the Acquiror. We have further
relied upon the assurances of the General Partners that they are unaware of any
factors that would materially alter the conclusions made in Legg Mason's
fairness opinion, including developments or trends that have materially
affected or are reasonably likely to materially affect such conclusions. Legg
Mason assumed that the financial forecasts (and the assumptions and bases
thereof) examined by it were reasonably prepared and reflected the best
currently available estimates and good faith judgments of the General Partners
and the Acquiror as to the future performance of the Partnership, the other CNL
Income Funds and the Acquiror, respectively. Legg Mason has relied on these
forecasts and does not in any respect assume any responsibility for the
accuracy or completeness thereof. Legg Mason also assumed, with the consent of
the General Partners, that any material liabilities (contingent or otherwise,
known or unknown) of the Partnership, the other CNL Income Funds and the
Acquiror are as set forth in the financial statements of the Partnership, the
other CNL Income Funds and the Acquiror, respectively. Legg Mason also assumed
with the consent of the General Partners that the table prepared by or for the
General Partners of the allocation of Share Consideration among the General
Partners and the limited partners of the Partnership has been prepared in
accordance with and complies with the terms and conditions of the partnership
agreement of the Partnership. Legg Mason also assumed that the Appraisal was
reasonably prepared by and reflected the good faith judgments of Valuation
Associates and Legg Mason does not in any respect assume any responsibility for
the accuracy or completeness thereof. Legg Mason did not make an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Partnership, the other CNL Income Funds or the Acquiror. Our opinion is
necessarily based upon financial, economic, market and other conditions and
circumstances existing and disclosed to us on the date hereof.
We have acted as financial advisor to the General Partners and will receive
a fee for our services. It is understood that this letter is for the
information of the General Partners in their evaluation of the Merger
Transactions and our opinion does not constitute a recommendation to the
General Partners or any limited partner of the Partnership or any of the other
CNL Income Funds as to how such partner should vote on the Merger or the Merger
Transactions, as the case may be, or as to whether such partner should elect to
receive the Share Consideration or cash and promissory notes of the Acquiror.
We were not requested to, nor did we, solicit the interest of any other party
in acquiring interests in the Partnership or its assets. Additionally, our
opinion does not compare the relative merits of the Merger and the Merger
Transactions with those of any other transaction or business strategy which
were or might have been considered by the General Partners as alternatives to
the Merger and the Merger Transactions.
It should be noted that in rendering this opinion with respect to the
fairness, from a financial point of view, of (i) the Share Consideration to be
offered with respect to the Partnership, (ii) the aggregate Common
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Stock offered with respect to the CNL Income Funds and (iii) the method of
allocating the shares of Common Stock of the Acquiror among the CNL Income
Funds, Legg Mason has neither addressed, nor are we rendering any opinion with
respect to, any other aspect of the Merger Transactions, including (a) the
value or fairness of the cash and promissory notes option, (b) the prices at
which the shares of Common Stock may trade following the Merger Transactions or
the trading value of the shares to be offered compared with the current fair
market value of the portfolios or other assets of the Partnership and the other
CNL Income Funds if liquidated in real estate markets, (c) the tax effect of
any aspect of the Merger Transactions, (d) the fairness of the amounts or
allocation of the costs of the Merger Transactions or the amounts of such costs
allocated to the limited partners or, (e) any other matters with respect to any
specific individual partner or class of partners of the Partnership or the
other CNL Income Funds.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Share Consideration offered to the Partnership and its
limited partners in the Merger, the aggregate shares of Common Stock offered by
the Acquiror with respect to the CNL Income Funds in the Merger Transactions
and the method of allocating the shares of Common Stock among the CNL Income
Funds in the Merger Transactions are fair from a financial point of view.
Very truly yours,
/s/ Legg Mason Wood Walker,
Incorporated
-------------------------------------
Legg Mason Wood Walker, Incorporated
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Appendix B
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.
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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 3,730,388 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
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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) 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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<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 $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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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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<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
SUPPLEMENT DATED , 1999
TO
PROSPECTUS/CONSENT SOLICITATION STATEMENT
DATED , 1999
FOR CNL INCOME FUND VII, LTD.
This Supplement is being furnished to you, as a Limited Partner of CNL
Income Fund VII, Ltd., which we refer to as the Income Fund, for the purpose of
enabling you to evaluate the proposed acquisition of your Income Fund by CNL
American Properties Fund, Inc., a Maryland corporation, which is a real estate
investment trust. This Supplement is designed to summarize only the risks,
effects, fairness and other considerations of the proposed acquisition that are
unique to you and the other Limited Partners of your Income Fund. This
Supplement does not purport to provide an overall summary of the proposed
acquisition and should be read in conjunction with the accompanying
Prospectus/Consent Solicitation Statement, which includes detailed discussions
regarding APF and the other Income Funds being acquired by APF. Accordingly,
the discussions in this Supplement are qualified by the more expanded treatment
of these matters appearing in the Prospectus/Consent Solicitation Statement.
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.
OVERVIEW
Pursuant to the Prospectus/Consent Solicitation Statement and this
Supplement, you are being asked to approve the Acquisition of your Income Fund
by APF. Your Income Fund is one of 18 limited partnerships (which we refer to
collectively as the Funds) that APF is seeking to acquire. Supplements have
also been prepared for each of the other Funds, copies of which may be obtained
without charge to 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 (or a REIT), formed in
1994, whose primary business, like that of the Funds, is the ownership of
restaurant properties leased to operators of national and regional restaurant
chains on a triple-net lease basis. As a full-service REIT, 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 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 shares of common stock (or APF Shares) will I receive if my Income
Fund is acquired by APF?
Your Income Fund will receive 3,202,371 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 $10.00 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
approximately 75 million APF Shares through three public offerings at offering
prices per APF share equal to the Exchange Value. At December 31, 1998, of the
approximately $750 million raised by APF, APF has used approximately $550
million to acquire restaurant properties and to make mortgage loans and had
approximately $120 million in uninvested proceeds which APF expects to invest
during the first quarter of 1999. The remaining proceeds were used to pay fees
and other offering expenses.
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<PAGE>
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
Fund?
Yes. Legg Mason Wood Walker, Incorporated 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 Funds, and (c) the method of allocating the APF
Shares among the Funds.
Do you, as the general partners of my Income Fund, recommend that I vote in
favor 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 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 how you want to vote, and sign
and mail it in the enclosed postage-paid return envelope as soon as possible,
so that at the Special Meeting of Limited Partners, your Units may be voted
"For" or "Against" APF's acquisition of your Income Fund. If you sign and send
in your consent form and do not indicate how you want to vote, your consent
form will be counted as a vote "For" the Acquisition. If you do not vote or you
abstain from voting, it will count as a vote "Against" the Acquisition.
In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to certain limitations. If you vote "Against" the Acquisition,
but your Income Fund is nevertheless acquired by APF, you may elect to receive
a payment (which we call the Cash/Notes Option) that is 10% in cash and 90% in
% Callable Notes due , 2006 (or Notes) based on the liquidation value
of your Income Fund, as determined by Valuation Associates, the appraisal firm
that we engaged in connection with the Acquisition. Such liquidation value will
be lower than the aggregate Exchange Value of the APF Shares offered to your
Income Fund in the Acquisition. The Notes will bear interest at a rate equal to
%, which was determined based on 120% of the applicable federal rate as of
, 1999. Please note that you may only receive the Cash/Notes Option if
you have voted "Against" the Acquisition and you elect to receive the
Cash/Notes Option on your consent form. You will receive APF Shares if your
Income Fund elects to be acquired in the Acquisition and you voted "For" the
Acquisition, or you voted "Against" the Acquisition and did not affirmatively
select the Cash/Notes Option. 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 (for example, 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 be based on the difference between the
value of the APF Shares or the tax basis of your Units. If you elect the
Cash/Notes Option, 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 and cash
received by your Income Fund over the tax basis of your Fund's net assets. Some
of the gain may be subject to the 25% rate of tax applicable to certain 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 $2,385. To
review the tax consequences to the Limited Partners of the
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<PAGE>
Funds in greater detail, see pages through of the Prospectus/Consent
Solicitation Statement 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 Funds acquired by APF.
Although the majority of APF's assets and the assets of the other Funds
acquired by APF are substantially similar to those of your Income Fund, the
restaurant properties owned by APF and the other 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 Funds' restaurant properties,
see "APF's Business and The Restaurant Properties--Business Objectives and
Strategies" and "--The Restaurant Properties--General" and "Business of the
Funds--Description of Restaurant Properties" in the Prospectus/Consent
Solicitation Statement.
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 Prospectus/Consent Solicitation Statement.
Investment Risks
. Uncertainty Regarding the Exchange Value and Trading Price of APF Shares
Following Listing. Your Income Fund will be receiving 3,202,371 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 is 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 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.
. Decrease in Distributions. In each of the years ended December 31, 1995, 1996
and 1997, your Income Fund made $900 in distributions, per $10,000 investment
to you. Based on APF's pro forma financial information, and assuming APF
acquires only your Income Fund and that each Limited Partner of your Income
receives only APF Shares, you would have received, for the year ended
December 31, 1997, $604 in distributions per $10,000 of original investment,
which is 32.9% less than the $900 distributed to you as Limited Partner
during the same period. 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
year ended December 31, 1997 and for the nine months ended September 30, 1998
is not necessarily indicative of the distributions you will receive as a
stockholder of APF after the Acquisition. See "Cash Distributions to Limited
Partners of Your Fund."
. Conflicts of Interest in the Acquisition; Substantial Benefits to Related
Parties. There are certain conflicts of interest inherent in the structure of
the Acquisition of your Income Fund. 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
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<PAGE>
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 that may or may not be
aligned with your interests as a Limited Partner of the Income Fund or with
their own positions as the general partners of your Income Fund. Assuming only
your Income Fund is acquired in the Acquisition, we will receive 31,848 APF
Shares. 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.
. Fundamental Change in Nature of 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 September 30, 1998), 397 restaurant
properties. The risks inherent in investing in an operating company such as
APF include APF's ability to invest in new restaurant properties that are not
as profitable as APF anticipated, the incurrence of substantial indebtedness
to make future acquisitions of restaurant properties which it may be unable
to repay and making mortgage loans to prospective operators of national and
regional restaurant chains which may not have the ability to repay.
As an APF stockholder, you will receive the benefits of your investment
through (i) dividend distributions on, and (ii) increases in the value of,
your APF Shares. In addition, 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 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
Cash/Notes Option). An investment in APF may not outperform your investment
in the Income Fund.
. Original Investment Timeframe. 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,
2019. 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 1997 and 2002. Because your Income Fund is in the
anticipated termination timeframe, we could elect to liquidate your Income
Fund. However, we have no current plans to dispose of your Income Fund's
restaurant properties if the Limited Partners do not approve the Acquisition.
Real Estate/Business Risks
. Risk of Default on Mortgage Loans and Market Risks associated with
Securitizations. 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.
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
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<PAGE>
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,) and 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 may 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.
. Risks Associated with Leverage. 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. At the time of the consummation of the Acquisition, as a general
policy, APF's Board of Directors will 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 funds from operations and its ability to make distributions to its
stockholders.
. Acquisition and Development Risks. APF plans to pursue its growth strategy
through the acquisition and development of additional restaurant properties.
To the extent that APF does pursue this growth strategy, we do not know that
it 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.
Tax Risks
. Failure of APF to Qualify as a REIT for Tax Purposes. 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.
. Risks Associated with Distribution Requirements. 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
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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 Tax Law. 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 Prospectus/Consent Solicitation Statement.
CONSIDERATION PAID TO INCOME FUND
The following table sets forth, for your Income Fund (i) the aggregate
amount of original Limited Partner investments in each Fund less any
distributions of net sales proceeds paid to the Limited Partners of that Fund,
(ii) the original amount of Limited Partner investments in each Fund less any
distributions of net sales proceeds per average $10,000 investment, (iii) the
number of APF Shares to be paid to your Income Fund, (iv) the estimated value
of the APF Shares paid to your Income Fund, (v) the estimated Acquisition
expenses allocated to your Income Fund, (vi) the estimated value, based on the
Exchange Value, of APF Shares paid to your Income Fund after deducting
Acquisition expenses, and (vii) the estimated value, based on the Exchange
Value, of APF Shares you will receive for each $10,000 of your original
investment:
<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 APF Shares Estimated of APF Shares $10,000 Original
of Net Sales Original to Payable to Acquisition after Acquisition Limited Partner
Proceeds(1) Investment(1) Fund(2) Fund(3) Expenses Expenses(3) Investment(3)
- ------------- ------------- --------- ---------- ----------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$30,000,000 $10,000 3,202,371 $32,023,710 $336,341 $31,687,369 $10,456
</TABLE>
- --------
(1) Income Fund has had no distributions of net sales proceeds.
(2) The APF Shares payable to each Fund as set forth in this chart will not
change if APF acquires fewer than all of the Funds in the Acquisition.
This number assumes that none of the Limited Partners of the Fund has
elected the Cash/Notes Option.
(3) 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.
Upon completion of the Acquisition of your Income Fund, the operations and
existence of your Income Fund will cease. For more detailed information, see
"The Acquisition" in the Prospectus/Consent Solicitation Statement. If your
Income Fund does not approve the Acquisition, we do not contemplate that your
Income Fund would be liquidated in the near future. The Acquisition, however,
does not result in an all-cash payment to you in the liquidation of your
investment. For example, if you are eligible for and choose the Cash/Notes
Option, you become a Noteholder of APF. You will have exchanged your Units for
unsecured debt obligations of APF which may not be retired in full until
, 2006, a date approximately seven years after the date the
Acquisition of your Income Fund occurs. On the other hand, if you exchange
your Units for APF Shares, you will receive an equity interest in APF whose
marketability will depend upon the market that may develop with respect to the
APF Shares, which will be listed on the NYSE.
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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...................................................... $ 15,717
Appraisals and Valuation........................................ 6,287
Fairness Opinions............................................... 28,290
Registration, Listing and Filing Fees........................... --
Soliciting Dealer Fee........................................... 69,654
Financial Consulting Fees....................................... --
Environmental Fees.............................................. 39,292
Accounting and Other Fees....................................... 42,198
--------
Subtotal.................................................... 201,438
Closing Transaction Costs
Transfer Fees and Taxes......................................... 37,508
Legal Fees...................................................... 44,763
Recording Costs................................................. --
Other........................................................... 52,632
--------
Subtotal.................................................... 134,903
--------
Total........................................................... $336,341
========
</TABLE>
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<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 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 as, in our opinion,
market conditions permit), as contemplated by the terms of the partnership
agreement.
Special Meeting to Discuss the Acquisition
We have scheduled a special meeting of the Limited Partners of your Income
Fund to discuss the solicitation materials, which include the
Prospectus/Consent Solicitation Statement, 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 (as defined below) and to explain in person our reasons
for recommending that you vote "For" the Acquisition.
VOTING PROCEDURE
The Prospectus/Consent Solicitation Statement, 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.
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
Prospectus/Consent Solicitation Statement. A copy of the Agreement and Plan of
Merger dated March 11, 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 December 31, 1999. Any
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<PAGE>
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.
The consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and certain 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
(including the Acquisition), 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. The partnership agreement also provide 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
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.
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<PAGE>
During the years ended December 31, 1995, 1996 and 1997 and the nine months
ended September 30, 1998, the aggregate amounts accrued or paid by your Income
Fund 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 years presented, are shown below under "Pro Forma":
<TABLE>
<CAPTION>
Year Ended December Nine Months
31, Ended
--------------------- September 30,
1995 1996 1997 1998
------ ------ ------- -------------
<S> <C> <C> <C> <C>
Historical:
General Partner Distributions............... -- -- -- --
Broker/Dealer Commissions(1)................ -- -- -- --
Due Diligence and Marketing Support Fees.... -- -- -- --
Acquisition Fees............................ -- -- -- --
Asset Management Fees ...................... -- -- -- --
Real Estate Disposition Fees(2)............. $7,200 -- -- --
------ ------ ------- -------
Total historical.......................... 7,200 -- -- --
Pro Forma:
Cash Distributions on APF Shares............ 2,975 $6,815 $18,401 $14,664
Salary Compensation......................... -- -- -- --
------ ------ ------- -------
Total pro forma........................... $2,975 $6,815 $18,401 $14,664
</TABLE>
- --------
(1) A majority of the fees paid as broker-dealer commissions and due diligence
and marketing support fees were reallowed to other broker-dealers
participating in the offering of the Income Fund's Units.
(2) 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 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 the Acquisition--Prices for 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>
Nine Months Ended
Sept. 30, 1998
--------------------
1993 1994 1995 1996 1997 Historical Pro Forma
---- ---- ---- ---- ---- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income........ $803 $826 $654 $768 $861 $595 $461
Distributions from Return of
Capital......................... 97 94 246 132 39 80 21
---- ---- ---- ---- ---- ---- ----
Total............................ $900 $920 $900 $900 $900 $675 $481
==== ==== ==== ==== ==== ==== ====
</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 year ended September 30, 1998 is
not necessarily indicative of the distributions you will receive as a
stockholder of APF after the Acquisition.
Assuming APF maintains its current level of debt for acquiring future
restaurant properties, the expected distribution rate per APF Share will be
8.8% (assuming a $10.00 per APF Share price based on the Exchange Value, the
annualized dividend per year is expected to be $0.88 per APF Share). Based on
the number of APF Shares that you would receive in the Acquisition per your
average $10,000 original investment and this distribution rate, you would
receive an annual distribution of approximately $920.
S-10
<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 certain 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 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 Cash/Note Option.
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, our relief 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 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 Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the Cash/Notes Option, constitutes 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 and is the best way to maximize the return on your
investment in light of the values of such consideration.
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
S-11
<PAGE>
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 of Valuation Associates and Legg Mason received fees for its services
and notwithstanding that Legg Mason has previously provided investment banking
services to the Funds and to Commercial Net Lease Realty, Inc., a former
affiliate of ours. See "Reports, Opinions and Appraisals" in the
Prospectus/Consent Solicitation Statement.
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 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 cash and promissory 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 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 Cash/Notes Option.
3. Valuation of Alternatives. Based on the appraisal of the Income Fund's
restaurant properties, we estimated the value of your Income Fund as an ongoing
concern and if liquidated. 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 Fund to 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
September 30, 1998 per $10,000 original investment. Since the calculation of
the book value was done on a GAAP basis, it is not indicative of the true fair
market value of your Income Fund. This figure was compared to the (i) value of
the Fund if it commenced an orderly liquidation of its investment portfolio on
December 31, 1998, (ii) value of the Fund if it continued to operate in
accordance with its existing partnership agreement and business plans, and
(iii) estimated value of the APF Shares, based on the Exchange Value, paid to
each Fund per average $10,000 invested.
S-12
<PAGE>
Summary of Valuations
(per $10,000 original investment)
<TABLE>
<CAPTION>
Estimated Value
of APF Shares
per Average
Going $10,000 Original
GAAP Book Liquidation Concern Limited Partner
Value Value(1) Value(1) Investment(2)
--------- ----------- -------- ----------------
<S> <C> <C> <C> <C>
CNL Income Fund VII, Ltd........ $8,109 $9,754 $10,411 $10,456
</TABLE>
- --------
(1) 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.
(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.
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have an independent
obligation 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 Funds). James M. Seneff, Jr. and
Robert A. Bourne act as the individual general partners of all of the 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.
Substantial Benefits to General Partners
As a result of the Acquisition (assuming only your Income Fund is acquired),
we are expected to receive certain benefits, including that we will be relieved
from certain ongoing liabilities with respect to the Funds that are acquired by
APF.
With respect to our ownership in your Income Fund, we may be issued up to
31,848 APF Shares in accordance with the terms of your Income Fund's
partnership agreement. The 31,848 APF Shares issued to us will have an
estimated value, based on the Exchange Value, of approximately $318,480
thousand.
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 Funds if the Acquisition does not occur.
S-13
<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 the Cash/Notes Option, in which case you will
receive cash and 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 Prospectus/Consent Solicitation Statement.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, the
assets (and any liabilities) of your Income Fund (if your Income Fund is
acquired by APF) will be transferred to APF in return for APF Shares and/or
cash and 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-14
<PAGE>
<TABLE>
<CAPTION>
Estimated Gain/
(Loss) per
Average $10,000
Original Limited
Partner Investment(1)
---------------------
<S> <C>
CNL Income Fund VII, Ltd.................................. $2,385
</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 Code, no gain or loss is recognized if (i)
property is transferred to a corporation by one more individuals or entities in
exchange for the stock of that corporation, and (ii) 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 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 the
Cash/Notes Option, 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 (1) 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 (2) 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 Cash/Notes Option, your Income Fund will receive APF
Shares, cash and Notes in exchange for your Income Fund's assets. Because the
principal portion of the Notes will not be due until , 2006, 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 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 (without reduction for
any selling expenses) 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 are 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, cash 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" (i.e., real property and
S-15
<PAGE>
depreciable assets used in a trade or business and held for more than one
year). Your share of gains or losses from the sale of section 1231 assets of
your Income Fund would be combined with any other section 1231 gains and losses
that you recognize in that year. If the result is a net loss, such loss is
characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property will be taxed as ordinary income to the extent of all
prior depreciation deductions taken by your Income Fund prior to sale. In
general, you may only use up to $3,000 of capital losses in excess of capital
gains to offset ordinary income in any taxable year. Any excess loss is carried
forward to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your Income Fund recognizes will be allocated to you and the other
Limited Partners in accordance with the terms of your Income Fund's partnership
agreement. Each Limited Partner will be allocated and must report his, her or
its allocable share of such gain, if any, pursuant to these terms, regardless
of the Limited Partner's decision to receive 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 Cash/Notes Option may
recognize gain in the year of the Acquisition despite the fact that they will
receive only a small amount of cash and no publicly-traded instruments 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 the Cash/Notes Option. See "-- Tax Consequences of
Liquidation and Termination of Your Fund" below.
Tax Consequences of the Liquidation and Termination of Your Fund. If your
Fund is acquired by APF, your Fund will be deemed to have liquidated and
distributed APF Shares and/or cash and 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 cash and 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 pro rata based on your respective capital account
balances. If you receive APF Shares in the Acquisition, you will recognize gain
or loss equal to
S-16
<PAGE>
the difference between the fair market value of the APF Shares that you receive
(determined on the closing date of the Acquisition) and your adjusted tax basis
in your Units (adjusted by your distributive share of income, gain, loss,
deduction and credit for the final taxable year of your Income Fund (including
any such items recognized by your Income Fund as a result of the Acquisition)
as well as any distributions you receive in such final taxable year (other than
the distribution of the APF Shares)). 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 cash and Notes in the Acquisition, you will recognize gain to
the extent that the amount of cash you receive in the Acquisition exceeds your
adjusted basis in your Units (adjusted by your distributive share of income,
gain, loss, deduction and credit for the final taxable year of your Income Fund
(including any such items recognized by your Income Fund as a result of the
Acquisition) as well as any distributions you receive in such final taxable
year (other than the distributions of the cash and Notes)). Your basis in the
Notes distributed to you will equal your adjusted basis in your Units, reduced
(but not below zero) by the amount of any cash distributed to you 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 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.
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 cash and 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 Prospectus/Consent Solicitation
Statement.
S-17
<PAGE>
SUMMARY SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
APF, FUNDS, ADVISOR AND CNL RESTAURANT FINANCIAL SERVICES GROUP
Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
Historical Pro Forma
-------------------------------------------------- --------------------------------
CNL
Restaurant
CNL Income Financial
Fund VII, Services Combined Pro Forma Combined Pro
APF Ltd. Advisor Group Historical Adjustments Forma
------------ ----------- ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data Revenues:
Rental and earned
income................. $ 22,947,199 $ 1,812,475 $ -- $ -- $ 24,759,674 $ 9,635,208 (a)
56,795 (b) $ 34,451,677
Management fees......... -- -- 21,405,127 5,122,366 26,527,493 (21,007,758)(c)
(2,875,906)(d) 2,643,829
Interest and other
income................. 6,117,911 127,438 751 18,463,647 24,709,747 1,526,547 (e) 26,236,294
------------ ----------- ----------- ------------ ------------ ------------ ------------
Total revenue........ 29,065,110 1,939,913 21,405,878 23,586,013 75,996,914 (12,665,114) 63, 331,800
Expenses:
General and
administrative......... 1,539,004 121,291 6,701,115 6,704,482 15,065,892 (1,303,981)(f)
(1,415,100)(g)
(32,503)(h) 12,314,308
Advisory fees........... 1,248,393 -- -- 1,026,231 2,274,624 (2,274,624)(i) --
State taxes............. 397,569 2,728 15,226 220,180 635,703 43,673 (j) 679,376
Depreciation and
amortization........... 2,693,020 228,267 131,539 1,000,493 4,053,319 3,112,849 (k)(l) 7,166,168
Interest expense........ -- -- 105,668 14,234,533 14,340,201 (68,670)(m) 14,271,531
Paid to affiliates -- -- 256,456 1,569,202 1,825,658 (1,825,658)(n) --
------------ ----------- ----------- ------------ ------------ ------------ ------------
Total expenses....... 5,877,986 352,286 7,210,004 24,755,121 38,195,397 (3,764,014) 34,431, 383
------------ ----------- ----------- ------------ ------------ ------------ ------------
Net earnings (loss)
before equity in
earnings of joint
ventures/ minority
interests, gain (loss)
on sale of properties,
gain on securitization,
and provision (credit)
for federal income
taxes.................. 23,187,124 1,587,627 14,195,874 (1,169,108) 37,801,517 (8,901,100) 28,900,417
------------ ----------- ----------- ------------ ------------ ------------ ------------
Equity in earnings of
joint ventures/minority
interests.............. (23,271) 215,559 -- 12,452 204,740 -- 204,740
Gain (loss) on sales of
properties............. -- 758 -- -- 758 -- 758
Gain on securitization.. -- -- -- 3,018,268 3,018,268 -- 3,018,268
Provision (credit) for
federal income taxes... -- -- 5,607,415 708,666 6,316,081 (6,316,081)(o) --
------------ ----------- ----------- ------------ ------------ ------------ ------------
Net earnings............ $ 23,163,853 $ 1,803,944 $ 8,588,459 $ 1,152,946 $ 34,709,202 $ (2,585,019) $ 32,124,183
============ =========== =========== ============ ============ ============ ============
Other Data:
Weighted average number
of shares of common
stock outstanding
during period.......... 47,633,909 N/A N/A N/A N/A -- 72,892,798(p)
Total properties owned
at end of period....... 357 40 N/A N/A N/A -- 397
Funds from operations... $ 26,408,569 $ 2,091,841 N/A N/A N/A -- $ 36,886,408
Total cash distributions
declared............... $ 26,460,446 $ 2,025,000 N/A N/A N/A -- $ 36,886,408
Cash distributions
declared per $10,000
investment............. $ 572 $ 675 N/A N/A N/A -- $ 506
<CAPTION>
Historical Combined Pro Forma
September 30, 1998 Historical September 30, 1998
-------------------------------------------------- ------------ --------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Real estate assets, net. $407,663,180 $18,541,360 $ -- $ -- $426,204,540 $ 9,277,959 (q)
26,052,741 (r) $461,535,240
Mortgages/notes
receivable............. 33,523,506 1,243,284 -- 173,776,981 208,543,771 849,195 (r) 209,392,966
Accounts receivable,
net.................... 575,104 6,576 7,544,985 7,342,103 15,468,768 (7,860,822)(s) 7,607,946
Investment in/due from
joint ventures......... 631,374 3,340,189 -- -- 3,971,563 1,515,830 (q) 5,487,393
Total assets............ 566,383,967 25,211,443 8,429,809 197,528,789 797,554,008 30,589,701 828,143,709
Total
liabilities/minority
interest............... 14,478,585 884,721 5,049,152 185,998,045 206,410,503 (10,851,686)(s)(t) 195,558,817
Total equity............ 551,905,382 24,326,722 3,380,657 11,530,744 595,143,505 41,441,387 (q)(t) 632,584,892
</TABLE>
- --------
S-18
<PAGE>
(a) Represents rental and earned income as if 1) properties that had been
previously constructed and acquired from January 1, 1998 through November
30, 1998 had been acquired and leased on January 1, 1997 and 2) properties
that were developed by APF from January 1, 1998 through November 30, 1998
had been placed in service on May 1, 1997 (assumes a four month development
period).
<TABLE>
<S> <C>
Rental and earned income on Property Transactions by APF...... $9,635,208
</TABLE>
(b) Represents $56,795 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, 1997.
(c) Represents the elimination of intercompany fees between APF, the Income
Fund, the Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees........................................... $ (1,569,202)
Secured equipment lease fee................................ (44,426)
Advisory fees.............................................. (1,722,383)
Reimbursement of administrative costs...................... (289,864)
Acquisition fees........................................... (15,392,193)
Underwriting fees.......................................... (254,945)
Administrative fees........................................ (148,491)
Executive fee.............................................. (310,000)
Guarantee fees............................................. (93,750)
Servicing fee.............................................. (1,014,117)
Development fees........................................... (166,876)
Consulting fee............................................. (1,511)
------------
Total................................................... $(21,007,758)
============
</TABLE>
(d) Represents the deferral of $2,875,906 in origination fees collected by CNL
Restaurant Financial Services Group that should be amortized over the term
of the loans originated (20 years) in accordance with the Statement of
Financial Accounting Standards #91 "Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases."
(e) Represents interest income of $1,318,870 earned from Other Investments
acquired and mortgage notes issued from January 1, 1998 through November
30, 1998 as if this had occurred on January 1, 1997 and the amortization of
$207,677 of deferred origination fees collected during the year ended
December 31, 1997 and during the nine months ended September 30, 1998,
which were capitalized and deferred in (d) above as if they had been
collected on January 1, 1997. These deferred fees are being amortized and
recorded as interest income.
(f) Represents the elimination of intercompany expenses paid between APF, the
Income Fund, the Advisor and the CNL Restaurant Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs....................... $ (289,864)
Servicing fee............................................... (1,014,117)
-----------
$(1,303,981)
===========
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by APF were subject
to capitalization during the entire period and 2) costs relating to
properties not developed by APF were subject to capitalization up through
the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs.............................. (1,415,100)
</TABLE>
(h) Represents savings of $32,503 in professional services and administrative
expenses resulting from reporting on one combined company versus 22
separate entities.
(i) Represents the elimination of fees between APF, the Income Fund, the
Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Advisory fees................................................ $(1,722,383)
Administrative fees.......................................... (148,491)
Executive fee................................................ (310,000)
Guarantee fees............................................... (93,750)
-----------
$(2,274,624)
===========
</TABLE>
(j) Represents additional state taxes of $43,673 resulting from assuming that
acquisitions from January 1, 1998 through November 30, 1998 had been
acquired on January 1, 1997 and assuming that the Income Fund had operated
under a REIT structure.
S-19
<PAGE>
(k) Represents an increase in depreciation of the building portion of the
properties acquired from January 1, 1998 through November 30, 1998 as if
they had been acquired on January 1, 1997 and the step up in basis referred
to in footnote (q) from acquiring the Income Fund portfolio using the
straight-line method over the estimated useful lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense........................................... $1,544,134
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of the CNL
Restaurant Financial Services Group referred to in footnote (q).
<TABLE>
<S> <C>
Amortization of goodwill....................................... $1,568,715
</TABLE>
(m) Represents elimination of interest expense recorded for the amortization of
$350,000 in arrangement fees collected during the year ended December 31,
1997 which were eliminated in footnote (4), II(d ) in the Notes to the Pro
Forma Financial Statements attached to this Supplement.
<TABLE>
<S> <C>
Interest expense................................................ $(68,670)
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees incurred
between APF, the Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Origination fees............................................. $(1,569,202)
Underwriting fees............................................ (254,945)
Consulting fee............................................... (1,511)
-----------
$(1,825,658)
===========
</TABLE>
(o) Represents the elimination of $6,316,081 in the provision for income taxes
as a result of the acquisition. APF expects to continue to qualify as a
REIT and does not expect to incur federal income taxes.
(p) APF Shares issued during the period required to fund acquisitions as if
they had been acquired on January 1, 1997 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 the
proposal to amend and restate APF's articles of incorporation to increase
the number of authorized APF Shares.
(q) Represents the payment of $336,341 in cash and the issuance of 15,468,737
APF Shares in consideration for the purchase of the Income Fund, Advisor
and CNL Restaurant Financial Services Group at September 30, 1998 using the
Exchange Value of $10 per APF Share plus estimated transaction costs. The
acquisitions of the Income Fund and the CNL Restaurant Financial Services
Group have been accounted for under the purchase accounting method and
goodwill was recognized to the extent that the estimated value of the
consideration paid exceeded the fair value of the net tangible assets
acquired. As for the acquisition of the Advisor from a related party, the
consideration paid in excess of the fair value of the net tangible assets
received has been accounted for as costs incurred in acquiring the Advisor
from a related party because the Advisor has not been deemed to qualify as
a "business" for purposes of applying APB Opinion No. 16 "Business
Combinations." Upon consummation of the Acquisition, this expense will be
recorded as an operating expense on APF's statement of earnings. APF will
not deduct this expense for purposes of calculating funds from operations
due to the nonrecurring and non-cash nature of the expense. As of September
30, 1998, $249,403 of transaction costs had been incurred by APF.
<TABLE>
<S> <C>
Income Fund................................................. $ 32,023,712
Advisor..................................................... 76,000,000
CNL Restaurant Financial Services Group..................... 47,000,000
------------
Total Purchase Price (cash and shares)...................... 155,023,712
Less cash paid to Income Fund............................... (336,341)
------------
Share consideration......................................... 154,687,371
Transaction costs of APF.................................... 8,933,000
------------
Total costs incurred........................................ $163,620,371
============
</TABLE>
In addition, APF i) used $8,933,000 in cash to pay the transaction costs
related to the Acquisition, ii) made an upward adjustment to the Income
Fund carrying value of land and building on operating leases by $7,553,818,
net investment in direct financing leases by $1,724,141, investment in
joint venture by $1,515,830, made downward adjustments to the carrying
value of accrued rental income of $1,183,770, and made downward adjustments
to other assets of $3,722,546 to adjust historical values to fair value,
iii) recorded goodwill of $41,832,391 for the acquisition of the CNL
Restaurant Financial Services Group, iv) reduced retained earnings by
$76,998,725 for the excess consideration paid over the net assets of the
Advisor and removed the historical common stock balance of $12,000,
additional paid in capital balance of $9,602,287, retained earnings balance
of $5,297,114 and partners capital balance of $24,326,722 of the Income
Fund, Advisor and CNL Restaurant Financial Services Group.
S-20
<PAGE>
(r) Represents the use of $26,901,936 in cash and cash equivalents at September
30, 1998 to acquire $26,052,741 in properties and issue $849,195 in
mortgage notes which occurred from October 1, 1998 through November 30,
1998.
(s) Represents the elimination by the Income Fund of $11,443 in related party
payables recorded as receivables by the Advisor, the elimination by the CNL
Restaurant Financial Services Group of $6,641,379 in related party payables
recorded as receivables by CNL Restaurant Financial Services Group and the
elimination by APF of $1,208,000 in related party payables recorded as
receivables by the Advisor.
(t) Represents the elimination of income taxes payable of $2,990,864 from
liabilities assumed in the acquisition of the CNL Restaurant Businesses
since the acquisition agreements require that the Advisor and CNL
Restaurant Financial Services Group have no accumulated or current earnings
and profits for federal income tax purposes at the time of the acquisition.
S-21
<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>
Nine Months Ended
September 30, Year Ended December 31,
----------------------- -----------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues (1)............ $ 2,155,472 $ 2,117,749 $ 2,919,734 $ 2,882,709 $ 2,716,883
Net income (2).......... 1,803,944 1,742,316 2,606,008 2,326,863 1,982,148
Cash distributions
declared............... 2,025,000 2,025,000 2,700,000 2,700,000 2,700,002
Net income per Unit (2). 0.060 0.057 0.086 0.077 0.065
Cash distributions
declared per Unit...... 0.068 0.068 0.090 0.090 0.090
Weighted average number
of Limited Partner
Units outstanding...... 30,000,000 30,000,000 30,000,000 30,000,000 30,000,000
<CAPTION>
September 30, December 31,
----------------------- -----------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total assets............ $25,211,443 $25,269,144 $25,479,762 $25,523,853 $25,915,616
Total partners' capital. 24,326,722 24,359,086 24,547,778 24,641,770 25,014,907
</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 nine months ended September 30, 1998 and 1997 includes
$758 and $685, respectively, from gain on sale of land and building. Net
income for the nine months ended September 30, 1997 also includes $19,739
from loss on sale of land and building. Net income for the years ended
December 31, 1997, 1996 and 1995, includes $184,627, $195,675 and $1,421,
respectively, from gains on dispositions of land and buildings. Net income
for the years ended December 31, 1997 and 1996, includes a loss on sale of
land and building of $19,739 and $235,465, respectively. In addition, net
income for the year ended December 31, 1995, includes a loss on demolition
of building and a loss on sale of land and building of $174,466 and $6,556,
respectively.
S-22
<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 September 30, 1998, the Income Fund owned 40 restaurant
properties, which included 10 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
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
The Income Fund's primary source of capital for the nine months ended
September 30, 1998 and 1997, 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
$2,085,545 and $2,099,452 for the nine months ended September 30, 1998 and
1997, respectively. The decrease in cash from operations for the nine months
ended September 30, 1998, as compared to the nine months ended September 30,
1997, 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, 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 the partners. At September 30, 1998, the
Income Fund had $828,551 invested in such short-term investments, as compared
to $761,317 at December 31, 1997. The funds remaining at September 30, 1998,
after payment of distributions 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 $737,856 at September 30, 1998, from $784,470 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 operations, the Income Fund declared distributions to the
Limited Partners of $2,025,000 for each of the nine months ended September 30,
1998 and 1997 ($675,000 for each of the quarters ended September 30, 1998 and
1997). This represents distributions for each applicable nine months of $0.068
per unit ($0.023 per unit for each applicable quarter). No distributions were
made to us for the quarters and nine months ended September 30, 1998 and 1997.
No amounts distributed to the Limited Partners for the nine months ended
September 30, 1998 and 1997, 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.
S-23
<PAGE>
The Years Ended December 31, 1997, 1996 and 1995
The Income Fund's primary source of capital for the years ended December 31,
1997, 1996 and 1995, 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 $2,840,459, $2,670,869 and
$2,484,538 for the years ended December 31, 1997, 1996 and 1995, respectively.
The increase in cash from operations during 1997 and 1996, each as compared to
the prior 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 items during the
years ended December 31, 1997, 1996 and 1995.
In August 1995, the Income Fund sold its restaurant property in Florence,
South Carolina, to the tenant for $1,160,000, and in connection therewith,
accepted a promissory note in the principal sum of $1,160,000, collateralized
by a mortgage on the restaurant property. The 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 $1,106,657 due in July 2000. Collections
commenced August 10, 1995. In accordance with Statement of Financial Accounting
Standards No. 66, "Accounting for Sales of Real Estate," the Income Fund
recorded the sale of the restaurant property using the installment sales
method. Therefore, the gain on the sale of the restaurant property was deferred
and is being recognized as income proportionately as payments under the
mortgage note are collected. The Income Fund recognized a gain of $926 and $836
for financial reporting purposes for the years ended December 31, 1997 and
1996, respectively, and had a deferred gain in the amount of $126,303 and
$127,229 at December 31, 1997 and 1996, respectively. The mortgage notes
receivable balances at December 31, 1997 and 1996, include principal of
$1,131,496 and $1,139,788, respectively, and accrued interest of $6,235 and
$6,281, respectively, and are shown net of the deferred gain of $126,303 and
$127,229, respectively. Proceeds received from the sale of this restaurant
property have been reinvested in additional restaurant properties or used for
other Income Fund purposes.
In November 1994, the Income Fund received notice from the subtenant of its
restaurant property in Jacksonville, Florida, that it intended to exercise its
option to purchase the restaurant property in accordance with the terms of its
sublease agreement. In December 1995, the Income Fund sold its restaurant
property in Jacksonville, Florida, to the subtenant for $240,000, and in
connection therewith, accepted a promissory note in the principal sum of
$240,000, collateralized by a mortgage on the restaurant property. The note
bears interest at a rate of 10% per annum and is being collected in 119 equal
monthly installments of $2,106, with a balloon payment of $218,252 due December
2005. Collections commenced in January 1996. As a result of the sale of the
restaurant property, the Income Fund recognized a loss of $6,556 for financial
reporting purposes for the year ended December 31, 1995. The mortgage notes
receivable balance at December 31, 1997 and 1996, include principal of $237,192
and $238,666, respectively, and accrued interest of $1,977 and $1,989,
respectively. Proceeds received from the sale of this restaurant property will
be distributed to the Limited Partners or will be used for other Income Fund
purposes.
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 and March 1997 in
accordance with the terms of the agreement, and has agreed to pay the Income
Fund the remaining balance due of approximately $28,000 in five 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
S-24
<PAGE>
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 form the sale.
In addition, in October 1996, the Income Fund sold its restaurant property
in Hartland, Michigan, for $625,000 and received net sales proceeds of
$617,035, resulting in a loss of approximately $235,465, for financial
reporting purposes. In February 1997, the Income Fund reinvested the net sales
proceeds in CNL Mansfield Joint Venture. The Income Fund has a 79% 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 affiliates
of the General Partner, 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 an affiliate of the General Partner. 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, qualified as a like-
kind exchange transaction in accordance with Section 1031 of the Internal
Revenue Code. However, 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 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
S-25
<PAGE>
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 make distributions to the partners. At December 31, 1997, the
Income Fund had $761,317 invested in such short-term investments, as compared
to $1,305,429 at December 31, 1996. The decrease in the amount invested in
short-term investments is primarily a result of the reinvestment of the net
sales proceeds received in 1996 from the sale of the restaurant property in
Hartland, Michigan, in CNL Mansfield Joint Venture in February 1997, as
described above. The funds remaining at December 31, 1997, will be used for the
payment of distributions and other liabilities.
During 1997, 1996 and 1995, certain of our affiliates incurred on behalf of
the Income Fund $74,968, $97,288 and $94,618, respectively, for certain
operating expenses. As of December 31, 1997 and 1996, the Income Fund owed
$27,683 and $1,867, respectively, to affiliates for such amounts and accounting
and administrative services. As of February 28, 1998, the Income Fund had
reimbursed the affiliates all such amounts. In addition, during the year ended
December 31, 1995, the Income Fund incurred $7,200 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 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. Amounts payable to
other parties, including distributions payable, of the Income Fund increased to
$749,587 at December 31, 1997, from $724,399 at December 31, 1996, primarily as
a result of an increase in rents paid in advance during the year ended December
31, 1997. Liabilities at December 31, 1997, to the extent they exceed cash and
cash equivalents at December 31, 1997, 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
General Partner contributions.
Based primarily on current and anticipated future cash from operations, the
Income Fund declared distributions to the Limited Partners of $2,700,000 for
each of the years ended December 31, 1997 and 1996, and $2,700,002 for the year
ended December 31, 1995. This represents distributions of $0.090 per Unit for
each of the years ended December 31, 1997, 1996 and 1995. No amounts
distributed to the Limited Partners for the years ended December 31, 1997, 1996
and 1995 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.
Due to low operating expenses and ongoing cash flow, we believe that the
Income Fund has sufficient working capital reserves at this time. In addition,
because all leases of the Income Fund's restaurant properties are on a triple-
net basis, it is not anticipated that a permanent reserve for maintenance and
repairs will be established at this time. To the extent, however, that the
Income Fund has insufficient funds for such purposes, we will contribute to the
Income Fund an aggregate amount of up to one percent of the offering proceeds
for maintenance and repairs.
S-26
<PAGE>
Results of Operations
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 1997, the Income Fund and its
consolidated joint venture, San Antonio #849 Joint Venture, owned and leased 31
wholly-owned restaurant properties (including one restaurant property in
Columbus, Indiana and one restaurant property in Dunnellon, Florida, which were
sold in May and October 1997, respectively) and during the nine months ended
September 30, 1998, the Income Fund and its consolidated 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 nine months
ended September 30, 1998 and 1997, the Income Fund and San Antonio #849 Joint
Venture earned $1,795,268 and $1,842,615, respectively, in rental income from
operating leases and earned income from direct financing leases, $595,923 and
$615,826 of which was earned for the quarters ended September 30, 1998 and
1997, respectively. Rental and earned income decreased during the quarter and
nine months ended September 30, 1998, as compared to the quarter and nine
months ended September 30, 1997, primarily as a result of the sales of the
restaurant properties in Columbus, Indiana and Dunnellon, Florida in May and
October 1997, respectively. The Income Fund reinvested these net sales proceeds
in two restaurant properties, as tenants-in-common, with certain of our
affiliates as described below.
During the nine months ended September 30, 1997, the Income Fund owned and
leased nine restaurant properties indirectly through other joint venture
arrangements and one restaurant property indirectly with an affiliate as
tenants-in-common (including the restaurant property in Yuma, Arizona held as
tenants-in-common with an affiliate, which was sold in October 1997). In
addition, during the nine months ended September 30, 1998, the Income Fund
owned and leased nine restaurant properties indirectly through other joint
venture arrangements and two restaurant properties indirectly with affiliates
as tenants-in-common. In connection therewith, during the nine months ended
September 30, 1998 and 1997, the Income Fund earned $229,480 and $151,930,
respectively, attributable to net income earned by these unconsolidated joint
ventures, $78,287 and $55,939 of which was earned for the quarters ended
September 30, 1998 and 1997, respectively. The increase in net income earned by
joint ventures during the quarter and nine months ended September 30, 1998, as
compared to the quarter and nine months ended September 30, 1997, is primarily
due to the fact that in December 1997, the Income Fund reinvested the net sales
proceeds received from the sale of two restaurant properties in October 1997,
in a restaurant property in Smithfield, North Carolina, and a restaurant
property in Miami, Florida, with certain of our affiliates as tenants-in-
common.
During at least one of the nine months ended September 30, 1998 and 1997,
four lessees of the Income Fund and its consolidated joint venture, San Antonio
#849 Joint Venture, Golden Corral Corporation, Restaurant Management Services,
Inc., Flagstar Enterprises, Inc. and Waving Leaves, 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 restaurant properties owned by unconsolidated joint ventures
and restaurant properties owned with affiliates as tenants-in-common). As of
September 30, 1998, Golden Corral Corporation was the lessee under leases
relating to five restaurants, Restaurant Management Services, Inc. was the
lessee under leases relating to eight restaurants, Flagstar Enterprises, Inc.
was the lessee under leases relating to two restaurants, 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,
Golden Corral Corporation, Restaurant Management Services, Inc. and Waving
Leaves, Inc. each will continue to contribute more than 10% of the Income
Fund's total rental income during the remainder of 1998 and subsequent years.
Any failure of these lessees could materially affect the Income Fund's income.
Operating expenses, including depreciation and amortization expense, were
$352,286 and $356,379 for the nine months ended September 30, 1998 and 1997,
respectively, of which $117,124 and $112,150 were incurred for the quarters
ended September 30, 1998 and 1997, respectively.
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
S-27
<PAGE>
purposes of $758 and $685 for the nine months ended September 30, 1998 and
1997, respectively, $259 and $234 of which was recognized for the quarters
ended September 30, 1998 and 1997, respectively. As a result of the sale of the
restaurant property in Columbus, Indiana in 1997, the Income Fund recognized a
loss for financial reporting purposes of $19,739 during the nine months ended
September 30, 1997. No restaurant properties were sold during the quarter and
nine months ended September 30, 1998.
The Years Ended December 31, 1997, 1996 and 1995
During 1995, the Income Fund owned and leased 33 wholly-owned restaurant
properties (including two restaurant properties in Florence, South Carolina,
and Jacksonville, Florida, which were sold in August and December 1995,
respectively), during 1996, the Income Fund 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 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).
In addition, during 1996 and 1995, the Income Fund was a co-venturer in four
separate joint ventures which owned and leased nine restaurant properties and
one restaurant property the Income Fund owned and leased with an affiliate as
tenants-in-common. During 1997, the Income Fund was a co-venturer in five
separate joint ventures which owned and leased 10 restaurant properties and
three restaurant properties the Income Fund owned with affiliates as tenants-
in-common (including one restaurant property in Yuma, Arizona which was sold in
October 1997). As of December 31, 1997, 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
wholly-owned 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
$22,100 to $166,700. 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, 1997, 1996 and 1995, the Income Fund and
its consolidated joint venture, San Antonio #849 Joint Venture, earned
$2,436,222, $2,459,094 and $2,427,464, 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, 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. This decrease 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 decrease in future years as a result of reinvesting the
proceeds from the sales of the restaurant properties in Hartland, Michigan;
Columbus, Ohio and Dunnellon, Florida in joint ventures and in restaurant
properties owned with affiliates, as tenants-in-common, as described below.
However, as a result of reinvesting in joint ventures and in restaurant
properties owned with affiliates, as tenants-in-common, net income earned by
unconsolidated joint ventures is expected to increase in 1998.
Rental and earned income increased during 1996, as compared to 1995, as a
result of recording rental income during 1996 relating to the restaurant
properties in Colorado Springs, and Pueblo, Colorado as compared to recording
no rental income during 1995 due to financial difficulties the tenant was
experiencing. The restaurant property in Colorado Springs, Colorado, was
subsequently sold, as described above in "Liquidity and Capital Resources." The
increase in rental and earned income during 1996, as compared to 1995, was
partially offset by a decrease in rental income during 1996, as a result of the
sale of the Income Fund restaurant properties in Florence, South Carolina, and
Jacksonville, Florida, in August and December 1995, respectively. However, as a
result of the Income Fund accepting mortgage notes for the sale of these
S-28
<PAGE>
restaurant properties, interest income increased during 1996 and 1995, as
described below and above in "Liquidity and Capital Resources."
For the years ended December 31, 1997, 1996 and 1995, the Income Fund also
earned $51,345, $44,973 and $68,820, respectively, in contingent rental income.
The increase in contingent rental income during 1997, as compared to 1996, is
primarily a result of increased gross sales of certain restaurant properties
requiring the payment of contingent rental income. The decrease in contingent
rental income during 1996, as compared to 1995, is primarily attributable to
the change in the percentage rent formula in accordance with the terms of the
lease agreement for one of the Income Fund's leases during 1996.
During the years ended December 31, 1997, 1996 and 1995, the Income Fund
earned $183,579, $240,079 and $84,390, respectively, in interest and other
income. The decrease in interest and other income for 1997, as compared to
1996, and the increase in interest and other income during 1996, as compared to
1995, is 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. The increase in interest and other income
during 1996, as compared to 1995, was primarily attributable to an increase in
interest earned on the mortgage notes accepted in connection with the sales of
the restaurant properties in Florence, South Carolina, in August 1995, and
Jacksonville, Florida, in December 1995, as discussed above in "Liquidity and
Capital Resources."
For the years ended December 31, 1997, 1996 and 1995, the Income Fund also
earned $267,251, $157,254 and $154,937, 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 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 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." In addition,
the increase in net income earned by joint ventures during the year ended 1997,
as compared to 1996, 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."
During at least one of the years ended December 31, 1997, 1996 and 1995,
three lessees of the Income Fund and its consolidated joint venture, Golden
Corral Corporation, Restaurant Management Services, Inc. and Flagstar
Enterprises, 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 nine restaurant
properties owned by unconsolidated joint ventures and three restaurant
properties owned with affiliates as tenants-in-common, including one restaurant
property owned as tenants-in-common which sold in October 1997). As of December
31, 1997, Golden Corral Corporation was the lessee under leases relating to
four restaurants, Restaurant Management Services, Inc. was the lessee under
leases relating to eight restaurants and Flagstar Enterprises, 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 lessees each
will continue to contribute more than 10% of the Income Fund's total rental
income during 1998 and subsequent years. In addition, during at least one at
least on of the years ended December 31, 1997, 1996 and 1995, three restaurant
chains, Golden Corral, Hardee's and Burger King, each accounted for more than
10% of the Income
S-29
<PAGE>
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 three
restaurant properties owned with affiliates as tenants-in-common, including one
restaurant property owned as tenants-in-common which was sold in October 1997).
In subsequent years, it is anticipated that these three restaurant chains each
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 lessees or restaurant chains could materially affect the
Income Fund's income.
Operating expenses, including depreciation and amortization expense, were
$478,614, $516,056 and $555,134 for the years ended December 31, 1997, 1996 and
1995, respectively. 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 1996, as compared
to 1995, was primarily attributable to the fact that the Income Fund accrued
approximately $46,500 for current and past due real estate taxes relating to
the restaurant properties in Colorado Springs and Pueblo, Colorado, during
1995. As described above, the amounts accrued during 1995 were reversed and
recorded as other income during 1996. No real estate taxes were recorded during
1996 relating to the restaurant property in Pueblo, Colorado, due to the fact
that the new tenant is responsible for the real estate taxes under the terms of
the assigned lease.
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.
The decrease in operating expenses during 1996, as compared to 1995, was
partially attributable to a decrease in depreciation expense as a result of the
demolition of the restaurant property in Daytona Beach, Florida, the sale of
the restaurant property in Florence, South Carolina, and the sale of the
restaurant property in Jacksonville, Florida, during 1995.
The decrease in operating expenses during 1996, as compared to 1995, was
partially offset by an increase in accounting and administrative expenses
associated with operating the Income Fund and its restaurant properties and an
increase in insurance expense as a result of our obtaining contingent liability
and property coverage for the Income Fund beginning in May 1995.
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.
In connection with the sale of its restaurant property in Florence, South
Carolina, during 1995, as described above in "Liquidity and Capital Resources,"
the Income Fund recognized a gain for financial reporting purposes of $926,
$836 and $1,421 for the years ended December 31, 1997, 1996 and 1995,
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
S-30
<PAGE>
sale was deferred and is being recognized as income proportionately as payments
under the mortgage note are collected. Therefore, the balance of the deferred
gain of $126,303 at December 31, 1997 is being recognized as income in future
periods as payments are 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.
In addition, as a result of the sale of the restaurant property in
Jacksonville, Florida, during 1995, as described above in "Liquidity and
Capital Resources," the Income Fund recognized a loss for financial reporting
purposes of $6,556 for the year ended December 31, 1995. In addition, as a
result of the demolition of the restaurant property in Daytona Beach, Florida,
as described above in "Liquidity and Capital Resources," the Income Fund
recognized a loss on demolition of building for financial reporting purposes of
$174,466 for the year ended December 31, 1995.
General
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Income Fund's financial position or results of operations.
The Income Fund's leases as of September 30, 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. Inflation has had
a minimal effect on income from operations. Management expects that increases
in restaurant sales volumes due to inflation and real sales growth should
result in an increase in rental income over time. Continued inflation also may
cause capital appreciation of the Income Fund's restaurant properties.
Inflation and changing prices, however, also may have an adverse impact on the
sales of the restaurants and on potential capital appreciation of the
restaurant properties.
The Year 2000 problem is the result of information technology systems and
embedded systems (products which are made with microprocessor (computer) chips
such as HVAC systems, physical security systems and elevators) using a two-
digit format, as opposed to four digits, to indicate the year. Such information
technology and embedded systems may be unable to properly recognize and process
date-sensitive information beginning January 1, 2000.
The Income Fund does not have any information technology systems. Certain of
our affiliates provide all services requiring the use of information technology
systems pursuant to a management agreement with the Income Fund. The
maintenance of embedded systems, if any, 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. We and our affiliates
have established a team dedicated to reviewing the internal information
technology systems used in the operation of the Income Fund, and the
information technology and embedded systems and the Year 2000 compliance plans
of the Income Fund's tenants, significant suppliers, financial institutions and
transfer agent.
The information technology infrastructure of our affiliates consists of a
network of personal computers and servers that were obtained from major
suppliers. The affiliates utilize various administrative and financial software
applications on that infrastructure to perform the business functions of the
Income Fund. Our inability and that of our affiliates to identify and timely
correct material Year 2000 deficiencies in the software and/or infrastructure
could result in an interruption in, or failure of, certain of the Income Fund's
business activities or operations. Accordingly, we and our affiliates have
requested and are evaluating documentation from the suppliers of the affiliates
regarding the Year 2000 compliance of their products that are used in the
business activities or operations of the Income Fund. The costs expected to be
incurred by us and our affiliates to become Year 2000 compliant will be
incurred by us and our affiliates; therefore, these costs will have no impact
on the Income Fund's financial position or results of operations.
S-31
<PAGE>
The Income Fund has material third party relationships with its tenants,
financial institutions and 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. If
any of these third parties are unable to meet their obligations to the Income
Fund because of the Year 2000 deficiencies, such a failure may have a material
impact on the Income Fund. Accordingly, we have requested and are evaluating
documentation from the Income Fund's tenants, financial institutions, and
transfer agent relating to their Year 2000 compliance plans. At this time, we
have not yet received sufficient certifications to be assured that the tenants,
financial institutions, and transfer agent have fully considered and mitigated
any potential material impact of the Year 2000 deficiencies. Therefore, we do
not, at this time, know of the potential costs to the Income Fund of any
adverse impact or effect of any Year 2000 deficiencies by these third parties.
We currently expect that all Year 2000 compliance testing and any necessary
remedial measures on the information technology systems used in the business
activities and operations of the Income Fund will be completed prior to June
30, 1999. Based on the progress we and our affiliates have made in identifying
and addressing the Income Fund's Year 2000 issues and the plan and timeline to
complete the compliance program, we do not foresee significant risks associated
with the Income Fund's Year 2000 compliance at this time. Because we and our
affiliates are still evaluating the status of the systems used in business
activities and operations of the Income Fund and the systems of the third
parties with which the Income Fund conducts its business, we have not yet
developed a comprehensive contingency plan and are unable to identify "the most
reasonably likely worst case scenario" at this time. As we identify significant
risks related to the Income Fund's Year 2000 compliance or if the Income Fund's
Year 2000 compliance program's progress deviates substantially from the
anticipated timeline, we will develop appropriate contingency plans.
S-32
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997... F-1
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997.............................................. F-2
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997.............. F-3
Condensed Statements of Cash Flows for the Nine Months Ended September 30,
1998 and 1997............................................................ F-4
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997........................................ F-5
Report of Independent Accountants......................................... F-6
Balance Sheets as of December 31, 1997 and 1996........................... F-7
Statements of Income for the Years Ended December 31, 1997, 1996 and 1995. F-8
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995............................................................ F-9
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995..................................................................... F-10
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and 1995................................................................. F-11
Unaudited Pro Forma Financial Information................................. F-19
Unaudited Pro Forma Balance Sheet as of September 30, 1998................ F-20
Unaudited Pro Forma Income Statement for the Nine Months Ended September
30, 1998................................................................. F-21
Unaudited Pro Forma Income Statement for the Year Ended December 31, 1997. F-22
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements............................................................... F-23
</TABLE>
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $2,397,837 and
$2,169,570........................................ $15,154,596 $15,382,863
Net investment in direct financing leases.......... 3,386,764 3,447,152
Investment in joint ventures....................... 3,340,189 3,393,932
Mortgage note receivable, less deferred gain of
$125,545 and $126,303............................. 1,243,284 1,250,597
Cash and cash equivalents.......................... 828,551 761,317
Receivables, less allowance for doubtful accounts
of $28,936 and $32,959............................ 6,576 64,092
Prepaid expenses................................... 7,291 4,755
Accrued rental income, less allowance for doubtful
accounts of $9,845 in 1998 and 1997............... 1,183,770 1,114,632
Other assets....................................... 60,422 60,422
----------- -----------
$25,211,443 $25,479,762
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable................................... $ 2,327 $ 6,131
Escrowed real estate taxes payable................. 4,727 7,785
Distributions payable.............................. 675,000 675,000
Due to related parties............................. 11,443 34,883
Rents paid in advance.............................. 44,359 60,671
----------- -----------
Total liabilities.............................. 737,856 784,470
Minority interest.................................. 146,865 147,514
Partners' capital.................................. 24,326,722 24,547,778
----------- -----------
$25,211,443 $25,479,762
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-1
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases..................... $ 492,759 $ 493,318 $1,483,950 $1,473,347
Earned income from direct
financing leases........... 103,164 122,508 311,318 369,268
Contingent rental income.... 4,829 2,602 17,207 5,685
Interest and other income... 42,300 46,474 127,438 131,517
---------- ---------- ---------- ----------
643,052 664,902 1,939,913 1,979,817
---------- ---------- ---------- ----------
Expenses:
General operating and
administrative............. 37,062 31,784 104,724 101,277
Bad debt expense............ -- -- -- 4,613
Professional services....... 3,973 4,277 16,567 14,683
Real estate taxes........... -- -- -- 2,979
State and other taxes....... -- -- 2,728 4,560
Depreciation and
amortization............... 76,089 76,089 228,267 228,267
---------- ---------- ---------- ----------
117,124 112,150 352,286 356,379
---------- ---------- ---------- ----------
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... 525,928 552,752 1,587,627 1,623,438
Minority Interest in Income of
Consolidated Joint Ventures.. (4,665) (4,698) (13,921) (13,998)
Equity in Earnings of
Unconsolidated Joint
Ventures..................... 78,287 55,939 229,480 151,930
Gain (Loss) on Sale of Land
and Buildings................ 259 234 758 (19,054)
---------- ---------- ---------- ----------
Net Income.................... $ 599,809 $ 604,227 $1,803,944 $1,742,316
========== ========== ========== ==========
Allocation of Net Income:
General partners............ $ 5,998 $ 6,036 $ 18,039 $ 17,495
Limited partners............ 593,811 598,191 1,785,905 1,724,821
---------- ---------- ---------- ----------
$ 599,809 $ 604,227 $1,803,944 $1,742,316
========== ========== ========== ==========
Net Income Per Limited Partner
Unit......................... $ 0.020 $ 0.020 $ 0.060 $ 0.057
========== ========== ========== ==========
Weighted Average Number of
Limited Partner Units
Outstanding.................. 30,000,000 30,000,000 30,000,000 30,000,000
========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1998 1997
----------------- ------------
<S> <C> <C>
General partners:
Beginning balance............................ $ 181,085 $ 156,785
Net income................................... 18,039 24,300
------------ ------------
199,124 181,085
------------ ------------
Limited partners:
Beginning balance............................ 24,366,693 24,484,985
Net income................................... 1,785,905 2,581,708
Distributions ($0.068 and $0.090 per limited
partner unit, respectively)................. (2,025,000) (2,700,000)
------------ ------------
24,127,598 24,366,693
------------ ------------
Total partners' capital........................ $ 24,326,722 $ 24,547,778
============ ============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities............ $2,085,545 $2,099,452
---------- ----------
Cash Flows from Investing Activities:
Proceeds from sale of land......................... -- 223,589
Investment in joint ventures....................... -- (616,245)
Collections on mortgage note receivable............ 8,004 7,230
Other.............................................. 13,255 --
---------- ----------
Net cash provided by (used in) investing
activities...................................... 21,259 (385,426)
---------- ----------
Cash Flows from Financing Activities:
Distributions to limited partners.................. (2,025,000) (2,025,000)
Distributions to holder of minority interest....... (14,570) (14,781)
---------- ----------
Net cash used in financing activities............ (2,039,570) (2,039,781)
---------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents... 67,234 (325,755)
Cash and Cash Equivalents at Beginning of Period....... 761,317 1,305,429
---------- ----------
Cash and Cash Equivalents at End of Period............. $ 828,551 $ 979,674
---------- ----------
Supplemental Schedule of Non-Cash Financing Activities
Distributions declared and unpaid at end of period. $ 675,000 $ 675,000
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, 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, 1997.
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 partner's proportionate share of the equity in the
Partnership's consolidated joint venture. All significant intercompany accounts
and transactions have been eliminated.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
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 the unconsolidated joint ventures and
the properties held as tenants-in-common with affiliates) for at least one of
the nine month periods ended September 30:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Golden Corral Corporation.............................. $509,751 $445,267
Restaurant Management Services, Inc. .................. 327,103 327,855
Waving Leaves, Inc..................................... 225,889 112,948
Flagstar Enterprises, Inc.............................. 113,294 231,196
</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 could significantly impact the
results of operations of the Partnership. However, the general partners believe
that the risk of such a default is reduced due to the essential or important
nature of these properties for the on-going operations of the lessees.
F-5
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners
CNL Income Fund VII, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund VII, Ltd.
(a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. 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 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 Income Fund VII, Ltd.
as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
January 15, 1998
F-6
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation.............................. $15,382,863 $15,930,547
Net investment in direct financing leases.............. 3,447,152 4,098,192
Investment in joint ventures........................... 3,393,932 1,789,238
Mortgage notes receivable, less deferred gain.......... 1,250,597 1,259,495
Cash and cash equivalents.............................. 761,317 1,305,429
Receivables, less allowance for doubtful accounts of
$32,959 and $43,234................................... 64,092 63,386
Prepaid expenses....................................... 4,755 4,654
Accrued rental income, less allowance for doubtful
accounts of $9,845 and $10,786........................ 1,114,632 1,012,490
Other assets........................................... 60,422 60,422
----------- -----------
$25,479,762 $25,523,853
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable....................................... $ 6,131 $ 6,502
Escrowed real estate taxes payable..................... 7,785 4,192
Distributions payable.................................. 675,000 675,000
Due to related parties................................. 34,883 9,067
Rents paid in advance.................................. 60,671 38,705
----------- -----------
Total liabilities.................................. 784,470 733,466
Minority interest...................................... 147,514 148,617
Partners' capital...................................... 24,547,778 24,641,770
----------- -----------
$25,479,762 $25,523,853
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases..... $1,960,724 $1,954,033 $1,888,830
Earned income from direct financing
leases................................. 475,498 505,061 538,634
Contingent rental income................ 51,345 44,973 68,820
Interest and other income............... 183,579 240,079 84,390
---------- ---------- ----------
2,671,146 2,744,146 2,580,674
---------- ---------- ----------
Expenses:
General operating and administrative.... 138,560 159,001 146,747
Professional services................... 23,546 27,640 27,379
Bad debt expense........................ 4,613 -- 2,584
Real estate taxes....................... 2,979 9,010 46,512
State and other taxes................... 4,560 2,448 2,562
Depreciation and amortization........... 304,356 317,957 329,350
---------- ---------- ----------
478,614 516,056 555,134
---------- ---------- ----------
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 Loss on Demolition of
Building................................. 2,192,532 2,228,090 2,025,540
Minority Interest in Income of
Consolidated Joint Venture............... (18,663) (18,691) (18,728)
Equity in Earnings of Unconsolidated Joint
Ventures................................. 267,251 157,254 154,937
Gain (Loss) on Sale of Land and Buildings. 164,888 (39,790) (5,135)
Loss on Demolition of Building............ -- -- (174,466)
---------- ---------- ----------
Net Income................................ $2,606,008 $2,326,863 $1,982,148
========== ========== ==========
Allocation of Net Income:
General partners........................ $ 24,300 $ 23,586 $ 20,784
Limited partners........................ 2,581,708 2,303,277 1,961,364
---------- ---------- ----------
$2,606,008 $2,326,863 $1,982,148
========== ========== ==========
Net Income Per Limited Partner Unit....... $ 0.086 $ 0.077 $ 0.065
========== ========== ==========
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-8
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<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,
1994................... $1,000 $111,415 $30,000,000 $(12,077,621) $11,137,967 $(3,440,000) $25,732,761
Distributions to
limited partners
($0.090 per limited
partner unit)......... -- -- -- (2,700,002) -- -- (2,700,002)
Net income............. -- 20,784 -- -- 1,961,364 -- 1,982,148
------ -------- ----------- ------------ ----------- ----------- -----------
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
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows From Operating Activities:
Cash received from tenants........... $ 2,500,189 $ 2,549,406 $ 2,399,249
Distributions from unconsolidated
joint ventures...................... 300,696 191,174 190,398
Cash paid for expenses............... (140,819) (248,523) (174,993)
Interest received.................... 180,393 178,812 69,884
----------- ----------- -----------
Net cash provided by operating
activities........................ 2,840,459 2,670,869 2,484,538
----------- ----------- -----------
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.......................... 9,766 8,821 12,725
----------- ----------- -----------
Net cash provided by (used in)
investing activities.............. (664,805) 629,209 12,725
----------- ----------- -----------
Cash Flows From Financing Activities:
Distributions to limited partners.... (2,700,000) (2,700,000) (2,760,002)
Distributions to holder of minority
interest............................ (19,766) (19,723) (17,240)
----------- ----------- -----------
Net cash used in financing
activities........................ (2,719,766) (2,719,723) (2,777,242)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................ (544,112) 580,355 (279,979)
Cash and Cash Equivalents at Beginning
of Year................................ 1,305,429 725,074 1,005,053
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 761,317 $ 1,305,429 $ 725,074
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................ $ 2,606,008 $ 2,326,863 $ 1,982,148
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation......................... 304,356 317,957 328,982
Amortization......................... -- -- 368
Minority interest in income of
consolidated joint venture.......... 18,663 18,691 18,728
Loss (gain) on sale of land and
buildings........................... (164,888) 39,790 5,135
Loss on demolition of building....... -- -- 174,466
Equity in earnings of unconsolidated
joint ventures, net of
distributions....................... 33,445 33,920 35,461
Decrease (increase) in receivables... 17,173 (14,827) 799
Decrease (increase) in prepaid
expenses............................ (101) 379 (3,320)
Decrease in net investment in direct
financing leases.................... 76,941 70,329 70,872
Increase in accrued rental income.... (102,142) (104,639) (169,520)
Increase (decrease) in accounts
payable and accrued expenses........ 3,222 (40,072) 46,367
Increase (decrease) in due to related
parties............................. 25,816 (4,244) 6,111
Increase (decrease) in rents paid in
advance............................. 21,966 26,722 (12,059)
----------- ----------- -----------
Total adjustments.................. 234,451 344,006 502,390
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. $ 2,840,459 $ 2,670,869 $ 2,484,538
=========== =========== ===========
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Mortgage notes accepted in exchange
for sale of land and buildings....... $ -- $ -- $ 1,400,000
=========== =========== ===========
Distributions declared and unpaid at
December 31.......................... $ 675,000 $ 675,000 $ 675,000
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
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.
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 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-11
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Investment in Joint Ventures--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 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.
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.
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 13 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
F-12
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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>
1997 1996
----------- -----------
<S> <C> <C>
Land............................................ $ 8,430,465 $ 8,673,793
Buildings....................................... 9,121,968 9,121,968
17,552,433 17,795,761
Less accumulated depreciation................... (2,169,570) (1,865,214)
----------- -----------
$15,382,863 $15,930,547
=========== ===========
</TABLE>
In July 1996, the Partnership sold its 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 property
was originally acquired by the Partnership in July 1990 and had a cost of
approximately $900,900, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $144,000 in excess of its original purchase price. In October
1996, the Partnership reinvested the net sales proceeds along with additional
funds, in a Boston Market property located in Marietta, Georgia.
In addition, in October 1996, the Partnership sold its property in Hartland,
Michigan, for $625,000 and received net sales proceeds of $617,035, resulting
in a loss of approximately $235,465 for financial reporting purposes.
In 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, 1997, 1996 and 1995, the Partnership recognized $102,142, $104,639 and
$169,520, 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, 1997:
<TABLE>
<S> <C>
1998.......................................................... $ 1,879,999
1999.......................................................... 1,891,776
2000.......................................................... 1,925,741
2001.......................................................... 2,022,708
2002.......................................................... 2,034,710
Thereafter.................................................... 12,545,975
-----------
$22,300,909
===========
</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 VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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>
1997 1996
----------- -----------
<S> <C> <C>
Minimum lease payments receivable............... $ 6,411,161 $ 7,824,101
Estimated residual values....................... 1,008,935 1,266,893
Less unearned income............................ (3,972,944) (4,992,802)
----------- -----------
Net investment in direct financing leases....... $ 3,447,152 $ 4,098,192
=========== ===========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998........................................................... $ 495,609
1999........................................................... 495,609
2000........................................................... 495,609
2001........................................................... 496,766
2002........................................................... 496,766
Thereafter..................................................... 3,930,802
----------
$6,411,161
==========
</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 percent 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, 1997, the Partnership and its co-venture partner had
contributed $616,245 and $163,964, respectively, to the joint venture to
acquire the restaurant property. As of December 31, 1997, the Partnership and
its co-venture partner owned a 79 percent and 21 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-14
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
As of December 31, 1996, 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,
1997, 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, 1997, 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 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>
1997 1996
----------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation........................ $10,892,405 $7,778,815
Cash............................................. 750 1,106
Receivables...................................... 18,819 14,495
Accrued rental income............................ 147,685 154,782
Other assets..................................... 1,079 1,115
Liabilities...................................... 8,625 1,216
Partners' capital................................ 11,052,113 7,949,097
Revenues......................................... 1,012,624 911,833
Net income....................................... 905,117 689,075
</TABLE>
The Partnership recognized income totalling $267,251, $157,254 and $154,937
for the years ended December 31, 1997, 1996 and 1995, respectively, from these
joint ventures and the two properties held as tenants-in-common with
affiliates.
6. Mortgage Notes Receivable
In connection with the sale of its property in Florence, South Carolina, 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 $1,106,657 due in
July 2000.
F-15
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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. 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>
1997 1996
---------- ----------
<S> <C> <C>
Principal balance................................. $1,368,688 $1,378,454
Accrued interest receivable....................... 8,212 8,270
Less deferred gain on sale of land and building... (126,303) (127,229)
---------- ----------
$1,250,597 $1,259,495
========== ==========
</TABLE>
The general partners believe that the estimated fair values of mortgage
notes receivable at December 31, 1997 and 1996, 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, 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 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.
During each of the years ended December 31, 1997 and 1996, the Partnership
declared distributions to the limited partners of $2,700,000, and during the
year ended December 31, 1995, the partnership declared distributions to the
limited partners of $2,700,002. No distributions have been made to the general
partners to date.
F-16
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................... $2,606,008 $2,326,863 $1,982,148
Depreciation for tax reporting purposes
in excess of depreciation for financial
reporting purposes..................... (25,552) (24,753) (36,960)
Gain or loss on sale of land and
buildings for financial reporting
purposes in excess of gain or loss for
tax reporting purposes................. (178,348) (163,152) 174,513
Direct financing leases recorded as
operating leases for tax reporting
purposes............................... 76,941 70,329 70,872
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............................... (55,911) 1,420 (68)
Accrued rental income................... (102,142) (104,639) (169,520)
Rents paid in advance................... 21,966 26,722 (12,059)
Minority interest in timing differences
of consolidated joint venture.......... 981 981 3,525
Other................................... (10,275) -- (20,722)
---------- ---------- ----------
Net income for federal income tax
purposes............................... $2,333,668 $2,133,771 $1,991,729
========== ========== ==========
</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 parent company of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, served
as president of CNL Fund Advisors, Inc. through October 1997. CNL Income Fund
Advisors, Inc. was a wholly owned subsidiary of CNL Group, Inc. until its
merger, effective January 1, 1996, with CNL Fund Advisors, Inc. During the
years ended December 31, 1997, 1996 and 1995, CNL Income Fund Advisors Inc. and
CNL Fund Advisors, Inc. (hereinafter referred to collectively as the
"Affiliates") each performed certain services for the Partnership, as described
below.
During the years ended December 31, 1997, 1996 and 1995, certain 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 Affiliates 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 property held as tenants-in-common with an affiliate, 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 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, 1997, 1996 and 1995.
F-17
<PAGE>
CNL INCOME FUND VII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Certain Affiliates are 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 Affiliates provide 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,
1995, the Partnership incurred $7,200 in deferred, subordinated real estate
disposition fees as a result of the Partnership's sale of its Property in
Jacksonville, Florida. No deferred, subordinated real estate disposition fees
were incurred for the years ended December 31, 1997 and 1996.
During the years ended December 31, 1997, 1996 and 1995, Affiliates provided
accounting and administrative services to the Partnership on a day-to-day
basis. The Partnership incurred $77,078, $92,985 and $81,259 for the years
ended December 31, 1997, 1996 and 1995, respectively, for such services.
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C> <C>
Due to Affiliates:
Expenditures incurred on behalf of the Partnership...... $20,321 $ 63
Accounting and administrative services.................. 7,362 1,804
Deferred, subordinated real estate Disposition fee...... 7,200 7,200
------- ------
$34,883 $9,067
======= ======
</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 at least one
of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Corporation..................... $625,724 $608,852 $618,413
Restaurant Management Services, Inc........... 444,069 446,867 446,279
Flagstar Enterprises, Inc..................... 307,738 464,042 469,374
</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
and the two properties held as tenants-in-common with affiliates) for at least
one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Family Steakhouse Restaurants... $625,724 $608,852 $618,413
Hardees....................................... 447,074 524,625 548,221
Burger King................................... 466,626 478,901 486,944
</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. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
F-18
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to the
Company gives effect to the Acquisition, and is based on estimates and
assumptions set for the 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 the Company, the
historical combined financial information of CNL Income Fund VII, Ltd., (the
"CNL 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 the Company, the
CNL Income Fund, Advisor and CNL Restaurant Financial Services Group. The pro
forma balance sheet assumes that the Acquisition occurred on September 30,
1998; the pro forma consolidated statements of earnings assume that the
Property Acquisitions (as defined on page ) and the Acquisition occurred on
January 1, 1997.
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.
UNAUDITED PRO FORMA BALANCE SHEET
September 30, 1998
<TABLE>
<CAPTION>
Historical Pro Forma
-------------------------------------------------------------------------------- ----------------------------
CNL Financial
CNL Income Services, CNL Financial Combined
APF Fund VII, Ltd. Advisor Inc. Corp. Portfolios Adjustments Pro Forma
------------ -------------- ---------- ------------- ------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Land and
buildings on
operating
leases, net..... $298,967,972 $15,154,596 $ 0 $ 0 $ 0 $314,122,568 $ 7,553,818 (1)
26,052,741 (2) $347,729,127
Net investment in
direct financing
leases.......... 117,028,760 3,386,764 0 0 0 120,415,524 1,724,141 (1) 122,139,665
Mortgages and
notes
receivable...... 33,523,506 1,243,284 0 0 173,776,981 208,543,771 849,195 (2) 209,392,966
Other
Investments..... 16,200,316 0 200,000 0 6,561,628 22,961,944 -- 22,961,944
Investment in
joint ventures.. 631,374 3,340,189 0 0 0 3,971,563 1,515,830 (1) 5,487,393
Cash and cash
equivalents..... 90,674,289 828,551 283,300 599,997 5,098,033 97,484,170 (336,341)(1)
(8,933,000)(1)
(26,901,936)(2) 61,312,893
Receivables...... 575,104 6,576 7,544,985 6,824,632 517,471 15,468,768 (7,860,822)(3) 7,607,946
Accrued rental
income.......... 3,071,451 1,183,770 0 0 0 4,255,221 (1,183,770)(2) 3,071,451
Other assets..... 5,711,195 67,713 401,524 295,570 3,854,477 10,330,479 41,832,391 (2)
(3,722,546)(2) 48,440,324
------------ ----------- ---------- ---------- ------------ ------------ ----------- ------------
Total assets.... $566,383,967 $25,211,443 $8,429,809 $7,720,199 $189,808,590 $797,554,008 $30,589,701 $828,143,709
============ =========== ========== ========== ============ ============ =========== ============
LIABILITIES &
EQUITY:
Accounts payable
and accrued
liabilities..... $ 379,496 $ 7,054 $ 449,751 $ 193,949 $ 1,236,138 $ 2,266,388 $ -- $ 2,266,388
Accrued
construction
costs payable... 3,045,304 0 0 0 0 3,045,304 -- 3,045,304
Distributions
payable......... 0 675,000 2,220,000 0 0 2,895,000 -- 2,895,000
Due to related
parties......... 2,552,411 11,443 0 1,452,512 6,556,920 10,573,286 (7,860,822)(3) 2,712,464
Income tax
payable......... 0 0 1,989,003 0 1,001,861 2,990,864 (2,990,864)(4) 0
Line of credit... 6,765,575 0 0 0 0 6,765,575 -- 6,765,575
Notes payable.... 0 0 390,398 28,462 175,528,203 175,947,063 -- 175,947,063
Deferred income.. 1,015,758 0 0 0 0 1,015,758 -- 1,015,758
Rents paid in
advance......... 437,497 44,359 0 0 0 481,856 -- 481,856
Minority
interest........ 282,544 146,865 0 0 0 429,409 -- 429,409
Common Stock..... 621,187 0 9,800 2,000 200 633,187 142,687 (1) 775,874
Additional paid
in capital...... 556,830,578 0 482,964 5,231,827 3,887,496 566,432,865 144,930,397 (1) 711,363,262
Accumulated
distributions in
excess of net
earnings........ (5,546,383) 0 2,887,893 811,449 1,597,772 (249,269) (82,295,839)(1)
2,990,864 (4) (79,554,244)
Partners capital. 0 24,326,722 0 0 0 24,326,722 (24,326,722)(1) 0
------------ ----------- ---------- ---------- ------------ ------------ ----------- ------------
Total
liabilities and
equity......... $566,383,967 $25,211,443 $8,429,809 $7,720,199 $189,808,590 $797,554,008 $30,589,701 $828,143,709
============ =========== ========== ========== ============ ============ =========== ============
</TABLE>
F-20
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA INCOME STATEMENT
September 30, 1998
<TABLE>
<CAPTION>
Historical Pro Forma
------------------------------------------------------------------------ ----------------------------
CNL
CNL Income Financial CNL
Fund VII, Services, Financial Combined
APF Ltd. Advisor Inc. Corp. Portfolios Adjustments Pro Forma
----------- ---------- ----------- ---------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and earned
income............ $22,947,199 $1,812,475 $ 0 $ 0 $ 0 $24,759,674 $ 9,635,208 (a)
56,795 (b) $34,451,677
Fees.............. 0 0 21,405,127 5,115,549 6,817 26,527,493 (21,007,758)(c)
(2,875,906)(d) 2,643,829
Interest and other
income............ 6,117,911 127,438 751 432,506 18,031,141 24,709,747 1,526,547 (e) 26,236,294
----------- ---------- ----------- ---------- ----------- ----------- ------------ -----------
Total revenue..... 29,065,110 1,939,913 21,405,878 5,548,055 18,037,958 75,996,914 (12,665,114) 63,331,800
Expenses:
General and
administrative.... 1,539,004 121,291 6,701,115 4,107,311 2,597,171 15,065,892 (1,303,981)(f)
(1,415,100)(g)
(32,503)(h) 12,314,308
Advisory fees..... 1,248,393 0 0 0 1,026,231 2,274,624 (2,274,624)(i) 0
Fees to Restaurant
Financial
Services Group... 0 0 256,456 1,569,202 0 1,825,658 (1,825,658)(n) 0
Interest.......... 0 0 105,668 3,534 14,230,999 14,340,201 (68,670)(m) 14,271,531
State taxes....... 397,569 2,728 15,226 18,564 201,616 635,703 43,673 (j) 679,376
Depreciation--
other............. 0 0 75,607 55,056 0 130,663 0 130,663
Depreciation--
property.......... 2,684,924 228,267 0 0 0 2,913,191 1,544,134 (k) 4,457,325
Amortization...... 8,096 0 55,932 138 945,299 1,009,465 1,568,715 (l) 2,578,180
----------- ---------- ----------- ---------- ----------- ----------- ------------ -----------
Total operating
expenses.......... 5,877,986 352,286 7,210,004 5,753,805 19,001,316 38,195,397 (3,764,014) 34,431,383
----------- ---------- ----------- ---------- ----------- ----------- ------------ -----------
Operating earnings
(losses).......... 23,187,124 1,587,627 14,195,874 (205,750) (963,358) 37,801,517 (8,901,100) 28,900,417
Equity in earnings
of joint
ventures/minority
interest (23,271) 215,559 0 12,452 0 204,740 0 204,740
Gain on sale of
properties........ 0 758 0 0 0 758 0 758
Gain on
securitization.... 0 0 0 0 3,018,268 3,018,268 0 3,018,268
----------- ---------- ----------- ---------- ----------- ----------- ------------ -----------
Net earnings
(losses) before
income taxes...... 23,163,853 1,803,944 14,195,874 (193,298) 2,054,910 41,025,283 (8,901,100) 32,124,183
Provision (credit)
for federal
income taxes..... 0 0 5,607,415 (81,229) 789,895 6,316,081 (6,316,081)(o) 0
----------- ---------- ----------- ---------- ----------- ----------- ------------ -----------
Net income......... $23,163,853 $1,803,944 $ 8,588,459 $ (112,069) $ 1,265,015 $34,709,202 $ (2,585,019) $32,124,183
=========== ========== =========== ========== =========== =========== ============ ===========
Earnings per share. $ 0.49 $ 0.44
=========== ===========
Shares outstanding:
Weighted average.. 47,633,909 72,892,798(p)
=========== ===========
End of period..... 62,118,679 77,587,416
=========== ===========
</TABLE>
F-21
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA INCOME STATEMENT
For the year ended December 31, 1997
<TABLE>
<CAPTION>
Historical Pro Forma
----------------------------------------------------------------------- ---------------------------
CNL
CNL Income Financial CNL
Fund VII, Services, Financial Combined
APF Ltd. Advisor Inc. Corp. Portfolios Adjustments Pro Forma
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and earned
income.............. $15,490,615 $2,487,567 $ 0 $ 0 $ 0 $17,978,182 $24,048,982 (a)
74,953 (b) $42,102,117
Fees................ 0 0 8,310,836 5,965,110 73,704 14,349,650 (9,072,165)(c)
(2,662,141)(d) 2,615,344
Interest and other
income.............. 3,967,318 183,579 165,569 0 10,932,843 15,249,309 249,395 (e) 15,498,704
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Total revenue....... 19,457,933 2,671,146 8,476,405 5,965,110 11,006,547 47,577,141 12,639,024 60,216,165
Expenses:
General and
administrative...... 1,010,725 169,698 4,266,169 1,889,904 828,848 8,165,344 (737,400)(f)
(1,619,238)(g)
(39,613)(h) 5,769,093
Advisory fees....... 804,879 0 0 0 1,802,532 2,607,411 (2,607,411)(i) 0
Fees to Restaurant
Financial Services
Group.............. 0 0 151,041 594,041 0 745,082 (745,082)(n) 0
Interest............ 0 0 162,153 183,315 8,320,000 8,665,468 (81,594)(m) 8,583,874
State taxes......... 251,358 4,560 12,084 1,294 1,600 270,896 17,547 (j) 288,443
Depreciation--other. 0 0 48,490 14,637 0 63,127 -- 63,127
Depreciation--
property............ 1,784,269 304,356 0 0 0 2,088,625 3,207,258 (k) 5,295,883
Amortization........ 10,793 0 18,093 61,324 916,577 1,006,787 2,091,620 (l) 3,098,407
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Total operating
expenses............ 3,862,024 478,614 4,658,030 2,744,515 11,869,557 23,612,740 (513,913) 23,098,827
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Operating earnings
(losses)............ 15,595,909 2,192,532 3,818,375 3,220,595 (863,010) 23,964,401 13,152,937 37,117,338
Equity in earnings
of joint
ventures/minority
interest........... (31,453) 248,588 0 (126,627) 0 90,508 -- 90,508
Gain on sale of
properties.......... 0 164,888 0 0 0 164,888 -- 164,888
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Net earnings before
income taxes........ 15,564,456 2,606,008 3,818,375 3,093,968 (863,010) 24,219,797 13,152,937 37,372,734
Provision (credit)
for federal income
taxes............... 0 0 1,508,258 1,272,133 (317,785) 2,462,606 (2,462,606)(o) 0
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Net earnings
(losses)............ $15,564,456 $2,606,008 $2,310,117 $1,821,835 $ (545,225) $21,757,191 $15,615,543 $37,372,734
=========== ========== ========== ========== =========== =========== =========== ===========
Earnings per share... $ 0.66 $ 0.51
=========== ===========
Shares outstanding:
Weighted average.... 23,423,868 73,563,915(p)
=========== ===========
End of period....... 36,192,971 73,563,915
=========== ===========
</TABLE>
F-22
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of September 30, 1998 reflects the
transactions of the acquisition of the CNL Income Fund, Advisor and CNL
Restaurant Financial Services Group (the "Acquisition Proposal") as set forth
in this Proxy Statement. The Pro Forma Statements of Earnings for the nine
months ended September 30, 1998, and for the year ended December 31, 1997, have
been prepared to reflect a) the issuance of additional shares and the property
acquisitions completed from January 1, 1997 through November 30, 1998
("Offering and Property Transactions") and b) the transactions of the
Acquisition Proposal as set forth in this Proxy Statement. This unaudited pro
forma financial information has been prepared utilizing the historical
financial statements of the Company and the historical combined financial
information of the CNL Income Fund, Advisor and CNL Restaurant Financial
Services Group and should be read in conjunction with the selected historical
financial data and accompanying notes of the Company, the CNL Income Fund,
Advisor and the CNL Restaurant Financial Services Group. The Pro Forma Balance
Sheet was prepared as if the Offering and Property Transactions and the
Acquisition Proposal occurred on September 30, 1998. The Pro Forma Statements
of Earnings were prepared as if the Property Acquisitions and the Acquisition
Proposal occurred as of January 1, 1997. The pro forma information is unaudited
and is not necessarily indicative of the consolidated operating results which
would have occurred if the Offering and Acquisition Transaction and the
Acquisition Proposal 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 Acquisition
Proposal have been made. Capitalized terms have the meanings as defined in the
Proxy Statement.
2. Method of Accounting
The acquisition of the CNL Income Fund and the CNL Restaurant Financial
Services Group will be accounted for under the purchase accounting method. The
Company 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, the Company 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 operating expense on the Company's consolidated statements of
earnings, but the Company will not deduct this expense for purposes of
calculating funds from operations due to the non-recurring and non-cash nature
of the expense.
All significant intercompany balances and transactions between the Company,
CNL Income Fund, Advisor and CNL Restaurant Financial Services Group have been
eliminated in the pro forma financial statements.
3. Adjustments to Pro Forma Balance Sheet
The following describes the pro forma adjustments to the Pro Forma Balance
Sheet as of September 30, 1998, as if the Acquisition was consummated on such
date. For purposes of the pro forma financial statements, it is assumed that at
an annual meeting of stockholders, the stockholders of the Company approved an
amendment to increase the number of authorized shares to an amount necessary to
enable the Company to issue the shares for the Acquisition.
(1) Represents the payment of $336,341 in cash and the issuance of
15,468,737 common shares in consideration for the purchase of the CNL
Income Fund, Advisor and CNL Restaurant Financial Services Group at
September 30, 1998 at a share price of $10 plus estimated transaction
costs. The acquisition of the CNL Income Fund and the CNL Restaurant
Financial Services Group has been accounted for under the purchase
accounting method and goodwill was recognized to the extent that the
consideration paid
F-23
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
exceeded the fair value of the net tangible assets acquired. As for the
acquisition of the Advisor from a related party, the consideration paid in
excess of the fair value of the net tangible assets received has been
accounted for as costs incurred in acquiring the Advisor from a related
party because the Advisor has not been deemed to qualify as a "business"
for purposes of applying APB Opinion No. 16 "Business Combinations." Upon
consummation of the Acquisition, this expense will be recorded as an
operating expense on the Company's statement of earnings. The Company will
not deduct this expense for purposes of calculating funds from operations
due to the nonrecurring and non-cash nature of the expense. As of September
30, 1998, $249,403 of transaction costs had been incurred by the Company.
<TABLE>
<S> <C>
CNL Income Fund............................................. $ 32,023,712
Advisor..................................................... 76,000,000
CNL Restaurant Financial Services Group..................... 47,000,000
------------
Total Purchase Price (cash and shares).................. 155,023,712
Less cash paid to CNL Income Fund........................... (336,341)
------------
Share consideration..................................... 154,687,371
Transaction costs of the Company............................ 8,933,000
------------
Total costs incurred.................................... $163,620,371
============
</TABLE>
In addition, the Company i) used $8,933,000 in cash to pay the transaction
costs related to the Acquisition, ii) made an upward adjustment to the CNL
Income Fund carrying value of land and building on operating leases by
$7,553,818, net investment in direct financing leases by $1,724,141, investment
in joint venture by $1,515,830, made downward adjustments to the carrying value
of accrued rental income of $1,183,770, made downward adjustments to other
assets of $3,722,546 to adjust historical values to fair value, iii) recorded
goodwill of $41,832,391 for the acquisition of the CNL Restaurant Financial
Services Group, iv) reduced retained earnings by $76,998,725 for the excess
consideration paid over the net assets of the Advisor and removed the
historical common stock balance of $12,000, additional paid in capital balance
of $9,602,287, retained earnings balance of $5,297,114 and partners capital
balance of $24,326,722 of the CNL Income Fund, Advisor and CNL Restaurant
Financial Services Group.
(2) Represents the use of $26,901,936 in cash and cash equivalents at
September 30, 1998 to acquire $26,052,741 in properties and issue $849,195
in mortgage notes which occurred from October 1, 1998 through November 30,
1998.
(3) Represents the elimination by the CNL Income Fund of $11,443 in
related party payables recorded as receivables by the Advisor, the
elimination by the CNL Restaurant Financial Services Group of $6,641,379 in
related party payables recorded as receivables by CNL Restaurant Financial
Services Group and the elimination by the Company of $1,208,000 in related
party payables recorded as receivables by the Advisor.
(4) Represents the elimination of income taxes payable of $2,990,864
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.
4. Adjustments to Pro Forma Income Statements
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the nine months ended September 30, 1998, as if
the Acquisition was consummated as of January 1, 1997.
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(a) Represents rental and earned income as if 1) properties that had
been previously constructed and acquired from January 1, 1998
through November 30, 1998 had been acquired and leased on January
1, 1997 and 2) properties that were developed by the Company from
January 1, 1998 through November 30, 1998 had been placed in
service on May 1, 1997 (assumes a four month development period).
<TABLE>
<S> <C>
Rental and earned income on Property
Transactions by the Company................ $9,635,208
</TABLE>
(b) Represents $56,795 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the CNL Income Fund as if the
leases had been acquired on January 1, 1997.
(c) Represents the elimination of intercompany fees between the
Company, the CNL Income Fund, the Advisor and the CNL Restaurant
Financial Services Group:
<TABLE>
<S> <C>
Origination fees......................... $ (1,569,202)
Secured equipment lease fee.............. (44,426)
Advisory fees............................ (1,722,383)
Reimbursement of administrative costs.... (289,864)
Acquisition fees......................... (15,392,193)
Underwriting fees........................ (254,945)
Administrative fees...................... (148,491)
Executive fee............................ (310,000)
Guarantee fees........................... (93,750)
Servicing fee............................ (1,014,117)
Development fees......................... (166,876)
Consulting fee........................... (1,511)
------------
Total................................ $(21,007,758)
============
</TABLE>
(d) Represents the deferral of $2,875,906 in origination fees collected
by CNL Restaurant Financial Services Group that should be amortized
over the term of the loans originated (20 years) in accordance with
the Statement of Financial Accounting Standards #91 "Accounting for
Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases."
(e) Represents interest income of $1,318,870 earned from Other
Investments acquired and mortgage notes issued from January 1, 1998
through November 30, 1998 as if this had occurred on January 1,
1997 and the amortization of $207,677 of deferred origination fees
collected during the year ended December 31, 1997 and during the
nine months ended September 30, 1998, which were capitalized and
deferred in (d) above as if they had been collected on January 1,
1997. These deferred fees are being amortized and recorded as
interest income.
(f) Represents the elimination of intercompany expenses paid between
the Company, the CNL Income Fund, the Advisor and the CNL
Restaurant Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs..... $ (289,864)
Servicing fee............................. (1,014,117)
-----------
$(1,303,981)
===========
</TABLE>
F-25
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during
the period as if 1) costs relating to properties developed by the
Company were subject to capitalization during the entire period and
2) costs relating to properties not developed by the Company were
subject to capitalization up through the time that EITF 97-11
became effective.
<TABLE>
<S> <C>
General and administrative costs.......... $(1,415,100)
</TABLE>
(h) Represents savings of $32,503 in professional services and
administrative expenses resulting from reporting on one combined
Company versus 22 separate entities.
(i) Represents the elimination of advisory fees between the Company,
the CNL Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Advisory fees............................ $ (1,722,383)
Administrative fees...................... (148,491)
Executive fee............................ (310,000)
Guarantee fees........................... (93,750)
------------
$(2,274,624)
============
</TABLE>
(j) Represents additional income taxes of $43,673 resulting from
assuming that acquisitions from January 1, 1998 through November
30, 1998 had been acquired on January 1, 1997 and assuming that the
CNL Income Fund had operated under a REIT structure.
(k) Represents an increase in depreciation of the building portion of
the properties acquired from January 1, 1998 through November 30,
1998 as if they had been acquired on January 1, 1997 and the step
up in basis referred to in footnote (2) from acquiring the CNL
Income Fund portfolio using the straight-line method over the
estimated useful lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense........................ $1,544,134
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of
the CNL Restaurant Financial Services Group referred to in footnote
(2).
<TABLE>
<S> <C>
Amortization of goodwill.................... $1,568,715
</TABLE>
(m) Represents elimination of interest expense recorded for the
amortization of $350,000 in arrangement fees collected during the
year ended December 31, 1997 which were eliminated in II (d) below.
<TABLE>
<S> <C>
Interest expense............................. $(68,670)
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees
incurred between the Company, the CNL Income Fund, the Advisor and
the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees.......................... $(1,569,202)
Underwriting fees......................... (254,945)
Consulting fee............................ (1,511)
-----------
$(1,825,658)
===========
</TABLE>
(o) Represents the elimination of $6,316,081 in the provision for
income taxes as a result of the Acquisition. The Company expects to
continue to qualify as a REIT and does not expect to incur federal
income taxes.
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(p) Common shares issued during the period required to fund
acquisitions as if they had been acquired on January 1, 1997 were
assumed to have been issued and outstanding as of January 1, 1998.
For purposes of the proforma financial statements, it is assumed
that the stockholders approved the proposal to increase the number
of authorized common shares of the Company.
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the year ended December 31, 1997, as if the
Acquisition was consummated as of January 1, 1997.
(a) Represents rental and earned income as if 1) properties that had
been previously constructed and acquired from January 1, 1998
through November 30, 1998 had been acquired and leased on January
1, 1997 and 2) properties that were developed by the Company from
January 1, 1997 through November 30, 1998 had been placed in
service on May 1, 1997 (assumes a four month development period).
<TABLE>
<S> <C>
Rental and earned income on Property
Transactions by the Company............... $24,048,982
</TABLE>
(b) Represents $74,953 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the CNL Income Fund as if the
leases had been acquired on January 1, 1997.
(c) Represents the elimination of intercompany fees between the
Company, the CNL Income Fund, the Advisor and the CNL Restaurant
Financial Services Group:
<TABLE>
<S> <C>
Origination fees.......................... $ (594,041)
Secured equipment lease fee............... (375,219)
Advisory fees............................. (1,775,680)
Reimbursement of administrative costs..... (138,412)
Acquisition fees.......................... (3,887,483)
Underwriting fees......................... (151,041)
Administrative fees....................... (269,231)
Executive fee............................. (250,000)
Guarantee fees............................ (312,500)
Arrangement fees.......................... (350,000)
Servicing fee............................. (598,988)
Development fees.......................... (369,570)
-----------
Total................................. $(9,072,165)
===========
</TABLE>
(d) Represents the deferral of $2,662,141 in origination fees collected
by CNL Restaurant Financial Services Group that should be amortized
over the term of the loans originated (20 years) in accordance with
the Statement of Financial Accounting Standards #91 "Accounting for
Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases."
(e) Represents the elimination of interest income of $1,931,331 earned
during the year ended December 31, 1997 assuming all monies raised
during 1997 and all cash held on January 1, 1997 was used to effect
the Acquisition on January 1, 1997, represents interest income of
$2,047,619 earned from Other Investments acquired and mortgage
notes issued from January 1, 1998 through November 30, 1998 as if
this had occurred on January 1, 1997 and the recognition of
$133,107 of origination fees collected during the year ended
December 31, 1997 which were deferred in (d) and are being
amortized and recorded as interest income.
F-27
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(f) Represents the elimination of intercompany expenses paid between
the Company, the CNL Income Fund, the Advisor and the CNL
Restaurant Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs..... $(138,412)
Servicing fee............................. (598,988)
---------
$(737,400)
=========
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during
the period as if 1) costs relating to properties developed by the
Company were subject to capitalization during the entire period and
2) costs relating to properties not developed by the Company were
subject to capitalization up through the time that EITF 97-11
became effective.
<TABLE>
<S> <C>
General and administrative costs........ $(1,619,238)
</TABLE>
(h) Represents savings of $39,613 in professional services and
administrative expenses resulting from reporting on one combined
Company versus 22 separate entities.
(i) Represents the elimination of advisory fees between the Company,
the CNL Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Advisory fees........................... $(1,775,680)
Administrative fees..................... (269,231)
Executive fee........................... (250,000)
Guarantee fees.......................... (312,500)
-----------
$(2,607,411)
===========
</TABLE>
(j) Represents additional income taxes of $17,547 resulting from
assuming that acquisitions from January 1, 1997 through November
30, 1998 had been acquired on January 1, 1997 and assuming that the
CNL Income Fund had operated under a REIT structure.
(k) Represents increase in depreciation of the building portion of the
properties acquired from January 1, 1997 through November 30, 1998
as if they had been acquired on January 1, 1997 and the step up in
basis referred to in footnote (2) from acquiring the CNL Income
Fund portfolio using the straight-line method over the estimated
useful lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense...................... $3,207,258
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of
the CNL Restaurant Financial Services Group referred to in footnote
(2).
<TABLE>
<S> <C>
Amortization of goodwill.................. $2,091,620
</TABLE>
(m) Represents elimination of yearly amortization of arrangement fees
of $350,000 capitalized as deferred costs and amortized as interest
expense and the capitalization of interest expense during the
period that properties were under development.
<TABLE>
<S> <C>
Amortization of arrangement fees........... $(24,144)
Capitalization of interest during
development period........................ (57,450)
--------
$(81,594)
========
</TABLE>
F-28
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Concluded)
(n) Represents the elimination of fees paid to affiliates for fees
incurred between the Company, the CNL Income Fund, the Advisor and
the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees.......................... $(594,041)
Underwriting fees......................... (151,041)
---------
$(745,082)
=========
</TABLE>
(o) Represents the elimination of $2,462,606 in the provision for
income taxes as a result of the Acquisition. The Company expects to
continue to qualify as a REIT and does not expect to incur federal
income taxes.
(p) Common shares issued during the period were assumed to have been
issued and outstanding as of January 1, 1997. For purposes of the
pro forma financial statement, it is assumed that the stockholders
approved the proposal to increase the number of authorized common
shares of the Company.
F-29
<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 eighteen 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
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.
B-1
<PAGE>
"Affiliated Group" means any affiliated group within the meaning of Code
(S)1504, or any similar group defined under a similar provision of state, local
or foreign law.
"Agreement" means this Agreement, as amended from time to time.
"APF" has the meaning set forth in the preface above.
"APF Common Shares" shall mean the shares of common stock, par value $0.01,
of APF.
"APF Indemnity Claim" has the meaning set forth in Section 12.1 below.
"APF SEC Documents" has the meaning set forth in Section 6.7 below.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms the basis for any specified
consequence.
"Business Combination" has the meaning set forth in Section 4.1(b) below.
"Cash/Note Option" has the meaning set forth in Section 4.4 below.
"Closing" has the meaning set forth in Section 2.3 below.
"CNL Income Funds" has the meaning set forth in the second paragraph of the
Recitals above.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the businesses
and affairs of the Fund, the Operating Partnership or APF, if any, that is not
already generally available to the public.
"Delaware RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Disclosure Schedule" has the meaning set forth in the first paragraph of
Article VII below.
"Dissenting Partners" has the meaning set forth in Section 4.4 below.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
tax-qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) tax-qualified defined benefit retirement
plan or arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Fairness Opinion" has the meaning set forth in the third paragraph of the
Recitals above.
"Florida RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Fund" has the meaning set forth in the preface above.
"Fund Articles of Merger" has the meaning set forth in Section 2.2 below.
"Fund Fairness Opinion" has the meaning set forth in the fifth paragraph of
the recitals above.
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"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
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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) 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
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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 $3,202,371 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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<PAGE>
12.4 Notification of Claims. Subject to the provisions of Section 12.5, in
the event of the occurrence of an event which any Party asserts constitutes an
APF Indemnity Claim or a Fund Indemnity Claim, as applicable, such Party shall
provide the indemnifying party with prompt notice of such event and shall
otherwise make available to the indemnifying party all relevant information
which is material to the claim and which is in the possession of the
indemnified party. If such event involves the claim of any third party (a
"Third-Party Claim"), the indemnifying party shall have the right to elect to
join in the defense, settlement, adjustment, or compromise of any such Third-
Party Claim, and to employ counsel to assist such indemnifying party in
connection with the handling of such claim, at the sole expense of the
indemnifying party, and no such claim shall be settled, adjusted or
compromised, or the defense thereof terminated, without the prior consent of
the indemnifying party unless and until the indemnifying party shall have
failed, after the lapse of a reasonable period of time, but in no event more
than 30 days after written notice to it of the Third-Party Claim, to join in
the defense, settlement, adjustment, or compromise of the same. An indemnified
party's failure to give timely notice or to furnish the indemnifying party with
any relevant data and documents in connection with any Third-Party Claim shall
not constitute a defense (in part or in whole) to any claim for indemnification
by such Party, except and only to the extent that such failure shall result in
any material prejudice to the indemnifying party. Any indemnifying party may
elect, at such Party's sole expense, to assume control of the defense,
settlement, adjustment, or compromise of any Third-Party Claim, with counsel
reasonably acceptable to the indemnified parties, insofar as such claim relates
to the liability of the indemnifying party, provided that such indemnifying
party shall obtain the consent of all indemnified parties before entering into
any settlement, adjustment, or compromise of such claims, or ceasing to defend
against such claims, unless such settlement is a cash settlement and contains
an unconditional release of the indemnified party from all existing and future
claims with respect to the matter being contested. In connection with any
Third-Party Claim, the indemnified party, or the indemnifying party if it has
assumed the defense of such claim pursuant to the preceding sentence, shall
diligently pursue the defense of such Third-Party Claim.
12.5 Survival. All representations and warranties, and, except as otherwise
provided in this Agreement, all covenants and agreements of the parties
contained in or made pursuant to this Agreement, and the rights of the parties
to seek indemnification with respect thereto, shall survive until eighteen
months from the Closing Date; provided, however, the representations and
warranties contained in Sections 6.2, 6.3 and 7.11 shall survive until the
expiration of the applicable statute of limitations with respect to the matters
covered thereby. No claim shall be made after the applicable survival period.
12.6 Limitations. Notwithstanding the foregoing, any claim by an indemnified
party against any indemnifying party under this Agreement shall be payable by
the indemnifying party only in the event, and to the extent, that the
accumulated amount of the claims in respect of such indemnifying party's
obligations to indemnify under this Agreement shall and the other claims
described in Article XIII exceed in the aggregate the dollar amount specified
in Article XIII. As to APF Indemnity Claims, the liability of each General
Partner shall be limited as provided in Article XIII.
12.7 Exclusive Provisions; No Rescission. Except as set forth in this
Agreement, no Party hereto is making any representation, warranty, covenant, or
agreement with respect to the matters contained herein. Anything herein to the
contrary notwithstanding, no breach of any representation, warranty, covenant,
or agreement contained herein or in any certificate or other document delivered
pursuant hereto relating to the Merger shall give rise to any right on the part
of any Party hereto, after the consummation of the Merger, to rescind this
Agreement or the transactions contemplated by this Agreement. Following the
consummation of the Merger, the rights of the Parties under the provisions of
this Article XII shall be the sole and exclusive remedy available to the
Parties with respect to claims, assertions, events, or proceedings arising out
of or relating to the Merger.
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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.
B-31
<PAGE>
14.9 Amendments and Waivers. No amendment of any provision of this Agreement
shall be valid unless the same shall be in writing and signed by APF, the OP
General Partner and the General Partners. No waiver by any Party of any
default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or
subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
14.10 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
14.11 Expenses. If the Closing occurs, APF will bear all costs and expenses
of the Parties incurred in connection with this Agreement and the transactions
contemplated hereby to the extent not already paid by the Fund or the General
Partners. If the Closing does not occur, APF, the OP General Partner and the
Operating Partnership will bear their own costs and expenses (including legal
fees and expenses) incurred in connection with this Agreement and the
transactions contemplated hereby, and the General Partners and the Fund will
divide their costs and expenses (including legal fees and expenses) as follows:
(i) the Fund shall bear that percentage of the costs and expenses equal to the
percentage obtained by dividing the number of Fund votes in favor of the Merger
by the sum of the total number of votes cast and the total number of
abstentions and (ii) the General Partners shall bear the remainder of the costs
and expenses.
14.12 Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.
14.13 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
14.14 Specific Performance. Each of the Parties acknowledges and agrees that
the other Parties would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Parties shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter (subject to the provisions set
forth in Section 13.15 below), in addition to any other remedy to which they
may be entitled, at law or in equity.
14.15 Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in and for Orange County,
Florida, in any action or proceeding arising out of or relating to this
Agreement and agrees that all claims in respect of the action or proceeding may
be heard and determined in any such court.
B-32
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
By: /s/ James M. Seneff, Jr.
Its: Chief Executive Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
By: /s/ Robert A. Bourne
Its: President
CNL APF GP Corp.
By: /s/ Robert A. Bourne
Its: President
CNL INCOME FUND 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-33
<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 Prospectus/Consent Solicitation Statement.
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.
OVERVIEW
Pursuant to the Prospectus/Consent Solicitation Statement and this
Supplement, you are being asked to approve the Acquisition of your Income Fund
by APF. Your Income Fund is one of 18 limited partnerships (which we refer to
collectively as the Funds) that APF is seeking to acquire. Supplements have
also been prepared for each of the other Funds, copies of which may be obtained
without charge to 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 (or a REIT), formed in
1994, whose primary business, like that of the Funds, is the ownership of
restaurant properties leased to operators of national and regional restaurant
chains on a triple-net lease basis. As a full-service REIT, 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 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 shares of common stock (or APF Shares) will I receive if my Income
Fund is acquired by APF?
Your Income Fund will receive 4,042,635 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 $10.00 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
approximately 75 million APF Shares through three public offerings at offering
prices per APF share equal to the Exchange Value. At December 31, 1998, of the
approximately $750 million raised by APF, APF has used approximately $550
million to acquire restaurant properties and to make mortgage loans and had
approximately $120 million in uninvested proceeds, which APF expects to invest
during the first quarter of 1999. The remaining proceeds were used to pay fees
and other offering expenses.
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<PAGE>
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
Fund?
Yes. Legg Mason Wood Walker, Incorporated 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 Funds, and (c) the method of allocating the APF
Shares among the Funds.
Do you, as the general partners of my Income Fund, recommend that I vote in
favor 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 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 how you want to vote, and sign
and mail it in the enclosed postage-paid return envelope as soon as possible,
so that at the Special Meeting of Limited Partners, your Units may be voted
"For" or "Against" APF's acquisition of your Income Fund. If you sign and send
in your consent form and do not indicate how you want to vote, your consent
form will be counted as a vote "For" the Acquisition. If you do not vote or you
abstain from voting, it will count as a vote "Against" the Acquisition.
In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to certain limitations. If you vote "Against" the Acquisition,
but your Income Fund is nevertheless acquired by APF, you may elect to receive
a payment (which we call the Cash/Notes Option) that is 10% in cash and 90% in
% Callable Notes due , 2006 (or Notes) based on the liquidation value
of your Income Fund, as determined by Valuation Associates, the appraisal firm
that we engaged in connection with the Acquisition. Such liquidation value will
be lower than the aggregate Exchange Value of the APF Shares offered to your
Income Fund in the Acquisition. The Notes will bear interest at a rate equal to
%, which was determined based on 120% of the applicable federal rate as of
, 1999. Please note that you may only receive the Cash/Notes Option if
you have voted "Against" the Acquisition and you elect to receive the
Cash/Notes Option on your consent form. You will receive APF Shares if your
Income Fund elects to be acquired in the Acquisition and you voted "For" the
Acquisition, or you voted "Against" the Acquisition and did not affirmatively
select the Cash/Notes Option. 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 (for example, 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 be based on the difference between the
value of the APF Shares or the tax basis of your Units. If you elect the
Cash/Notes Option, 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 and cash
received by your Income Fund over the tax basis of your Fund's net assets. Some
of the gain may be subject to the 25% rate of tax applicable to certain 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 $2,811. To
review the tax consequences to the Limited Partners of the Funds in greater
detail, see pages through of the Prospectus/Consent Solicitation
Statement and "Federal Income Tax Considerations" in this Supplement.
S-2
<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 Funds acquired by APF.
Although the majority of APF's assets and the assets of the other Funds
acquired by APF are substantially similar to those of your Income Fund, the
restaurant properties owned by APF and the other 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 Funds' restaurant properties,
see "APF's Business and The Restaurant Properties--Business Objectives and
Strategies" and "--The Restaurant Properties--General" and "Business of the
Funds--Description of Restaurant Properties" in the Prospectus/Consent
Solicitation Statement.
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 Prospectus/Consent Solicitation Statement.
Investment Risks
. Uncertainty Regarding the Exchange Value and Trading Price of APF Shares
Following Listing. Your Income Fund will be receiving 4,042,635 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 is 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 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.
. Decrease in Distributions. In each of the years ended December 31, 1995,
1996 and 1997, your Income Fund made $950, $975 and $1,000, respectively,
in distributions, per $10,000 investment to you. Based on APF's pro forma
financial information, and assuming APF acquires only your Income Fund
and that each Limited Partner of your Income receives only APF Shares,
you would have received, for the year ended December 31, 1997, $656 in
distributions per $10,000 of original investment, which is 34.4% less
than the $1,000 distributed to you as Limited Partner during the same
period. 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 year
ended December 31, 1997 and for the nine months ended September 30, 1998
is not necessarily indicative of the distributions you will receive as a
stockholder of APF after the Acquisition. See "Cash Distributions to
Limited Partners of Your Fund."
. Conflicts of Interest in the Acquisition; Substantial Benefits to Related
Parties. There are certain conflicts of interest inherent in the
structure of the Acquisition of your Income Fund. 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 that may or may not be aligned with your
interests as a Limited Partner of the Income
S-3
<PAGE>
Fund or with their own positions as the general partners of your Income
Fund. Assuming only your Income Fund is acquired in the Acquisition, we
will receive 54,864 APF Shares. 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.
. Fundamental Change in Nature of 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 September 30, 1998), 393 restaurant properties. The risks inherent
in investing in an operating company such as APF include APF's ability to
invest in new restaurant properties that are not as profitable as APF
anticipated, the incurrence of substantial indebtedness to make future
acquisitions of restaurant properties which it may be unable to repay and
making mortgage loans to prospective operators of national and regional
restaurant chains which may not have the ability to repay.
As an APF stockholder, you will receive the benefits of your investment
through (i) dividend distributions on, and (ii) increases in the value
of, your APF Shares. In addition, 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 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 Cash/Notes
Option). An investment in APF may not outperform your investment in the
Income Fund.
. Original Investment Timeframe. 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, 2019. 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 1998 and 2003. Because
your Income Fund is in the anticipated termination timeframe, we could
elect to liquidate your Income Fund. However, we have no current plans to
dispose of your Income Fund's restaurant properties if the Limited
Partners do not approve the Acquisition.
Real Estate/Business Risks
. Risk of Default on Mortgage Loans and Market Risks associated with
Securitizations. 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.
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
S-4
<PAGE>
securitize (thereby remaining exposed to the related credit and repayment
risks on such mortgage loans,) and 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 may 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.
. Risks Associated with Leverage. 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. At the time of the consummation of the
Acquisition, as a general policy, APF's Board of Directors will 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 funds from
operations and its ability to make distributions to its stockholders.
. Acquisition and Development Risks. APF plans to pursue its growth
strategy through the acquisition and development of additional restaurant
properties. To the extent that APF does pursue this growth strategy, we
do not know that it 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.
Tax Risks
. Failure of APF to Qualify as a REIT for Tax Purposes. 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.
. Risks Associated with Distribution Requirements. 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,
S-5
<PAGE>
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 Tax Law. 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 Prospectus/Consent Solicitation Statement.
CONSIDERATION PAID TO INCOME FUND
The following table sets forth, for your Income Fund (i) the aggregate
amount of original Limited Partner investments in each Fund less any
distributions of net sales proceeds paid to the Limited Partners of that Fund,
(ii) the original amount of Limited Partner investments in each Fund less any
distributions of net sales proceeds per average $10,000 investment, (iii) the
number of APF Shares to be paid to your Income Fund, (iv) the estimated value
of the APF Shares paid to your Income Fund, (v) the estimated Acquisition
expenses allocated to your Income Fund, (vi) the estimated value, based on the
Exchange Value, of APF Shares paid to your Income Fund after deducting
Acquisition expenses, and (vii) the estimated value, based on the Exchange
Value, of APF Shares you will receive for each $10,000 of your original
investment:
<TABLE>
<CAPTION>
Original Limited Original Limited Estimated Value
Partner Investments Partner Investments of APF Shares
Less any Less any Distributions Number of Estimated Value per Average
Distributions of of Net Sales Proceeds APF Shares Estimated Value of Estimated of APF Shares $10,000 Original
Net Sales per $10,000 Offered to APF Shares Acquisition after Acquisition Limited Partner
Proceeds(1) Original Investment(1) Fund(2) Payable to Fund(3) Expenses Expenses(3) Investment(3)
- ------------------- ---------------------- ---------- ------------------ ----------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$35,000,000 $10,000 4,042,635 $40,426,350 $472,595 $39,953,755 $11,259
</TABLE>
- --------
(1) Income Fund has had no distributions of net sales proceeds.
(2) The APF Shares payable to each Fund as set forth in this chart will not
change if APF acquires fewer than all of the Funds in the Acquisition. This
number assumes that none of the Limited Partners of the Fund has elected
the Cash/Notes Option.
(3) 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.
Upon completion of the Acquisition of your Income Fund, the operations and
existence of your Income Fund will cease. For more detailed information, see
"The Acquisition" in the Prospectus/Consent Solicitation Statement. If your
Income Fund does not approve the Acquisition, we do not contemplate that your
Income Fund would be liquidated in the near future. The Acquisition, however,
does not result in an all-cash payment to you in the liquidation of your
investment. For example, if you are eligible for and choose the Cash/Notes
Option, you become a Noteholder of APF. You will have exchanged your Units for
unsecured debt obligations of APF which may not be retired in full until
, 2006, a date approximately seven years after the date the Acquisition
of your Income Fund occurs. On the other hand, if you exchange your Units for
APF Shares, you will receive an equity interest in APF whose marketability will
depend upon the market that may develop with respect to the APF Shares, which
will be listed on the NYSE.
S-6
<PAGE>
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.
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....................................................... $ 19,007
Appraisals and Valuation......................................... 7,603
Fairness Opinions................................................ 34,213
Registration, Listing and Filing Fees............................ --
Soliciting Dealer Fee............................................ 82,178
Financial Consulting Fees........................................ --
Environmental Fees............................................... 47,518
Accounting and Other Fees........................................ 53,610
--------
Subtotal....................................................... 244,129
</TABLE>
Closing Transaction Costs
<TABLE>
<S> <C>
Transfer Fees and Taxes.......................................... 99,139
Legal Fees....................................................... 65,629
Recording Costs.................................................. --
Other............................................................ 63,698
--------
Subtotal....................................................... 228,466
--------
Total............................................................ $472,595
========
</TABLE>
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 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 as, in our opinion,
market conditions permit), as contemplated by the terms of the partnership
agreement.
S-7
<PAGE>
Special Meeting to Discuss the Acquisition
We have scheduled a special meeting of the Limited Partners of your Income
Fund to discuss the solicitation materials, which include the
Prospectus/Consent Solicitation Statement, 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 (as defined below) and to explain in
person our reasons for recommending that you vote "For" the Acquisition.
VOTING PROCEDURE
The Prospectus/Consent Solicitation Statement, 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.
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
Prospectus/Consent Solicitation Statement. A copy of the Agreement and Plan of
Merger dated March 11, 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 December
31, 1999. 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.
The consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and certain 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
(including the Acquisition), you will be deemed to have voted "For" such
matter.
Part B of the consent form is a power of attorney, which must be signed
separately. The power of attorney appoints James M. Seneff, Jr. and Robert A.
Bourne as your attorneys-in-fact for the purpose of executing all other
documents and instruments advisable or necessary to complete the Acquisition.
The power of attorney is intended solely to ease the administrative burden of
completing the Acquisition without requiring your signatures on multiple
documents.
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<PAGE>
COMPENSATION, REIMBURSEMENTS AND DISTRIBUTIONS
TO THE GENERAL PARTNERS AND THEIR AFFILIATES
The following information has been prepared to compare the amounts of
compensation paid and cash distributions made, by your Income Fund to us and
our affiliates to the amounts that would have been paid if the compensation and
distribution structure, which will be in effect after the Acquisition, had been
in effect during the years presented below.
Under your Income Fund's partnership agreement, we and our affiliates are
entitled to receive fees in connection with managing the affairs of each Income
Fund. The partnership agreement also provide 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
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, 1995, 1996 and 1997 and the nine months
ended September 30, 1998, the aggregate amounts accrued or paid by your Income
Fund 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 years presented, are shown below under "Pro Forma":
<TABLE>
<CAPTION>
Year Ended December Nine Months
31, Ended
-------------------- September 30,
1995 1996 1997 1998
------ ------ ------ -------------
<S> <C> <C> <C> <C>
Historical:
General Partner Distributions Broker/Dealer
Commissions(1)............................ -- -- -- --
Due Diligence and Marketing Support Fees... -- -- -- --
Acquisition Fees........................... -- -- -- --
Asset Management Fees...................... -- -- -- --
Real Estate Disposition Fees(2)............ 13,800 41,250 -- --
------ ------ ------ ------
Total historical......................... 13,800 41,250 -- --
Pro Forma:
Cash Distributions on APF Shares........... 5,586 11,380 31,982 25,400
Salary Compensation........................ -- -- -- --
------ ------ ------ ------
Total pro forma.......................... 5,586 11,380 31,982 25,400
</TABLE>
- --------
(1) A majority of the fees paid as broker-dealer commissions and due diligence
and marketing support fees were reallowed to other broker dealers
participating in the offering of the Income Fund's Units.
(2) Payment of real estate disposition fees is subordinated to certain minimum
returns to the Limited Partners.
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<PAGE>
CASH DISTRIBUTIONS TO LIMITED PARTNERS OF YOUR 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 the Acquisition--Prices for 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>
Nine Months Ended
Sept. 30, 1998
--------------------
1993 1994 1995 1996 1997 Historical Pro Forma
---- ---- ---- ---- ----- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income...... $900 $936 $944 $875 $ 917 $675 502
Distributions from Return of
Capital(1).................... -- 9 6 100 $ 83 -- 19
---- ---- ---- ---- ----- ---- ---
Total........................ $900 $945 $950 $975 1,000 $675 521
==== ==== ==== ==== ===== ==== ===
</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 nine months ended September 30,
1998 is not necessarily indicative of the distributions you will receive as a
stockholder of APF after the Acquisition.
Assuming APF maintains its current level of debt for acquiring future
restaurant properties, the expected distribution rate per APF Share will be
8.8% (assuming a $10.00 per APF Share price based on the Exchange Value, the
annualized dividend per year is expected to be $0.88 per APF Share). Based on
the number of APF Shares that you would receive in the Acquisition per your
average $10,000 original investment and this distribution rate, you would
receive an annual distribution of approximately $991.
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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 certain 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 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 Cash/Note Option.
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, our relief 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 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 Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the Cash/Notes Option, constitutes 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 and is the best way to maximize the return on your
investment in light of the values of such consideration.
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
S-11
<PAGE>
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 of Valuation Associates and
Legg Mason received fees for its services and notwithstanding that Legg Mason
has previously provided investment banking services to the Funds and to
Commercial Net Lease Realty, Inc., a former affiliate of ours. See "Reports,
Opinions and Appraisals" in the Prospectus/Consent Solicitation Statement.
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 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 cash and promissory 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 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 Cash/Notes Option.
3. Valuation of Alternatives. Based on the appraisal of the Income Fund's
restaurant properties, we estimated the value of your Income Fund as an ongoing
concern and if liquidated. 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 Fund to 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
September 30, 1998 per $10,000 original investment.
S-12
<PAGE>
Since the calculation of the book value was done on a GAAP basis, it is not
indicative of the true fair market value of your Income Fund. This figure was
compared to the (i) value of the Fund if it commenced an orderly liquidation of
its investment portfolio on December 31, 1998, (ii) value of the Fund if it
continued to operate in accordance with its existing partnership agreement and
business plans, and (iii) estimated value of the APF Shares, based on the
Exchange Value, paid to each Fund per average $10,000 invested.
Summary of Valuations
(per $10,000 original investment)
<TABLE>
<CAPTION>
Estimated Value
of APF Shares
per Average
$10,000
GAAP Going Original
Book Liquidation Concern Limited Partner
Value Value(1) Value(1) Investment(2)
------ ----------- -------- ---------------
<S> <C> <C> <C> <C>
CNL Income Fund VIII, Ltd. ........ $8,848 $10,473 $11,229 $11,259
</TABLE>
- --------
(1) 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.
(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.
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have an independent
obligation 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 Funds). James M. Seneff, Jr. and
Robert A. Bourne act as the individual general partners of all of the 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.
Benefits to General Partners
As a result of the Acquisition (assuming only your Income Fund is acquired),
we are expected to receive certain benefits, including that we will be relieved
from certain ongoing liabilities with respect to the Funds that are acquired by
APF.
With respect to our ownership in your Income Fund, we may be issued up to
54,864 APF Shares in the aggregate in accordance with the terms of your Income
Fund's partnership agreement. The 54,864 APF Shares issued to us will have an
estimated value, based on the Exchange Value of approximately $548,640
thousand.
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 Funds if the Acquisition does not occur.
S-13
<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 the Cash/Notes Option, in which case you will
receive cash and 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 Prospectus/Consent Solicitation Statement.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, the
assets (and any liabilities) of your Income Fund (if your Income Fund is
acquired by APF) will be transferred to APF in return for APF Shares and/or
cash and 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
S-14
<PAGE>
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 VIII, Ltd. ............................... $2,811
</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 Code, no gain or loss is recognized if (i)
property is transferred to a corporation by one more individuals or entities in
exchange for the stock of that corporation, and (ii) 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 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 the
Cash/Notes Option, 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 (1) 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 (2) 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 Cash/Notes Option, your Income Fund will receive APF
Shares, cash and Notes in exchange for your Income Fund's assets. Because the
principal portion of the Notes will not be due until , 2006, 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 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 (without reduction for
any selling expenses) 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 are 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, cash and Notes.
S-15
<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" (i.e., real property and
depreciable assets used in a trade or business and held for more than one
year). Your share of gains or losses from the sale of section 1231 assets of
your Income Fund would be combined with any other section 1231 gains and losses
that you recognize in that year. If the result is a net loss, such loss is
characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property will be taxed as ordinary income to the extent of all
prior depreciation deductions taken by your Income Fund prior to sale. In
general, you may only use up to $3,000 of capital losses in excess of capital
gains to offset ordinary income in any taxable year. Any excess loss is carried
forward to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your Income Fund recognizes will be allocated to you and the other
Limited Partners in accordance with the terms of your Income Fund's partnership
agreement. Each Limited Partner will be allocated and must report his, her or
its allocable share of such gain, if any, pursuant to these terms, regardless
of the Limited Partner's decision to receive 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 Cash/Notes Option may
recognize gain in the year of the Acquisition despite the fact that they will
receive only a small amount of cash and no publicly-traded instruments 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 the Cash/Notes Option. See "--Tax Consequences of
Liquidation and Termination of Your Fund" below.
Tax Consequences of the Liquidation and Termination of Your Fund. If your
Fund is acquired by APF, your Fund will be deemed to have liquidated and
distributed APF Shares and/or cash and 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 cash and 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 pro rata 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 (determined on the closing date of the Acquisition) and your
adjusted tax basis in your Units (adjusted by your distributive share of
income, gain, loss, deduction and credit for the final taxable year of your
Income Fund (including any such items recognized by your Income Fund as a
result of the Acquisition) as well as any distributions you receive in such
final taxable year (other than the distribution of the APF Shares)). 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 cash and Notes in the Acquisition, you will recognize gain to
the extent that the amount of cash you receive in the Acquisition exceeds your
adjusted basis in your Units (adjusted by your distributive share of income,
gain, loss, deduction and credit for the final taxable year of your Income Fund
(including any such items recognized by your Income Fund as a result of the
Acquisition) as well as any distributions you
S-16
<PAGE>
receive in such final taxable year (other than the distributions of the cash
and Notes)). Your basis in the Notes distributed to you will equal your
adjusted basis in your Units, reduced (but not below zero) by the amount of any
cash distributed to you 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 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.
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 cash and 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 Prospectus/Consent Solicitation
Statement.
S-17
<PAGE>
SUMMARY SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
APF, FUNDS, ADVISOR AND CNL RESTAURANT FINANCIAL SERVICES GROUP
Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
Historical Pro Forma
------------------------------------------------- --------------------------------
CNL
Restaurant
CNL Income Financial
Fund VIII, Services Combined Pro Forma Combined Pro
APF Ltd. Advisor Group Historical Adjustments Forma
------------ ----------- ---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data Revenues:
Rental and earned
income................. $ 22,947,199 $ 2,266,311 $ -- $ -- $ 25,213,510 $ 9,635,208 (a)
133,495 (b) $ 34,982,213
Management fees......... -- -- 21,405,127 5,122,366 26,527,493 (21,009,261)(c)
(2,875,906)(d) 2,642,326
Interest and other
income................. 6,117,911 201,501 751 18,463,647 24,783,810 1,526,547 (e) 26,310,357
------------ ----------- ---------- ------------ ------------ ------------ ------------
Total revenue........... 29,065,110 2,467,812 21,405,878 23,586,013 76,524,813 (12,589,917) 63,934,896
Expenses:
General and
administrative......... 1,539,004 133,386 6,701,115 6,704,482 15,077,987 (1,305,484)(f)
(1,415,100)(g)
(36,113)(h) 12,321,290
Advisory fees........... 1,248,393 -- -- 1,026,231 2,274,624 (2,274,624)(i) --
State taxes............. 397,569 5,372 15,226 220,180 638,347 53,759 (j) 692,106
Depreciation and
amortization........... 2,693,020 171,930 131,539 1,000,493 3,996,982 3,107,708 (k)(l) 7,104,690
Interest expense........ -- -- 105,668 14,234,533 14,340,201 (68,670)(m) 14,271,531
Paid to affiliates...... -- -- 256,456 1,569,202 1,825,658 (1,825,658)(n) --
------------ ----------- ---------- ------------ ------------ ------------ ------------
Total expenses.......... 5,877,986 310,688 7,210,004 24,755,121 38,153,799 (3,764,182) 34,389,617
------------ ----------- ---------- ------------ ------------ ------------ ------------
Net earnings (loss)
before equity in
earnings of joint
ventures/minority
interests, gain (loss)
on sale of properties,
gain on securitization,
and provision (credit)
for federal income
taxes.................. 23,187,124 2,157,124 14,195,874 (1,169,108) 38,371,014 (8,825,735) 29,545,279
------------ ----------- ---------- ------------ ------------ ------------ ------------
Equity in earnings of
joint ventures/minority
interests.............. (23,271) 200,307 -- 12,452 189,488 -- 189,488
Gain (loss) on sales of
properties............. -- 108,176 -- -- 108,176 -- 108,176
Gain on securitization.. -- -- -- 3,018,268 3,018,268 -- 3,018,268
Provision (credit) for
federal income taxes... -- -- 5,607,415 708,666 6,316,081 (6,316,081)(o) --
------------ ----------- ---------- ------------ ------------ ------------ ------------
Net earnings............ $ 23,163,853 $ 2,465,607 $8,588,459 $ 1,152,946 $ 35,370,865 $ (2,509,654) $ 32,861,211
============ =========== ========== ============ ============ ============ ============
Other Data:
Weighted average number
of shares of common
stock outstanding
during period.......... 47,633,909 N/A N/A N/A N/A -- 73,732,615 (p)
Total properties at end
of period.............. 357 36 N/A N/A N/A -- 393
Funds from operations... $ 26,408,569 $ 2,668,654 N/A N/A N/A -- $ 37,533,445
Total cash distributions
declared............... $ 26,460,466 $ 2,362,502 N/A N/A N/A -- $ 37,533,445
Cash distributions
declared per $10,000
investment............. $ 572 $ 675 N/A N/A N/A -- $ 509
<CAPTION>
Historical Combined Pro Forma
September 30, 1998 Historical September 30, 1998
------------------------------------------------- ------------ --------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data
Real estate assets,
net.................... $407,663,180 $23,685,763 $ -- $ -- $431,348,943 $ 12,248,630 (q)
26,052,741 (r) $469,645,314
Mortgages/notes
receivable............. 33,523,506 1,822,560 -- 173,776,981 209,123,047 849,195 (r) 209,972,242
Accounts receivable,
net.................... 575,104 16,023 7,544,985 7,342,103 15,478,215 (7,909,384)(s) 7,568,831
Investment in/due from
joint ventures......... 631,374 2,824,170 -- -- 3,455,544 1,379,674 (q) 4,835,218
Total assets............ 566,383,967 32,029,983 8,429,809 197,528,789 804,372,548 32,389,913 836,762,461
Total
liabilities/minority
interest............... 14,478,585 1,060,480 5,049,152 185,998,045 206,586,262 (10,900,248)(s)(t) 195,686,014
Total equity............ 551,905,382 30,969,503 3,380,657 11,530,744 597,786,286 43,290,161 (q)(t) 641,076,447
</TABLE>
- --------
S-18
<PAGE>
(a) Represents rental and earned income as if 1) properties that had been
previously constructed and acquired from January 1, 1998 through November
30, 1998 had been acquired and leased on January 1, 1997 and 2) properties
that were developed by APF from January 1, 1998 through November 30, 1998
had been placed in service on May 1, 1997 (assumes a four month development
period).
<TABLE>
<S> <C>
Rental and earned income on Property
Transactions by APF........................ $9,635,208
</TABLE>
(b) Represents $133,495 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, 1997.
(c) Represents the elimination of intercompany fees between APF, the Income
Fund, the Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees......................... $ (1,569,202)
Secured equipment lease fee.............. (44,426)
Advisory fees............................ (1,722,383)
Reimbursement of administrative costs.... (291,367)
Acquisition fees......................... (15,392,193)
Underwriting fees........................ (254,945)
Administrative fees...................... (148,491)
Executive fee............................ (310,000)
Guarantee fees........................... (93,750)
Servicing fee............................ (1,014,117)
Development fees......................... (166,876)
Consulting fee........................... (1,511)
------------
Total................................... $(21,009,261)
============
</TABLE>
(d) Represents the deferral of $2,875,906 in origination fees collected by CNL
Restaurant Financial Services Group that should be amortized over the term
of the loans originated (20 years) in accordance with the Statement of
Financial Accounting Standards #91 "Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases."
(e) Represents interest income of $1,318,870 earned from Other Investments
acquired and mortgage notes issued from January 1, 1998 through November
30, 1998 as if this had occurred on January 1, 1997 and the amortization of
$207,677 of deferred origination fees collected during the year ended
December 31, 1997 and during the nine months ended September 30, 1998,
which were capitalized and deferred in (d) above as if they had been
collected on January 1, 1997. These deferred fees are being amortized and
recorded as interest income.
(f) Represents the elimination of intercompany expenses paid between APF, the
Income Fund, the Advisor and the CNL Restaurant Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs..... $ (291,367)
Servicing fee............................. (1,014,117)
-----------
$(1,305,484)
===========
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by APF were subject
to capitalization during the entire period and 2) costs relating to
properties not developed by APF were subject to capitalization up through
the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs.......... $(1,415,100)
</TABLE>
(h) Represents savings of $36,113 in professional services and administrative
expenses resulting from reporting on one combined company versus 22
separate entities.
(i) Represents the elimination of fees between APF, the Income Fund, the
Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Advisory fees............................. $(1,722,383)
Administrative fees....................... (148,491)
Executive fee............................. (310,000)
Guarantee fees............................ (93,750)
-----------
$(2,274,624)
===========
</TABLE>
(j) Represents additional state taxes of $53,759 resulting from assuming that
acquisitions from January 1, 1998 through November 30, 1998 had been
acquired on January 1, 1997 and assuming that the Income Fund had operated
under a REIT structure.
(k) Represents an increase in depreciation of the building portion of the
properties acquired from January 1, 1998 through November 30, 1998 as if
they had been acquired on January 1, 1997 and the step up in basis referred
to in footnote (q) from acquiring the Income Fund portfolio using the
straight-line method over the estimated useful lives of generally 30 years.
S-19
<PAGE>
<TABLE>
<S> <C>
Depreciation expense........................ $1,544,215
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of the CNL
Restaurant Financial Services Group referred to in footnote (q).
<TABLE>
<S> <C>
Amortization of goodwill.................... $1,563,493
</TABLE>
(m) Represents elimination of interest expense recorded for the amortization of
$350,000 in arrangement fees collected during the year ended December 31,
1997 which were eliminated in footnote (4), II(d ) in the Notes to the Pro
Forma Financial Statements attached to this Supplement.
<TABLE>
<S> <C>
Interest expense............................. $(68,670)
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees incurred
between APF, the Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Origination fees.......................... $(1,569,202)
Underwriting fees......................... (254,945)
Consulting fee............................ (1,511)
-----------
$(1,825,658)
===========
</TABLE>
(o) Represents the elimination of $6,316,081 in the provision for income taxes
as a result of the Acquisition. APF expects to continue to qualify as a
REIT and does not expect to incur federal income taxes.
(p) APF Shares issued during the period required to fund acquisitions as if
they had been acquired on January 1, 1997 were assumed to have been issued
and outstanding as of January 1, 1998. For purposes of the proforma
financial statements, it is assumed that the stockholders approved the
proposal to amend and restate APF's articles of incorporation to increase
the number of authorized APF Shares.
(q) Represents the payment of $472,595 in cash and the issuance of 16,295,376
APF Shares in consideration for the purchase of the Income Fund, Advisor
and CNL Restaurant Financial Services Group at September 30, 1998 using the
Exchange Value of $10 per APF Share plus estimated transaction costs. The
acquisitions of the Income Fund and the CNL Restaurant Financial Services
Group have been accounted for under the purchase accounting method and
goodwill was recognized to the extent that the estimated value of the
consideration paid exceeded the fair value of the net tangible assets
acquired. As for the acquisition of the Advisor from a related party, the
consideration paid in excess of the fair value of the net tangible assets
received has been accounted for as costs incurred in acquiring the Advisor
from a related party because the Advisor has not been deemed to qualify as
a "business" for purposes of applying APB Opinion No. 16 "Business
Combinations." Upon consummation of the Acquisition, this expense will be
recorded as an operating expense on the APF's statement of earnings. APF
will not deduct this expense for purposes of calculating funds from
operations due to the nonrecurring and non-cash nature of the expense. As
of September 30, 1998, $249,403 of transaction costs had been incurred by
APF.
<TABLE>
<S> <C>
Income Fund............................... $ 40,426,353
Advisor................................... 76,000,000
CNL Restaurant Financial Services Group... 47,000,000
------------
Total Purchase Price (cash and shares)... 163,426,353
Less cash paid to Income Fund............. (472,595)
------------
Share consideration...................... 162,953,758
Transaction costs of APF.................. 8,933,000
------------
Total costs incurred..................... $171,886,758
============
</TABLE>
In addition, APF i) used $8,933,000 in cash to pay the transaction costs
related to the Acquisition, ii) made an upward adjustment to the Income Fund
carrying value of land and building on operating leases by $8,325,348, net
investment in direct financing leases by $3,918,282, investment in joint
venture by $1,379,674, made downward adjustments to the carrying value of
accrued rental income of $1,896,493, and made downward adjustments to other
assets of $3,715,062 to adjust historical values to fair value, iii) recorded
goodwill of $41,693,143 for the acquisition of the CNL Restaurant Financial
Services Group, iv) reduced retained earnings by $76,773,557 for the excess
consideration paid over the net assets of the Advisor and removed the
historical common stock balance of $12,000, additional paid in capital
balance of $9,602,287, retained earnings balance of $5,297,114 and partners
capital balance of $30,969,503 of the Income Fund, Advisor and CNL Restaurant
Financial Services Group.
(r) Represents the use of $26,901,936 in cash and cash equivalents at September
30, 1998 to acquire $26,052,741 in properties and issue $849,195 in
mortgage notes which occurred from October 1, 1998 through November 30,
1998.
(s) Represents the elimination by the Income Fund of $60,005 in related party
payables recorded as receivables by the Advisor, the elimination by the CNL
Restaurant Financial Services Group of $6,641,379 in related party payables
recorded as receivables by CNL Restaurant Financial Services Group and the
elimination by APF of $1,208,000 in related party payables recorded as
receivables by the Advisor.
(t) Represents the elimination of income taxes payable of $2,990,864 from
liabilities assumed in the acquisition of the CNL Restaurant Businesses
since the acquisition agreements require that the Advisor and CNL
Restaurant Financial Services Group have no accumulated or current earnings
and profits for federal income tax purposes at the time of the acquisition.
S-20
<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>
Nine Months Ended
September 30, Year Ended December 31,
----------------------- -----------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues(1)............. $ 2,668,119 $ 2,685,394 $ 3,619,489 $ 3,593,610 $ 3,667,137
Net income(2)........... 2,465,607 2,404,646 3,241,567 3,096,992 3,336,755
Cash distributions
declared(3)............ 2,712,502 2,362,502 3,150,003 3,412,500 3,325,002
Net income per Unit(2).. 0.070 0.068 0.092 0.088 0.094
Cash distributions
declared per Unit(3)... 0.078 0.068 0.090 0.098 0.095
Weighted average number
of Limited Partner
Units outstanding...... 35,000,000 35,000,000 35,000,000 35,000,000 35,000,000
<CAPTION>
September 30, December 31,
----------------------- -----------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total assets............ $32,029,983 $32,256,524 $32,258,296 $32,437,106 $32,575,586
Total partners'
capital................ 30,969,503 31,166,978 31,216,398 31,124,834 31,440,342
</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 nine months ended September 30, 1998 includes $108,176
from gain on sale of land and building. Net income for the year ended
December 31, 1995, includes $71,638 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 years ended December 31, 1996 and 1995, include a
special distribution to the Limited Partners of $262,500 and $175,000,
respectively, which represented cumulative excess operating reserves.
S-21
<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
September 30, 1998, 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
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
The Income Fund's primary source of capital for the nine months ended
September 30, 1998 and 1997, 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
$2,697,992 and $2,694,116 for the nine months ended September 30, 1998 and
1997, respectively. The increase in cash from operations for the nine months
ended September 30, 1998, is primarily a result of changes in the Income Fund's
working capital.
Other sources and uses of capital included the following items during the
nine months ended September 30, 1998.
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.
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 the partners. At September 30, 1998, the
Income Fund had $1,724,745 invested in such short-term investments, as compared
to $1,602,236 at December 31, 1997. The increase in cash and cash equivalents
at September 30, 1998, is primarily attributable to the receipt of settlement
proceeds relating to the right of way taking in Brooksville, Florida, as
described above. The funds remaining at September 30, 1998, after payment of
distributions for the nine months ended September 30, 1998, and other
liabilities, will be used to meet the Income Fund's working capital and other
needs and also may be used to acquire an additional restaurant property.
Total liabilities of the Income Fund, including distributions payable,
increased to $951,915 at September 30, 1998, from $933,524 at December 31,
1997, primarily as the result of an increase in rents paid in advance at
September 30, 1998, as compared to 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 operations, and for the nine months ended September 30,
1998, accumulated excess operating reserves, the Income Fund declared
distributions to the Limited Partners of $2,712,502 and $2,362,502 for the nine
months ended September 30, 1998 and 1997, respectively ($787,501 for each of
the quarters ended September 30, 1998 and 1997). This represents distributions
of $0.078 and $0.068 per unit for
S-22
<PAGE>
the nine months ended September 30, 1998 and 1997, respectively ($0.023 per
unit for each applicable quarter). No distributions were made to us for the
quarters and nine months ended September 30, 1998 and 1997. No amounts
distributed to the Limited Partners for the nine months ended September 30,
1998 and 1997, 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.
The Years Ended December 31, 1997, 1996 and 1995
The Income Fund's primary source of capital for the years ended December 31,
1997, 1996 and 1995 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 $3,543,056, $3,462,668 and
$3,263,685 for the years ended December 31, 1997, 1996 and 1995, respectively.
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, and the
increase in cash from operations for 1996, as compared to 1995, was primarily a
result of changes in the Income Fund's working capital during each of the
respective years.
Other sources and uses of capital included the following items during the
years ended December 31, 1997, 1996 and 1995.
In July 1995, the Income Fund sold its restaurant property in Ocoee,
Florida, for $1,200,000 and received net sales proceeds of $1,184,865,
resulting in a gain of $71,638 for financial reporting purposes. This
restaurant property was originally acquired by the Income Fund in November 1990
and had a cost of approximately $927,900, excluding acquisition fees and
miscellaneous acquisition costs; therefore, the Income Fund sold the restaurant
property for approximately $257,000 in excess of its original purchase price.
In September 1995, the Income Fund reinvested $950,663 of the net sales
proceeds in land and building of a Shoney's in North Fort Myers, Florida.
In December 1995, the Income Fund sold its two restaurant properties in
Jacksonville, Florida, to the subtenant for a total of $460,000, and in
connection therewith, accepted promissory notes in the principal sums of
$240,000 and $220,000, collateralized by mortgages on the restaurant
properties. The notes bear interest at a rate of 10% 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. As a
result of the sale of the two restaurant properties, the Income Fund recognized
a loss of $11,712 for financial reporting purposes for the year ended December
31, 1995. The mortgage notes receivable balances at December 31, 1997 and 1996,
of $458,407 and $461,255, respectively, include accrued interest of $3,788 and
$3,812, respectively, relating to these two restaurant properties. Proceeds
received from the collection of these mortgage notes will be distributed to the
Limited Partners or will be used for other Income Fund purposes.
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 approximate 12%
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.
S-23
<PAGE>
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 financed 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, 1997 and 1996 of $1,394,979 and $1,401,007,
respectively, include accrued interest of $12,386 and $12,439, respectively,
relating to this restaurant property. Proceeds received from the collection of
this mortgage note will be distributed to the Limited Partners or will be used
for other Income Fund purposes. This restaurant property was originally
acquired by the Income Fund in December 1990 and had a cost of approximately
$1,177,000, excluding acquisition fees and miscellaneous acquisition expenses;
therefore, the Income Fund sold the restaurant property for approximately
$198,000 in excess of its original purchase price. Due to the fact that the
Income Fund had recognized accrued rental income since the inception of the
lease relating to the straight lining of future scheduled rent increases in
accordance with generally accepted accounting principles, the Income Fund wrote
off the cumulative balance of such accrued rental income at the time of the
sale of this restaurant property, resulting in a loss of $99,031 for financial
reporting purposes. Due to the fact that the straight lining of future
scheduled rent increases over the term of the lease is a non-cash accounting
adjustment, the write off of these amounts is a loss for financial statement
purposes only.
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 the partners. At December 31, 1997, the
Income Fund had $1,602,236 invested in such short-term investments as compared
to $1,476,274 at December 31, 1996.
During 1997, 1996 and 1995, affiliates incurred $80,998, $100,264 and
$95,550, respectively, for certain operating expense on behalf of the Income
Fund. As of December 31, 1997 and 1996 the Income Fund owed $4,599 and $1,830,
respectively, to affiliates for such amounts and accounting and administrative
services. As of February 28, 1998, 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, 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, decreased to $873,875
December 31, 1997, from $1,147,333 at December 31, 1996. The decrease in other
liabilities is primarily attributable to the Income Fund's accruing a special
distribution payable to the Limited Partners of $262,500 at December 31, 1996,
from cumulative excess operating reserves. No special distribution payable was
accrued at December 31, 1997.
Based on cash from operations, and for the years ended December 31, 1996 and
1995, cumulative excess operating reserves, the Income Fund declared
distributions to the Limited Partners of $3,150,003, $3,412,500 and $3,325,002
for the years ended December 31, 1997, 1996 and 1995, respectively. This
represents distributions of $0.090 per Unit for the year ended December 31,
1997, $0.098 per Unit for the year ended December 31, 1996 and $0.095 per Unit
for the year ended December 31, 1995. We anticipate that the Income Fund will
declare a special distribution to the Limited Partners during the quarter
ending March 31, 1998,
S-24
<PAGE>
representing cumulative excess operating reserves. No amounts distributed to
the Limited Partners for the years ended December 31, 1997, 1996 and 1995, 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.
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
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 1998 and 1997, the Income Fund
and its consolidated joint venture, Woodway Joint Venture, owned and leased 28
wholly-owned restaurant properties to operators of fast-food and family-style
restaurant chains. In connection therewith, during the nine months ended
September 30, 1998 and 1997, the Income Fund and Woodway Joint Venture earned
$2,245,278 and $2,265,000, respectively, in rental income from operating leases
and earned income from direct financing leases, $737,090 and $755,070 of which
was earned during the quarters ended September 30, 1998 and 1997, respectively.
The decrease in rental and earned income for the quarter and nine months ended
September 30, 1998, as compared to the quarter and nine months ended September
30, 1997, is primarily 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 terms.
For the nine months ended September 30, 1998 and 1997, the Income Fund owned
and leased eight restaurant properties indirectly through joint venture
arrangements. In connection therewith, during the nine months ended September
30, 1998 and 1997, the Income Fund earned $210,430 and $214,372, respectively,
attributable to net income earned by these unconsolidated joint ventures,
$71,177 and $74,581 of which was earned during the quarters ended September 30,
1998 and 1997, respectively.
Operating expenses, including depreciation and amortization expense, were
$310,688 and $280,748 for the nine months ended September 30, 1998 and 1997,
respectively, of which $112,376 and $90,683 were incurred for the quarters
ended September 30, 1998 and 1997, respectively. The increase in operating
expenses during the quarter and nine months ended September 30, 1998, as
compared to the quarter and nine months ended September 30, 1997, is partially
attributable to an increase in administrative expenses for services related to
accounting; financial, tax and regulatory compliance and reporting; lease and
loan compliance; Limited Partner distributions and reporting; and investor
relations. In addition, the increase in operating expenses during the quarter
and nine months ended September 30, 1998, as compared to the quarter and nine
months ended September 30, 1997, is partially due to an increase in
depreciation expense relating to the fact that during the quarter and nine
months ended September 30, 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.
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 quarter and nine months ended September 30, 1998, for financial
reporting purposes. No restaurant properties were sold during the quarter and
nine months ended September 30, 1997.
S-25
<PAGE>
The Years Ended December 31, 1997, 1996 and 1995
During 1995, the Income Fund owned and leased 31 wholly-owned restaurant
properties (including one restaurant property in Ocoee, Florida, which was sold
in July 1995, and two restaurant properties in Jacksonville, Florida, which
were sold in December 1995), during 1996, the Income Fund owned and leased
28 wholly-owned restaurant properties (including one restaurant property in
Orlando, Florida, which was sold in October 1996) and during 1997, the Income
Fund owned and leased 28 wholly-owned restaurant properties. In addition,
during 1995, the Income Fund was a co-venturer in two separate joint ventures
that each owned and leased one restaurant property, and one joint venture that
owned and leased six restaurant properties, and during 1996 and 1997, the
Income Fund was a co-venturer in four joint ventures that owned and leased a
total of nine restaurant properties. As of December 31, 1997, 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 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 sixth lease year), the annual
base rent required under the terms of the lease will increase.
During the years ended December 31, 1997, 1996 and 1995, the Income Fund and
its consolidated joint venture, Woodway Joint Venture, earned $3,015,642,
$3,182,058 and $3,300,816, 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 a
decrease of approximately $141,300, as a result of the sale of the restaurant
property in Orlando, Florida, in October 1996, as described above in "Liquidity
and Capital Resources."
Rental and earned income decreased approximately $53,600 during the year
ended December 31, 1996, as compared to the year ended December 31, 1995, as a
result of the sale of two restaurant properties located in Jacksonville,
Florida, in December 1995. In addition, rental and earned income decreased
approximately $45,400 during 1996, as compared to 1995, as a result of the sale
of the restaurant property in Orlando, Florida, in October 1996 as described
above. However, as a result of Income Fund accepting mortgage notes for the
sale of the two restaurant properties located in Jacksonville, Florida, and the
restaurant property located in Orlando, Florida, interest income increased
during the years ended December 31, 1997 and 1996, each as compared to the
previous year, as discussed below.
For the years ended December 31, 1997, 1996 and 1995, the Income Fund also
earned $85,735, $31,712 and $59,085, respectively, in 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. The decrease in
contingent rental income during 1996, as compared to 1995, is partially
attributable to decreases in gross sales relating to certain restaurant
properties.
During the years ended December 31, 1997, 1996 and 1995, the Income Fund
also earned $238,338 , $127,246 and $76,445, respectively, in interest and
other income. The increase in interest and other income during 1997 and 1996,
each as compared to the previous year, 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, 1997, 1996 and 1995, the Income Fund also
earned $293,480, $266,500 and $244,933, 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 1997
and 1996, each as compared to the previous year, 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."
S-26
<PAGE>
During at least one of the years ended December 31, 1997, 1996 and 1995,
four lessees of the Income Fund and its consolidated joint venture, (i) Golden
Corral Corporation, (ii) Carrols Corporation (iii) Restaurant Management
Services, Inc. and (iv) Flagstar Enterprises, Inc. and Quincy's Inc. (which are
affiliated entities under common control of Flagstar Corporation) (herein after
referred to as Flagstar Corporation), 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 joint ventures). As of December 31,
1997, Golden Corral Corporation was the lessee under leases relating to four
restaurants, Carrols Corporation was the lessee under leases relating to five
restaurants, Restaurant Management Services, Inc. was the lessee under leases
relating to five restaurants and Flagstar Corporation was the lessee under
leases relating to three restaurants. It is anticipated that, based on the
minimum annual rental payments required by the leases, Golden Corral
Corporation, Carrols Corporation and Restaurant Management Services, each will
continue to contribute more than 10% of the Income Fund's total rental income
during 1998 and subsequent years. In addition, during at least one of the three
years ended December 31, 1997, 1996 and 1995, three restaurant chains, Golden
Corral Family Steakhouse Restaurants, Burger King and Shoney'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 venture and the Income Fund's
share of rental income from eight restaurant properties owned by unconsolidated
joint ventures). In subsequent years, it is anticipated that these three
restaurant chains each 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 lessees or restaurant chains could
materially affect the Income Fund's income.
Operating expenses, including depreciation and amortization expense, were
$377,922, $397,587 and $390,308 for the years ended December 31, 1997, 1996 and
1995, respectively. 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. The increase in operating expenses during 1996 as
compared to 1995, is primarily attributable to an increase in accounting and
administrative expenses associated with operating the Income Fund and its
restaurant properties and an increase in insurance expense as a result of our'
obtaining contingent liability and property coverage for the Income Fund
beginning in 1995. The increase in operating expenses during 1996, as compared
to 1995, was partially offset by a decrease in depreciation expense as a result
of the sale of the two properties located in Jacksonville, Florida, in December
1995, as described above in "Liquidity and Capital Resources."
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. In addition,
as a result of the 1995 sales of the restaurant property in Ocoee, Florida, and
the two restaurant properties in Jacksonville, Florida, as described above in
"Liquidity and Capital Resources," the Income Fund recognized a gain of $71,638
and a loss of $11,712, respectively, during the year ended December 31, 1995.
No restaurant properties were sold during 1997.
General
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Income Fund's financial position or results of operations.
The Income Fund's leases as of September 30, 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.
S-27
<PAGE>
The Year 2000 problem is the result of information technology systems and
embedded systems (products which are made with microprocessor (computer) chips
such as HVAC systems, physical security systems and elevators) using a two-
digit format, as opposed to four digits, to indicate the year. Such information
technology and embedded systems may be unable to properly recognize and process
date-sensitive information beginning January 1, 2000.
The Income Fund does not have any information technology systems. Certain of
our affiliates provide all services requiring the use of information technology
systems pursuant to a management agreement with the Income Fund. The
maintenance of embedded systems, if any, 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. We and affiliates have
established a team dedicated to reviewing the internal information technology
systems used in the operation of the Income Fund, and the information
technology and embedded systems and the Year 2000 compliance plans of the
Income Fund's tenants, significant suppliers, financial institutions and
transfer agent.
The information technology infrastructure of our affiliates consists of a
network of personal computers and servers that were obtained from major
suppliers. The affiliates utilize various administrative and financial software
applications on that infrastructure to perform the business functions of the
Income Fund. Our inability and that of our affiliates to identify and timely
correct material Year 2000 deficiencies in the software and/or infrastructure
could result in an interruption in, or failure of, certain of the Income Fund's
business activities or operations. Accordingly, we and our affiliates have
requested and are evaluating documentation from the suppliers of the affiliates
regarding the Year 2000 compliance of their products that are used in the
business activities or operations of the Income Fund. The costs expected to be
incurred by us and our affiliates to become Year 2000 compliant will be
incurred by us and our affiliates; therefore, these costs will have no impact
on the Income Fund's financial position or results of operations.
The Income Fund has material third party relationships with its tenants,
financial institutions and 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. If
any of these third parties are unable to meet their obligations to the Income
Fund because of the Year 2000 deficiencies, such a failure may have a material
impact on the Income Fund. Accordingly, we have requested and are evaluating
documentation from the Income Fund's tenants, financial institutions, and
transfer agent relating to their Year 2000 compliance plans. At this time, we
have not yet received sufficient certifications to be assured that the tenants,
financial institutions, and transfer agent have fully considered and mitigated
any potential material impact of the Year 2000 deficiencies. Therefore, we do
not, at this time, know of the potential costs to the Income Fund of any
adverse impact or effect of any Year 2000 deficiencies by these third parties.
We currently expect that all Year 2000 compliance testing and any necessary
remedial measures on the information technology systems used in the business
activities and operations of the Income Fund will be completed prior to June
30, 1999. Based on the progress we and our affiliates have made in identifying
and addressing the Income Fund's Year 2000 issues and the plan and timeline to
complete the compliance program, we do not foresee significant risks associated
with the Income Fund's Year 2000 compliance at this time. Because we and our
affiliates are still evaluating the status of the systems used in business
activities and operations of the Income Fund and the systems of the third
parties with which the Income Fund conducts its business, we have not yet
developed a comprehensive contingency plan and are unable to identify "the most
reasonably likely worst case scenario" at this time. As we identify significant
risks related to the Income Fund's Year 2000 compliance or if the Income Fund's
Year 2000 compliance program's progress deviates substantially from the
anticipated timeline, we will develop appropriate contingency plans.
S-28
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997... F-1
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997.............................................. F-2
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997.............. F-3
Condensed Statements of Cash Flows for the Nine Months Ended September 30,
1998 and 1997............................................................ F-4
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997........................................ F-5
Report of Independent Accountants......................................... F-6
Balance Sheets as of December 31, 1997 and 1996........................... F-7
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995..................................................................... F-8
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995............................................................ F-9
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995..................................................................... F-10
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and 1995................................................................. F-11
Unaudited Pro Forma Financial Information................................. F-19
Unaudited Pro Forma Balance Sheet as of September 30, 1998................ F-20
Unaudited Pro Forma Income Statement for the Nine Months Ended September
30, 1998................................................................. F-21
Unaudited Pro Forma Income Statement for the Year Ended December 31,
1997..................................................................... F-22
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements............................................................... F-23
</TABLE>
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September December
30, 1998 31, 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $1,610,464 and
$1,438,534........................................... $15,844,324 $13,960,232
Net investment in direct financing leases............. 7,841,439 10,044,975
Investment in joint ventures.......................... 2,824,170 2,877,717
Mortgage notes receivable............................. 1,822,560 1,853,386
Cash and cash equivalents............................. 1,724,745 1,602,236
Receivables, less allowance for doubtful accounts of
$22,160 and $19,228.................................. 16,023 51,393
Prepaid expenses...................................... 7,558 4,357
Accrued rental income, less allowance for doubtful
accounts of $4,501 in 1997........................... 1,896,493 1,811,329
Other assets.......................................... 52,671 52,671
----------- -----------
$32,029,983 $32,258,296
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 7,857 $ 8,359
Escrowed real estate taxes payable.................... 23,100 24,459
Distributions payable................................. 787,501 787,501
Due to related parties................................ 60,005 59,649
Rents paid in advance................................. 73,452 53,556
----------- -----------
Total liabilities................................... 951,915 933,524
Minority interest..................................... 108,565 108,374
Partners' capital..................................... 30,969,503 31,216,398
----------- -----------
$32,029,983 $32,258,296
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-1
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases .................... $ 478,742 $ 452,867 $1,389,490 $1,354,475
Earned income from direct
financing leases .......... 258,348 302,203 855,788 910,525
Contingent rental income.... -- 2,547 21,033 34,487
Interest and other income... 66,175 60,005 201,501 181,801
---------- ---------- ---------- ----------
803,265 817,622 2,467,812 2,481,288
---------- ---------- ---------- ----------
Expenses:
General operating and
administrative ............ 40,683 33,808 116,775 103,897
Professional services....... 4,248 4,632 16,611 15,042
State and other taxes....... -- -- 5,372 5,081
Depreciation and
amortization............... 67,445 52,243 171,930 156,728
---------- ---------- ---------- ----------
112,376 90,683 310,688 280,748
---------- ---------- ---------- ----------
Income Before Minority
Interest in Income of
Consolidated Joint Venture,
Equity in Earnings of
Unconsolidated Joint Ventures
and Gain on Sale of Land..... 690,889 726,939 2,157,124 2,200,540
Minority Interest in Income of
Consolidated Joint Venture... (3,412) (3,436) (10,123) (10,266)
Equity in Earnings of
Unconsolidated Joint
Ventures..................... 71,177 74,581 210,430 214,372
Gain on Sale of Land.......... 108,176 -- 108,176 --
---------- ---------- ---------- ----------
Net Income.................... $ 866,830 $ 798,084 $2,465,607 $2,404,646
========== ========== ========== ==========
Allocation of Net Income:
General partners............ $ 7,586 $ 7,981 $ 23,574 $ 24,046
Limited partners............ 859,244 790,103 2,442,033 2,380,600
========== ========== ========== ==========
$ 866,830 $ 798,084 $2,465,607 $2,404,646
========== ========== ========== ==========
Net Income Per Limited Partner
Unit......................... $ 0.025 $ 0.023 $ 0.070 $ 0.068
========== ========== ========== ==========
Weighted Average Number of
Limited Partner Units
Outstanding.................. 35,000,000 35,000,000 35,000,000 35,000,000
========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
September December
30, 1998 31, 1997
----------- -----------
<S> <C> <C>
General partners:
Beginning balance.................................. $ 226,441 $ 194,025
Net income......................................... 23,574 32,416
----------- -----------
250,015 226,441
----------- -----------
Limited partners:
Beginning balance.................................. 30,989,957 30,930,809
Net income......................................... 2,442,033 3,209,151
Distributions ($0.078 and $0.090 per limited
partner unit, respectively)....................... (2,712,502) (3,150,003)
----------- -----------
30,719,488 30,989,957
----------- -----------
Total partners' capital.............................. $30,969,503 $31,216,398
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities........ $ 2,697,992 $ 2,694,116
----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land......................... 116,397 --
Collections on mortgage notes receivable........... 30,554 2,092
----------- -----------
Net cash provided by investing activities........ 146,951 2,092
----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners.................. (2,712,502) (2,625,001)
Distributions to holder of minority interest....... (9,932) (10,028)
----------- -----------
Net cash used in financing activities............ (2,722,434) (2,635,029)
----------- -----------
Net Increase in Cash and Cash Equivalents............ 122,509 61,179
Cash and Cash Equivalents at Beginning of Period..... 1,602,236 1,476,274
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 1,724,745 $ 1,537,453
----------- -----------
Supplemental Schedule of Non-Cash Investing and
Financing Activities
Net investment in direct financing leases
reclassified to land and building on operating
leases as a result of lease amendments............ $ 2,064,243 $ --
----------- -----------
Distributions declared and unpaid at end of
period............................................ $ 787,501 $ 787,501
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, 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 CNL Income Fund VIII, Ltd.'s
Form 10-K for the year ended December 31, 1997.
CNL Income Fund VIII, Ltd. (the "Partnership") accounts for its 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.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2. Land and Buildings on Operating Leases
In July 1998, the Partnership 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 property in Brooksville, Florida. In connection
therewith, the Partnership recognized a gain of $108,176 for financial
reporting purposes.
3. Net Investment in Direct Financing Leases
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 amount. No losses on the termination of direct financing
leases were recorded for financial reporting purposes.
F-5
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners
CNL Income Fund VIII, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund VIII,
Ltd. (a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. 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 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 Income Fund VIII, Ltd.
as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
January 12, 1998
F-6
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation............................. $13,960,232 $14,169,203
Net investment in direct financing leases............. 10,044,975 10,223,225
Investment in joint ventures.......................... 2,877,717 2,940,826
Mortgage notes receivable............................. 1,853,386 1,862,262
Cash and cash equivalents............................. 1,602,236 1,476,274
Receivables, less allowance for doubtful accounts of
$19,228 and $4,775................................... 51,393 25,675
Prepaid expenses...................................... 4,357 4,377
Accrued rental income, less allowance for doubtful
accounts of $4,501 in 1997........................... 1,811,329 1,682,593
Other assets.......................................... 52,671 52,671
----------- -----------
$32,258,296 $32,437,106
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 8,359 $ 7,693
Escrowed real estate taxes payable.................... 24,459 15,138
Distributions payable................................. 787,501 1,050,000
Due to related parties................................ 59,649 56,880
Rents paid in advance................................. 53,556 74,502
----------- -----------
Total liabilities................................. 933,524 1,204,213
Minority interest..................................... 108,374 108,059
Partners' capital..................................... 31,216,398 31,124,834
----------- -----------
$32,258,296 $32,437,106
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases..... $1,804,273 $1,867,968 $1,951,189
Earned income from direct financing
leases................................. 1,211,369 1,314,090 1,349,627
Contingent rental income................ 85,735 31,712 59,085
Interest and other income............... 238,338 127,246 76,445
---------- ---------- ----------
3,339,715 3,341,016 3,436,346
---------- ---------- ----------
Expenses:
General operating and administrative.... 140,586 156,177 140,009
Professional services................... 23,284 27,682 25,927
State and other taxes................... 5,081 4,757 6,796
Depreciation and amortization........... 208,971 208,971 217,576
---------- ---------- ----------
377,922 397,587 390,308
---------- ---------- ----------
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................................ 2,961,793 2,943,429 3,046,038
Minority Interest in Income of
Consolidated Joint Venture............... (13,706) (13,906) (14,142)
Equity in Earnings of Unconsolidated Joint
Ventures................................. 293,480 266,500 244,933
Gain (Loss) on Sale of Land and
Buildings................................ -- (99,031) 59,926
---------- ---------- ----------
Net Income................................ $3,241,567 $3,096,992 $3,336,755
========== ========== ==========
Allocation of Net Income:
General partners........................ $ 32,416 $ 31,413 $ 32,714
Limited partners........................ 3,209,151 3,065,579 3,304,041
---------- ---------- ----------
$3,241,567 $3,096,992 $3,336,755
========== ========== ==========
Net Income Per Limited Partner Unit....... $ 0.092 $ 0.088 $ 0.094
========== ========== ==========
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-8
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<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,
1994................... $1,000 $128,898 $35,000,000 $(12,447,136) $12,760,827 $(4,015,000) $31,428,589
Distributions to
limited partners
($0.095 per limited
partner unit)......... -- -- -- (3,325,002) -- -- (3,325,002)
Net income............. -- 32,714 -- -- 3,304,041 -- 3,336,755
------ -------- ----------- ------------ ----------- ----------- -----------
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
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants............. $ 3,114,439 $ 3,222,903 $ 3,074,333
Distributions from unconsolidated joint
ventures.............................. 356,589 323,531 295,114
Cash paid for expenses................. (163,215) (194,218) (170,074)
Interest received...................... 235,243 110,452 64,312
----------- ----------- -----------
Net cash provided by operating
activities............................ 3,543,056 3,462,668 3,263,685
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and
buildings............................. -- -- 1,184,865
Additions to land and buildings on
operating leases...................... -- (1,135) (397,291)
Investment in direct financing leases.. -- (1,326) (550,911)
Investment in joint venture............ -- (234,059) --
Collections on mortgage notes
receivable............................ 8,799 2,557 --
Other.................................. -- (34,793) --
----------- ----------- -----------
Net cash provided by (used in)
investing activities.................. 8,799 (268,756) 236,663
----------- ----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners...... (3,412,502) (3,325,000) (3,307,502)
Distributions to holder of minority
interest.............................. (13,391) (13,503) (11,526)
----------- ----------- -----------
Net cash used in financing activities.. (3,425,893) (3,338,503) (3,319,028)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................ 125,962 (144,591) 181,320
Cash and Cash Equivalents at Beginning
of Year................................ 1,476,274 1,620,865 1,439,545
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 1,602,236 $ 1,476,274 $ 1,620,865
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................. $ 3,241,567 $ 3,096,992 $ 3,336,755
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation........................... 208,971 208,971 216,295
Amortization........................... -- -- 1,281
Minority interest in income of
consolidated joint venture............ 13,706 13,906 14,142
Equity in earnings of unconsolidated
joint ventures, net of distributions.. 63,109 57,031 50,181
Loss (gain) on sale of land and
buildings............................. -- 99,031 (59,926)
Decrease (increase) in receivables..... (25,641) 429 16,572
Decrease (increase) in prepaid
expenses.............................. 20 (1,465) (2,912)
Decrease in net investment in direct
financing leases...................... 178,250 157,194 122,052
Increase in accrued rental income...... (128,736) (219,757) (342,862)
Increase (decrease) in accounts payable
and accrued expenses.................. 9,987 12,203 (15,650)
Increase (decrease) in due to related
parties............................... 2,769 (4,505) 6,335
Increase (decrease) in rents paid in
advance............................... (20,946) 42,638 (78,578)
----------- ----------- -----------
Total adjustments...................... 301,489 365,676 (73,070)
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. $ 3,543,056 $ 3,462,668 $ 3,263,685
=========== =========== ===========
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Mortgage notes accepted in exchange for
sale of land and buildings............ $ -- $ 1,375,000 $ 460,000
=========== =========== ===========
Distributions declared and unpaid at
December 31........................... $ 787,501 $ 1,050,000 $ 962,500
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
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.
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 undercounted
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.
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 uncorrectable, the corresponding receivable and
the allowance for doubtful accounts are decreased accordingly.
Investment in Joint Ventures--The Partnership accounts for its 88 percent
interest in Woodway Joint Venture using the consolidation method. Minority
interest represents the minority joint venture partner's
F-11
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 partner's 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 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.
F-12
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. Land and Buildings on Operating Leases
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Land........................................... $ 9,167,336 $ 9,167,336
Buildings...................................... 6,231,430 6,231,430
----------- -----------
15,398,766 15,398,766
Less accumulated depreciation.................. (1,438,534) (1,229,563)
----------- -----------
$13,960,232 $14,169,203
=========== ===========
</TABLE>
In October 1996, the Partnership sold its property in Orlando, Florida, to
the tenant for $1,375,000 and accepted the sales proceeds in the form of a
promissory note (Note 6). This property was originally acquired by the
Partnership in December 1990 and had a cost of approximately $1,177,000,
excluding acquisition fees and miscellaneous acquisition expenses; therefore,
the Partnership sold the property for approximately $198,000 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 $99,031 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.
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, 1997, 1996 and 1995, the Partnership recognized $128,736, $219,757 and
$342,862, 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, 1997:
<TABLE>
<S> <C>
1998......................................................... $ 1,704,859
1999......................................................... 1,704,859
2000......................................................... 1,735,498
2001......................................................... 1,825,526
2002......................................................... 1,871,537
Thereafter................................................... 12,996,507
-----------
$21,838,786
===========
</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 VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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>
1997 1996
------------ ------------
<S> <C> <C>
Minimum lease payments receivable.............. $ 18,939,788 $ 20,329,407
Estimated residual values...................... 3,040,615 3,040,615
Less unearned income........................... (11,935,428) (13,146,797)
------------ ------------
Net investment in direct financing leases...... $ 10,044,975 $ 10,223,225
============ ============
</TABLE>
In October 1996, 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 payments receivable
and estimated residual values) and unearned income relating to this property
was removed from the accounts and the loss from the sale relating to the land
portion of the property was reflected in income (Note 3).
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998........................................................... $ 1,389,622
1999........................................................... 1,389,622
2000........................................................... 1,389,622
2001........................................................... 1,413,128
2002........................................................... 1,424,842
Thereafter..................................................... 11,932,952
-----------
$18,939,788
===========
</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 an 86 percent and a 37 percent interest in the profits
and losses of Asheville Joint Venture and CNL Restaurant Investments II,
respectively. The remaining interests in these joint ventures are held by
affiliates of the Partnership which have the same general partners.
In May 1996, the Partnership entered into a joint venture arrangement,
Middleburg Joint Venture, with an affiliate of the Partnership which has the
same general partners to hold one restaurant property. In connection therewith,
the Partnership contributed $234,059 to the joint venture and has a 12 percent
interest in the profits and losses of the joint venture.
F-14
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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>
1997 1996
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation......................... $6,487,210 $6,654,361
Net investment in direct financing lease.......... 1,335,223 1,349,611
Cash.............................................. 596 9,859
Receivables....................................... 14,169 13,840
Prepaid expenses.................................. 1,017 888
Accrued rental income............................. 128,993 91,074
Liabilities....................................... 864 9,992
Partners' capital................................. 7,966,344 8,109,641
Revenues.......................................... 1,001,284 862,821
Net income........................................ 824,576 688,253
</TABLE>
The Partnership recognized income totaling $293,480, $266,500 and $244,933
for the years ended December 31, 1997, 1996 and 1995, 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 totaling $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>
1997 1996
---------- ----------
<S> <C> <C>
Principal balance................................... $1,837,212 $1,846,011
Accrued interest receivable......................... 16,174 16,251
---------- ----------
$1,853,386 $1,862,262
========== ==========
</TABLE>
The general partners believe that the estimated fair value of mortgage notes
receivable at December 31, 1997 and 1996, 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
F-15
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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, 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 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.
During the years ended December 31, 1997, 1996 and 1995, the Partnership
declared distributions to the limited partners of $3,150,003, $3,412,500 and
$3,325,002, 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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................. $3,241,567 $3,096,992 $3,336,755
Depreciation for tax reporting
purposes in excess of depreciation
for financial reporting purposes..... (204,419) (219,372) (219,653)
Direct financing leases recorded as
operating leases for tax reporting
purposes............................. 178,250 157,197 122,052
Allowance for doubtful accounts....... 18,954 (23,716) 8,067
Accrued rental income................. (133,237) (219,757) (342,862)
Rents paid in advance................. (21,446) 42,637 (70,010)
Gain or loss on sale of land and
buildings for tax reporting purposes
in excess of gain or loss for
financial reporting purposes......... 670 99,031 161,548
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................... (2,987) 13,320 (4,016)
Minority interest in timing
differences of consolidated joint
venture.............................. 1,571 1,677 2,783
---------- ---------- ----------
Net income for federal income tax
purposes............................. $3,078,923 $2,948,009 $2,994,664
========== ========== ==========
</TABLE>
F-16
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 parent company of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, served
as president of CNL Fund Advisors, Inc. through October 1997. CNL Income Fund
Advisors, Inc. was a wholly owned subsidiary of CNL Group, Inc. until its
merger, effective January 1, 1996, with CNL Fund Advisors, Inc. During the
years ended December 31, 1997, 1996 and 1995, CNL Income Fund Advisors, Inc.
and CNL Fund Advisors, Inc. (hereinafter referred to collectively as the
"Affiliates") each performed certain services for the Partnership, as described
below.
During the years ended December 31, 1997, 1996 and 1995, certain 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 Affiliates 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, 1997, 1996 and 1995.
Certain Affiliates are 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 Affiliates provide 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,
1996 and 1995, the Partnership incurred $41,250 and $13,800, respectively, in
deferred, subordinated real estate disposition fees as the result of the sales
of the property in Orlando, Florida, and two properties in Jacksonville,
Florida. No deferred, subordinated real estate disposition fees were incurred
for the year ended December 1997.
During the years ended December 31, 1997, 1996 and 1995, Affiliates provided
accounting and administrative services to the Partnership on a day-to-day
basis. The Partnership incurred $80,461, $89,317 and $73,365 for the years
ended December 31, 1997, 1996 and 1995, respectively, for such services.
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Due to Affiliates:
Accounting and administrative services.................... $ 4,599 $ 1,830
Deferred, subordinated real estate disposition fee........ 55,050 55,050
------- -------
$59,649 $56,880
======= =======
</TABLE>
F-17
<PAGE>
CNL INCOME FUND VIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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
at least one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Golden Corral Corporation..................... $706,839 $663,889 $663,943
Restaurant Management Services, Inc. ......... 531,110 533,990 525,260
Carrols Corporation........................... 523,517 526,034 532,990
Flagstar Enterprises, Inc. and Quincy's
Restaurants, Inc. ............................ 232,876 356,720 363,335
</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 at least one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- -------- --------
<S> <C> <C> <C>
Burger King................................. $1,003,419 $989,480 $987,871
Golden Corral Family Steakhouse
Restaurants................................ 735,949 681,042 663,943
Shoney's.................................... 607,054 609,072 526,649
</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. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these Properties for the on-going operations
of the lessees.
F-18
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to the
Company gives effect to the Acquisition, and is based on estimates and
assumptions set for the 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 the Company, the
historical combined financial information of CNL Income Fund VIII, Ltd., (the
"CNL 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 the Company, the
CNL Income Fund, Advisor and CNL Restaurant Financial Services Group. The pro
forma balance sheet assumes that the Acquisition occurred on September 30,
1998; the pro forma consolidated statements of earnings assume that the
Property Acquisitions (as defined on page ) and the Acquisition occurred on
January 1, 1997.
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.
UNAUDITED PRO FORMA BALANCE SHEET
September 30, 1998
<TABLE>
<CAPTION>
Historical
---------------------------------------------------------------------------------
CNL Financial
CNL Income Services, CNL Financial Combined
APF Fund VIII, Ltd. Advisor Inc. Corp. Portfolios
------------ --------------- ---------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Land and
buildings on
operating
leases, net..... $298,967,972 $15,844,324 $ 0 $ 0 $ 0 $314,812,296
Net investment in
direct
financing
leases.......... 117,028,760 7,841,439 0 0 0 124,870,199
Mortgages and
notes
receivable...... 33,523,506 1,822,560 0 0 173,776,981 209,123,047
Other
Investments..... 16,200,316 0 200,000 0 6,561,628 22,961,944
Investment in
joint ventures.. 631,374 2,824,170 0 0 0 3,455,544
Cash and cash
equivalents..... 90,674,289 1,724,745 283,300 599,997 5,098,033 98,380,364
Receivables...... 575,104 16,023 7,544,985 6,824,632 517,471 15,478,215
Accrued rental
income.......... 3,071,451 1,896,493 0 0 0 4,967,944
Other assets..... 5,711,195 60,229 401,524 295,570 3,854,477 10,322,995
------------ ----------- ---------- ---------- ------------ ------------
Total assets.... $566,383,967 $32,029,983 $8,429,809 $7,720,199 $189,808,590 $804,372,548
============ =========== ========== ========== ============ ============
<CAPTION>
Pro Forma
-----------------------------
Adjustments Pro Forma
--------------- -------------
<S> <C> <C>
ASSETS:
Land and
buildings on
operating
leases, net..... $ 8,325,348 (1)
26,052,741 (2) $349,190,385
Net investment in
direct
financing
leases.......... 3,918,282 (1) 128,788,481
Mortgages and
notes
receivable...... 849,195 (2) 209,972,242
Other
Investments..... -- 22,961,944
Investment in
joint ventures.. 1,379,674 (1) 4,835,218
Cash and cash
equivalents..... (472,595)(1)
(8,933,000)(1)
(26,901,936)(2) 62,072,833
Receivables...... (7,909,384)(3) 7,568,831
Accrued rental
income.......... (1,896,493)(1) 3,071,451
Other assets..... 41,693,143 (1)
(3,715,062)(1) 48,301,076
--------------- -------------
Total assets.... $32,389,913 $836,762,461
=============== =============
LIABILITIES &
EQUITY:
Accounts payable
and accrued
liabilities..... $ 379,496 $ 30,957 $ 449,751 $ 193,949 $ 1,236,138 $ 2,290,291
Accrued
construction
costs payable... 3,045,304 0 0 0 0 3,045,304
Distributions
payable......... 0 787,501 2,220,000 0 0 3,007,501
Due to related
parties......... 2,552,411 60,005 0 1,452,512 6,556,920 10,621,848
Income tax
payable......... 0 0 1,989,003 0 1,001,861 2,990,864
Line of credit... 6,765,575 0 0 0 0 6,765,575
Notes payable.... 0 0 390,398 28,462 175,528,203 175,947,063
Deferred income.. 1,015,758 0 0 0 0 1,015,758
Rents paid in
advance......... 437,497 73,452 0 0 0 510,949
Minority
interest........ 282,544 108,565 0 0 0 391,109
Common Stock..... 621,187 0 9,800 2,000 200 633,187
Additional paid
in capital...... 556,830,578 0 482,964 5,231,827 3,887,496 566,432,865
Accumulated
distributions in
excess of net
earnings........ (5,546,383) 0 2,887,893 811,449 1,597,772 (249,269)
Partners
capital......... 0 30,969,503 0 0 0 30,969,503
------------ ----------- ---------- ---------- ------------ ------------
Total
liabilities
and equity..... $566,383,967 $32,029,983 $8,429,809 $7,720,199 $189,808,590 $804,372,548
============ =========== ========== ========== ============ ============
<CAPTION>
Pro Forma
-----------------------------
Adjustments Pro Forma
--------------- -------------
<S> <C> <C>
LIABILITIES &
EQUITY:
Accounts payable
and accrued
liabilities..... $ -- $ 2,290,291
Accrued
construction
costs payable... -- 3,045,304
Distributions
payable......... -- 3,007,501
Due to related
parties......... (7,909,384)(3) 2,712,464
Income tax
payable......... (2,990,864)(4) 0
Line of credit... -- 6,765,575
Notes payable.... -- 175,947,063
Deferred income.. -- 1,015,758
Rents paid in
advance......... -- 510,949
Minority
interest........ -- 391,109
Common Stock..... 150,954 (1) 784,141
Additional paid
in capital...... 153,188,517 (1) 719,621,382
Accumulated
distributions in
excess of net
earnings........ (82,070,671)(1)
2,990,864 (4) (79,329,076)
Partners
capital......... (30,969,503)(1) 0
--------------- -------------
Total
liabilities
and equity..... $32,389,913 $836,762,461
=============== =============
</TABLE>
F-20
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA INCOME STATEMENT
September 30, 1998
<TABLE>
<CAPTION>
Historical
--------------------------------------------------------------------------------
CNL Financial
CNL Income Services, CNL Financial Combined
APF Fund VIII, Ltd. Advisor Inc. Corp. Portfolios
----------- --------------- ----------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and earned
income........... $22,947,199 $2,266,311 $ 0 $ 0 $ 0 $25,213,510
Fees.............. 0 0 21,405,127 5,115,549 6,817 26,527,493
Interest and
other income..... 6,117,911 201,501 751 432,506
18,031,141 24,783,810
----------- ---------- ----------- ---------- ----------- -----------
Total revenue... 29,065,110 2,467,812 21,405,878 5,548,055 18,037,958 76,524,813
Expenses:
General and
administrative... 1,539,004 133,386 6,701,115 4,107,311 2,597,171 15,077,987
Advisory fees..... 1,248,393 0 0 0 1,026,231 2,274,624
Fees to
Restaurant
Financial
Services Group... 0 0 256,456 1,569,202 0 1,825,658
Interest.......... 0 0 105,668 3,534 14,230,999 14,340,201
State taxes....... 397,569 5,372 15,226 18,564 201,616 638,347
Depreciation--
other............ 0 0 75,607 55,056 0 130,663
Depreciation--
property......... 2,684,924 171,930 0 0 0 2,856,854
Amortization...... 8,096 0 55,932 138 945,299 1,009,465
----------- ---------- ----------- ---------- ----------- -----------
Total operating
expenses....... 5,877,986 310,688 7,210,004 5,753,805 19,001,316 38,153,799
----------- ---------- ----------- ---------- ----------- -----------
Operating earnings
(losses).......... 23,187,124 2,157,124 14,195,874 (205,750) (963,358) 38,371,014
Equity in
earnings of
joint
ventures/minority
interest......... (23,271) 200,307 0 12,452 0 189,488
Gain on sale of
properties....... 0 108,176 0 0 0 108,176
Gain on
securitization... 0 0 0 0 3,018,268 3,018,268
----------- ---------- ----------- ---------- ----------- -----------
Net earnings
(losses) before
income taxes...... 23,163,853 2,465,607 14,195,874 (193,298) 2,054,910 41,686,946
Provision
(credit) for
federal income
taxes............ 0 0 5,607,415 (81,229) 789,895 6,316,081
----------- ---------- ----------- ---------- ----------- -----------
Net income......... $23,163,853 $2,465,607 $ 8,588,459 $ (112,069) $ 1,265,015 $35,370,865
=========== ========== =========== ========== =========== ===========
Earnings per
share............. $ 0.49
===========
Shares outstanding:
Weighted
average.......... 47,633,909
===========
End of period..... 62,118,679
===========
<CAPTION>
Pro Forma
-------------------------------
Adjustments Pro Forma
---------------- --------------
<S> <C> <C>
Revenues:
Rental and earned
income........... $ 9,635,208 (a)
133,495 (b) $34,982,213
Fees.............. (21,009,261)(c)
Interest and
other income..... (2,875,906)(d) 2,642,326
1,526,547 (e) 26,310,357
---------------- --------------
Total revenue... (12,589,917) 63,934,896
Expenses:
General and
administrative... (1,305,484)(f)
(1,415,100)(g)
(36,113)(h) 12,321,290
Advisory fees..... (2,274,624)(i) 0
Fees to
Restaurant
Financial
Services Group... (1,825,658)(n) 0
Interest.......... (68,670)(m) 14,271,531
State taxes....... 53,759 (j) 692,106
Depreciation--
other............ 0 130,663
Depreciation--
property......... 1,544,215 (k) 4,401,069
Amortization...... 1,563,493 (l) 2,572,958
---------------- --------------
Total operating
expenses....... (3,764,182) 34,389,617
---------------- --------------
Operating earnings
(losses).......... (8,825,735) 29,545,279
Equity in
earnings of
joint
ventures/minority
interest......... 0 189,488
Gain on sale of
properties....... 0 108,176
Gain on
securitization... 0 3,018,268
---------------- --------------
Net earnings
(losses) before
income taxes...... (8,825,735) 32,861,211
Provision
(credit) for
federal income
taxes............ (6,316,081)(o) 0
---------------- --------------
Net income......... $ (2,509,654) $32,861,211
================ ==============
Earnings per
share............. $ 0.45
==============
Shares outstanding:
Weighted
average.......... 73,732,615(p)
==============
End of period..... 78,414,055
==============
</TABLE>
F-21
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA INCOME STATEMENT
For the year ended December 31, 1997
<TABLE>
<CAPTION>
Historical
-------------------------------------------------------------------------------
CNL Financial
CNL Income Services, CNL Financial Combined
APF Fund VIII, Ltd. Advisor Inc. Corp. Portfolios
----------- --------------- ---------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and earned
income........... $15,490,615 $3,101,377 $ 0 $ 0 $ 0 $18,591,992
Fees.............. 0 0 8,310,836 5,965,110 73,704 14,349,650
Interest and
other income..... 3,967,318 238,338 165,569 0 10,932,843 15,304,068
----------- ---------- ---------- ---------- ----------- -----------
Total Revenue... 19,457,933 3,339,715 8,476,405 5,965,110 11,006,547 48,245,710
Expenses:
General and
administrative... 1,010,725 163,870 4,266,169 1,889,904 828,848 8,159,516
Advisory fees..... 804,879 0 0 0 1,802,532 2,607,411
Fees to
Restaurant
Financial
Services Group... 0 0 151,041 594,041 0 745,082
Interest.......... 0 0 162,153 183,315 8,320,000 8,665,468
State taxes....... 251,358 5,081 12,084 1,294 1,600 271,417
Depreciation--
other............ 0 0 48,490 14,637 0 63,127
Depreciation--
property......... 1,784,269 208,971 0 0 0 1,993,240
Amortization...... 10,793 0 18,093 61,324 916,577 1,006,787
----------- ---------- ---------- ---------- ----------- -----------
Total operating
expenses....... 3,862,024 377,922 4,658,030 2,744,515 11,869,557 23,512,048
----------- ---------- ---------- ---------- ----------- -----------
Operating earnings
(losses).......... 15,595,909 2,961,793 3,818,375 3,220,595 (863,010) 24,733,662
Equity in
earnings of
joint
ventures/minority
interest......... (31,453) 279,774 0 (126,627) 0 121,694
----------- ---------- ---------- ---------- ----------- -----------
Net earnings before
income taxes...... 15,564,456 3,241,567 3,818,375 3,093,968 (863,010) 24,855,356
Provision
(credit) for
federal income
taxes............ 0 0 1,508,258 1,272,133 (317,785) 2,462,606
----------- ---------- ---------- ---------- ----------- -----------
Net earnings
(losses).......... $15,564,456 $3,241,567 $2,310,117 $1,821,835 $ (545,225) $22,392,750
=========== ========== ========== ========== =========== ===========
Earnings per
share............. $ 0.66
===========
Shares outstanding:
Weighted
average.......... 23,423,868
===========
End of period..... 36,192,971
===========
<CAPTION>
Pro Forma
------------------------------
Adjustments Pro Forma
--------------- --------------
<S> <C> <C>
Revenues:
Rental and earned
income........... $24,048,982 (a)
233,199 (b) $42,874,173
Fees.............. (9,074,807)(c)
(2,662,141)(d) 2,612,702
Interest and
other income..... 249,395 (e) 15,553,463
--------------- --------------
Total Revenue... 12,794,628 61,040,338
Expenses:
General and
administrative... (740,042)(f)
(1,619,238)(g)
(43,237)(h) 5,756,999
Advisory fees..... (2,607,411)(i) 0
Fees to
Restaurant
Financial
Services Group... (745,082)(n) 0
Interest.......... (81,594)(m) 8,583,874
State taxes....... 21,634 (j) 293,051
Depreciation--
other............ -- 63,127
Depreciation--
property......... 3,207,365 (k) 5,200,605
Amortization...... 2,084,657 (l) 3,091,444
--------------- --------------
Total operating
expenses....... (522,948) 22,989,100
--------------- --------------
Operating earnings
(losses).......... 13,317,576 38,051,238
Equity in
earnings of
joint
ventures/minority
interest......... -- 121,694
--------------- --------------
Net earnings before
income taxes...... 13,317,576 38,172,932
Provision
(credit) for
federal income
taxes............ (2,462,606)(o) 0
--------------- --------------
Net earnings
(losses).......... $15,780,182 $38,172,932
=============== ==============
Earnings per
share............. $ 0.51
==============
Shares outstanding:
Weighted
average.......... 74,405,864(p)
==============
End of period..... 74,405,864
==============
</TABLE>
F-22
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of September 30, 1998 reflects the
transactions of the acquisition of the CNL Income Fund, Advisor and CNL
Restaurant Financial Services Group (the "Acquisition Proposal") as set forth
in this Proxy Statement. The Pro Forma Statements of Earnings for the nine
months ended September 30, 1998, and for the year ended December 31, 1997, have
been prepared to reflect a) the issuance of additional shares and the property
acquisitions completed from January 1, 1997 through November 30, 1998
("Offering and Property Transactions") and b) the transactions of the
Acquisition Proposal as set forth in this Proxy Statement. This unaudited pro
forma financial information has been prepared utilizing the historical
financial statements of the Company and the historical combined financial
information of the CNL Income Fund, Advisor and CNL Restaurant Financial
Services Group and should be read in conjunction with the selected historical
financial data and accompanying notes of the Company, the CNL Income Fund,
Advisor and the CNL Restaurant Financial Services Group. The Pro Forma Balance
Sheet was prepared as if the Offering and Property Transactions and the
Acquisition Proposal occurred on September 30, 1998. The Pro Forma Statements
of Earnings were prepared as if the Property Acquisitions and the Acquisition
Proposal occurred as of January 1, 1997. The pro forma information is unaudited
and is not necessarily indicative of the consolidated operating results which
would have occurred if the Offering and Acquisition Transaction and the
Acquisition Proposal 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 Acquisition
Proposal have been made. Capitalized terms have the meanings as defined in the
Proxy Statement.
2. Method of Accounting
The acquisition of the CNL Income Fund and the CNL Restaurant Financial
Services Group will be accounted for under the purchase accounting method. The
Company 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, the Company 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 operating expense on the Company's consolidated statements of
earnings, but the Company will not deduct this expense for purposes of
calculating funds from operations due to the non-recurring and non-cash nature
of the expense.
All significant intercompany balances and transactions between the Company,
CNL Income Fund, Advisor and CNL Restaurant Financial Services Group have been
eliminated in the pro forma financial statements.
3. Adjustments to Pro Forma Balance Sheet
The following describes the pro forma adjustments to the Pro Forma Balance
Sheet as of September 30, 1998, as if the Acquisition was consummated on such
date. For purposes of the pro forma financial statements, it is assumed that at
an annual meeting of stockholders, the stockholders of the Company approved an
amendment to increase the number of authorized shares to an amount necessary to
enable the Company to issue the shares for the Acquisition.
(1) Represents the payment of $472,595 in cash and the issuance of
16,295,376 common shares in consideration for the purchase of the CNL
Income Fund, Advisor and CNL Restaurant Financial Services Group at
September 30, 1998 at a share price of $10 plus estimated transaction
costs. The acquisition of the CNL Income Fund and the CNL Restaurant
Financial Services Group has been accounted for under the purchase
accounting method and goodwill was recognized to the extent that the
consideration paid exceeded the fair value of the net tangible assets
acquired. As for the acquisition of the Advisor from a
F-23
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
related party, the consideration paid in excess of the fair value of the
net tangible assets received has been accounted for as costs incurred in
acquiring the Advisor from a related party because the Advisor has not been
deemed to qualify as a "business" for purposes of applying APB Opinion No.
16 "Business Combinations." Upon consummation of the Acquisition, this
expense will be recorded as an operating expense on the Company's statement
of earnings. The Company will not deduct this expense for purposes of
calculating funds from operations due to the nonrecurring and non-cash
nature of the expense. As of September 30, 1998, $249,403 of transaction
costs had been incurred by the Company.
<TABLE>
<S> <C>
CNL Income Fund............................................ $ 40,426,353
Advisor.................................................... 76,000,000
CNL Restaurant Financial Services Group.................... 47,000,000
------------
Total Purchase Price (cash and shares)................... 163,426,353
Less cash paid to CNL Income Fund.......................... (472,595)
------------
Share consideration...................................... 162,953,758
Transaction costs of the Company........................... 8,933,000
------------
Total costs incurred..................................... $171,886,758
============
</TABLE>
In addition, the Company i) used $8,933,000 in cash to pay the transaction
costs related to the Acquisition, ii) made an upward adjustment to the CNL
Income Fund carrying value of land and building on operating leases by
$8,325,348, net investment in direct financing leases by $3,918,282,
investment in joint venture by $1,379,674, made downward adjustments to the
carrying value of accrued rental income of $1,896,493, made downward
adjustments to other assets of $3,715,062 to adjust historical values to
fair value, iii) recorded goodwill of $41,693,143 for the acquisition of
the CNL Restaurant Financial Services Group, iv) reduced retained earnings
by $76,773,557 for the excess consideration paid over the net assets of the
Advisor and removed the historical common stock balance of $12,000,
additional paid in capital balance of $9,602,287, retained earnings balance
of $5,297,114 and partners capital balance of $30,969,503 of the CNL Income
Fund, Advisor and CNL Restaurant Financial Services Group.
(2) Represents the use of $26,901,936 in cash and cash equivalents at
September 30, 1998 to acquire $26,052,741 in properties and issue $849,195
in mortgage notes which occurred from October 1, 1998 through November 30,
1998.
(3) Represents the elimination by the CNL Income Fund of $60,005 in
related party payables recorded as receivables by the Advisor, the
elimination by the CNL Restaurant Financial Services Group of $6,641,379 in
related party payables recorded as receivables by CNL Restaurant Financial
Services Group and the elimination by the Company of $1,208,000 in related
party payables recorded as receivables by the Advisor.
(4) Represents the elimination of income taxes payable of $2,990,864
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.
4. Adjustments to Pro Forma Income Statements
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the nine months ended September 30, 1998, as if the
Acquisition was consummated as of January 1, 1997.
(a) Represents rental and earned income as if 1) properties that had
been previously constructed and acquired from January 1, 1998
through November 30, 1998 had been acquired and leased on
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
January 1, 1997 and 2) properties that were developed by the Company
from January 1, 1998 through November 30, 1998 had been placed in
service on May 1, 1997 (assumes a four month development period).
<TABLE>
<S> <C>
Rental and earned income on Property
Transactions by the Company................ $9,635,208
</TABLE>
(b) Represents $133,495 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the CNL Income Fund as if the
leases had been acquired on January 1, 1997.
(c) Represents the elimination of intercompany fees between the Company,
the CNL Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Origination fees......................... $ (1,569,202)
Secured equipment lease fee.............. (44,426)
Advisory fees............................ (1,722,383)
Reimbursement of administrative costs.... (291,367)
Acquisition fees......................... (15,392,193)
Underwriting fees........................ (254,945)
Administrative fees...................... (148,491)
Executive fee............................ (310,000)
Guarantee fees........................... (93,750)
Servicing fee............................ (1,014,117)
Development fees......................... (166,876)
Consulting fee........................... (1,511)
------------
Total.................................. $(21,009,261)
============
</TABLE>
(d) Represents the deferral of $2,875,906 in origination fees collected
by CNL Restaurant Financial Services Group that should be amortized
over the term of the loans originated (20 years) in accordance with
the Statement of Financial Accounting Standards #91 "Accounting for
Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases."
(e) Represents interest income of $1,318,870 earned from Other
Investments acquired and mortgage notes issued from January 1, 1998
through November 30, 1998 as if this had occurred on January 1, 1997
and the amortization of $207,677 of deferred origination fees
collected during the year ended December 31, 1997 and during the
nine months ended September 30, 1998, which were capitalized and
deferred in (d) above as if they had been collected on January 1,
1997. These deferred fees are being amortized and recorded as
interest income.
(f) Represents the elimination of intercompany expenses paid between the
Company, the CNL Income Fund, the Advisor and the CNL Restaurant
Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs..... $ (291,367)
Servicing fee............................. (1,014,117)
-----------
$(1,305,484)
===========
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during
the period as if 1) costs relating to properties developed by the
Company were subject to capitalization during the entire period and
2) costs relating to properties not developed by the Company were
subject to capitalization up through the time that EITF 97-11 became
effective.
<TABLE>
<S> <C>
General and administrative costs.......... $(1,415,100)
</TABLE>
F-25
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(h) Represents savings of $36,113 in professional services and
administrative expenses resulting from reporting on one combined
Company versus 22 separate entities.
(i) Represents the elimination of advisory fees between the Company,
the CNL Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Advisory fees............................. $(1,722,383)
Administrative fees....................... (148,491)
Executive fee............................. (310,000)
Guarantee fees............................ (93,750)
-----------
$(2,274,624)
===========
</TABLE>
(j) Represents additional income taxes of $53,759 resulting from
assuming that acquisitions from January 1, 1998 through November
30, 1998 had been acquired on January 1, 1997 and assuming that the
CNL Income Fund had operated under a REIT structure.
(k) Represents an increase in depreciation of the building portion of
the properties acquired from January 1, 1998 through November 30,
1998 as if they had been acquired on January 1, 1997 and the step
up in basis referred to in footnote (2) from acquiring the CNL
Income Fund portfolio using the straight-line method over the
estimated useful lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense........................ $1,544,215
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of
the CNL Restaurant Financial Services Group referred to in footnote
(2)
<TABLE>
<S> <C>
Amortization of goodwill.................... $1,563,493
</TABLE>
(m) Represents elimination of interest expense recorded for the
amortization of $350,000 in arrangement fees collected during the
year ended December 31, 1997 which were eliminated in II (d) below.
<TABLE>
<S> <C>
Interest expense............................. $(68,670)
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees
incurred between the Company, the CNL Income Fund, the Advisor and
the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees.......................... $(1,569,202)
Underwriting fees......................... (254,945)
Consulting fee............................ (1,511)
-----------
$(1,825,658)
===========
</TABLE>
(o) Represents the elimination of $6,316,081 in the provision for
income taxes as a result of the Acquisition. The Company expects to
continue to qualify as a REIT and does not expect to incur federal
income taxes.
(p) Common shares issued during the period required to fund
acquisitions as if they had been acquired on January 1, 1997 were
assumed to have been issued and outstanding as of January 1, 1998.
For purposes of the proforma financial statements, it is assumed
that the stockholders approved the proposal to increase the number
of authorized common shares of the Company.
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the year ended December 31, 1997, as if the
Acquisition was consummated as of January 1, 1997.
(a) Represents rental and earned income as if 1) properties that had
been previously constructed and acquired from January 1, 1998
through November 30, 1998 had been acquired and leased on
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
January 1, 1997 and 2) properties that were developed by the Company
from January 1, 1997 through November 30, 1998 had been placed in
service on May 1, 1997 (assumes a four month development period).
<TABLE>
<S> <C>
Rental and earned income on Property
Transactions by the Company............. $24,048,982
</TABLE>
(b) Represents $233,199 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the CNL Income Fund as if the
leases had been acquired on January 1, 1997.
(c) Represents the elimination of intercompany fees between the Company,
the CNL Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Origination fees........................ $ (594,041)
Secured equipment lease fee............. (375,219)
Advisory fees........................... (1,775,680)
Reimbursement of administrative costs... (141,054)
Acquisition fees........................ (3,887,483)
Underwriting fees....................... (151,041)
Administrative fees..................... (269,231)
Executive fee........................... (250,000)
Guarantee fees.......................... (312,500)
Arrangement fees........................ (350,000)
Servicing fee........................... (598,988)
Development fees........................ (369,570)
-----------
Total................................. $(9,074,807)
===========
</TABLE>
(d) Represents the deferral of $2,662,141 in origination fees collected
by CNL Restaurant Financial Services Group that should be amortized
over the term of the loans originated (20 years) in accordance with
the Statement of Financial Accounting Standards #91 "Accounting for
Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases."
(e) Represents the elimination of interest income of $1,931,331 earned
during the year ended December 31, 1997 assuming all monies raised
during 1997 and all cash held on January 1, 1997 was used to effect
the Acquisition on January 1, 1997, represents interest income of
$2,047,619 earned from Other Investments acquired and mortgage notes
issued from January 1, 1998 through November 30, 1998 as if this had
occurred on January 1, 1997 and the recognition of $133,107 of
origination fees collected during the year ended December 31, 1997
which were deferred in (d) and are being amortized and recorded as
interest income.
(f) Represents the elimination of intercompany expenses paid between the
Company, the CNL Income Fund, the Advisor and the CNL Restaurant
Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs..... $(141,054)
Servicing fee............................. (598,988)
---------
$(740,042)
=========
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during
the period as if 1) costs relating to properties developed by the
Company were subject to capitalization during the entire period and
2) costs relating to properties not developed by the Company were
subject to capitalization up through the time that EITF 97-11 became
effective.
<TABLE>
<S> <C>
General and administrative costs........ $(1,619,238)
</TABLE>
F-27
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(h) Represents savings of $43,237 in professional services and
administrative expenses resulting from reporting on one combined
Company versus 22 separate entities.
(i) Represents the elimination of advisory fees between the Company,
the CNL Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Advisory fees............................. $(1,775,680)
Administrative fees....................... (269,231)
Executive fee............................. (250,000)
Guarantee fees............................ (312,500)
-----------
$(2,607,411)
===========
</TABLE>
(j) Represents additional income taxes of $21,634 resulting from
assuming that acquisitions from January 1, 1997 through November
30, 1998 had been acquired on January 1, 1997 and assuming that the
CNL Income Fund had operated under a REIT structure.
(k) Represents increase in depreciation of the building portion of the
properties acquired from January 1, 1997 through November 30, 1998
as if they had been acquired on January 1, 1997 and the step up in
basis referred to in footnote (2) from acquiring the CNL Income
Fund portfolio using the straight-line method over the estimated
useful lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense........................ $3,207,365
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of
the CNL Restaurant Financial Services Group referred to in footnote
(2)
<TABLE>
<S> <C>
Amortization of goodwill.................... $2,084,657
</TABLE>
(m) Represents elimination of yearly amortization of arrangement fees
of $350,000 capitalized as deferred costs and amortized as interest
expense and the capitalization of interest expense during the
period that properties were under development.
<TABLE>
<S> <C>
Amortization of arrangement fees............. $(24,144)
Capitalization of interest during development
period...................................... (57,450)
--------
$(81,594)
========
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees
incurred between the Company, the CNL Income Fund, the Advisor and
the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees............................ $(594,041)
Underwriting fees........................... (151,041)
---------
(745,082)
=========
</TABLE>
(o) Represents the elimination of $2,462,606 in the provision for
income taxes as a result of the Acquisition. The Company expects to
continue to qualify as a REIT and does not expect to incur federal
income taxes.
(p) Common shares issued during the period were assumed to have been
issued and outstanding as of January 1, 1997. For purposes of the
proforma financial statement, it is assumed that the stockholders
approved the proposal to increase the number of authorized common
shares of the Company.
F-28
<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 eighteen 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
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.
B-1
<PAGE>
"Affiliated Group" means any affiliated group within the meaning of Code
(S)1504, or any similar group defined under a similar provision of state, local
or foreign law.
"Agreement" means this Agreement, as amended from time to time.
"APF" has the meaning set forth in the preface above.
"APF Common Shares" shall mean the shares of common stock, par value $0.01,
of APF.
"APF Indemnity Claim" has the meaning set forth in Section 12.1 below.
"APF SEC Documents" has the meaning set forth in Section 6.7 below.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms the basis for any specified
consequence.
"Business Combination" has the meaning set forth in Section 4.1(b) below.
"Cash/Note Option" has the meaning set forth in Section 4.4 below.
"Closing" has the meaning set forth in Section 2.3 below.
"CNL Income Funds" has the meaning set forth in the second paragraph of the
Recitals above.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the businesses
and affairs of the Fund, the Operating Partnership or APF, if any, that is not
already generally available to the public.
"Delaware RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Disclosure Schedule" has the meaning set forth in the first paragraph of
Article VII below.
"Dissenting Partners" has the meaning set forth in Section 4.4 below.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
tax-qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) tax-qualified defined benefit retirement
plan or arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Fairness Opinion" has the meaning set forth in the third paragraph of the
Recitals above.
"Florida RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Fund" has the meaning set forth in the preface above.
"Fund Articles of Merger" has the meaning set forth in Section 2.2 below.
"Fund Fairness Opinion" has the meaning set forth in the fifth paragraph of
the recitals above.
B-2
<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-3
<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-4
<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.
B-5
<PAGE>
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
B-6
<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 $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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will (i) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which the Fund is subject or any
provision of the certificate of limited partnership or limited partnership
agreement of the Fund or (ii) result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice or consent
under any agreement, contract, lease, license, instrument, or other arrangement
to which the Fund is a party or by which it is bound or to which any of its
assets is subject (or result in the imposition of any Security Interest upon
any of its assets).
7.5 Title to Assets. The Fund has good title to, or a valid leasehold
interest in, the properties and assets used by it, located on its premises, or
set forth in its most recent quarterly report on Form 10-Q filed with the SEC
(the "Most Recent 10-Q") or acquired after the date thereof, free and clear of
all Security Interests, except for properties and assets disposed of in the
Ordinary Course of Business since the date of the Most Recent 10-Q.
7.6 Subsidiaries. The Fund does not have any Subsidiaries, operating or
otherwise.
7.7 Reports and Financial Statements. The Fund has filed all required
reports, schedules, forms, statements and other documents with the SEC since
January 1, 1996 (along with any such documents filed subsequent to the date
hereof, the "Fund SEC Documents"). All of the Fund SEC Documents (other than
preliminary material), as of their respective filing dates, complied in all
material respects with all applicable requirements of the Securities Act and
the Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such Fund SEC Documents. None of the Fund SEC
Documents at the time of filing contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the extent
such statements have been modified or superseded by later filed Fund SEC
Documents. There is no unresolved violation by any governmental entity of which
the Fund has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to the Fund could have a Material
Adverse Effect on the Fund. The financial statements of the Fund included in
the Fund SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with GAAP
(except, the case of interim financial statements, as permitted by Forms 10-Q
and 8-K of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly presented, in
accordance with the applicable requirements of GAAP, the financial position of
the Fund as of the dates thereof and the results of operations and cash flows
of the Fund for the periods then ended (subject, in the case of interim
financial statements, to normal year-end adjustments).
7.8 Events Subsequent to the Most Recent 10-Q. Since the date of the Most
Recent 10-Q nothing has had a Material Adverse Effect on the Fund. Without
limiting the generality of the foregoing, since that date, except as set forth
in the appropriately lettered paragraph of Section 7.8 of the Disclosure
Schedule:
(a) the Fund has not sold, leased, transferred, or assigned any of its
assets, tangible or intangible, other than for a fair consideration (as
reasonably determined by the General Partners) in the Ordinary Course of
Business;
(b) the Fund has not entered into any agreement, contract, lease, or license
(or series of related agreements, contracts, leases, and licenses) involving
more than $50,000 except in the Ordinary Course of Business;
(c) no party (including the Fund) has accelerated, terminated, modified, or
canceled any agreement, contract, lease, or license (or series of related
agreements, contracts, leases, and licenses) to which the Fund is a party or by
which it is bound except in the Ordinary Course of Business;
(d) the Fund has not imposed any Security Interest upon any of its assets,
tangible or intangible except in the Ordinary Course of Business;
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(e) the Fund has not made any capital expenditure (or series of related
capital expenditures) involving more than $50,000 except in the Ordinary Course
of Business;
(f) the Fund has not made any capital investment in, any loan to, or any
acquisition of the securities or assets of any other Person (or series of
related capital investments, loans, and acquisitions) outside the Ordinary
Course of Business;
(g) the Fund has not issued any note, bond, or other debt security or
created, incurred, assumed, or guaranteed any indebtedness for borrowed money
or capitalized lease obligation outside the Ordinary Course of Business;
(h) the Fund has not delayed or postponed the payment of accounts payable
and other Liabilities outside the Ordinary Course of Business;
(i) the Fund has not canceled, compromised, waived, or released any right or
claim (or series of related rights and claims) outside the Ordinary Course of
Business;
(j) the Fund has not granted any license or sublicense of any rights under
or with respect to any Intellectual Property;
(k) there has been no change made or authorized in the certificate of
limited partnership or limited partnership agreement of the Fund;
(l) the Fund has not issued, sold, or otherwise disposed of any ownership
interests, or granted any options, warrants, or other rights to purchase or
obtain (including upon conversion, exchange, or exercise) any ownership
interests in the Fund;
(m) the Fund has not declared, set aside, or paid any dividend or made any
distribution with respect to its ownership interests (whether in cash or in
kind) or redeemed, purchased, or otherwise acquired any of its ownership
interests other than distributions consistent with past practices;
(n) the Fund has not experienced any material damage, destruction, or loss
(whether or not covered by insurance) to its property;
(o) the Fund has not made any loan to, or entered into any other transaction
with, any of the General Partners or the directors, officers, or employees of
the corporate General Partner outside the Ordinary Course of Business;
(p) the Fund has not entered into any employment contract or collective
bargaining agreement, written or oral, or modified the terms of any existing
such contract or agreement;
(q) the Fund has not made or pledged to make any charitable or other capital
contribution outside the Ordinary Course of Business;
(r) to the Knowledge of the General Partners, there has not been any other
material occurrence, event, incident, action, failure to act, or transaction
outside the Ordinary Course of Business involving the Fund; and
(s) the Fund is not under any legal obligation, whether written or oral, to
do any of the foregoing.
7.9 Undisclosed Liabilities. The Fund does not have any Liability (and, to
the Knowledge of the General Partners, there is no Basis for any present or
future action, suit, proceeding, hearing, investigation, charge, complaint,
claim, or demand against it giving rise to any Liability), except for (i)
Liabilities set forth on the face of the Most Recent Balance Sheet (rather than
in any notes thereto) and (ii) Liabilities which have arisen after the date of
the Most Recent Balance Sheet in the Ordinary Course of Business (none of which
results
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from, arises out of, relates to, is in the nature of, or was caused by any
breach of contract, breach of warranty, tort, infringement, or violation of
law) or which are not in the aggregate material.
7.10 Legal Compliance. Except as disclosed in the Fund SEC Documents, the
Fund has complied in all material respects with all applicable laws (including
rules, regulations, codes, plans, injunctions, judgments, orders, decrees,
rulings, and charges thereunder), the violation of which could cause a Material
Adverse Effect to the Fund, of federal, state, local, and foreign governments
(and all agencies thereof), and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has been filed or
commenced against it alleging any failure so to comply.
7.11 Tax Matters.
(a) The Fund has filed all material Tax Returns that it was required to
file, including, without limitation, any material Tax Returns required to be
filed with any state. All such Tax Returns were correct and complete in all
material respects. All Taxes owed by the Fund (as shown on any filed Tax
Return) have been paid. The Fund currently is not the beneficiary of any
extension of time within which to file any Tax Return. No claim has ever been
made by an authority in a jurisdiction where the Fund does not file Tax Returns
that it is or may be subject to taxation by that jurisdiction. There are no
Security Interests on any of the assets of the Fund that arose in connection
with any failure (or alleged failure) to pay any Tax.
(b) The Fund has withheld and, if due, paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any independent
contractor, creditor, Partner, or other third party.
(c) The General Partners do not expect any authority to assess any
additional Taxes for any period for which Tax Returns have been filed. There is
no dispute or claim concerning any Tax Liability of the Fund either (A) claimed
or raised by any authority in writing or (B) as to which any of the General
Partners has Knowledge. Section 7.11(c) of the Disclosure Schedule lists all
federal, state, local, and foreign income Tax Returns filed with respect to the
Fund for taxable periods ended on or after December 31, 1996, indicates those
Tax Returns that have been audited, and indicates those Tax Returns that
currently are the subject of audit. The General Partners have made available to
APF and the Operating Partnership correct and complete copies of all federal
income Tax Returns, examination reports, and statements of deficiencies
assessed against or agreed to by the Fund since December 31, 1996.
(d) The Fund has not waived any statute of limitations in respect of Taxes
or agreed to any extension of time with respect to a Tax assessment or
deficiency.
(e) The Fund has not filed a consent under Code (S)341(f) concerning
collapsible corporations. The Fund has not made any payments, is not obligated
to make any payments, and is not a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be
deductible under Code (S)280G. The Fund has disclosed on its federal income Tax
Returns all positions taken therein that could give rise to a substantial
understatement of federal income Tax within the meaning of Code (S)6662. The
Fund is not a party to any Tax allocation or sharing agreement. The Fund (A)
has not been a member of an Affiliated Group filing a consolidated federal
income Tax Return (other than a group the common parent of which was the Fund)
or (B) has any Liability for the Taxes of any Person (other than the Fund)
under Treas. Reg. (S)1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract, or otherwise.
7.12 Real Property.
Section 7.12(a) of the Disclosure Schedule lists and describes briefly all
real property owned, leased or subleased by the Fund. Section 7.12(b) of the
Disclosure Schedule lists all leases and subleases to which the Fund is a
party, and the General Partners have made available to APF correct and complete
copies of all such
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leases and subleases (as amended to date). With respect to each lease and
sublease listed in Section 7.12(b) of the Disclosure Schedule:
(a) the lease or, to the Knowledge of the General Partners, the sublease is
legal, valid, binding, enforceable, and in full force and effect, except as may
be affected by bankruptcy, insolvency, moratorium and the rights of creditors
generally;
(b) no consent is required with respect to the lease or sublease as a result
of this Agreement, and the actions contemplated by this Agreement will not
result in the change of any terms of the lease or sublease or otherwise affect
the ongoing validity of the lease or sublease;
(c) no party to the lease or sublease is in breach or default, and no event
has occurred which, with notice or lapse of time, would constitute a breach or
default or permit termination, modification, or acceleration thereunder;
(d) no party to the lease or, to knowledge of the General Partners, sublease
has repudiated any provision thereof;
(e) there are no disputes, oral agreements, or forbearance programs in
effect as to the lease or, to the Knowledge of the General Partners, sublease;
(f) the Fund has not assigned, transferred, conveyed, mortgaged, deeded in
trust, or encumbered any interest in the leasehold or subleasehold;
(g) all facilities leased or subleased thereunder have received all
approvals of governmental authorities (including licenses and permits) required
by the Fund in connection with the operation thereof and, to the Knowledge of
the General Partners, have been operated and maintained in all material
respects in accordance with applicable laws, rules, and regulations; and
(h) all facilities leased or subleased thereunder are supplied with
utilities and other services necessary for the operation of said facilities.
7.13 Intellectual Property.
(a) The Fund owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of the Fund as presently conducted. Each item of Intellectual
Property owned or used by the Fund immediately prior to the Closing hereunder
will be owned or available for use by the Fund on identical terms and
conditions immediately subsequent to the Closing hereunder. The Fund has taken
all necessary action to maintain and protect each item of Intellectual Property
that it owns or uses.
(b) The Fund has not Knowingly interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual Property
rights of third parties, and neither the General Partners nor any of the
corporate General Partner's directors and officers (and employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that the Fund
must license or refrain from using any Intellectual Property rights of any
third party). To the Knowledge of the General Partners, no third party has
interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Intellectual Property rights of the Fund which are material
to the operation of the Fund's business.
(c) The Fund has no patent or registration which has been issued to the Fund
with respect to any of its Intellectual Property.
(d) Section 7.13(d) of the Disclosure Schedule identifies each item of
Intellectual Property that any third party owns and that the Fund uses pursuant
to license, sublicense, agreement, or permission. The General
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Partners have made available to APF and the Operating Partnership correct and
complete copies of all such licenses, sublicenses, agreements, and permissions
(as amended to date).
(e) To the Knowledge of the General Partners, nothing will interfere with,
infringe upon, misappropriate, or otherwise come into conflict with, any
Intellectual Property rights of third parties as a result of the continued
operation of the Fund's business as presently conducted.
7.14 Tangible Assets. The Fund owns or leases all buildings, machinery,
equipment, and other tangible assets used in the conduct of its business as
presently conducted. Each such tangible asset is free from all material
defects, has been maintained in accordance with normal industry practice, is in
good operating condition and repair (subject to normal wear and tear), and is
suitable for the purposes for which it presently is used. The Most Recent
Balance Sheet sets forth all of the assets, in the opinion of the General
Partners, necessary to conduct the Fund's business as it is currently being
conducted.
7.15 Contracts. Section 7.15 of the Disclosure Schedule lists all of the
following types of contracts and other agreements to which the Fund is a party:
(a) any agreement (or group of related agreements) for the lease of personal
property to or from any Person providing for lease payments in excess of
$25,000 per annum;
(b) any agreement concerning a partnership or joint venture;
(c) any agreement (or group of related agreements) under which it has
created, incurred, assumed, or guaranteed any indebtedness for borrowed money,
or any capitalized lease obligation or under which it has imposed a Security
Interest on any of its assets, tangible or intangible;
(d) any agreement concerning confidentiality or noncompetition;
(e) any agreement with any General Partner or any of their Affiliates (other
than the Fund);
(f) any agreement under which it has advanced or loaned any amount to any of
the General Partners or the corporate General Partner's directors, officers,
and employees outside the Ordinary Course of Business; or
(g) any agreement under which the consequences of a default or termination
could have a Material Adverse Effect.
The General Partners have made available to APF and the Operating
Partnership a correct and complete copy of each written agreement listed in
Section 7.15 of the Disclosure Schedule (as amended to date) which is not
included as an exhibit to a Fund SEC Document and a written summary setting
forth the terms and conditions of each oral agreement referred to in Section
7.15 of the Disclosure Schedule. With respect to each agreement set forth in
Section 7.15 of the Disclosure Schedule or filed as an exhibit to a Fund SEC
Document: (A) the agreement is legal, valid, binding, enforceable, and in full
force and effect (except as may be affected by bankruptcy, insolvency,
moratorium or the rights of creditors generally); (B) the agreement will
continue to be legal, valid, binding, enforceable, and in full force and effect
on identical terms following the consummation of the transactions contemplated
hereby (except as may be affected by bankruptcy, insolvency, moratorium or the
rights of creditors generally); (C) no party is in breach or default, and no
event has occurred which with notice or lapse of time would constitute a breach
or default, or permit termination, modification, or acceleration, under the
agreement; and (D) no party has repudiated any provision of the agreement.
7.16 Notes and Accounts Receivable. All notes and accounts receivable of the
Fund are reflected properly on its books and records, are valid receivables
subject to no setoffs or counterclaims, and are current and collectible in
accordance with their terms at their recorded amounts, subject only to the
reserve for bad debts set forth on the face of the Most Recent Balance Sheet
(rather than in any notes thereto) as adjusted for the passage of time through
the Closing Date in accordance with the past custom and practice of the Fund.
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7.17 Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of the Fund.
7.18 Insurance. Section 7.18 of the Disclosure Schedule sets forth the
following information with respect to each insurance policy (including
policies providing property, casualty, liability, and workers' compensation
coverage and bond and surety arrangements) to which the Fund has been a party,
a named insured, or otherwise the beneficiary of coverage at any time within
the past five years (or such lesser periods as the Fund has actively engaged
in business or owned any material assets): (i) the name, address, and
telephone number of the agent; (ii) the name of the insurer, the name of the
policyholder, and the name of each covered insured; and (iii) the policy
number and the period of coverage. With respect to each current insurance
policy, to the Knowledge of the General Partners and the Fund: (A) the policy
is legal, valid, binding, enforceable, and in full force and effect; (B) the
policy will continue to be legal, valid, binding, enforceable, and in full
force and effect on identical terms following the consummation of the
transactions contemplated hereby; (C) neither the Fund nor any other party to
the policy is in breach or default (including with respect to the payment of
premiums or the giving of notices), and no event has occurred which, with
notice or the lapse of time, would constitute such a breach or default, or
permit termination, modification, or acceleration, under the policy; and (D)
no party to the policy has repudiated any provision thereof. The Fund has been
covered during the past five years (or such lesser periods as the Fund has
actively engaged in business or owned any material assets) by insurance in
scope and amount customary and reasonable for the businesses in which it has
engaged during the aforementioned period. Section 7.18 of the Disclosure
Schedule describes any self-insurance arrangements affecting the Fund.
7.19 Litigation. Section 7.19 of the Disclosure Schedule sets forth each
instance, not already disclosed in the Fund SEC Documents, in which the Fund
(i) is subject to any outstanding injunction, judgment, order, decree, ruling,
or charge or (ii) is a party to or, to its Knowledge, is threatened to be made
a party to any action, suit, proceeding, hearing, or investigation of, in, or
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator. None of the
actions, suits, proceedings, hearings, and investigations set forth in Section
7.19 of the Disclosure Schedule or the Fund SEC Documents could result in any
Material Adverse Effect on the Fund. None of the General Partners has any
reason to believe that any additional such action, suit, proceeding, hearing,
or investigation may be brought or threatened against the Fund.
7.20 Tenants. To the Knowledge of any of the General Partners, no current
tenant of a property owned by the Fund presently intends to materially change
its relationship with the owner of the property, either due to the
transactions contemplated hereby or otherwise.
7.21 Employees. The Fund does not have and has never had any employees,
officers or directors. The Fund is not and has never been a party to or had
any liability with respect to any Employee Benefit Plan.
7.22 Guaranties. The Fund is not a guarantor of and is not otherwise liable
for any liability or obligation (including indebtedness) of any other Person.
7.23 Registration Statement. The information furnished by the Fund for
inclusion in the Registration Statement will not, as of the effective date of
the Registration Statement, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
7.24 Environmental Matters. The Fund is currently in compliance with all
material environmental laws, ordinances, regulations and orders applicable to
its business or properties, and, to the Knowledge of the General Partners, the
tenants' present uses of the Fund's properties, whether leased or owned, do
not materially violate any such laws, ordinances, regulations or orders. The
Fund is not subject to any Liability or claim in connection with any
environmental law or any use, treatment, storage or disposal of any hazardous
substance or material or pollutant or any spill, leakage, discharge or release
of any hazardous substance or material or pollutant as a result of having
owned or operated any business prior to the Effective Time, which if a
violation existed would have a Material Adverse Effect on the Fund.
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7.25 Vote Required. The affirmative vote of at least a majority of the
outstanding Fund Interests is the only vote of any security holder in the Fund
(under applicable law or otherwise) required to approve the Merger, this
Agreement and the other transactions contemplated hereby.
7.26 Disclosure. The representations and warranties contained in this
Article VII do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Article VII not misleading.
ARTICLE VIII
Pre-Closing Covenants
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing.
8.1 General. Each of the Parties will use its reasonable best efforts to
take all action and to do all things necessary, proper, or advisable in order
to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions
set forth in Article X below).
8.2 Notices and Consents. The General Partners shall give any notices to
third parties and obtain any third party consents referred to in Sections 5.1,
5.2, 7.3 and 7.4 above and the related sections of the Disclosure Schedule.
APF, the OP General Partner and the Operating Partnership shall give any
notices to third parties and obtain any third party consents referred to in
Sections 6.4 and 6.5 above. Each of the Parties shall give any notices to, make
any filings with, and use its reasonable best efforts to obtain any
authorizations, consents, and approvals of governments and governmental
agencies in connection with the matters referred to in Sections 5.1, 6.4 and
7.3 above.
8.3 Maintenance of Business; Prohibited Acts. During the period from the
date of this Agreement to the Effective Time, the General Partners will not,
and will not cause the Fund to, take any action that adversely affects the
ability of the Fund (i) to pursue its business in the ordinary course, (ii) to
seek to preserve intact its current business organizations, and (iii) to
preserve its relationships with its tenants; and the General Partners will not
allow the Fund to, without the OP General Partner's prior written consent,
which consent shall not be unreasonably withheld:
(a) issue, deliver, sell, dispose of, pledge or otherwise encumber, or
authorize or propose the issuance, delivery, sale, disposition or pledge or
other encumbrance of (i) any additional ownership interests (including the Fund
Interests), or any securities or rights convertible into, exchangeable for or
evidencing the right to subscribe for any of its ownership interests, or any
rights, warrants, options, calls, commitments or any other agreements of any
character to purchase or acquire any of its ownership interests or any other
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for any of its ownership interests, or (ii) any other securities
in respect of, in lieu of or in substitution for the Fund Interests outstanding
on the date hereof;
(b) redeem, purchase or otherwise acquire, or propose to redeem, purchase or
otherwise acquire, any of its outstanding securities (including the Fund
Interests);
(c) split, combine, subdivide or reclassify any of its ownership interests
or otherwise make any payments to the Partners; provided, however, that nothing
shall prohibit: (i) the payment of any ordinary distribution in respect of its
ownership interests at such times and in such manner and amount as may be
consistent with the Fund's past practice (which in any event shall include any
and all compensation paid or payable or expenses reimbursed or reimbursable for
the period from December 31, 1998 through the Effective Time, to the extent not
otherwise paid or distributed to the Partners), or (ii) any distribution of
property necessary for the representation and warranty set forth in Section
7.11 to be true and correct;
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(d) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization (other
than the Merger);
(e) make any acquisition, by means of merger, consolidation or otherwise, of
any direct or indirect ownership interest in or assets comprising any business
enterprise or operation outside the Ordinary Course of Business;
(f) other than as may be necessary to consummate the Merger, adopt any
amendments to its certificate of limited partnership or limited partnership
agreement;
(g) incur any indebtedness for borrowed money or guarantee such indebtedness
or agree to become contingently liable, by guaranty or otherwise, for the
obligations or indebtedness of any other person or make any loans, advances or
capital contributions to, or investments in, any other corporation, any
partnership or other legal entity or to any other persons, outside the Ordinary
Course of Business;
(h) engage in the conduct of any business the nature of which is materially
different from the business in which the Fund is currently engaged;
(i) enter into any agreement providing for acceleration of payment or
performance or other consequence as a result of a change of control of the
Fund;
(j) forgive any indebtedness owed to the Fund or convert or contribute by
way of capital contribution any such indebtedness owed;
(k) authorize or enter into any agreement providing for management services
to be provided by the Fund to any third party or an increase in management fees
paid by any third party under existing management agreements;
(l) mortgage, pledge, encumber, sell, lease or transfer any material assets
of the Fund except as contemplated by this Agreement;
(m) authorize or announce an intention to do any of the foregoing, or enter
into any contract, agreement, commitment or arrangement to do any of the
foregoing; or
(n) perform any act or omit to take any action that would make any of the
representations made above inaccurate or materially misleading as of the
Effective Time.
8.4 Full Access. The General Partners shall permit representatives of APF
and the OP General Partner to have full access at all reasonable times, and in
a manner so as not to interfere with the normal business operations of the Fund
to all premises, properties, personnel, books, records (including Tax records),
contracts, and documents of or pertaining to the Fund. APF, the OP General
Partner and the Operating Partnership shall permit representatives of the
General Partners and the Fund to have full access at all reasonable times, and
in a manner so as not to interfere with the normal business operations of APF
and the Operating Partnership to all premises, properties, personnel, books,
records (including Tax records), contracts, and documents of or pertaining to
APF, the OP General Partner and the Operating Partnership. The Parties agree
that any information obtained in connection with the exercise of their rights
pursuant to this Section 8.4 shall be Confidential Information for purposes of
this Agreement.
8.5 Notice of Developments. Each Party will give prompt written notice to
the others of any material adverse development causing a breach of any of its
own representations and warranties in Articles V, VI or VII above, as
applicable. No disclosure by any Party pursuant to this Section 8.5, however,
shall be deemed to amend or supplement the Disclosure Schedule or to prevent or
cure any misrepresentation, breach of warranty, or breach of covenant.
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8.6 Reorganization. From and after the date hereof and prior to the
Effective Time, except for the transactions contemplated or permitted herein,
each of APF, the Operating Partnership, the General Partners and the Fund shall
use reasonable efforts to conduct its business and file Tax Returns in a manner
that would not jeopardize the qualification of APF after the Effective Time as
a real estate investment trust as defined within Section 856 of the Code.
8.7 Fund Partner Approval. The General Partners hereby agree to vote the
Fund Interests owned by them in favor of this Agreement and the transactions
contemplated hereby and agree, subject to the satisfaction of their fiduciary
duties as general partners under Florida law, as reasonably determined by the
General Partners, to recommend that the limited Partners of the Fund vote their
Fund Interests in favor of this Agreement and the transactions contemplated
hereby.
8.8 Delivery of Certain Financial Statements.
(a) In addition to disclosure in Fund SEC Documents required to be filed by
the Fund, promptly after they are available, and in any event not later than
the tenth business day prior to the Closing Date, the Fund shall provide to APF
and the OP General Partner with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by the Fund and each of the
General Partners that such balance sheets (including the related notes, if any)
present fairly, in all material respects, the financial position of the Fund as
of their respective dates, and the other related statements (including the
related notes, if any) included therein present fairly, in all material
respects, the results of its operations and cash flows for the respective
periods or as of the respective dates set forth therein, all in conformity with
GAAP consistently applied during the periods involved, except as otherwise
stated in the notes thereto, subject to normal year-end audit adjustments.
(b) In addition to disclosure in APF SEC Documents required to be filed by
APF, promptly after they are available, and in any event not later than the
tenth business day prior to the Closing Date, APF shall provide to the Fund and
the General Partners with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by APF that such balance
sheets (including the related notes, if any) present fairly, in all material
respects, the financial position of APF as of their respective dates, and the
other related statements (including the related notes, if any) included therein
present fairly, in all material respects, the results of its operations and
cash flows for the respective periods or as of the respective dates set forth
therein, all in conformity with GAAP consistently applied during the periods
involved, except as otherwise stated in the notes thereto, subject to normal
year-end audit adjustments.
8.9 State Takeover Statutes. APF, the APF Board of Directors, the Operating
Partnership, the Fund and the General Partners shall (i) take all action
necessary so that no "fair price," "business combination," "moratorium,"
"control share acquisition" or any other anti-takeover statute or similar
statute enacted under state or federal laws of the United States or similar
statute or regulation, including without limitation, the control share
acquisition provisions of Section 3-701 et seq. of the Maryland GCL and the
business combination provisions of Section 3-601 et seq of the Maryland GCL
(each, a "Takeover Statute"), is or becomes applicable to the Merger, this
Agreement or any of the other transactions contemplated by this Agreement, and
(ii) if any Takeover Statute becomes applicable to the Merger, this Agreement
or any other transaction contemplated by this Agreement, take all action
necessary to minimize the effect of such Takeover Statute on the Merger and the
other transactions contemplated by this Agreement.
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8.10 Exclusivity. None of the General Partners shall solicit, initiate, or
encourage the submission of any proposal or offer from any Person relating to
the acquisition of any capital stock or other voting securities or any
substantial portion of the assets of the Fund (including any acquisition
structured as a merger, consolidation, or share exchange). The General Partners
shall notify APF and the Operating Partnership immediately if any Person makes
any proposal, offer, inquiry, or contact with respect to any of the foregoing.
8.11 Listing. APF shall effect, at or before the issuance of any APF Common
Shares issued as Share Consideration pursuant to Article IV, authorization for
listing or quotation of such APF Common Shares on the NYSE, subject to official
notice of issuance.
8.12 Maintenance of APF's Business. During the period from the date of this
Agreement to the Effective Time, APF will not take any action that adversely
affects the ability of APF (i) to pursue its business in the ordinary course,
(ii) to seek to preserve intact its current business organizations (iii) to
preserve its relationships with its tenants and (iv) will not take any action
to affect it status as a REIT for federal income tax purposes.
8.13 Registration of Share Consideration. APF shall cause the Registration
Statement to become effective prior to the Closing Date.
8.14 Delivery and Approval of Disclosure Schedule and Schedule 1. Within
fifteen (15) business days after the date of this Agreement the General
Partners shall deliver to APF the Disclosure Schedule and APF shall deliver to
the General Partners Schedule 1. Within fifteen (15) business days after APF
receives the Disclosure Schedule it shall give the General Partners notice
either that the disclosures in the Disclosure Schedule are, as to substance,
satisfactory to APF, in its sole and absolute discretion, or that they are not
satisfactory and that APF terminate this Merger Agreement pursuant to Section
11.2. Likewise, within fifteen (15) business days after the General Partners
receive Schedule 1, the General Partners shall give APF notice either that the
disclosures in Schedule 1 are, as to substance, satisfactory to them, in their
sole and absolute discretion, or that they are not satisfactory and that such
General Partners terminate the Agreement pursuant to Section 11.2. In the case
of both APF and the General Partners, the failure of either to give the notice
specified above within the applicable fifteen (15) business day period shall
constitute approval of the Disclosure Schedule or Schedule 1, as applicable.
8.15 Certain Acquisitions. APF or its Subsidiaries shall acquire CNL Fund
Advisors, Inc., CNL Financial Corp. and CNL Financial Services, Inc.
(collective, the "CNL Restaurant Services Group") substantially in accordance
with the terms and conditions set forth in their respective merger agreements
dated on or about the date hereof or such other terms that are mutually agreed
to by the parties.
ARTICLE IX
Post-Closing Covenants
The Parties agree as follows with respect to the period following the
Closing:
9.1 General. In the event that at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of the Parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request, all at the sole cost and expense of the requesting
Party (unless the requesting Party is entitled to indemnification therefor
under Article XII below). The General Partners acknowledge and agree that from
and after the Closing, the Surviving Partnership will be entitled to possession
of all documents, books, records (including Tax records), agreements, and
financial data of any sort relating to the Fund.
9.2 Litigation Support. In the event and for so long as any Party actively
is contesting or defending against any action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand in connection
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with (i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Fund, each of the other Parties will
cooperate with it and its counsel in the contest or defense, make available
their personnel, and provide such testimony and access to their books and
records as shall be necessary in connection with the contest or defense, all at
the sole cost and expense of the contesting or defending Party (unless the
contesting or defending Party is entitled to indemnification therefor under
Article XII below).
9.3 Transition. The General Partners will not take any action that is
designed or intended to have the effect of discouraging any tenant, lessor,
licensor, customer, supplier, or other business associate of the Fund from
maintaining the same business relationships with the Surviving Partnership
after the Closing as it maintained with the Fund prior to the Closing.
9.4 Confidentiality.
(a) The General Partners and the Fund will treat and hold as such all of the
Confidential Information, refrain from using any of the Confidential
Information except in connection with this Agreement, and deliver promptly to
APF or the OP General Partner, as applicable, or destroy, at the request and
option of APF or the OP General Partner, as applicable, all tangible
embodiments (and all copies) of the Confidential Information which are in its
possession. In the event that any of the General Partners or the Fund is
requested or required (by oral question or request for information or documents
in any legal proceeding, interrogatory, subpoena, civil investigative demand,
or similar process) to disclose any Confidential Information, such General
Partner or the Fund, as applicable, will notify APF or the OP General Partner,
as applicable, promptly of the request or requirement so that such Party may
seek an appropriate protective order or waive compliance with the provisions of
this Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, such General Partner or the Fund is, on the advice of
counsel, compelled to disclose any Confidential Information to any tribunal or
else stand liable for contempt, then such General Partner or the Fund, as
applicable, may disclose the Confidential Information to such tribunal;
provided, however, that such General Partner or the Fund, as applicable, shall
use its best efforts to obtain, at the request of APF or the OP General
Partner, as applicable, an order or other assurance that confidential treatment
will be accorded to such portion of the Confidential Information required to be
disclosed as APF or the OP General Partner, as applicable, shall designate.
(b) APF, the OP General Partner and the Operating Partnership will treat and
hold as such all of the Confidential Information, refrain from using any of the
Confidential Information except in connection with this Agreement, and, if the
Closing does not occur, deliver promptly to the Fund General Partners, as
applicable, or destroy, at the request and option of the Fund or the General
Partners, as applicable, all tangible embodiments (and all copies) of the
Confidential Information which are in its possession. Prior to the Closing and
if the Closing does not occur, in the event that any of APF, the OP General
Partner or the Operating Partnership is requested or required (by oral question
or request for information or documents in any legal proceeding, interrogatory,
subpoena, civil investigative demand, or similar process) to disclose any
Confidential Information, APF, the OP General Partner or the Operating
Partnership, as applicable, will notify the Fund or the General Partners, as
applicable, promptly of the request or requirement so that such Party may seek
an appropriate protective order or waive compliance with the provisions of this
Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, APF, the OP General Partner or the Operating Partnership is,
on the advice of counsel, compelled to disclose any Confidential Information to
any tribunal or else stand liable for contempt, then APF, the OP General
Partner or the Operating Partnership, as applicable, may disclose the
Confidential Information to such tribunal; provided, however, that APF, the OP
General Partner or the Operating Partnership, as applicable, shall use its best
efforts to obtain, at the request of the Fund or the General Partners, as
applicable, an order or other assurance that confidential treatment will be
accorded to such portion of the Confidential Information required to be
disclosed as the Fund or the General Partners, as applicable, shall designate.
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9.5 Covenant Not to Compete. Unless employed by the Surviving Partnership or
APF after the Closing, for a period of three years from and after the Closing
Date, none of the General Partners will engage directly or indirectly in any
business serving the restaurant industry that the Surviving Partnership or APF
conducts as of the Closing Date, except existing restaurant businesses and
properties currently owned or advised by affiliates of CNL Group, Inc.,
including CNL Advisory Services, Inc. In addition, and not in lieu of the
foregoing, for a period of three years from and after the Closing Date, James
M. Seneff, Jr. hereby covenants and agrees not to engage or participate,
directly or indirectly, as principal, agent, executive, employee, employer,
consultant, stockholder, partner or in any other individual capacity
whatsoever, in the conduct or management of, or own any stock or any other
equity investment in or debt of, any business that relates to the ownership,
acquisition or development of "restaurant operations"; provided, however, for
the purposes of this Agreement, "restaurant operations" shall not include the
ownership, acquisition or development of hotel and health care properties that
contain restaurant operations and those entities set forth on Schedule 9.5, and
provided further, the noncompetition covenant shall not operate to preclude Mr.
Seneff's ownership of APF Common Shares and of up to 5% of the equity
securities of companies whose common stock is publicly traded that are engaged
in owning, operating, franchising or making are engaged in owning, operating,
franchising or making loans to restaurants and restaurant companies. If the
final judgment of a court of competent jurisdiction declares that any term or
provision of this Section 9.5 is invalid or unenforceable, the Parties agree
that the court making the determination of invalidity or unenforceability shall
have the power to reduce the scope, duration, or area of the term or provision,
to delete specific words or phrases, or to replace any invalid or unenforceable
term or provision with a term or provision that is valid and enforceable and
that comes closest to expressing the intention of the invalid or unenforceable
term or provision, and this Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment may be appealed.
9.6 Tax Matters.
(a) If there is an adjustment to any item reported on a pre-closing Tax
Return that results in an increase in the Taxes payable by the Fund or any of
the General Partners, and such adjustment results in a corresponding adjustment
to items reported on a post-closing Tax Return with the result that the Taxes
payable either by APF, any of its Subsidiaries, or by any consolidated group of
companies of which APF or any Subsidiary are then members are reduced, or a
refund of Taxes is increased, then any APF Indemnity Claim that the General
Partners or Fund owes APF or the Operating Partnership pursuant to Article XII
below shall be reduced by the amount by which such Taxes are reduced or such
refunds are increased.
(b) Any refund or credit of Taxes (including any statutory interest thereon)
received by APF or any of its Subsidiaries attributable to periods ending on or
prior to or including the Closing Date that were paid by the Fund pursuant to
this Agreement shall reduce any APF Indemnity Claim that the General Partners
or the Fund owes APF pursuant to Article XII below by an amount equal to the
amount of such refund or credit.
(c) In the event that APF or any of its Subsidiaries receives notice,
whether orally or in writing, of any pending or threatened federal, state,
local or foreign tax examinations, claims settlements, proposed adjustments or
related matters with respect to Taxes that could affect the Fund or the General
Partners, or if the Fund or any of the General Partners receives notice of such
matters that could affect APF or any of its Subsidiaries, the party receiving
such notice shall notify in writing the potentially affected party within ten
(10) days thereof. The failure of either party to give the notice required by
this Section shall not impair such party's rights under this Agreement except
to the extent that the other party demonstrates that it has been damaged
thereby.
(d) The General Partners shall have the responsibility for, and shall be
entitled, at their expense, to contest, control, compromise, reasonably settle
or appeal all proceedings with respect to pre-closing Taxes.
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ARTICLE X
Conditions to Obligation to Close
10.1 Conditions to Each Party's Obligation. The respective obligations of
APF, the OP General Partner, the Operating Partnership, the Fund and the
General Partners to consummate the transactions contemplated by this Agreement
are subject to the fulfillment at or prior to the Closing Date of each of the
following conditions, which conditions may be waived upon the written consent
of APF and the General Partners:
(a) Governmental Approvals and Consents. The Parties shall have received all
other authorizations, consents, and approvals of governments and governmental
agencies referred to in Sections 5.1, 6.4, and 7.3 above.
(b) No Injunction or Proceedings. There shall not be any action, suit, or
proceeding pending or threatened before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction or
before any arbitrator wherein an unfavorable injunction, judgment, order,
decree, ruling, or charge would, in the reasonable judgment of APF or the
General Partners, (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions contemplated
by this Agreement to be rescinded following consummation, or (C) materially
adversely affect the right of the Surviving Partnership to own its assets and
to operate its businesses (and no such injunction, judgment, order, decree,
ruling, or charge shall be in effect).
(c) No Suspension of Trading, Etc. At the Effective Time, there shall be no
declaration of a banking moratorium by federal or state authorities or any
suspension of payments by banks in the United States (whether mandatory or not)
or of the extension of credit by lending institutions in the United States, or
commencement of war or other international, armed hostility or national
calamity directly or indirectly involving the United States, which war,
hostility or calamity (or any material acceleration or worsening thereof), in
the sole judgment of APF, would have a Material Adverse Effect on the Fund or,
in the sole judgment of any of the General Partners, would have a Material
Adverse Effect on APF.
(d) Shareholder/Partner Approvals. The stockholders of APF shall have
approved APF's Amended and Restated Articles of Incorporation in the form
attached hereto as Exhibit A, and the Partners of the Fund shall have approved
the Merger Proposal, amendments to the partnership agreement, if any.
(e) Registration of Share Consideration. The Registration Statement shall
have become effective under the Securities Act and shall not be the subject of
any stop order or proceedings by the SEC seeking a stop order.
10.2 Conditions to Obligation of APF, the OP General Partner and the
Operating Partnership. The obligations of APF, the OP General Partner and the
Operating Partnership to consummate the transactions to be performed by them in
connection with the Closing are subject to satisfaction on or prior to December
31, 1999 of the following conditions:
(a) the General Partners and the Fund shall have delivered to APF and the OP
General Partner a certificate to the effect that:
(i) the representations and warranties set forth in Article V and
Article VII above are true and correct in all material respects at and as
of the Closing Date;
(ii) the General Partners and the Fund have performed and complied with
all of their covenants hereunder in all material respects at and as of the
Closing Date;
(iii) the General Partners and the Fund have procured all of the
material third-party consents specified in, respectively, Section 5.2 and
Section 7.4 above and the related sections of the Disclosure Schedule; and
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<PAGE>
(iv) no action, suit, or proceeding is pending or, to their Knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation, or
(C) affect adversely the right of the Surviving Partnership to own its
assets and to operate its businesses (and no such injunction, judgment,
order, decree, ruling, or charge is in effect);
Notwithstanding the foregoing, APF's obligation to close as a result of a
breach of the representations and warranties contained in Section 7.24 shall
be governed solely by Section 10.2(e) below.
(b) since December 31, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of the Fund, such determination to be made in the
reasonable discretion of APF;
(c) APF and the Operating Partnership shall have received an opinion dated
as of the Closing Date from Baker and Hostetler LLP, counsel to the General
Partners and the Fund, taken as a whole, in form and substance reasonably
satisfactory to APF and the Operating Partnership;
(d) APF shall have received the Disclosure Schedule and approved it in
accordance with Section 8.14;
(e) There shall not exist an unlawful environmental condition on one or
more properties owned by the Fund, which in the opinion of a mutually
acceptable environmental engineer or consultant, would require APF to expend
in excess of $4,042,635 in order to remediate such unlawful environmental
condition and cause the subject property or properties to comply with
applicable environmental laws, ordinances, regulations or orders; and
(f) If each of the CNL Income Funds approves its respective Proposed
Acquisition, Merrill Lynch & Co. shall not have withdrawn its Fairness Opinion
issued in connection with the Merger. If a Proposed Acquisition is not
approved by the applicable CNL Income Fund, then the Special Committee of the
Board of Directors of APF shall have received a fairness opinion addressed to
APF and its stockholders from Merrill Lynch & Co. as to the fairness of the
Proposed Acquisitions that were approved by the respective CNL Income Fund,
including the consideration to be paid in connection therewith, to APF and its
stockholders from a financial point of view.
APF, the OP General Partner and the Operating Partnership may waive any
condition specified in this Section 10.2 if they execute a writing so stating
at or prior to the Closing.
10.3 Conditions to Obligation of the General Partners and the Fund. The
obligations of the General Partners and the Fund to consummate the
transactions to be performed by them in connection with the Closing are
subject to satisfaction on or prior to December 31, 1999 of the following
conditions:
(a) APF, the OP General Partner and the Operating Partnership shall have
delivered to the General Partners and the Fund a certificate to the effect
that:
(i) the representations and warranties set forth in Article VI above are
true and correct in all material respects at and as of the Closing Date;
(ii) APF, the OP General Partner and the Operating Partnership have
performed and complied with all of their covenants hereunder in all
material respects through the Closing; and
(iii) no action, suit, or proceeding is pending or, to their knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement or (B) cause any of the
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<PAGE>
transactions contemplated by this Agreement to be rescinded following
consummation (and no such injunction, judgment, order, decree, ruling, or
charge is in effect);
(b) APF shall have delivered to the Fund for distribution to the Partners
the Share Consideration pursuant to Section 4.2 and, as applicable, the cash
and Notes pursuant to Section 4.4;
(c) since September 30, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of APF;
(d) APF shall have acquired the CNL Restaurant Services Group;
(e) the General Partners shall have received Schedule 1 and approved it in
accordance with Section 8.14;
(f) the APF Common Shares shall have been approved for listing on the NYSE
subject to official notice of issuance;
(g) the General Partners shall have received an opinion dated as of the
Closing Date from Shaw Pittman Potts & Trowbridge, counsel to APF and the
Operating Partnership, in form and substance reasonably satisfactory to the
General Partners; and
(h) Legg Mason Wood Walker Incorporated shall not have withdrawn the Fund
Fairness Opinion.
The General Partners and the Fund may waive any condition specified in this
Section 10.3 if they execute a writing so stating at or prior to the Closing.
ARTICLE XI
Termination
11.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by the General Partners, the limited partners of the Fund,
the OP General Partner or the stockholders of APF, respectively, either by the
mutual written consent of APF, the OP General Partner and the General Partners
or by mutual action of the General Partners and the Boards of Directors of
each of the corporate General Partner and the OP General Partner and the
Special Committee.
11.2 Termination by Individual Parties. This Agreement may be terminated
and the Merger may be abandoned (a) by action of the Special Committee and the
Board of Directors of the OP General Partner in the event of a failure of a
condition to the obligations of APF and the Operating Partnership set forth in
Section 10.2 of this Agreement; (b) by the General Partners in the event of a
failure of a condition to the obligations of General Partners or the Fund set
forth in Section 10.3 of this Agreement; (c) any Party if the Merger shall not
have occurred by December 31, 1999 or (d) if a United States federal or state
court of competent jurisdiction or United States federal or state governmental
agency shall have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other action
shall have become final and non-appealable; provided, in the case of a
termination pursuant to clause (a) or (b) above, that the terminating party
shall not have breached in any material respect its obligations under this
Agreement in any manner that shall have proximately contributed to the
occurrence of the failure referred to in said clause.
11.3 Effect of Termination and Abandonment. In the event of termination of
this Agreement and abandonment of the Merger pursuant to this Article XI, no
Party hereto (or any of its directors or officers) shall have any liability or
further obligation to any other Party to this Agreement, except that nothing
herein will relieve any Party from liability for any breach of this Agreement
or the obligations set forth in Sections 9.4 and 13.11.
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ARTICLE XII
Indemnification
12.1 Indemnity Obligations of the General Partners and the Fund. Subject to
Sections 12.5 and 12.6 hereof, each of the General Partners severally, in
accordance with its percentage interest in the Share Consideration and limited
in amount to the value of the APF Common Shares received by it, based upon the
average per share closing price of the APF Common Shares for the first twenty
trading days after the APF Common Shares are listed on NYSE (the "20 Day
Average Price"), agree to indemnify and hold APF, the OP General Partner and
the Surviving Partnership harmless from, and to reimburse APF, the OP General
Partner and the Surviving Partnership for, any APF Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "APF Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, obligation, suit, action, fee, cost, or expense
of any nature whatsoever resulting from (i) any breach of any representation
and warranty of any of the General Partners or the Fund which is contained in
this Agreement or any Schedule, Exhibit, or certificate delivered pursuant
hereto; (ii) any breach or non-fulfillment of, or any failure to perform, any
of the covenants, agreements, or undertakings of any of the General Partners or
the Fund which are contained in or made pursuant to this Agreement; and (iii)
all interest, penalties, costs, and expenses (including, without limitation,
all reasonable fees and disbursements of counsel) arising out of or related to
any indemnification made under this Section 12.1.
12.2 Indemnity Obligations of APF, the OP General Partner and the Operating
Partnership. Subject to Sections 12.5 and 12.6 hereof, APF, the OP General
Partner and the Operating Partnership (including in its capacity as the
Surviving Partnership) hereby jointly and severally agree to indemnify and hold
each of the General Partners and the Fund harmless from, and to reimburse each
of the General Partners and the Fund for, any Fund Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "Fund Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, suit, action, fee, cost, or expense of any nature
whatsoever incurred by any of the General Partners or the Fund resulting from
(i) any breach of any representation and warranty of APF, the OP General
Partner or the Operating Partnership which is contained in this Agreement or
any Schedule, Exhibit, or certificate delivered pursuant hereto; (ii) any
breach or non-fulfillment of, or failure to perform, any of the covenants,
agreements, or undertakings of APF, the OP General Partner and the Operating
Partnership which are contained in or made pursuant to the terms and conditions
of this Agreement; and (iii) all interest, penalties, costs, and expenses
(including, without limitation, all reasonable fees and disbursements of
counsel) arising out of or related to any indemnification made under this
Section 12.2.
12.3 Appointment of Representative. James M. Seneff, Jr. is hereby appointed
as the exclusive agent of the General Partners and the Fund to act on their
behalf with respect to any and all Fund Indemnity Claims and any and all APF
Indemnity Claims arising under this Agreement or such other representative as
may be hereafter appointed by the General Partners. Such agent is herein
referred to as the "Representative." The Representative shall take, and the
General Partners agree that the Representative shall take, any and all actions
which the Representative believes are necessary or appropriate under this
Agreement for and on behalf of the General Partners and the Fund, as fully as
if such parties were acting on their own behalf, including, without limitation,
asserting Fund Indemnity Claims against APF, the OP General Partner and the
Operating Partnership, defending all APF Indemnity Claims, consenting to,
compromising, or settling all Fund Indemnity Claims and APF Indemnity Claims,
conducting negotiations with APF, the OP General Partner and the Operating
Partnership and their representatives regarding such claims, taking any and all
other actions specified in or contemplated by this Agreement and engaging
counsel, accountants, or other representatives in connection with the foregoing
matters. APF, the OP General Partner and the Operating Partnership shall have
the right to rely upon all actions taken or omitted to be taken by the
Representative pursuant to this Agreement, all of which actions or omissions
shall be legally binding upon each of the General Partners and the Fund. The
Representative, acting pursuant to this Section 12.3, shall not be liable to
any of the General Partners or the Fund for any act or omission, except in
connection with any act or omission that was the result of the Representative's
bad faith or gross negligence.
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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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<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-32
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
By: /s/ James M. Seneff, Jr.
Its: Chief Executive Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
By: /s/ Robert A. Bourne
Its: President
CNL APF GP Corp.
By: /s/ Robert A. Bourne
Its: President
CNL INCOME FUND 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
B-33
<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 Prospectus/Consent Solicitation Statement.
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.
OVERVIEW
Pursuant to the Prospectus/Consent Solicitation Statement and this
Supplement, you are being asked to approve the Acquisition of your Income Fund
by APF. Your Income Fund is one of 18 limited partnerships (which we refer to
collectively as the Funds) that APF is seeking to acquire. Supplements have
also been prepared for each of the other Funds, copies of which may be obtained
without charge to 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 (or a REIT), formed in
1994, whose primary business, like that of the Funds, is the ownership of
restaurant properties leased to operators of national and regional restaurant
chains on a triple-net lease basis. As a full-service REIT, 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 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 shares of common stock (or APF Shares) will I receive if my Income
Fund is acquired by APF?
Your Income Fund will receive 3,700,097 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 $10.00 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
approximately 75 million APF Shares through three public offerings at offering
prices
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<PAGE>
per APF share equal to the Exchange Value. At December 31, 1998, of the
approximately $750 million raised by APF, APF has used approximately $550
million to acquire restaurant properties and to make mortgage loans and had
approximately $120 million in uninvested proceeds which APF expects to invest
during the first quarter of 1999. The remaining proceeds were used to pay fees
and other offering expenses.
What is the required vote necessary to approve the Acquisition?
Pursuant to the terms of your Income Fund's partnership agreement, APF's
acquisition of your Income Fund may not be consummated without the approval of
greater than 50% of the outstanding 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
Fund?
Yes. Legg Mason Wood Walker, Incorporated 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 Funds, and (c) the method of allocating the APF
Shares among the Funds.
Do you, as the general partners of my Income Fund, recommend that I vote in
favor 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 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 how you want to vote, and sign
and mail it in the enclosed postage-paid return envelope as soon as possible,
so that at the Special Meeting of Limited Partners, your Units may be voted
"For" or "Against" APF's acquisition of your Income Fund. If you sign and send
in your consent form and do not indicate how you want to vote, your consent
form will be counted as a vote "For" the Acquisition. If you do not vote or you
abstain from voting, it will count as a vote "Against" the Acquisition.
In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to certain limitations. If you vote "Against" the Acquisition,
but your Income Fund is nevertheless acquired by APF, you may elect to receive
a payment (which we call the Cash/Notes Option) that is 10% in cash and 90% in
% Callable Notes due , 2006 (or Notes) based on the liquidation value of
your Income Fund, as determined by Valuation Associates, the appraisal firm
that we engaged in connection with the Acquisition. Such liquidation value will
be lower than the aggregate Exchange Value of the APF Shares offered to your
Income Fund in the Acquisition. The Notes will bear interest at a rate equal to
%, which was determined based on 120% of the applicable federal rate as of
, 1999. Please note that you may only receive the Cash/Notes Option if
you have voted "Against" the Acquisition and you elect to receive the
Cash/Notes Option on your consent form. You will receive APF Shares if your
Income Fund elects to be acquired in the Acquisition and you voted "For" the
Acquisition, or you voted "Against" the Acquisition and did not affirmatively
select the Cash/Notes Option. 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 (for example, 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 be based on the difference between the
value of the APF Shares or the tax basis of your Units. If you elect the
Cash/Notes Option, 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 and cash
received by your Income Fund over the tax basis of your Fund's net assets. Some
of the gain may be subject to the 25% rate of tax applicable to certain real
property gain.
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<PAGE>
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 $1,918. To
review the tax consequences to the Limited Partners of the Funds in greater
detail, see pages through of the Prospectus/Consent Solicitation Statement
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 Funds acquired by APF.
Although the majority of APF's assets and the assets of the other Funds
acquired by APF are substantially similar to those of your Income Fund, the
restaurant properties owned by APF and the other 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 Funds' restaurant properties,
see "APF's Business and The Restaurant Properties--Business Objectives and
Strategies" and "--The Restaurant Properties--General" and "Business of the
Funds--Description of Restaurant Properties" in the Prospectus/Consent
Solicitation Statement.
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 Prospectus/Consent Solicitation Statement.
Investment Risks
. Uncertainty Regarding the Exchange Value and Trading Price of APF Shares
Following Listing. Your Income Fund will be receiving 3,700,097 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 is 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 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.
. Decrease in Distributions. In each of the years ended December 31, 1995,
1996 and 1997, your Income Fund made $910, $910, and $920, respectively, in
distributions, per $10,000 investment to you. Based on APF's pro forma
financial information, and assuming APF acquires only your Income Fund and
that each Limited Partner of your Income receives only APF Shares, you would
have received, for the year ended December 31, 1997, $598 in distributions
per $10,000 of original investment, which is 35.0% less than the
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<PAGE>
$920 distributed to you as Limited Partner during the same period. 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 year ended December 31, 1997 and
for the nine months ended September 30, 1998 is not necessarily indicative
of the distributions you will receive as a stockholder of APF after the
Acquisition. See "Cash Distributions to Limited Partners of Your Fund."
. Conflicts of Interest in the Acquisition; Substantial Benefits to Related
Parties. There are certain conflicts of interest inherent in the structure
of the Acquisition of your Income Fund. 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
that may or may not be aligned with your interests as a Limited Partner of
the Income Fund or with their own positions as the general partners of your
Income Fund. Assuming only your Income Fund is acquired in the Acquisition,
we will receive 33,349 APF Shares. 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.
. Fundamental Change in Nature of 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 September
30, 1998), 398 restaurant properties. The risks inherent in investing in an
operating company such as APF include APF's ability to invest in new
restaurant properties that are not as profitable as APF anticipated, the
incurrence of substantial indebtedness to make future acquisitions of
restaurant properties which it may be unable to repay and making mortgage
loans to prospective operators of national and regional restaurant chains
which may not have the ability to repay.
As an APF stockholder, you will receive the benefits of your investment
through (i) dividend distributions on, and (ii) increases in the value of,
your APF Shares. In addition, 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 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 Cash/Notes Option). An investment in APF may not
outperform your investment in the Income Fund.
. Original Investment Timeframe. 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, 2019. 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 1998 and 2003. Because your Income Fund is in
the anticipated termination timeframe, we could elect to liquidate your
Income Fund. However, we have no current plans to dispose of your Income
Fund's restaurant properties if the Limited Partners do not approve the
Acquisition.
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Real Estate/Business Risks
. Risk of Default on Mortgage Loans and Market Risks associated with
Securitizations. 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.
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,) and 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 may 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.
. Risks Associated with Leverage. 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. At the time of the consummation of the Acquisition, as a
general policy, APF's Board of Directors will 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 funds from operations and its ability to make
distributions to its stockholders.
. Acquisition and Development Risks. APF plans to pursue its growth strategy
through the acquisition and development of additional restaurant properties.
To the extent that APF does pursue this growth strategy, we do not know that
it will do so successfully because APF may have difficulty finding new
restaurant properties, negotiating with new or existing tenants or securing
acceptable financing. In addition, investing in additional restaurant
properties is subject to many risks. For instance, if an additional
restaurant property is in a market in which APF has not invested before, APF
will have relatively little experience in and may be unfamiliar with that
new market.
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Tax Risks
. Failure of APF to Qualify as a REIT for Tax Purposes. 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.
. Risks Associated with Distribution Requirements. 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 Tax Law. 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 Prospectus/Consent Solicitation Statement.
CONSIDERATION PAID TO INCOME FUND
The following table sets forth, for your Income Fund (i) the aggregate
amount of original Limited Partner investments in each Fund less any
distributions of net sales proceeds paid to the Limited Partners of that Fund,
(ii) the original amount of Limited Partner investments in each Fund less any
distributions of net sales proceeds per average $10,000 investment, (iii) the
number of APF Shares to be paid to your Income Fund, (iv) the estimated value
of the APF Shares paid to your Income Fund, (v) the estimated Acquisition
expenses allocated to your Income Fund, (vi) the estimated value, based on the
Exchange Value, of APF Shares paid to your Income Fund after deducting
Acquisition expenses, and (vii) the estimated value, based on the Exchange
Value, of APF Shares you will receive for each $10,000 of your original
investment:
<TABLE>
<CAPTION>
Original
Limited
Partner
Original Investments
Limited Less any
Partner Distributions of Estimated Estimated Value
Investments Net Sales Number of Value of of APF Shares
Less any Proceeds per APF APF Estimated Value per Average
Distributions of $10,000 Shares Shares Estimated of APF Shares $10,000 Original
Net Sales Original Offered to Payable to Acquisition after Acquisition Limited Partner
Proceeds(1) Investment(1) Fund(2) Fund(3) Expenses Expenses(3) Investment(3)
- ---------------- ---------------- ---------- ----------- ----------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$35,000,000 $10,000 3,700,097 $37,000,970 $420,663 $36,580,307 $10,356
</TABLE>
- --------
(1) Income Fund has had no distributions of net sales proceeds.
(2) The APF Shares payable to each Fund as set forth in this chart will not
change if APF acquires fewer than all of the Funds in the Acquisition.
This number assumes that none of the Limited Partners of the Fund has
elected the Cash/Notes Option.
(3) 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.
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Upon completion of the Acquisition of your Income Fund, the operations and
existence of your Income Fund will cease. For more detailed information, see
"The Acquisition" in the Prospectus/Consent Solicitation Statement. If your
Income Fund does not approve the Acquisition, we do not contemplate that your
Income Fund would be liquidated in the near future. The Acquisition, however,
does not result in an all-cash payment to you in the liquidation of your
investment. For example, if you are eligible for and choose the Cash/Notes
Option, you become a Noteholder of APF. You will have exchanged your Units for
unsecured debt obligations of APF which may not be retired in full until
, 2006, a date approximately seven years after the date the Acquisition of
your Income Fund occurs. On the other hand, if you exchange your Units for APF
Shares, you will receive an equity interest in APF whose marketability will
depend upon the market that may develop with respect to the APF Shares, which
will be listed on the NYSE.
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....................................................... $ 17,546
Appraisals and Valuation......................................... 7,019
Fairness Opinions................................................ 31,583
Registration, Listing and Filing Fees............................ --
Soliciting Dealer Fee............................................ 77,079
Financial Consulting Fees........................................ --
Environmental Fees............................................... 43,866
Accounting and Other Fees........................................ 50,891
--------
Subtotal....................................................... 227,984
Closing Transaction Costs
Transfer Fees and Taxes.......................................... 63,583
Legal Fees....................................................... 70,305
Recording Costs.................................................. --
Other............................................................ 58,791
--------
Subtotal....................................................... 192,679
--------
Total............................................................ $420,663
========
</TABLE>
S-7
<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 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 as, in our opinion,
market conditions permit), as contemplated by the terms of the partnership
agreement.
Special Meeting to Discuss the Acquisition
We have scheduled a special meeting of the Limited Partners of your Income
Fund to discuss the solicitation materials, which include the
Prospectus/Consent Solicitation Statement, 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 (as defined below) and to explain in
person our reasons for recommending that you vote "For" the Acquisition.
VOTING PROCEDURE
The Prospectus/Consent Solicitation Statement, 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.
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 Prospectus/Consent Solicitation
Statement. A copy of the Agreement and Plan of Merger dated March 11, 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 December 31,
1999. Any
S-8
<PAGE>
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.
The consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and certain 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
(including the Acquisition), 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. The partnership agreement also provide 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
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, 1995, 1996 and 1997 and the nine months
ended September 30, 1998, the aggregate amounts accrued or paid by your Income
Fund 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 years presented, are shown below under "Pro Forma":
S-9
<PAGE>
<TABLE>
<CAPTION>
Nine
Months
Year Ended December 31, Ended
----------------------- September 30,
1995 1996 1997 1998
------- ------- ------- -------------
<S> <C> <C> <C> <C>
Historical:
General Partner Distributions.......... -- -- -- --
Broker/Dealer Commissions(1)........... -- -- -- --
Due Diligence and Marketing Support
Fees.................................. -- -- -- --
Acquisition Fees....................... -- -- -- --
Asset Management Fees.................. -- -- -- --
Real Estate Disposition Fees(2)........ -- -- -- --
------- ------- ------- -------
Total historical..................... -- -- -- --
Pro Forma:
Cash Distributions on APF Shares....... $22,083 $26,144 $19,260 $15,217
Salary Compensation.................... -- -- -- --
------- ------- ------- -------
Total pro forma...................... $22,083 $26,144 $19,260 $15,217
</TABLE>
- --------
(1) A majority of the fees paid as broker-dealer commissions and due diligence
and marketing support fees were reallowed to other broker-dealers
participating in the offering of the Income Fund's Units.
(2) 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 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 the Acquisition--Prices for 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>
Nine Months Ended
Sept. 30, 1998
--------------------
1993 1994 1995 1996 1997 Historical Pro Forma
---- ---- ---- ---- ---- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income....... $882 $850 $845 $837 $831 $500 $453
Distributions from Return of
Capital(1)..................... 18 50 65 73 89 175 19
---- ---- ---- ---- ---- ---- ----
Total......................... $900 $900 $910 $910 $920 $675 $472
==== ==== ==== ==== ==== ==== ====
</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.
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 nine months ended September 30,
1998 is not necessarily indicative of the distributions you will receive as a
stockholder of APF after the Acquisition.
S-10
<PAGE>
Assuming APF maintains its current level of debt for acquiring future
restaurant properties, the expected distribution rate per APF Share will be
8.8% (assuming a $10.00 per APF Share price based on the Exchange Value, the
annualized dividend per year is expected to be $0.88 per APF Share). Based on
the number of APF Shares that you would receive in the Acquisition per your
average $10,000 original investment and this distribution rate, you would
receive an annual distribution of approximately $911.
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 certain 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 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 Cash/Note Option.
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, our relief 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 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 Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the Cash/Notes Option, constitutes 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 and is the best way to maximize the return on your
investment in light of the values of such consideration.
S-11
<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 each of Valuation Associates and
Legg Mason received fees for its services and notwithstanding that Legg Mason
has previously provided investment banking services to the Funds and to
Commercial Net Lease Realty, Inc., a former affiliate of ours. See "Reports,
Opinions and Appraisals" in the Prospectus/Consent Solicitation Statement.
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 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 cash and promissory 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 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 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 Cash/Notes Option.
3. Valuation of Alternatives. Based on the appraisal of the Income Fund's
restaurant properties, we estimated the value of your Income Fund as a ongoing
concern and if liquidated. 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 Fund to Fund. In addition to the receipt
of cash available for distribution, you and the
S-12
<PAGE>
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
September 30, 1998 per $10,000 original investment. Since the calculation of
the book value was done on a GAAP basis, it is not indicative of the true fair
market value of your Income Fund. This figure was compared to the (i) value of
the Fund if it commenced an orderly liquidation of its investment portfolio on
December 31, 1998, (ii) value of the Fund if it continued to operate in
accordance with its existing partnership agreement and business plans, and
(iii) estimated value of the APF Shares, based on the Exchange Value, paid to
each Fund per average $10,000 invested.
Summary of Valuations
(per $10,000 original investment)
<TABLE>
<CAPTION>
Estimated Value
of APF Shares
per Average
$10,000
Original
GAAP Book Liquidation Going Concern Limited Partner
Value Value(1) Value(1) Investment(2)
--------- ----------- ------------- ---------------
<S> <C> <C> <C> <C>
CNL Income Fund IX, Ltd.... $8,418 $9,650 $10,311 $10,356
</TABLE>
- --------
(1) 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.
(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.
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have an independent
obligation 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 Funds). James M. Seneff, Jr. and
Robert A. Bourne act as the individual general partners of all of the 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.
Benefits to General Partners
As a result of the Acquisition (assuming only your Income Fund is acquired),
we are expected to receive certain benefits, including that we will be relieved
from certain ongoing liabilities with respect to Funds that are acquired by
APF.
With respect to our ownership in your Income Fund, we may be issued up to
33,349 APF Shares in the aggregate in accordance with the terms of your Income
Fund's partnership agreement. The 33,349 APF Shares issued to us will have an
estimated value, based on the Exchange Value, of approximately $333,490
thousand.
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
S-13
<PAGE>
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
Funds if the Acquisition does not occur.
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 the Cash/Notes Option, in which case you will
receive cash and 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 Prospectus/Consent Solicitation Statement.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, the
assets (and any liabilities) of your Income Fund (if your Income Fund is
acquired by APF) will be transferred to APF in return for APF Shares and/or
cash and 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,
S-14
<PAGE>
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........................................ $1,918
</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 Code, no gain or loss is recognized if (i)
property is transferred to a corporation by one more individuals or entities in
exchange for the stock of that corporation, and (ii) 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 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 the
Cash/Notes Option, 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 (1) 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 (2) 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 Cash/Notes Option, your Income Fund will receive APF
Shares, cash and Notes in exchange for your Income Fund's assets. Because the
principal portion of the Notes will not be due until --------, 2006, 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 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 (without reduction for
any selling expenses) 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 are assumed or taken subject to by the
S-15
<PAGE>
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, cash 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" (i.e., real property and
depreciable assets used in a trade or business and held for more than one
year). Your share of gains or losses from the sale of section 1231 assets of
your Income Fund would be combined with any other section 1231 gains and losses
that you recognize in that year. If the result is a net loss, such loss is
characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property will be taxed as ordinary income to the extent of all
prior depreciation deductions taken by your Income Fund prior to sale. In
general, you may only use up to $3,000 of capital losses in excess of capital
gains to offset ordinary income in any taxable year. Any excess loss is carried
forward to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your Income Fund recognizes will be allocated to you and the other
Limited Partners in accordance with the terms of your Income Fund's partnership
agreement. Each Limited Partner will be allocated and must report his, her or
its allocable share of such gain, if any, pursuant to these terms, regardless
of the Limited Partner's decision to receive 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 Cash/Notes Option may
recognize gain in the year of the Acquisition despite the fact that they will
receive only a small amount of cash and no publicly-traded instruments 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 the Cash/Notes Option. See "--Tax Consequences of
Liquidation and Termination of Your Fund" below.
Tax Consequences of the Liquidation and Termination of Your Fund. If your
Fund is acquired by APF, your Fund will be deemed to have liquidated and
distributed APF Shares and/or cash and 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 cash and 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 pro rata 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 (determined on the closing date of the Acquisition) and your
adjusted tax basis in your Units (adjusted by your distributive share of
income, gain, loss, deduction and credit for the final taxable year of your
Income Fund (including any such items recognized by your Income Fund as a
result of the Acquisition) as well as any distributions you receive in such
final taxable year (other than the distribution of the APF Shares)). 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.
S-16
<PAGE>
If you receive cash and Notes in the Acquisition, you will recognize gain to
the extent that the amount of cash you receive in the Acquisition exceeds your
adjusted basis in your Units (adjusted by your distributive share of income,
gain, loss, deduction and credit for the final taxable year of your Income Fund
(including any such items recognized by your Income Fund as a result of the
Acquisition) as well as any distributions you receive in such final taxable
year (other than the distributions of the cash and Notes)). Your basis in the
Notes distributed to you will equal your adjusted basis in your Units, reduced
(but not below zero) by the amount of any cash distributed to you 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 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.
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 cash and 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 Prospectus/Consent Solicitation
Statement.
S-17
<PAGE>
SUMMARY SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
APF, FUNDS, ADVISOR AND CNL RESTAURANT FINANCIAL SERVICES GROUP
Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
Historical Pro Forma
-------------------------------------------------- --------------------------------
CNL
CNL Restaurant
Income Financial
Fund IX, Services Combined Pro Forma Combined
APF Ltd. Advisor Group Historical Adjustments Pro Forma
------------ ----------- ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data
Revenues:
Rental and earned
income............... $ 22,947,199 $ 1,630,947 $ -- $ -- $ 24,578,146 $ 9,635,208 (a)
68,814 (b) $ 34,282,168
Management fees....... -- -- 21,405,127 5,122,366 26,527,493 (21,010,744)(c)
(2,875,906)(d) 2,640,843
Interest and other
income............... 6,117,911 39,539 751 18,463,647 24,621,848 1,526,547)(e) 26,148,395
------------ ----------- ----------- ------------ ------------ ------------ ------------
Total revenue......... 29,065,110 1,670,486 21,405,878 23,586,013 75,727,487 (12,656,081) 63,071,406
Expenses:
General and
administrative....... 1,539,004 142,375 6,701,115 6,704,482 15,086,976 (1,306,967)(f)
(1,415,100)(g)
(35,996)(h) 12,328,913
Advisory fees......... 1,248,393 -- -- 1,026,231 2,274,624 (2,274,624)(i) --
State taxes........... 397,569 14,337 15,226 220,180 647,312 50,404 (j) 697,716
Depreciation and
amortization......... 2,693,020 197,603 131,539 1,000,493 4,022,655 3,078,340 (k)(l) 7,100,995
Interest expense...... -- -- 105,668 14,234,533 14,340,201 (68,670)(m) 14,271,531
Paid to affiliates.... -- -- 256,456 1,569,202 1,825,658 (1,825,658)(n) --
------------ ----------- ----------- ------------ ------------ ------------ ------------
Total expenses........ 5,877,986 354,315 7,210,004 24,755,121 38,197,426 (3,798,271) 34,399,155
------------ ----------- ----------- ------------ ------------ ------------ ------------
Net earnings (loss)
before equity in
earnings of joint
ventures/minority
interests, gain on
securitization, and
provision (credit) for
federal income taxes.. 23,187,124 1,316,171 14,195,874 (1,169,108) 37,530,061 (8,857,810) 28,672,251
------------ ----------- ----------- ------------ ------------ ------------ ------------
Equity in earnings of
joint
ventures/minority
interests............. (23,271) 432,608 -- 12,452 421,789 -- 421,789
Gain on
securitization........ -- -- -- 3,018,268 3,018,268 -- 3,018,268
Provision (credit) for
federal income taxes.. -- -- 5,607,415 708,666 6,316,081 (6,316,081)(o) --
------------ ----------- ----------- ------------ ------------ ------------ ------------
Net earnings........... $ 23,163,853 $ 1,748,779 $ 8,588,459 $ 1,152,946 $ 34,654,037 $ (2,541,729) $ 32,112,308
============ =========== =========== ============ ============ ============ ============
Other Data:
Weighted average number
of shares of common
stock outstanding
during period......... 47,633,909 N/A N/A N/A N/A -- 73,390,248(p)
Total net-leased
properties at end of
period................ 357 41 N/A N/A N/A -- 398
Funds from operations.. $26,408,569 $2,040,161 N/A N/A N/A -- $36,843,509
Total cash
distributions
declared.............. $26,460,446 $2,362,503 N/A N/A N/A -- $36,843,509
Cash distributions
declared per $10,000
investment............ $ 572 $ 675 N/A N/A N/A -- $ 494
<CAPTION>
Historical Combined Pro Forma
September 30, 1998 Historical September 30, 1998
-------------------------------------------------- ------------ --------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data
Real estate assets,
net................... $407,663,180 $21,355,611 $ -- $ -- $429,018,791 $ 8,505,264 (q)
26,052,741 (r) $463,576,796
Mortgages/notes
receivable............ 33,523,506 -- $ -- 173,776,981 207,300,487 849,195 (r) 208,149,682
Accounts receivable,
net................... 575,104 10,491 7,544,985 7,342,103 15,472,683 (7,853,842)(q) 7,618,841
Investment in/due from
joint ventures........ 631,374 6,497,278 -- -- 7,128,652 2,360,444 (q) 9,489,096
Total assets........... 566,383,967 30,405,344 8,429,809 197,528,789 802,747,909 30,489,073 833,236,982
Total
liabilities/minority
interest.............. 14,478,585 941,844 5,049,152 185,998,045 206,467,626 (10,844,706)(s)(t) 195,622,920
Total equity........... 551,905,382 29,463,500 3,380,657 11,530,744 596,280,283 41,333,779 (q)(t) 637,614,062
</TABLE>
- --------
S-18
<PAGE>
(a) Represents rental and earned income as if 1) properties that had been
previously constructed and acquired from January 1, 1998 through November
30, 1998 had been acquired and leased on January 1, 1997 and 2) properties
that were developed by APF from January 1, 1998 through November 30, 1998
had been placed in service on May 1, 1997 (assumes a four month development
period).
<TABLE>
<S> <C>
Rental and earned income on Property Transactions by APF......... $9,635,208
</TABLE>
(b) Represents $68,814 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, 1997.
(c) Represents the elimination of intercompany fees between APF, the Income
Fund, the Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees............................................. $ (1,569,202)
Secured equipment lease fee.................................. (44,426)
Advisory fees................................................ (1,722,383)
Reimbursement of administrative costs........................ (292,850)
Acquisition fees............................................. (15,392,193)
Underwriting fees............................................ (254,945)
Administrative fees.......................................... (148,491)
Executive fee................................................ (310,000)
Guarantee fees............................................... (93,750)
Servicing fee................................................ (1,014,117)
Development fees............................................. (166,876)
Consulting fee............................................... (1,511)
------------
Total....................................................... $(21,010,744)
============
</TABLE>
(d) Represents the deferral of $2,875,906 in origination fees collected by CNL
Restaurant Financial Services Group that should be amortized over the term
of the loans originated (20 years) in accordance with the Statement of
Financial Accounting Standards #91 "Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases."
(e) Represents interest income of $1,318,870 earned from Other Investments
acquired and mortgage notes issued from January 1, 1998 through November
30, 1998 as if this had occurred on January 1, 1997 and the amortization of
$207,677 of deferred origination fees collected during the year ended
December 31, 1997 and during the nine months ended September 30, 1998,
which were capitalized and deferred in (d) above as if they had been
collected on January 1, 1997. These deferred fees are being amortized and
recorded as interest income.
(f) Represents the elimination of intercompany expenses paid between APF, the
Income Fund, the Advisor and the CNL Restaurant Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs......................... $ (292,850)
Servicing fee................................................. (1,014,117)
-----------
$(1,306,967)
===========
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by APF were subject
to capitalization during the entire period and 2) costs relating to
properties not developed by APF were subject to capitalization up through
the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs............................... $(1,415,100)
</TABLE>
(h) Represents savings of $35,996 in professional services and administrative
expenses resulting from reporting on one combined company versus 22
separate entities.
(i) Represents the elimination of fees between APF, the Income Fund, the
Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Advisory fees.................................................. $(1,722,383)
Administrative fees............................................ (148,491)
Executive fee.................................................. (310,000)
Guarantee fees................................................. (93,750)
-----------
$(2,274,624)
===========
</TABLE>
(j) Represents additional state income taxes of $50,404 resulting from assuming
that acquisitions from January 1, 1998 through November 30, 1998 had been
acquired on January 1, 1997 and assuming that the Income Fund had operated
under a REIT structure.
(k) Represents an increase in depreciation of the building portion of the
properties acquired from January 1, 1998 through November 30, 1998 as if
they had been acquired on January 1, 1997 and the step up in basis referred
to in footnote (2) to the Notes to the Pro Forma Financial Statements
attached to this Supplement from acquiring the Income Fund portfolio using
the straight-line method over the estimated useful lives of generally 30
years.
<TABLE>
<S> <C>
Depreciation expense............................................. $1,512,785
</TABLE>
S-19
<PAGE>
(l) Represents the amortization of the goodwill on the acquisition of the CNL
Restaurant Financial Services Group referred to in footnote (q).
<TABLE>
<S> <C>
Amortization of goodwill......................................... $1,565,555
</TABLE>
(m) Represents elimination of interest expense recorded for the amortization of
$350,000 in arrangement fees collected during the year ended December 31,
1997 which were eliminated in footnote (4), II(d) in the Notes to the Pro
Forma Financial Statements attached to this Supplement.
<TABLE>
<S> <C>
Interest expense.................................................. $(68,670)
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees incurred
between APF, the Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Origination fees............................................... $(1,569,202)
Underwriting fees.............................................. (254,945)
Consulting fee................................................. (1,511)
-----------
$(1,825,658)
===========
</TABLE>
(o) Represents the elimination of $6,316,081 in the provision for income taxes
as a result of the acquisition. APF expects to continue to qualify as a
REIT and does not expect to incur federal income taxes.
(p) Common shares issued during the period required to fund acquisitions as if
they had been acquired on January 1, 1997 were assumed to have been issued
and outstanding as of January 1, 1998. For purposes of the proforma
financial statements, it is assumed that the stockholders approved the
proposal to increase the number of authorized common shares of the Company.
(q) Represents the payment of $420,663 in cash and the issuance of 15,958,031
APF Shares in consideration for the purchase of the Income Fund, Advisor
and CNL Restaurant Financial Services Group at September 30, 1998 using the
Exchange Value of $10 per APF share plus estimated transaction costs. The
acquisition of the Income Fund and the CNL Restaurant Financial Services
Group have been accounted for under the purchase accounting method and
goodwill was recognized to the extent the estimated value of the
consideration paid exceeded the fair value of the net tangible assets
acquired. As for the acquisition of the Advisor from a related party, the
consideration paid in excess of the fair value of the net tangible assets
received has been accounted for as costs incurred in acquiring the Advisor
from a related party because the Advisor has not been deemed to qualify as
a "business" for purposes of applying APB Opinion No. 16 "Business
Combinations." Upon consummation of the Acquisition, this expense will be
recorded as an operating expense on APF's statement of earnings. APF will
not deduct this expense for purposes of calculating funds from operations
due to the nonrecurring and non-cash nature of the expense. As of September
30, 1998, $249,403 of transaction costs had been incurred by APF.
<TABLE>
<S> <C>
Income Fund................................................... $ 37,000,971
Advisor....................................................... 76,000,000
CNL Restaurant Financial Services Group....................... 47,000,000
------------
Total Purchase Price (cash and shares)........................ 160,000,971
Less cash paid to Income Fund................................. (420,663)
Share consideration........................................... 159,580,308
------------
Transaction costs of APF...................................... 8,933,000
------------
Total costs incurred.......................................... $168,513,308
============
</TABLE>
In addition, APF i) used $8,993,000 in cash to pay the transaction costs
related to the Acquisition, ii) made an upward adjustment to the Income Fund
carrying value of land and building on operating leases by $6,080,949, net
investment in direct financing leases by $2,424,315, investment in joint
venture by $2,360,444, made downward adjustments to the carrying value of
accrued rental income of $1,241,786, and made downward adjustments to other
assets of $3,675,485 to adjust historical values to fair value, iii)
recorded goodwill of $41,748,141 for the acquisition of the CNL Restaurant
Financial Services Group, iv) reduced retained earnings by $76,862,492 for
the excess consideration paid over the net assets of the Advisor and removed
the historical common stock balance of $12,000, additional paid in capital
balance of $9,602,287, retained earnings balance of $5,297,114 and partners
capital balance of $29,463,500 of the Income Fund, Advisor and CNL
Restaurant Financial Services Group.
(r) Represents the use of $26,901,936 in cash and cash equivalents at September
30, 1998 to acquire $26,052,741 in properties and issue $849,195 in
mortgage notes which occurred from October 1, 1998 through November 30,
1998.
(s) Represents the elimination by the Income Fund of $4,463 in related party
payables recorded as receivables by the Advisor, the elimination by the CNL
Restaurant Financial Services Group of $6,641,379 in related party payables
recorded as receivables by CNL Restaurant Financial Services Group and the
elimination by APF of $1,208,000 in related party payables recorded as
receivables by the Advisor.
(t) Represents the elimination of income taxes payable of $2,990,864 from
liabilities assumed in the acquisition of the CNL Restaurant Businesses
since the acquisition agreements require that the Advisor and CNL
Restaurant Financial Services Group have no accumulated or current earnings
and profits for federal income tax purposes at the time of the acquisition.
S-20
<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>
Nine Months Ended
September 30, Year Ended December 31,
----------------------- -----------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues (1)............ $ 2,103,094 $ 2,380,849 $ 3,230,343 $ 3,404,066 $ 3,428,147
Net income (2).......... 1,748,779 2,208,079 2,937,632 2,960,299 2,987,971
Cash distributions
declared (3)........... 2,432,503 2,362,503 3,150,004 3,185,004 3,185,004
Net income per Unit..... 0.49 0.63 0.83 0.84 0.85
Cash distributions
declared per
Unit (3)............... 0.70 0.68 0.90 0.91 0.91
Weighted average number
of Limited Partner
Units outstanding...... 3,500,000 3,500,000 3,500,000 3,500,000 3,500,000
<CAPTION>
September 30, December 31,
----------------------- -----------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total assets............ $30,405,344 $31,168,167 $31,096,421 $31,343,847 $31,517,255
Total partners'
capital................ 29,463,500 30,205,172 30,147,224 30,359,596 30,584,301
</TABLE>
- --------
(1) Revenues include equity in earnings of joint ventures.
(2) Net income for the nine months ended September 30, 1997 includes $199,643
from gain on sale of land and building. Net income for the year ended
December 31, 1997, includes $199,643 from a gain on sale of land and
building.
(3) Distributions for the years ended December 31, 1996 and 1995, each includes
a special distribution to the Limited Partners of $35,000, which
represented cumulative excess operating reserves.
S-21
<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 September 30, 1998, the Income Fund owned 41 restaurant
properties, which included interests in 13 restaurant properties owned by joint
ventures in which the Income Fund is a co-venturer and one restaurant property
owned with an affiliate as tenants in common.
Liquidity and Capital Resources
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
The Income Fund's primary source of capital for the nine months ended
September 30, 1998 and 1997, 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
$2,461,641 and $2,363,892 for the nine months ended September 30, 1998 and
1997, respectively. The increase in cash from operations for the nine months
ended September 30, 1998, as compared to the nine months ended September 30,
1997, 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.
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 the partners. At September 30, 1998, the
Income Fund had $1,279,526 invested in such short-term investments, as compared
to $1,250,388 at December 31, 1997. The funds remaining at September 30, 1998,
after payment of distributions 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 $941,844 at September 30, 1998, from $949,197 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 operations, and for the nine months ended September 30,
1998, accumulated excess operating reserves, the Income Fund declared
distributions to the Limited Partners of $2,432,503 and $2,362,503 for the nine
months ended September 30, 1998 and 1997, respectively ($787,501 for each of
the quarters ended September 30, 1998 and 1997). This represents distributions
of $0.70 and $0.68 per unit for the nine months ended September 30, 1998 and
1997, respectively ($0.23 per unit for each of the quarters ended June 30, 1998
and 1997). No distributions were made to us for the quarters and nine months
ended September 30, 1998 and 1997. No amounts distributed to the Limited
Partners for the nine months ended September 30, 1998 and 1997, 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-22
<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.
The Years Ended December 31, 1997, 1996 and 1995
The Income Fund's primary source of capital for the years ended December 31,
1997, 1996 and 1995, 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 $3,157,964, $3,356,240 and
$3,098,276 for the years ended December 31, 1997, 1996 and 1995, respectively.
The decrease in cash from operations 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. The
increase in cash from operations during 1996, as compared to 1995, is primarily
due to changes in the Income Fund's working capital.
Other sources and uses of capital included the following during the years
ended December 31, 1997, 1996 and 1995.
In June 1997, the Income Fund sold its restaurant property in Alpharetta,
Georgia, and received net sales proceeds of $1,053,571, resulting in a gain for
financial reporting purposes of $199,643. This restaurant property was
originally acquired by the Income Fund in September 1991 and had a cost of
approximately $711,200, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Income Fund sold the restaurant property
for approximately $342,400 in excess of its original purchase price. In July
1997, the Income Fund reinvested approximately $1,049,800 of these net sales
proceeds in an IHOP restaurant property in Englewood, Colorado, as tenants-in-
common, with one of our affiliates. In connection therewith, the Income Fund
and the affiliate entered into an agreement whereby each co-venturer will share
in the profits and losses of the restaurant property in proportion to each co-
venturer's percentage interest. As of December 31, 1997, the Income Fund owned
a 67.23% interest in the restaurant property. We believe that the 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, qualified as a like-kind exchange transaction
for federal income tax purposes.
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 simultaneously 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.
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 the partners. At December 31, 1997, the Income Fund had
$1,250,388 invested in such short-term investments as compared to $1,288,618 at
December 31, 1996.
S-23
<PAGE>
During 1997, 1996 and 1995, our affiliates incurred on behalf of the Income
Fund $77,999, $97,032 and $88,563, respectively, for certain operating
expenses. As of December 31, 1997 and 1996, the Income Fund owed $4,619 and
$1,405, respectively, to affiliates for such amounts and accounting and
administrative services. As of February 28, 1998, the Income Fund had
reimbursed the affiliates all such amounts. Other liabilities, including
distributions payable, decreased to $944,578 at December 31, 1997, from
$982,846 at December 31, 1996, primarily as the result of the Income Fund's
accruing a special distribution payable to the Limited Partners of $35,000, at
December 31, 1996, which was paid in January 1997.
Based on cash from operations, the Income Fund declared distributions to the
Limited Partners of $3,150,004 for the year ended December 31, 1997 and
$3,185,004 for each of the years ended December 31, 1996 and 1995. This
represents a distribution of $0.90 per Unit for the year ended December 31,
1997 and $0.91 per Unit for each of the years ended December 31, 1996 and 1995.
We anticipate that the Income Fund will declare a special distribution to the
Limited Partners during the quarter ending March 31, 1998, representing
cumulative excess operating reserves. No amounts distributed to the Limited
Partners for the years ended December 31, 1997, 1996 and 1995, 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.
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
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 1997, the Income Fund owned and
leased 28 wholly-owned restaurant properties (including one restaurant property
in Alpharetta, Georgia, which was sold in June 1997) and during the nine months
ended September 30, 1998, the Income Fund owned and leased 27 wholly-owned
restaurant properties, to operators of fast-food and family-style restaurant
chains. In connection therewith, during the nine months ended September 30,
1998 and 1997, the Income Fund earned $1,588,343 and $1,918,423, respectively,
in rental income from operating leases (net of adjustments to accrued rental
income) and earned income from direct financing leases from these restaurant
properties, $660,861 and $615,425 of which was earned during the quarters ended
September 30, 1998 and 1997, respectively. The decrease in rental and earned
income during the nine months ended September 30, 1998, as compared to the nine
months ended September 30, 1997, is partially attributable to, and the increase
in rental and earned income during the quarter ended September 30, 1998, as
compared to the quarter ended September 30, 1997, is partially offset by, the
fact that in May 1998, the tenant of the restaurant properties in Williamsville
and Rochester, New York, filed for bankruptcy. As a result, during the quarter
and nine months ended September 30, 1998, the Income Fund wrote off
approximately $4,600 and $272,200, respectively, 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). This decrease was partially offset by the fact that
during the quarter and nine months ended September 30, 1998, the Income Fund
collected and recognized as income, approximately $65,700 in rental and earned
income from the tenant of these restaurant properties, for which the Income
Fund had previously established an allowance for doubtful accounts. The tenant
has rejected the lease relating to the restaurant property in Williamsville,
New York and, as a result, the Income Fund will not
S-24
<PAGE>
receive rental income from this restaurant property. The tenant is currently in
the process of deciding whether to affirm or reject the lease for the
restaurant property in Rochester, New York. If the lease for the Rochester, New
York restaurant property is rejected, the Income Fund anticipates that rental
income from this restaurant property will terminate. However, we do not
anticipate that any decrease in rental income due to lost revenues relating to
these restaurant properties will have a material effect on the Income Fund's
financial position or results of operations. We are currently seeking either
new tenants or purchasers for these restaurant properties.
The decrease in rental and earned income during the nine months ended
September 30, 1998, is also partially attributable to, and the increase during
the quarter ended September 30, 1998, is partially offset by, the fact that the
Income Fund established an allowance for doubtful accounts of approximately
$14,600 and $43,900 for the quarter and nine months ended September 30, 1998,
respectively, relating to the restaurant property in Grand Prairie, Texas, in
accordance with its collection policy. No such allowance was established during
the quarter and nine months ended September 30, 1997. The Income Fund intends
to pursue collection of past due amounts from this tenant and will recognize
such amounts as income if collected.
The decrease in rental and earned income during the nine months ended
September 30, 1998, as compared to the nine months ended September 30, 1997, is
partially attributable to, and the increase during the quarter ended September
30, 1998, as compared to the quarter ended September 30, 1997, is partially
offset by, a decrease of approximately $20,400 and $21,800 for the quarter and
nine months ended September 30, 1998, respectively, in rental and earned income
due to the fact that the Income Fund amended the leases for the restaurant
properties in Shelby, North Carolina; Maple Heights, Ohio; Watertown, New York
and Carrboro, North Carolina to provide for rent reductions.
In addition, rental and earned income decreased approximately $47,700 during
the nine months ended September 30, 1998, as a result of the sale of the
restaurant property in Alpharetta, Georgia, in June 1997. The Income Fund
reinvested the net sales proceeds in an additional restaurant property as
tenants-in-common with certain of our affiliates in July 1997, resulting in an
increase in equity in earnings of joint ventures, as described below.
The decrease in rental and earned income during the nine months ended
September 30, 1998, as compared to the nine months ended September 30, 1997,
was partially offset by, and the increase during the quarter ended September
30, 1998, as compared to the quarter ended September 30, 1997, is partially
attributable to, the fact that in September 1997, the Income Fund re-leased the
restaurant property in Copley Township, Ohio to a new tenant to operate the
restaurant property as a Shell's Seafood restaurant and rent commenced in
December 1997. The Income Fund had ceased recording rental income relating to
the former tenant in September 1997.
During the nine months ended September 30, 1998 and 1997, the Income Fund
also earned $42,604 and $50,263, respectively, in contingent rental income,
$943 and $20,436 of which was earned during the quarters ended September 30,
1998 and 1997, respectively. The decrease during the quarter and nine months
ended September 30, 1998, as compared to the quarter and nine months ended
September 30, 1997, is partially attributable to the fact that no contingent
rents were recorded during the quarter ended September 30, 1998 as a result of
the Income Fund adopting EITF 98-9, a consensus reached by the Financial
Accounting Standards Board entitled "Accounting for Contingent Rent in the
Interim Financial Periods." The EITF states that a lessor should defer
recognition of contingent rent in interim periods until the specified target
that triggers the contingent rental income is achieved. Adoption of this
consensus did not have a material effect on the Income Fund's financial
position or results of operations. The decrease in contingent rental income
during the nine months ended September 30, 1998, as compared to the nine months
ended September 30, 1997, is partially offset by an increase in gross sales of
certain restaurants, the leases of which require the payment of contingent
rent.
For the nine months ended September 30, 1998 and 1997, the Income Fund also
owned and leased 13 restaurant properties indirectly through joint venture
arrangements and during the nine months ended
S-25
<PAGE>
September 30, 1998, the Income Fund owned and leased one restaurant property
with an affiliate as tenants-in- common. In connection therewith, during the
nine months ended September 30, 1998 and 1997, the Income Fund earned $432,608
and $373,525, respectively, attributable to net income earned by these joint
ventures, $155,940 and $148,487 of which was earned during the quarters ended
September 30, 1998 and 1997, respectively. The increase in net income earned by
joint ventures for the quarter and nine months ended September 30, 1998 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.
Operating expenses, including depreciation and amortization expense, were
$354,315 and $372,413 for the nine months ended September 30, 1998 and 1997,
respectively, of which $122,534 and $113,038 were incurred for the quarters
ended September 30, 1998 and 1997, respectively. The decrease in operating
expenses during the nine months ended September 30, 1998, as compared to the
nine months ended September 30, 1997, is partially attributable to the fact
that during the nine months ended September 30, 1997, the Income Fund recorded
bad debt expense of $21,000 relating to the restaurant property in Copley
Township, Ohio, as a result of the former tenant ceasing operating the
restaurant property in April 1997. In addition, the decrease in operating
expenses during the nine months ended September 30, 1998, is 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 approximately $23,200
during the nine months ended September 30, 1997. Due to the fact that the
restaurant property was re-leased to a new tenant in September 1997, no such
expenses were recorded during the nine months ended September 30, 1998.
The increase in operating expenses during the quarter ended September 30,
1998, was primarily attributable to an increase in depreciation expense due to
the fact that the Income Fund reclassified certain leases from direct financing
leases to operating leases in connection with lease amendments described above.
In accordance with the Statement of Financial Accounting Standards #13,
Accounting for Leases," the Income Fund recorded each of the reclassified
leases at the lower of original cost, present fair value, or present carrying
amount.
As a result of the sale of the restaurant property in Alpharetta, Georgia
during 1997, the Income Fund recognized a gain for financial reporting purposes
of $199,643 during the nine months ended September 30, 1997. No restaurant
properties were sold during the nine months ended September 30, 1998.
The Years Ended December 31, 1997, 1996 and 1995
During the years ended December 31, 1997, 1996 and 1995, the Income Fund
owned and leased 27 wholly-owned restaurant properties (including one
restaurant property in Alpharetta, Georgia, which was sold in June 1997). In
addition, during 1997, 1996 and 1995, the Income Fund was a co-venturer in two
separate joint ventures that each owned and leased six properties and one joint
venture that owned and leased one restaurant property. During 1997, the Income
Fund also owned and leased one restaurant property with an affiliate as
tenants-in-common. As of December 31, 1997, the Income Fund owned, either
directly or through joint venture arrangements, 40 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 $50,400 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, 1997, 1996 and 1995, the Income Fund
earned $2,572,954, $2,771,319 and $2,807,108, respectively, in rental income
from operating leases and earned income from direct financing leases from the
Income Fund's wholly-owned restaurant properties. The decrease in rental and
earned income in 1997, as compared to 1996, is partially due to a decrease in
rental and earned income of approximately $65,000 during 1997, due to the fact
that during April 1997, the operator of the restaurant
S-26
<PAGE>
property in Copley Township, Ohio, ceased operations of the restaurant property
and the Income Fund ceased recording rental income and wrote-off the allowance
for doubtful accounts. As described above, the Income Fund re-leased this
restaurant property to Shells Seafood Restaurants in September 1997 and rent
commenced December 1997. The decrease in rental and earned income during 1996,
as compared to 1995, is primarily the result of the fact that during 1996, the
Income Fund established an allowance for doubtful accounts relating to the same
restaurant property in Copley Township, Ohio.
Rental and earned income also decreased during 1997, as compared to 1996,
due to the fact that the Income Fund established an allowance for doubtful
accounts of approximately $70,000 during 1997, relating to the Perkins
restaurant properties in Williamsville and Rochester, New York, which are
leased by the same tenant, due to financial difficulties the tenant is
experiencing. No such allowance was established during 1996. The Income Fund
intends to pursue collection of past due amounts from this tenant and will
recognize such amounts as income if collected.
As described above, rental and earned income decreased approximately $51,800
during 1997, 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."
In addition, for the years ended December 31, 1997, 1996 and 1995, the
Income Fund earned $74,867, $120,999 and $110,036, respectively, in contingent
rental income. The decrease in contingent rental income for 1997, as compared
to 1996, is primarily attributable to a change 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. The
increase in contingent rental income during 1996, as compared to 1995, 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, 1997, 1996 and 1995, the Income Fund
also earned $537,853, $460,400 and $453,794, respectively, in income
attributable to net income earned by joint ventures in which the Income Fund is
a co-venturer. The increase in net income earned by joint ventures during 1997,
as compared to 1996 and 1995, 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 at least one of the years ended December 31, 1997, 1996 and 1995,
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 10% 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, 1997, 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 six
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 10% of
the Income Fund's total rental income in 1998 and subsequent years. In
addition, during at least one of the years ended December 31, 1997, 1996 and
1995, four restaurant chains, Burger King, Hardee's, Golden Corral and
Shoney's, each accounted for more than 10% of the Income Fund's total rental
income (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). In subsequent years, it is anticipated that these four
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.
S-27
<PAGE>
Operating expenses, including depreciation and amortization expense, were
$492,354, $443,767 and $440,176 for the years ended December 31, 1997, 1996 and
1995, respectively. The increase in operating expenses for 1997, as compared to
1996, is partially attributable to the fact that the Income Fund recorded bad
debt expense of $21,000 relating to the restaurant property in Copley Township,
Ohio. Due to the fact that the former tenant ceased operating the restaurant
property in April 1997, we believe collection of this amount is doubtful. In
addition, the increase in operating expenses during 1997, was partially due to
the fact that during 1997, the Income Fund recorded past due real estate taxes
relating to the restaurant property in Copley Township, Ohio of $23,191. The
Income Fund recorded $9,905 of such expense during 1996. In addition, the
increase in operating expenses for 1997, as compared to 1996, was partially
attributable to the fact that the Income Fund recorded approximately $7,600 in
real estate tax expense in 1997 relating to the Perkins restaurant properties
in Williamsville and Rochester, New York, which are leased by the same tenant,
due to the financial difficulties the tenant is experiencing. The Income Fund
intends to pursue collection of such amounts and will recognize such amounts as
income if collected. No real estate tax expense was recorded for these
restaurant properties in 1996.
The increase in operating expenses during 1996, as compared to 1995, is
primarily a result of an increase in accounting and administrative expenses
associated with operating the Income Fund and its restaurant properties and an
increase in insurance expense as a result of our obtaining contingent liability
and property coverage for the Income Fund beginning in May 1995.
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 1996 or
1995.
General
The Income Fund's leases as of September 30, 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.
The Year 2000 problem is the result of information technology systems and
embedded systems (products which are made with microprocessor (computer) chips
such as HVAC systems, physical security systems and elevators) using a two-
digit format, as opposed to four digits, to indicate the year. Such information
technology and embedded systems may be unable to properly recognize and process
date-sensitive information beginning January 1, 2000.
The Income Fund does not have any information technology systems. Certain of
our affiliates provide all services requiring the use of information technology
systems pursuant to a management agreement with the Income Fund. The
maintenance of embedded systems, if any, at the Income Fund's properties is the
responsibility of the tenants of the properties in accordance with the terms of
the Income Fund's leases. We and our affiliates have established a team
dedicated to reviewing the internal information technology systems used in the
operation of the Income Fund, and the information technology and embedded
systems and the Year 2000 compliance plans of the Income Fund's tenants,
significant suppliers, financial institutions and transfer agent.
The information technology infrastructure of our affiliates consists of a
network of personal computers and servers that were obtained from major
suppliers. The affiliates utilize various administrative and financial software
applications on that infrastructure to perform the business functions of the
Income Fund. Our inability and that of our affiliates to identify and timely
correct material Year 2000 deficiencies in the software and/or
S-28
<PAGE>
infrastructure could result in an interruption in, or failure of, certain of
the Income Fund's business activities or operations. Accordingly, we and our
affiliates have requested and are evaluating documentation from the suppliers
of the affiliates regarding the Year 2000 compliance of their products that are
used in the business activities or operations of the Income Fund. The costs
expected to be incurred by us and our affiliates to become Year 2000 compliant
will be incurred by us and our affiliates; therefore, these costs will have no
impact on the Income Fund's financial position or results of operations.
The Income Fund has material third party relationships with its tenants,
financial institutions and 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. If
any of these third parties are unable to meet their obligations to the Income
Fund because of the Year 2000 deficiencies, such a failure may have a material
impact on the Income Fund. Accordingly, we have requested and are evaluating
documentation from the Income Fund's tenants, financial institutions, and
transfer agent relating to their Year 2000 compliance plans. At this time, we
have not yet received sufficient certifications to be assured that the tenants,
financial institutions, and transfer agent have fully considered and mitigated
any potential material impact of the Year 2000 deficiencies. Therefore, we do
not, at this time, know of the potential costs to the Income Fund of any
adverse impact or effect of any Year 2000 deficiencies by these third parties.
We currently expect that all Year 2000 compliance testing and any necessary
remedial measures on the information technology systems used in the business
activities and operations of the Income Fund will be completed prior to June
30, 1999. Based on the progress we and our affiliates have made in identifying
and addressing the Income Fund's Year 2000 issues and the plan and timeline to
complete the compliance program, we do not foresee significant risks associated
with the Income Fund's Year 2000 compliance at this time. Because we and our
affiliates are still evaluating the status of the systems used in business
activities and operations of the Income Fund and the systems of the third
parties with which the Income Fund conducts its business, we have not yet
developed a comprehensive contingency plan and are unable to identify "the most
reasonably likely worst case scenario" at this time. As we identify significant
risks related to the Income Fund's Year 2000 compliance or if the Income Fund's
Year 2000 compliance program's progress deviates substantially from the
anticipated timeline, we will develop appropriate contingency plans.
S-29
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997... F-1
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997.............................................. F-2
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997.............. F-3
Condensed Statements of Cash Flows for the Nine Months Ended September 30,
1998 and 1997............................................................ F-4
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997........................................ F-5
Report of Independent Accountants......................................... F-6
Balance Sheets as of December 31, 1997 and 1996........................... F-7
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995..................................................................... F-8
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995............................................................ F-9
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995..................................................................... F-10
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and 1995................................................................. F-11
Unaudited Pro Forma Financial Information................................. F-18
Unaudited Pro Forma Balance Sheet as of September 30, 1998................ F-19
Unaudited Pro Forma Income Statement for the Nine Months Ended September
30, 1998................................................................. F-21
Unaudited Pro Forma Income Statement for the Year Ended December 31,
1997..................................................................... F-23
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements............................................................... F-25
</TABLE>
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $1,694,248 and
$1,497,770......................................... $15,043,968 $14,163,111
Net investment in direct financing leases........... 6,311,643 7,482,757
Investment in joint ventures........................ 6,497,278 6,619,364
Cash and cash equivalents........................... 1,279,526 1,250,388
Receivables, less allowance for doubtful accounts of
$261,045 and $108,316.............................. 10,491 96,134
Prepaid expenses.................................... 6,854 3,924
Lease costs, less accumulated amortization of $1,202
and $77............................................ 13,798 14,923
Accrued rental income............................... 1,241,786 1,465,820
----------- -----------
$30,405,344 $31,096,421
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable.................................... $ 888 $ 4,490
Accrued and escrowed real estate taxes payable...... 28,221 45,591
Distributions payable............................... 787,501 787,501
Due to related parties.............................. 4,463 4,619
Rents paid in advance and deposits.................. 120,771 106,996
----------- -----------
Total liabilities................................. 941,844 949,197
----------- -----------
Partners' capital................................... 29,463,500 30,147,224
----------- -----------
$30,405,344 $31,096,421
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-1
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
-------------------- ----------------------
1998 1997 1998 1997
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases.......................... $ 455,811 $ 426,942 $1,308,630 $1,306,829
Adjustments to accrued rental
income.......................... (4,600) -- (272,200) --
Earned income from direct
financing leases................ 209,650 188,483 551,913 611,594
Contingent rental income......... 943 20,436 42,604 50,263
Interest and other income........ 11,871 9,045 39,539 38,638
--------- --------- ---------- ----------
673,675 644,906 1,670,486 2,007,324
Expenses:
General operating and
administrative.................. 41,132 40,746 112,211 111,993
Bad debt expense................. 4,148 -- 9,281 21,000
Professional services............ 6,141 5,359 20,883 16,490
Real estate taxes................ -- 4,063 -- 23,191
State and other taxes............ -- -- 14,337 11,127
Depreciation and amortization.... 71,113 62,870 197,603 188,612
--------- --------- ---------- ----------
122,534 113,038 354,315 372,413
Income Before Equity in Earnings of
Joint Ventures and Gain on Sale of
Land and Building................. 551,141 531,868 1,316,171 1,634,911
Equity in Earnings of Joint
Ventures.......................... 155,940 148,487 432,608 373,525
Gain on Sale of Land and Building.. -- -- -- 199,643
--------- --------- ---------- ----------
Net Income......................... $ 707,081 $ 680,355 $1,748,779 $2,208,079
========= ========= ========== ==========
Allocation of Net Income:
General partners................. $ 7,071 $ 6,803 $ 17,488 $ 20,084
Limited partners................. 700,010 673,552 1,731,291 2,187,995
--------- --------- ---------- ----------
$ 707,081 $ 680,355 $1,748,779 $2,208,079
========= ========= ========== ==========
Net Income Per Limited Partner
Unit.............................. $ 0.20 $ 0.19 $ 0.49 $ 0.63
========= ========= ========== ==========
Weighted Average Number of Limited
Partner Units Outstanding......... 3,500,000 3,500,000 3,500,000 3,500,000
========= ========= ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1998 1997
----------------- ------------
<S> <C> <C>
General partners:
Beginning balance............................. $ 190,772 $ 163,392
Net income.................................... 17,488 27,380
----------- -----------
208,260 190,772
----------- -----------
Limited partners:
Beginning balance............................. 29,956,452 30,196,204
Net income.................................... 1,731,291 2,910,252
Distributions ($0.70 and $0.90 per limited
partner unit, respectively).................. (2,432,503) (3,150,004)
----------- -----------
29,255,240 29,956,452
----------- -----------
Total partners' capital......................... $29,463,500 $30,147,224
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities.......... $ 2,461,641 $ 2,363,892
----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and building.......... -- 1,053,571
Investment in joint venture...................... -- (1,049,762)
----------- -----------
Net cash provided by investing activities...... -- 3,809
----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners................ (2,432,503) (2,397,502)
----------- -----------
Net cash used in financing activities.......... (2,432,503) (2,397,502)
----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents......................................... 29,138 (29,801)
Cash and Cash Equivalents at Beginning of Period..... 1,250,388 1,288,618
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 1,279,526 $ 1,258,817
=========== ===========
Supplemental Schedule of Non-Cash Investing and
Financing Activities
Net investment in direct financing leases
reclassified to land and building on operating
leases due to lease amendments.................... $ 1,077,335 $ --
=========== ===========
Distributions declared and unpaid at end of
period............................................ $ 787,501 $ 787,501
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, 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, 1997.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2. Net Investment in Direct Financing Leases
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.
F-5
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners
CNL Income Fund IX, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund IX, Ltd.
(a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. 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 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 pro-vide 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 Income Fund IX, Ltd. as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
January 12, 1998
F-6
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation............................. $14,163,111 $14,797,549
Net investment in direct financing leases............. 7,482,757 7,964,985
Investment in joint ventures.......................... 6,619,364 5,708,555
Cash and cash equivalents............................. 1,250,388 1,288,618
Receivables, less allowance for doubtful accounts of
$108,316 and $28,983................................. 96,134 75,256
Prepaid expenses...................................... 3,924 3,845
Lease costs, less accumulated amortization of $77 in
1997................................................. 14,923 --
Accrued rental income................................. 1,465,820 1,505,039
----------- -----------
$31,096,421 $31,343,847
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 4,490 $ 4,987
Accrued and escrowed real estate taxes payable........ 45,591 61,618
Distributions payable................................. 787,501 822,500
Due to related parties................................ 4,619 1,405
Rents paid in advance and deposits.................... 106,996 93,741
----------- -----------
Total liabilities................................... 949,197 984,251
Partners' capital..................................... 30,147,224 30,359,596
----------- -----------
$31,096,421 $31,343,847
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases........ $1,742,351 $1,854,245 $1,880,854
Earned income from direct financing
leases.................................... 830,603 917,074 926,254
Contingent rental income................... 74,867 120,999 110,036
Interest and other income.................. 44,669 51,348 57,209
---------- ---------- ----------
2,692,490 2,943,666 2,974,353
---------- ---------- ----------
Expenses:
General operating and administrative....... 153,175 152,437 130,167
Professional services...................... 24,658 26,610 20,566
Bad debt expense........................... 21,000 -- --
Real estate taxes.......................... 30,835 9,906 24,837
State and other taxes...................... 11,126 2,775 11,123
Depreciation and amortization.............. 251,560 252,039 253,483
---------- ---------- ----------
492,354 443,767 440,176
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Ventures and Gain on Sale of Land and
Building.................................... 2,200,136 2,499,899 2,534,177
Equity in Earnings of Joint Ventures......... 537,853 460,400 453,794
Gain on Sale of Land and Building............ 199,643 -- --
---------- ---------- ----------
Net Income................................... $2,937,632 $2,960,299 $2,987,971
========== ========== ==========
Allocation of Net Income:
General partners........................... $ 27,380 $ 29,603 $ 29,880
Limited partners........................... 2,910,252 2,930,696 2,958,091
---------- ---------- ----------
$2,937,632 $2,960,299 $2,987,971
========== ========== ==========
Net Income Per Limited Partner Unit.......... $ 0.83 $ 0.84 $ 0.85
========== ========== ==========
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-8
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<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,
1994................... $1,000 $102,909 $35,000,000 $(10,320,575) $10,188,000 $(4,190,000) $30,781,334
Distributions to
limited partners
($0.91 per limited
partner unit)......... -- -- -- (3,185,004) -- -- (3,185,004)
Net income............. -- 29,880 -- -- 2,958,091 -- 2,987,971
------ -------- ----------- ------------ ----------- ----------- -----------
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
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants........... $ 2,666,373 $ 2,900,048 $ 2,608,733
Distributions from joint ventures.... 676,806 603,833 602,845
Cash paid for expenses............... (229,884) (186,126) (157,127)
Interest received.................... 44,669 38,485 43,825
----------- ----------- -----------
Net cash provided by operating
activities........................ 3,157,964 3,356,240 3,098,276
----------- ----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and
building............................ 1,053,571 -- --
Investment in joint venture.......... (1,049,762) -- --
Payment of lease costs............... (15,000) -- --
----------- ----------- -----------
Net cash used in investing
activities........................ (11,191) -- --
----------- ----------- -----------
Cash Flows From Financing Activities:
Distributions to limited partners.... (3,185,003) (3,185,004) (3,150,004)
----------- ----------- -----------
Net cash used in financing
activities........................ (3,185,003) (3,185,004) (3,150,004)
----------- ----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................ (38,230) 171,236 (51,728)
Cash and Cash Equivalents at Beginning
of Year................................ 1,288,618 1,117,382 1,169,110
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 1,250,388 $ 1,288,618 $ 1,117,382
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................ $ 2,937,632 $ 2,960,299 $ 2,987,971
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation......................... 251,483 251,483 251,483
Amortization......................... 77 556 2,000
Equity in earnings of joint ventures,
net of distributions................ 138,953 143,433 149,051
Gain on sale of land and building.... (199,643) -- --
Decrease (increase) in receivables... (20,878) 87,823 (21,714)
Increase in prepaid expenses......... (79) (2,913) (932)
Decrease in net investment in direct
financing leases.................... 121,311 89,696 73,784
Increase in accrued rental income.... (70,837) (225,434) (287,264)
Increase (decrease) in accounts
payable and accrued expenses........ (16,524) 12,111 32,889
Increase (decrease) in due to related
parties............................. 3,214 (4,639) 6,044
Increase (decrease) in rents paid in
advance and deposits................ 13,255 43,825 (95,036)
----------- ----------- -----------
Total adjustments.................. 220,332 395,941 110,305
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. $ 3,157,964 $ 3,356,240 $ 3,098,276
=========== =========== ===========
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Distributions declared and unpaid at
December 31.......................... $ 787,501 $ 822,500 $ 822,500
=========== =========== ===========
Land and building under operating
lease simultaneously exchanged for
land and building under operating
lease................................ $ -- $ 406,768 $ --
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
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.
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.
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 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.
F-11
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
1. Significant Accounting Policies--(Continued)
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.
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,
F-12
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
2. Leases--(Continued)
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>
1997 1996
----------- -----------
<S> <C> <C>
Land........................................... $ 8,207,939 $ 8,590,894
Buildings...................................... 7,452,942 7,452,942
----------- -----------
15,660,881 16,043,836
Less accumulated depreciation.................. (1,497,770) (1,246,287)
----------- -----------
$14,163,111 $14,797,549
=========== ===========
</TABLE>
In December 1996, the tenant of the property in Woodmere, Ohio, exercised
its option under the terms of its lease agreement, to substitute the existing
property for a replacement property. In conjunction therewith, the Partnership
simultaneously exchanged the Burger King property in Woodmere, Ohio, with a
Burger King property in Carrboro, North Carolina. The lease for the property in
Woodmere, Ohio, was amended to allow the property in Carrboro, North Carolina,
to continue under the terms of the original lease. All closing costs were paid
by the tenant. The Partnership accounted for this as a non-monetary exchange of
similar assets and recorded the acquisition of the property in Carrboro, North
Carolina, at the net book value of the 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 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.
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, 1997, 1996 and 1995, the Partnership recognized $70,837, $225,434 and
$287,264, 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, 1997:
<TABLE>
<S> <C>
1998......................................................... $ 1,766,123
1999......................................................... 1,766,123
2000......................................................... 1,766,123
2001......................................................... 1,802,660
2002......................................................... 1,933,986
Thereafter................................................... 12,647,153
-----------
$21,682,168
===========
</TABLE>
F-13
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
3. Land and Buildings on Operating Leases--(Continued)
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>
1997 1996
----------- ------------
<S> <C> <C>
Minimum lease payments receivable............ $13,764,606 $ 15,621,897
Estimated residual values.................... 2,495,379 2,590,434
Less unearned income......................... (8,777,228) (10,247,346)
----------- ------------
Net investment in direct financing leases.... $ 7,482,757 $ 7,964,985
=========== ============
</TABLE>
The following is a schedule of future minimum lease payments to be received
on the direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998......................................................... $968,047
1999......................................................... 968,047
2000......................................................... 968,047
2001......................................................... 975,586
2002......................................................... 999,905
Thereafter................................................... 8,884,974
-----------
$13,764,606
===========
</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 67.23% 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
F-14
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
5. Investment in Joint Ventures--(Continued)
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>
1997 1996
----------- -----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation..................... $12,582,754 $12,359,586
Net investment in direct financing lease...... 1,003,680 --
Cash.......................................... 15,124 1,497
Receivables................................... 35,773 13,840
Prepaid expenses.............................. 23,544 22,543
Accrued rental income......................... 11,620 --
Liabilities................................... 14,280 1,198
Partners' capital............................. 13,658,215 12,396,268
Revenues...................................... 1,506,380 1,362,027
Net income.................................... 1,141,755 1,000,884
</TABLE>
The Partnership recognized income totalling $537,853, $460,400 and $453,794
for the years ended December 31, 1997, 1996 and 1995, respectively, from these
joint ventures.
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, 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 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.
During the year ended December 31, 1997, the Partnership declared
distributions to the limited partners of $3,150,004 and during each of the
years ended December 31, 1996 and 1995, the Partnership declared distributions
to the limited partners of $3,185,004. No distributions have been made to the
general partners to date.
F-15
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................ $2,937,632 $2,960,299 $2,987,971
Depreciation for tax reporting
purposes in excess of
depreciation for financial reporting
purposes............................ (116,620) (123,734) (123,820)
Direct financing leases recorded as
operating leases for
tax reporting purposes.............. 121,311 89,696 73,784
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.................. 36,745 37,469 37,469
Accrued rental income................ (70,837) (225,434) (287,264)
Rents paid in advance................ 13,255 43,825 (95,036)
Allowance for doubtful accounts...... 79,333 14,221 (11,173)
---------- ---------- ----------
Net income for federal income tax
purposes............................ $2,804,999 $2,796,342 $2,581,931
========== ========== ==========
</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 parent company of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, served
as president of CNL Fund Advisors, Inc. through October 1997. CNL Income Fund
Advisors, Inc. was a wholly owned subsidiary of CNL Group, Inc. until its
merger, effective January 1, 1996, with CNL Fund Advisors, Inc. During the
years ended December 31, 1997, 1996 and 1995, CNL Income Fund Advisors, Inc.
and CNL Fund Advisors, Inc. (hereinafter referred to collectively as the
"Affiliates") each performed certain services for the Partnership, as described
below.
During the years ended December 31, 1997, 1996 and 1995, certain 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 Affiliates 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, 1997, 1996 and 1995.
Certain Affiliates are 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 Affiliates provide 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
F-16
<PAGE>
CNL INCOME FUND IX, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
8. Related Party Transactions--(Continued)
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, 1997, 1996 and 1995, Affiliates provided
accounting and administrative services to the Partnership on a day-to-day
basis. The Partnership incurred $79,234, $82,487 and $64,398 for the years
ended December 31, 1997, 1996 and 1995, respectively, for such services.
The due to related parties at December 31, 1997 and 1996, totalled $4,619
and $1,405, 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 at least one of the
years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Burger King Corporation and BK Acquisition,
Inc....................................... $649,445 $623,949 $617,694
TPI Restaurants, Inc....................... 556,700 565,351 562,259
Carrols Corporation........................ 440,057 442,286 444,866
Flagstar Enterprises, Inc.................. 436,312 460,762 486,188
Golden Corral Corporation.................. 337,337 328,975 329,997
</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 at least one
of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Burger King........................... $1,249,715 $1,310,994 $1,293,094
Shoney's.............................. 808,675 889,148 904,534
Hardees............................... 436,312 460,762 486,188
Golden Corral Family Steakhouse
Restaurants.......................... 337,337 328,975 329,997
</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. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
F-17
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to the
Company gives effect to the Acquisition, and is based on estimates and
assumptions set for the 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 the Company, the
historical combined financial information of CNL Income Fund IX, Ltd., (the
"CNL 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 the Company, the
CNL Income Fund, Advisor and CNL Restaurant Financial Services Group. The pro
forma balance sheet assumes that the Acquisition occurred on September 30,
1998; the pro forma consolidated statements of earnings assume that the
Property Acquisitions (as defined on page ) and the Acquisition occurred on
January 1, 1997.
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-18
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA BALANCE SHEET
September 30, 1998
<TABLE>
<CAPTION>
Historical
-------------------------------------------------------------------------------
CNL CNL
Income CNL Financial Financial Combined
APF Fund IX, Ltd. Advisor Services, Inc. Corp. Portfolios
------------ ------------- ---------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Land and
buildings on
operating
leases, net.... $298,967,972 $15,043,968 $ 0 $ 0 $ $314,011,940
Net investment
in direct
financing
leases......... 117,028,760 6,311,643 0 0 $ 0 123,340,403
Mortgages and
notes
receivable..... 33,523,506 0 0 0 0 207,300,487
Other
Investments.... 16,200,316 0 200,000 0 173,776,981 22,961,944
Investment in
joint
ventures....... 631,374 6,497,278 0 0 6,561,628 7,128,652
Cash and cash
equivalents.... 90,674,289 1,279,526 283,300 599,997 0 97,935,145
Receivables..... 575,104 10,491 7,544,985 6,824,632 5,098,033
Accrued rental
income......... 3,071,451 1,241,786 0 0
517,471 15,472,683
0 4,313,237
Other assets.... 5,711,195 20,652 401,524 295,570 3,854,477 10,283,418
------------ ----------- ---------- ---------- ------------ ------------
Total assets.... $566,383,967 $30,405,344 $8,429,809 $7,720,199 $189,808,590 $802,747,909
============ =========== ========== ========== ============ ============
LIABILITIES & EQUITY:
Accounts payable
and accrued
liabilities.... $ 379,496 $ 29,109 $ 449,751 $ 193,949 $ 1,236,138 $ 2,288,443
Accrued
construction
costs payable.. 3,045,304 0 0 0 0 3,045,304
Distributions
payable........ 0 787,501 2,220,000 0 0 3,007,501
Due to related
parties........ 2,552,411 4,463 0 1,452,512 6,556,920 10,566,306
Income tax
payable........ 0 0 1,989,003 0 1,001,861 2,990,864
Line of credit.. 6,765,575 0 0 0 0 6,765,575
Notes payable... 0 0 390,398 28,462 175,528,203 175,947,063
Deferred
income......... 1,015,758 0 0 0 0 1,015,758
Rents paid in
advance........ 437,497 120,771 0 0 0 558,268
Minority
interest....... 282,544 0 0 0 0 282,544
Common Stock.... 621,187 0 9,800 2,000 200 633,187
Additional paid
in capital..... 556,830,578 0 482,964 5,231,827 3,887,496 566,432,865
Accumulated
distributions
in excess of
net earnings... (5,546,383) 0 2,887,893 811,449 1,597,772 (249,269)
Partners
capital........ 0 29,463,500 0 0 0 29,463,500
------------ ----------- ---------- ---------- ------------ ------------
Total
liabilities and
equity......... $566,383,967 $30,405,344 $8,429,809 $7,720,199 $189,808,590 $802,747,909
============ =========== ========== ========== ============ ============
<CAPTION>
Pro Forma
------------------------------
Adjustments Pro Forma
---------------- ------------- ---
<S> <C> <C> <C>
ASSETS:
Land and
buildings on
operating
leases, net.... $ 6,080,949 (1)
26,052,741 (2) $346,145,630
Net investment
in direct
financing
leases......... 2,424,315 (1) 125,764,718
Mortgages and
notes
receivable..... 849,195 (2) 208,149,682
Other
Investments.... -- 22,961,944
Investment in
joint
ventures....... 2,360,444 (1) 9,489,096
Cash and cash
equivalents.... (420,663)(1)
Receivables..... (8,933,000)(1)
Accrued rental
income......... (26,901,936)(2) 61,679,546
(7,853,842)(3) 7,618,841
(1,241,786)(1) 3,071,451
Other assets.... 41,748,141 (1)
(3,675,485)(1) 48,356,074
---------------- ------------- ---
Total assets.... $ 30,489,073 $833,236,982
================ ============= ===
LIABILITIES & EQUITY:
Accounts payable
and accrued
liabilities.... $ -- $ 2,288,443
Accrued
construction
costs payable.. -- 3,045,304
Distributions
payable........ -- 3,007,501
Due to related
parties........ (7,853,842)(3) 2,712,464
Income tax
payable........ (2,990,864)(4) 0
Line of credit.. -- 6,765,575
Notes payable... -- 175,947,063
Deferred
income......... -- 1,015,758
Rents paid in
advance........ -- 558,268
Minority
interest....... -- 282,544
Common Stock.... 147,580 (1) 780,767
Additional paid
in capital..... 149,818,441 (1) 716,251,306
Accumulated
distributions
in excess of
net earnings... (82,159,606)(1)
2,990,864 (4) (79,418,011)
Partners
capital........ (29,463,500)(1) 0
---------------- ------------- ---
Total
liabilities and
equity......... $ 30,489,073 $833,236,982
================ ============= ===
</TABLE>
F-19
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA INCOME STATEMENT
September 30, 1998
<TABLE>
<CAPTION>
Historical
--------------------------------------------------------------------------------
CNL Income CNL Financial CNL Financial Combined
APF Fund IX, Ltd. Advisor Services, Inc. Corp. Portfolios
----------- ------------- ----------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and
earned income.. $22,947,199 $1,630,947 $ 0 $ 0 $ 0 $24,578,146
Fees............ 0 0 21,405,127 5,115,549 6,817 26,527,493
Interest and
other income... 6,117,911 39,539 751 432,506 18,031,141 24,621,848
----------- ---------- ----------- ----------- ------------ -----------
Total revenue... 29,065,110 1,670,486 21,405,878 5,548,055 18,037,958 75,727,487
Expenses:
General and
administrative.. 1,539,004 142,375 6,701,115 4,107,311 2,597,171 15,086,976
Advisory fees... 1,248,393 0 0 0 1,026,231 2,274,624
Fees to
Restaurant
Financial
Services
Group.......... 0 0 256,456 1,569,202 0 1,825,658
Interest........ 0 0 105,668 3,534 14,230,999 14,340,201
State taxes..... 397,569 14,337 15,226 18,564 201,616 647,312
Depreciation--
other.......... 0 0 75,607 55,056 0 130,663
Depreciation--
property....... 2,684,924 196,478 0 0 0 2,881,402
Amortization.... 8,096 1,125 55,932 138 945,299 1,010,590
----------- ---------- ----------- ----------- ------------ -----------
Total operating
expenses....... 5,877,986 354,315 7,210,004 5,753,805 19,001,316 38,197,426
----------- ---------- ----------- ----------- ------------ -----------
Operating
earnings
(losses)....... 23,187,124 1,316,171 14,195,874 (205,750) (963,358) 37,530,061
Equity in
earnings of
joint ventures/minority
interest....... (23,271) 432,608 0 12,452 0 421,789
Gain on
securitization.. 0 0 0 0 3,018,268 3,018,268
----------- ---------- ----------- ----------- ------------ -----------
Net earnings
(losses) before
income taxes... 23,163,853 1,748,779 14,195,874 (193,298) 2,054,910 40,970,118
Provision
(credit) for
federal income
taxes.......... 0 0 5,607,415 (81,229) 789,895 6,316,081
----------- ---------- ----------- ----------- ------------ -----------
Net income...... $23,163,853 $1,748,779 $ 8,588,459 $ (112,069) $ 1,265,015 $34,654,037
=========== ========== =========== =========== ============ ===========
Earnings per
share.......... $ 0.49
===========
Shares
outstanding:
Weighted
average........ 47,633,909
===========
End of period... 62,118,679
<CAPTION>
Pro Forma
-------------------------------
Adjustments Pro Forma
---------------- -------------- ---
<S> <C> <C> <C>
Revenues:
Rental and
earned income.. $ 9,635,208 (a)
68,814 (b) $34,282,168
Fees............ (21,010,744)(c)
(2,875,906)(d) 2,640,843
Interest and
other income... 1,526,547 (e) 26,148,395
---------------- -------------- ---
Total revenue... (12,656,081) 63,071,406
Expenses:
General and
administrative.. (1,306,967)(f)
(1,415,100)(g)
(35,996)(h) 12,328,913
Advisory fees... (2,274,624)(i) 0
Fees to
Restaurant
Financial
Services
Group.......... (1,825,658)(n) 0
Interest........ (68,670)(m) 14,271,531
State taxes..... 50,404 (j) 697,716
Depreciation--
other.......... -- 130,663
Depreciation--
property....... 1,512,785 (k) 4,394,187
Amortization.... 1,565,555 (l) 2,576,145
---------------- -------------- ---
Total operating
expenses....... (3,798,271) 34,399,155
---------------- -------------- ---
Operating
earnings
(losses)....... (8,857,810) 28,672,251
Equity in
earnings of
joint ventures/minority
interest....... -- 421,789
Gain on
securitization.. -- 3,018,268
---------------- -------------- ---
Net earnings
(losses) before
income taxes... (8,857,810) 32,112,308
Provision
(credit) for
federal income
taxes.......... (6,316,081)(o) 0
---------------- -------------- ---
Net income...... $ (2,541,729) $32,112,308
================ ============== ===
Earnings per
share.......... $ 0.44
==============
Shares
outstanding:
Weighted
average........ 73,390,248(p)
==============
End of period... 78,076,710
</TABLE>
F-20
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA INCOME STATEMENT
For the year ended December 31, 1997
<TABLE>
<CAPTION>
Historical Pro Forma
------------------------------------------------------------------------------ ---------------------------
CNL Income CNL Financial CNL Financial Combined
APF Fund IX, Ltd. Advisor Services, Inc. Corp. Portfolios Adjustments Pro Forma
----------- ------------- ---------- -------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and earned
income........... $15,490,615 $2,647,821 $ 0 $ 0 $ 0 $18,138,436 $24,048,982 (a)
100,169 (b) $42,287,587
Fees............. 0 0 8,310,836 5,965,110 73,704 14,349,650 (9,074,807)(c)
(2,662,141)(d) 2,612,702
Interest and
other income..... 3,967,318 44,669 165,569 0 10,932,843 15,110,399 249,395 (e) 15,359,794
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Total Revenue.. 19,457,933 2,692,490 8,476,405 5,965,110 11,006,547 47,598,485 12,661,598 60,260,083
Expenses:
General and
administrative... 1,010,725 229,668 4,266,169 1,889,904 828,848 8,225,314 (740,042)(f)
(1,619,238)(g)
(38,937)(h) 5,827,097
Advisory fees.... 804,879 0 0 0 1,802,532 2,607,411 (2,607,411)(i) 0
Fees to
Restaurant
Financial
Services Group... 0 0 151,041 594,041 0 745,082 (745,082)(n) 0
Interest 0 0 162,153 183,315 8,320,000 8,665,468 (81,594)(m) 8,583,874
State taxes...... 251,358 11,126 12,084 1,294 1,600 277,462 20,121 (j) 297,583
Depreciation--
other............ 0 0 48,490 14,637 0 63,127 -- 63,127
Depreciation--
property......... 1,784,269 251,483 0 0 0 2,035,752 3,165,460 (k) 5,201,212
Amortization..... 10,793 77 18,093 61,324 916,577 1,006,864 2,087,407 (l) 3,094,271
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Total operating
expenses........ 3,862,024 492,354 4,658,030 2,744,515 11,869,557 23,626,480 (559,316) 23,067,164
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Operating earnings
(losses)......... 15,595,909 2,200,136 3,818,375 3,220,595 (863,010) 23,972,005 13,220,914 37,192,919
Equity in
earnings of joint
ventures/minority
interest......... (31,453) 537,853 0 (126,627) 0 379,773 -- 379,773
Gain on sale of
properties....... 0 199,643 0 0 0 199,643 -- 199,643
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Net earnings
before income
taxes............ 15,564,456 2,937,632 3,818,375 3,093,968 (863,010) 24,551,421 13,220,914 37,772,335
Provision
(credit) for
federal income
taxes............ 0 0 1,508,258 1,272,133 (317,785) 2,462,606 (2,462,606)(o) 0
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Net earnings
(losses)......... $15,564,456 $2,937,632 $2,310,117 $1,821,835 $ (545,225) $22,088,815 $15,683,520 $37,772,335
=========== ========== ========== ---------- =========== =========== =========== ===========
Earnings per
share............ $ 0.66 $ 0.51
=========== ===========
Shares
outstanding:
Weighted
average.......... 23,423,868 74,062,684 (p)
=========== ===========
End of period.... 36,192,971 74,062,684
=========== ===========
</TABLE>
F-21
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
Notes and Management's Assumptions to Unaudited
Pro Forma Financial Statements
1. Basis of Presentation
The Pro Forma Balance Sheet as of September 30, 1998 reflects the
transactions of the acquisition of the CNL Income Fund, Advisor and CNL
Restaurant Financial Services Group (the "Acquisition Proposal") as set forth
in this Proxy Statement. The Pro Forma Statements of Earnings for the nine
months ended September 30, 1998, and for the year ended December 31, 1997, have
been prepared to reflect a) the issuance of additional shares and the property
acquisitions completed from January 1, 1997 through November 30, 1998
("Offering and Property Transactions") and b) the transactions of the
Acquisition Proposal as set forth in this Proxy Statement. This unaudited pro
forma financial information has been prepared utilizing the historical
financial statements of the Company and the historical combined financial
information of the CNL Income Fund, Advisor and CNL Restaurant Financial
Services Group and should be read in conjunction with the selected historical
financial data and accompanying notes of the Company, the CNL Income Fund,
Advisor and the CNL Restaurant Financial Services Group. The Pro Forma Balance
Sheet was prepared as if the Offering and Property Transactions and the
Acquisition Proposal occurred on September 30, 1998. The Pro Forma Statements
of Earnings were prepared as if the Property Acquisitions and the Acquisition
Proposal occurred as of January 1, 1997. The pro forma information is unaudited
and is not necessarily indicative of the consolidated operating results which
would have occurred if the Offering and Acquisition Transaction and the
Acquisition Proposal 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 Acquisition
Proposal have been made. Capitalized terms have the meanings as defined in the
Proxy Statement.
2. Method of Accounting
The acquisition of the CNL Income Fund and the CNL Restaurant Financial
Services Group will be accounted for under the purchase accounting method. The
Company 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, the Company 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 operating expense on the Company's consolidated statements of
earnings, but the Company will not deduct this expense for purposes of
calculating funds from operations due to the non-recurring and non-cash nature
of the expense.
All significant intercompany balances and transactions between the Company,
CNL Income Fund, Advisor and CNL Restaurant Financial Services Group have been
eliminated in the pro forma financial statements.
3. Adjustments to Pro Forma Balance Sheet
The following describes the pro forma adjustments to the Pro Forma Balance
Sheet as of September 30, 1998, as if the Acquisition was consummated on such
date. For purposes of the pro forma financial statements, it is assumed that at
an annual meeting of stockholders, the stockholders of the Company approved an
amendment to increase the number of authorized shares to an amount necessary to
enable the Company to issue the shares for the Acquisition.
(1) Represents the payment of $420,663 in cash and the issuance of 15,958,031
common shares in consideration for the purchase of the CNL Income Fund,
Advisor and CNL Restaurant Financial Services Group at September 30, 1998
at a share price of $10 plus estimated transaction costs. The acquisition
of the CNL Income Fund and the CNL Restaurant Financial Services Group has
been accounted for under
F-22
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
Notes and Management's Assumptions to Unaudited
Pro Forma Financial Statements--(Continued)
the purchase accounting method and goodwill was recognized to the extent
that the consideration paid exceeded the fair value of the net tangible
assets acquired. As for the acquisition of the Advisor from a related party,
the consideration paid in excess of the fair value of the net tangible
assets received has been accounted for as costs incurred in acquiring the
Advisor from a related party because the Advisor has not been deemed to
qualify as a "business" for purposes of applying APB Opinion No. 16
"Business Combinations." Upon consummation of the Acquisition, this expense
will be recorded as an operating expense on the Company's statement of
earnings. The Company will not deduct this expense for purposes of
calculating funds from operations due to the nonrecurring and non-cash
nature of the expense. As of September 30, 1998, $249,403 of transaction
costs had been incurred by the Company.
<TABLE>
<S> <C>
CNL Income Fund........................................... $ 37,000,971
Advisor................................................... 76,000,000
CNL Restaurant Financial Services Group................... 47,000,000
------------
Total Purchase Price (cash and shares).................. 160,000,971
Less cash paid to CNL Income Fund......................... (420,663)
------------
Share consideration..................................... 159,580,308
Transaction costs of the Company.......................... 8,933,000
------------
Total costs incurred.................................... $168,513,308
============
</TABLE>
In addition, the Company i) used $8,993,000 in cash to pay the
transaction costs related to the Acquisition, ii) made an upward adjustment
to the CNL Income Fund carrying value of land and building on operating
leases by $6,080,949, net investment in direct financing leases by
$2,424,315, investment in joint venture by $2,360,444, made downward
adjustments to the carrying value of accrued rental income of $1,241,786,
made downward adjustments to other assets of $3,675,485 to adjust
historical values to fair value, iii) recorded goodwill of $41,748,141 for
the acquisition of the CNL Restaurant Financial Services Group, iv) reduced
retained earnings by $76,862,492 for the excess consideration paid over the
net assets of the Advisor and removed the historical common stock balance
of $12,000, additional paid in capital balance of $9,602,287, retained
earnings balance of $5,297,114 and partners capital balance of $29,463,500
of the CNL Income Fund, Advisor and CNL Restaurant Financial Services
Group.
(2) Represents the use of $26,901,936 in cash and cash equivalents at September
30, 1998 to acquire $26,052,741 in properties and issue $849,195 in
mortgage notes which occurred from October 1, 1998 through November 30,
1998.
(3) Represents the elimination by the CNL Income Fund of $4,463 in related
party payables recorded as receivables by the Advisor, the elimination by
the CNL Restaurant Financial Services Group of $6,641,379 in related party
payables recorded as receivables by CNL Restaurant Financial Services Group
and the elimination by the Company of $1,208,000 in related party payables
recorded as receivables by the Advisor.
(4) Represents the elimination of income taxes payable of $2,990,864 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.
F-23
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
Notes and Management's Assumptions to Unaudited
Pro Forma Financial Statements--(Continued)
4. Adjustments to Pro Forma Income Statements
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the nine months ended September 30, 1998, as if
the Acquisition was consummated as of January 1, 1997.
(a) Represents rental and earned income as if 1) properties that had been
previously constructed and acquired from January 1, 1998 through
November 30, 1998 had been acquired and leased on January 1, 1997 and
2) properties that were developed by the Company from January 1, 1998
through November 30, 1998 had been placed in service on May 1, 1997
(assumes a four month development period).
<TABLE>
<S> <C>
Rental and earned income on Property Transactions by the
Company................................................... $9,635,208
</TABLE>
(b) Represents $68,814 in accrued rental income resulting from the
straight- lining of scheduled rent increases throughout the lease terms
for the leases acquired from the CNL Income Fund as if the leases had
been acquired on January 1, 1997.
(c) Represents the elimination of intercompany fees between the Company,
the CNL Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Origination fees.......................................... $ (1,569,202)
Secured equipment lease fee............................... (44,426)
Advisory fees............................................. (1,722,383)
Reimbursement of administrative costs..................... (292,850)
Acquisition fees.......................................... (15,392,193)
Underwriting fees......................................... (254,945)
Administrative fees....................................... (148,491)
Executive fee............................................. (310,000)
Guarantee fees............................................ (93,750)
Servicing fee............................................. (1,014,117)
Development fees.......................................... (166,876)
Consulting fee............................................ (1,511)
------------
Total................................................... $(21,010,744)
============
</TABLE>
(d) Represents the deferral of $2,875,906 in origination fees collected by
CNL Restaurant Financial Services Group that should be amortized over
the term of the loans originated (20 years) in accordance with the
Statement of Financial Accounting Standards #91 "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring
Loans and Initial Direct Costs of Leases."
(e) Represents interest income of $1,318,870 earned from Other Investments
acquired and mortgage notes issued from January 1, 1998 through
November 30, 1998 as if this had occurred on January 1, 1997 and the
amortization of $207,677 of deferred origination fees collected during
the year ended December 31, 1997 and during the nine months ended
September 30, 1998, which were capitalized and deferred in (d) above as
if they had been collected on January 1, 1997. These deferred fees are
being amortized and recorded as interest income.
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
Notes and Management's Assumptions to Unaudited
Pro Forma Financial Statements--(Continued)
(f) Represents the elimination of intercompany expenses paid between the
Company, the CNL Income Fund, the Advisor and the CNL Restaurant
Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs...................... $ (292,850)
Servicing fee.............................................. (1,014,117)
-----------
$(1,306,967)
===========
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by the Company
were subject to capitalization during the entire period and 2) costs
relating to properties not developed by the Company were subject to
capitalization up through the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs............................ $(1,415,100)
</TABLE>
(h) Represents savings of $35,996 in professional services and
administrative expenses resulting from reporting on one combined
Company versus 22 separate entities.
(i) Represents the elimination of advisory fees between the Company, the
CNL Income Fund, the Advisor and the CNL Restaurant Financial Services
Group:
<TABLE>
<S> <C>
Advisory fees............................................... $(1,722,383)
Administrative fees......................................... (148,491)
Executive fee............................................... (310,000)
Guarantee fees.............................................. (93,750)
-----------
$(2,274,624)
===========
</TABLE>
(j) Represents additional income taxes of $50,404 resulting from assuming
that acquisitions from January 1, 1998 through November 30, 1998 had
been acquired on January 1, 1997 and assuming that the CNL Income Fund
had operated under a REIT structure.
(k) Represents an increase in depreciation of the building portion of the
properties acquired from January 1, 1998 through November 30, 1998 as
if they had been acquired on January 1, 1997 and the step up in basis
referred to in footnote (2) from acquiring the CNL Income Fund
portfolio using the straight-line method over the estimated useful
lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense.......................................... $1,512,785
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of the
CNL Restaurant Financial Services Group referred to in footnote (2)
<TABLE>
<S> <C>
Amortization of goodwill...................................... $1,565,555
</TABLE>
(m) Represents elimination of interest expense recorded for the
amortization of $350,000 in arrangement fees collected during the year
ended December 31, 1997 which were eliminated in II (d) below.
<TABLE>
<S> <C>
Interest expense............................................... $(68,670)
</TABLE>
F-25
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
Notes and Management's Assumptions to Unaudited
Pro Forma Financial Statements--(Continued)
(n) Represents the elimination of fees paid to affiliates for fees incurred
between the Company, the CNL Income Fund, the Advisor and the CNL
Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees............................................ $(1,569,202)
Underwriting fees........................................... (254,945)
Consulting fee.............................................. (1,511)
-----------
$(1,825,658)
===========
</TABLE>
(o) Represents the elimination of $6,316,081 in the provision for income
taxes as a result of the Acquisition. The Company expects to continue
to qualify as a REIT and does not expect to incur federal income taxes.
(p) Common shares issued during the period required to fund acquisitions as
if they had been acquired on January 1, 1997 were assumed to have been
issued and outstanding as of January 1, 1998. For purposes of the
proforma financial statements, it is assumed that the stockholders
approved the proposal to increase the number of authorized common
shares of the Company.
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the year ended December 31, 1997, as if the
Acquisition was consummated as of January 1, 1997.
(a) Represents rental and earned income as if 1) properties that had been
previously constructed and acquired from January 1, 1998 through
November 30, 1998 had been acquired and leased on January 1, 1997 and
2) properties that were developed by the Company from January 1, 1997
through November 30, 1998 had been placed in service on May 1, 1997
(assumes a four month development period).
<TABLE>
<S> <C>
Rental and earned income on Property Transactions by the
Company.................................................. $24,048,982
</TABLE>
(b) Represents $100,169 in accrued rental income resulting from the
straight- lining of scheduled rent increases throughout the lease terms
for the leases acquired from the CNL Income Fund as if the leases had
been acquired on January 1, 1997.
(c) Represents the elimination of intercompany fees between the Company,
the CNL Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Origination fees........................................... $ (594,041)
Secured equipment lease fee................................ (375,219)
Advisory fees.............................................. (1,775,680)
Reimbursement of administrative costs...................... (141,054)
Acquisition fees........................................... (3,887,483)
Underwriting fees.......................................... (151,041)
Administrative fees........................................ (269,231)
Executive fee.............................................. (250,000)
Guarantee fees............................................. (312,500)
Arrangement fees........................................... (350,000)
Servicing fee.............................................. (598,988)
Development fees........................................... (369,570)
-----------
Total.................................................... $(9,074,807)
===========
</TABLE>
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
Notes and Management's Assumptions to Unaudited
Pro Forma Financial Statements--(Continued)
(d) Represents the deferral of $2,662,141 in origination fees collected by
CNL Restaurant Financial Services Group that should be amortized over
the term of the loans originated (20 years) in accordance with the
Statement of Financial Accounting Standards #91 "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring
Loans and Initial Direct Costs of Leases."
(e) Represents the elimination of interest income of $1,931,331 earned
during the year ended December 31, 1997 assuming all monies raised
during 1997 and all cash held on January 1, 1997 was used to effect the
Acquisition on January 1, 1997, represents interest income of
$2,047,619 earned from Other Investments acquired and mortgage notes
issued from January 1, 1998 through November 30, 1998 as if this had
occurred on January 1, 1997 and the recognition of $133,107 of
origination fees collected during the year ended December 31, 1997
which were deferred in (d) and are being amortized and recorded as
interest income.
(f) Represents the elimination of intercompany expenses paid between the
Company, the CNL Income Fund, the Advisor and the CNL Restaurant
Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs......................... $(141,054)
Servicing fee................................................. (598,988)
----------
$(740,042)
==========
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by the Company
were subject to capitalization during the entire period and 2) costs
relating to properties not developed by the Company were subject to
capitalization up through the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs............................ $(1,619,238)
</TABLE>
(h) Represents savings of $38,937 in professional services and
administrative expenses resulting from reporting on one combined
Company versus 22 separate entities.
(i) Represents the elimination of advisory fees between the Company, the
CNL Income Fund, the Advisor and the CNL Restaurant Financial Services
Group:
<TABLE>
<S> <C>
Advisory fees............................................... $(1,775,680)
Administrative fees......................................... (269,231)
Executive fee............................................... (250,000)
Guarantee fees.............................................. (312,500)
-----------
$(2,607,411)
===========
</TABLE>
(j) Represents additional income taxes of $20,121 resulting from assuming
that acquisitions from January 1, 1997 through November 30, 1998 had
been acquired on January 1, 1997 and assuming that the CNL Income Fund
had operated under a REIT structure.
(k) Represents increase in depreciation of the building portion of the
properties acquired from January 1, 1997 through November 30, 1998 as
if they had been acquired on January 1, 1997 and the step up in
F-27
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
Notes and Management's Assumptions to Unaudited
Pro Forma Financial Statements--(Continued)
basis referred to in footnote (2) from acquiring the CNL Income Fund
portfolio using the straight-line method over the estimated useful lives
of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense.......................................... $3,165,460
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of the
CNL Restaurant Financial Services Group referred to in footnote (2)
<TABLE>
<S> <C>
Amortization of goodwill...................................... $2,087,407
</TABLE>
(m) Represents elimination of yearly amortization of arrangement fees of
$350,000 capitalized as deferred costs and amortized as interest
expense and the capitalization of interest expense during the period
that properties were under development.
<TABLE>
<S> <C>
Amortization of arrangement fees............................... $(24,144)
Capitalization of interest during development period........... (57,450)
--------
$(81,594)
========
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees incurred
between the Company, the CNL Income Fund, the Advisor and the CNL
Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees.............................................. $(594,041)
Underwriting fees............................................. (151,041)
---------
(745,082)
=========
</TABLE>
(o) Represents the elimination of $2,462,606 in the provision for income
taxes as a result of the Acquisition. The Company expects to continue
to qualify as a REIT and does not expect to incur federal income taxes.
(p) Common shares issued during the period were assumed to have been issued
and outstanding as of January 1, 1997. For purposes of the proforma
financial statement, it is assumed that the stockholders approved the
proposal to increase the number of authorized common shares of the
Company.
F-28
<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 eighteen 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
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.
B-1
<PAGE>
"Affiliated Group" means any affiliated group within the meaning of Code
(S)1504, or any similar group defined under a similar provision of state, local
or foreign law.
"Agreement" means this Agreement, as amended from time to time.
"APF" has the meaning set forth in the preface above.
"APF Common Shares" shall mean the shares of common stock, par value $0.01,
of APF.
"APF Indemnity Claim" has the meaning set forth in Section 12.1 below.
"APF SEC Documents" has the meaning set forth in Section 6.7 below.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms the basis for any specified
consequence.
"Business Combination" has the meaning set forth in Section 4.1(b) below.
"Cash/Note Option" has the meaning set forth in Section 4.4 below.
"Closing" has the meaning set forth in Section 2.3 below.
"CNL Income Funds" has the meaning set forth in the second paragraph of the
Recitals above.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the businesses
and affairs of the Fund, the Operating Partnership or APF, if any, that is not
already generally available to the public.
"Delaware RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Disclosure Schedule" has the meaning set forth in the first paragraph of
Article VII below.
"Dissenting Partners" has the meaning set forth in Section 4.4 below.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
tax-qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) tax-qualified defined benefit retirement
plan or arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Fairness Opinion" has the meaning set forth in the third paragraph of the
Recitals above.
"Florida RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Fund" has the meaning set forth in the preface above.
"Fund Articles of Merger" has the meaning set forth in Section 2.2 below.
"Fund Fairness Opinion" has the meaning set forth in the fifth paragraph of
the recitals above.
B-2
<PAGE>
"Fund Indemnity Claim" has the meaning set forth in Section 12.2 below.
"Fund Interests" means the general and limited partnership interests in the
Fund.
"Fund SEC Documents" has the meaning set forth in Section 7.7 below.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"General Partners" has the meaning set forth in the preface above.
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements
thereto, and all patents, patent applications, and patent disclosures,
together with all reissuances, continuations, continuations-in-part,
revisions, extensions, and reexaminations thereof, (b) all trademarks, service
marks, trade dress, logos, trade names, and corporate names, together with all
translations, adaptations, derivations, and combinations thereof and including
all goodwill associated therewith, and all applications, registrations, and
renewals in connection therewith, (c) all copyrightable works, all copyrights,
and all applications, registrations, and renewals in connection therewith, (d)
all mask works and all applications, registrations, and renewals in connection
therewith, (e) all trade secrets and confidential business information
(including ideas, research and development, know-how, formulas, compositions,
manufacturing and production processes and techniques, technical data,
designs, drawings, specifications, customer and supplier lists, pricing and
cost information, and business and marketing plans and proposals), (f) all
computer software (including data and related documentation but excluding
commercially available shrink wrap software), (g) all other proprietary
rights, and (h) all copies and tangible embodiments thereof (in whatever form
or medium).
"IRS" means the Internal Revenue Service.
"Knowledge" means in the case of the Fund, CNL Realty Corporation, Inc.,
APF and the OP General Partner, the actual knowledge of a director or an
executive officer after reasonable investigation and, in the case of the
individual General Partners, the collective actual Knowledge of all of the
General Partners after reasonable investigation. For the purposes of this
Agreement, the Knowledge of one General Partner shall be attributed to the
other General Partners.
"Known" and "Knowingly" mean that the Fund, any General Partner or APF, as
applicable, had Knowledge of the particular matter or took the action
described with prior Knowledge.
"Liability" means any liability (whether Known or unknown, whether asserted
or unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due),
including any liability for Taxes.
"Material Adverse Effect" means, as to any Party, a material adverse effect
on the business, properties, operations or condition (financial or otherwise)
which is not related to an industry-wide change in the economy or market or
other conditions affecting all businesses in the industry of the Party to
which the term is applied.
"Merger" has the meaning set forth in the first paragraph of the Recitals
above.
"Merger Proposal" has the meaning set forth in fourth paragraph of the
Recitals above.
"Most Recent 10-Q" has the meaning set forth in Section 7.5 below.
"Most Recent Balance Sheet" means the most recent balance sheet filed in a
Fund SEC Document.
"Notes" has the meaning set forth in Section 4.4 below.
"NYSE" means the New York Stock Exchange.
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"OP Certificate of Merger" has the meaning set forth in Section 2.2 below.
"OP General Partner" has the meaning set forth in the Preface above.
"OP Limited Partner" means CNL APF LP Corp., a Delaware corporation and
wholly owned subsidiary of APF.
"Operating Partnership" has the meaning set forth in the preface above.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity
and frequency).
"Party" or "Parties" has the meaning set forth in the preface above.
"Partner" means any holder of Fund Interests.
"Person" means an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, a limited liability company,
an unincorporated organization, a governmental entity (or any department,
agency, or political subdivision thereof) or other entity.
"Proposed Acquisitions" has the meaning set forth in the second paragraph of
the Recitals above.
"Registration Statement" means the registration statement on Form S-4 to be
filed by APF to register the APF Common Shares to be issued as Share
Consideration in the Merger.
"Representative" has the meaning set forth in Section 12.3 below.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance, charge,
or other security interest, other than (a) mechanic's, materialmen's, and
similar liens, (b) liens for Taxes not yet due and payable or for Taxes that
the taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money and (e) any minor
imperfection of title or similar lien which individually or in the aggregate
could not reasonably be expected to have a Material Adverse Effect on such
Party.
"Share Consideration" has the meaning set forth in Section 4.1(a) below.
"Special Committee" has the meaning set forth in the third paragraph to the
Recitals above.
"Subsidiary" means any corporation, partnership, joint venture, limited
liability company or other entity with respect to which a specified Person (or
a Subsidiary thereof) owns a majority of the common stock or other voting
interests or has the power to vote or direct the voting of sufficient
securities or interests to elect a majority of the directors or otherwise
control the management.
"Surviving Partnership" has the meaning set forth in Section 2.1 below.
"Takeover Statute" has the meaning set forth in Section 8.9 below.
"Tax" means any federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Code
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(S)59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-
on minimum, estimated, or other tax of any kind whatsoever, including any
interest, penalty, or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Third-Party Claim" has the meaning set forth in Section 12.4 below.
ARTICLE II
Merger; Effective Time; Closing
2.1 Merger. Subject to the terms and conditions of this Agreement, the
Delaware RULPA and the Florida RULPA, at the Effective Time, the Operating
Partnership and the Fund shall consummate the Merger in which (i) the Fund
shall be merged with and into the Operating Partnership and the separate
limited partnership existence of the Fund shall thereupon cease, (ii) the
Operating Partnership shall be the successor or surviving limited partnership
in the Merger and shall continue to be governed by the laws of the State of
Delaware and (iii) the separate limited partnership existence of the Operating
Partnership with all its rights, privileges, immunities, powers and franchises
shall continue unaffected by the Merger. The limited partnership surviving the
Merger is sometimes hereinafter referred to as the "Surviving Partnership." The
Merger shall have the effects set forth in the Delaware RULPA and the Florida
RULPA. As a result of the Merger, the outstanding Fund Interests shall be
converted or cancelled in the manner provided in Article IV.
2.2 Effective Time. On the Closing Date, subject to the terms and conditions
of this Agreement, the Operating Partnership and the Fund shall (i) execute or
cause to be executed (A) a Certificate of Merger in the form required by the
Delaware RULPA (the "OP Certificate of Merger") and (B) Articles of Merger in
the form required by the Florida RULPA (the "Fund Articles of Merger"), and
(ii) cause the OP Certificate of Merger to be filed with the Delaware Secretary
of State as provided in the Delaware RULPA and the Fund Articles of Merger to
be filed with the Florida Department of State as provided in the Florida RULPA,
in each case, on the Closing Date or as soon as practicable thereafter. The
Merger shall become effective at (i) such time as the OP Certificate of Merger
has been duly filed with the Delaware of Secretary of State and the Fund
Articles of Merger has been duly filed with the Florida Department of State or
(ii) such other time as is agreed upon by APF, the OP General Partner and the
General Partners and specified in the OP Certificate of Merger and the Fund
Articles of Merger. Such time is hereinafter referred to as the "Effective
Time."
2.3 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Shaw Pittman Potts
& Trowbridge, 2300 N Street, N.W., Washington, D.C. 20037, commencing at 9:00
a.m. local time on such date as within five (5) business days following the
fulfillment or waiver of the conditions set forth in Article X (other than
conditions which by their nature are intended to be fulfilled at the Closing)
or such other place or time or on such other date as APF, the OP General
Partner and the General Partners may agree or as may be necessary to permit the
fulfillment or waiver of the conditions set forth in Article X (the "Closing
Date"). In no event shall the Closing Date be a date subsequent to December 31,
1999. At the Closing, there shall be delivered to APF, the Operating
Partnership, the OP General Partner, the General Partners and the Fund the
certificates and other documents and instruments required to be delivered under
Article X.
2.4 Further Assurances. Each Party hereto will execute such further
documents and instruments and take such further actions as may be reasonably
requested by one or more of the other Parties to consummate the Merger, to vest
the Surviving Partnership with full title to all assets, properties, rights,
approvals, immunities and franchises of either the Fund or the Operating
Partnership or to effect the other purposes of this Agreement.
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ARTICLE III
Certificate of Limited Partnership; Limited Partnership Agreement;and General
Partner of Surviving Partnership
3.1 Certificate of Limited Partnership. At the Effective Time, the
certificate of limited partnership of the Operating Partnership, as in effect
immediately prior to the Effective Time, shall be the certificate of limited
partnership of the Surviving Partnership until thereafter amended as provided
therein.
3.2 Limited Partnership Agreement. At the Effective Time, the limited
partnership agreement of the Operating Partnership, as in effect immediately
prior to the Effective Time, shall be the limited partnership agreement of the
Surviving Partnership.
3.3 General Partner. The general partner of the Operating Partnership
immediately prior to the Effective Time shall be the general partner of the
Surviving Partnership from and after the Effective Time until it is replaced or
it resigns in accordance with the limited partnership agreement of the
Surviving Partnership.
ARTICLE IV
Share Consideration; Payment of Share Consideration
4.1 Share Consideration; Conversion or Cancellation of Fund Interests in
Merger.
(a) At the Effective Time, by virtue of the Merger and without any action by
the Parties, all of the outstanding Fund Interests (i) shall be converted into
the right to receive up to 3,700,097 fully paid and nonassessable APF Common
Shares (1,850,049 APF Common Shares if the Reverse Split [defined below] occurs
before the Closing) (the "Share Consideration") pursuant to the terms of
Section 4.2 below, (ii) shall cease to be outstanding, and (iii) shall be
canceled and retired and shall cease to exist, and each Partner, as the holder
of such Fund Interests shall cease to have any rights with respect thereto,
except the right to receive either (A) APF Common Shares therefor in accordance
with this Section 4.1 and Section 4.3 or (B) the cash and Notes in accordance
with Section 4.4 below. Subject to the approval of the APF's shareholders of an
amendment to its article of incorporation, APF anticipates that prior to the
Closing it will effect a one for two reverse stock split (the "Reverse Split")
pursuant to which each two shares of APF Common Shares outstanding will be
exchanged for one share of APF Common Shares.
(b) Except for the Reverse Stock Split described in Section 4.1(a), prior to
the Effective Time, APF shall not split or combine the APF Common Shares, or
pay a stock dividend or other stock distribution in APF Common Shares, or in
rights or securities exchangeable for, convertible into or exercisable for APF
Common Shares, or otherwise change APF Common Shares into, or exchange APF
Common Shares for, any other securities (whether pursuant to or as part of a
merger, consolidation, acquisition of property or stock, separation,
reorganization, or liquidation of APF as a result of which APF stockholders
receive cash, stock, or other property in exchange for, or in connection with,
their APF Common Shares (a "Business Combination") or otherwise), or make any
other dividend or distribution on or of APF Common Shares (other than regular
quarterly cash dividends paid on APF Common Shares or any distribution pursuant
to APF's dividend reinvestment plan), without the parties hereto having first
entered into an amendment to this Agreement pursuant to which the Share
Consideration will be adjusted to reflect such split, combination, dividend,
distribution, Business Combination, or change.
(c) At the Effective Time, by virtue of the Merger and without any action by
holders thereof, all of the APF Common Shares issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding.
4.2 Payment of Share Consideration. At the Closing, subject to Section 4.4
below, the Partners shall receive the Share Consideration (less expenses paid
by APF on behalf of the Fund), distributed in accordance
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with the provisions of the Fund's limited partnership agreement as of the
Closing Date. For the purposes of this Agreement, the Share Consideration will
be reduced (i) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund and (ii) as provided
in Section 4.4 below.
4.3 Fractional APF Common Shares. No certificates representing fractional
APF Common Shares shall be issued upon conversion of any Fund Interests. Each
Partner of the Fund who would otherwise be entitled to fractional APF Common
Shares will receive one APF Common Share for a fractional interest representing
50% or more of one APF Common Share. No APF Common Shares will be issued for a
fractional interest representing less than 50% of one APF Common Share.
4.4 Cash/Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote against the
Merger and affirmatively elect the cash/note option (the "Cash/Note Option"),
such Dissenting Partners shall be entitled to receive, in lieu of the Share
Consideration, consideration based on such Dissenting Partners' percentage
interest (as determined by the Fund's partnership agreement) in the Fund's
asset liquidation value of $33,776,342, based on Valuation Associates'
appraisal. Such consideration shall be payable 10% in cash and 90% in Callable
Notes due in 2006 (the "Notes"). The Notes will bear interest at a fixed rate
equal to 120% of the applicable federal rate as of the date the consent
solicitation on Form S-4 is mailed to the limited partners. The Share
Consideration shall be reduced on a one-for-one basis for all APF Shares
otherwise distributable to Dissenting Partners had such Dissenting Partners not
elected the Cash/Note Option.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE GENERAL PARTNERS
Each General Partner severally represents and warrants to APF and the
Operating Partnership that the statements contained in this Article V are
correct and complete as of the date hereof and on the Closing Date:
5.1 Authorization of Transaction. The General Partner has full power and
authority (including, as applicable, full corporate power and authority) to
execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement constitutes the valid and legally binding obligation of the
General Partner, enforceable in accordance with its terms and conditions. The
General Partner does not need to give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or
governmental agency in order to consummate the transactions contemplated by
this Agreement, except in connection with federal securities laws and any
applicable "Blue Sky" or state securities laws.
5.2 Noncontravention. Except as set forth in Section 5.2 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, will violate any
constitution, statute, regulation, rule, injunction, judgment, order, decree,
ruling, charge, or other restriction of any government, governmental agency, or
court to which the General Partner is subject or, as applicable, any provision
of the General Partner's articles of incorporation, bylaws or other
organizational documents.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF APF, THE OP
GENERAL PARTNER AND THE OPERATING PARTNERSHIP
APF, the OP General Partner and the Operating Partnership jointly and
severally represent and warrant to the General Partners and the Fund that the
statements contained in this Article VI are correct and complete as of the date
hereof and the Closing Date:
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6.1 Organization. APF is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Maryland. APF is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where the failure to
so qualify or obtain authorization would not have a Material Adverse Effect on
APF. APF has full corporate power and authority and all licenses, permits, and
authorizations necessary to carry on the businesses in which it is engaged and
to own and use the properties owned and used by it. The OP General Partner is a
corporation duly organized, validly existing, and in good standing under the
laws of the state of Delaware. The Operating Partnership is a limited
partnership duly organized, validly existing, and in good standing under the
laws of the State of Delaware. The Operating Partnership is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction
where such qualification is required, except where the failure to so qualify or
obtain authorization would not have a Material Adverse Effect on the Operating
Partnership. The Operating Partnership has full limited partnership power and
authority and all licenses, permits, and authorizations necessary to carry on
the businesses in which it is engaged and to own and use the properties owned
and used by it. APF and the OP General Partner have delivered to the General
Partners and the Fund correct and complete copies of the certificate of
incorporation of APF and the OP General Partner and the certificate of limited
partnership and the limited partnership agreement of the Operating Partnership
(each as amended to date). The minute books (containing the records of meetings
of the stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of APF and
the OP General Partner and any organizational records of the Operating
Partnership have been made available to the General Partners and the Fund and
are correct and complete. APF is not in default under or in violation of any
provision of its certificate of incorporation, and the Operating Partnership is
not in default under or in violation of any provision of its certificate of
limited partnership or limited partnership agreement.
6.2 Capital Stock. The authorized capital stock of APF consists of
125,000,000 shares of common stock, $.01 par value (the "APF Common Shares"),
of which 74,696,927 shares are outstanding as of January 31, 1999. Since
January 31, 1999, APF has not issued any shares of capital stock. All
outstanding APF Common Shares are, and all APF Common Shares issuable under any
stock option plans of APF, will be when issued in accordance with the terms
thereof, duly authorized, validly issued, fully paid and nonassessable. Except
for the 57,299,903 APF Common Shares which may be issued in connection with
APF's acquisition of the other 17 CNL Income Funds in the Proposed Acquisitions
and the 12,300,000 APF Shares which may be issued in connection with APF's
acquisition of CNL Fund Advisors, Inc., CNL Financial Services, Inc. and CNL
Financial Corp., there are outstanding on the date hereof no options, warrants,
calls, rights, commitments or any other agreements of any character to which
APF is a party or by which it may be bound, requiring it to issue, transfer,
sell, purchase, register, redeem, or acquire any shares of capital stock or any
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for or acquire any shares of its capital stock. All of the
outstanding general partner interests of the Operating Partnership are owned by
the OP General Partner, and all of the outstanding limited partner interests of
the Operating Partnership are owned by the OP Limited Partnership, and there
are outstanding on the date hereof no options, warrants, rights, commitments or
any other agreements of any character to which the Operating Partnership or any
partner thereof is a party or which it may be bound requiring it to issue,
transfer, sell, purchase, register, redeem or acquire any interest in the
Operating Partnership.
6.3 Authorization for Common Stock. The Share Consideration will, when
issued, be duly authorized, validly issued, fully paid and nonassessable, and
no stockholder of APF will have any preemptive right or similar rights of
subscription or purchase in respect thereof. The Share Consideration will be
registered under the Securities Act and will be registered or exempt from
registration under all applicable state securities laws. The Share
Consideration will, when issued, be approved for listing on the NYSE, subject
to official notice of issuance.
6.4 Authorization of Transaction. APF, the OP General Partner and the
Operating Partnership have full power and authority (including full corporate
and limited partnership, as applicable, power and authority) to
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execute and deliver this Agreement and to perform their obligations hereunder.
The execution, delivery and performance by APF, the OP General Partner and the
Operating Partnership of this Agreement have been duly and validly authorized
by the boards of directors of APF and the OP General Partner. This Agreement
constitutes the valid and legally binding obligation of APF, the OP General
Partner and the Operating Partnership, enforceable in accordance with its terms
and conditions. None of APF, the OP General Partner or the Operating
Partnership needs to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
6.5 Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which, APF, the OP General Partner or the
Operating Partnership is subject or any provision of APF's or the OP General
Partner's articles of incorporation or by-laws or the Operating Partnership's
certificate of limited partnership or limited partnership agreement or (ii)
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice or consent under any agreement, contract, lease, license,
instrument, or other arrangement to which APF, the OP General Partner or the
Operating Partnership is a party or by which it is bound or to which any of its
assets is subject or (iii) result in the imposition of a Security Interest upon
any of its assets.
6.6 Title to Assets. APF has good title to, or a valid leasehold interest
in, the properties and assets used by it, located on its premises, or set forth
in its most recent quarterly report on Form 10-Q filed with the SEC or acquired
after the date thereof, free and clear of all Security Interests, except for
properties and assets disposed of in the Ordinary Course of Business since the
date of its most recent quarterly report on Form 10-Q.
6.7 Reports and Financial Statements. APF has filed all required reports,
schedules, forms, statements and other documents with the SEC since January 1,
1996 (along with any such documents filed subsequent to the date hereof, the
"APF SEC Documents"). All of the APF SEC Documents (other than preliminary
material), as of their respective filing dates, complied in all material
respects with all applicable requirements of the Securities Act and the
Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such APF SEC Documents. None of the APF SEC Documents
at the time of filing contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading, except to the extent such statements have
been modified or superseded by later filed APF SEC Documents. There is no
unresolved violation, criticism or exception by any governmental entity of
which APF has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to APF could have a Material Adverse
Effect on APF. The financial statements of APF included in the APF SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP (except, the case
of interim financial statements, as permitted by Forms 10-Q and 8-K of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly presented, in accordance with the
applicable requirements of GAAP, the financial position of APF as of the dates
thereof and the results of operations and cash flows of APF for the periods
then ended (subject, in the case of interim financial statements, to normal
year-end adjustments).
6.8 Events Subsequent to September 30, 1998. Since September 30, 1998,
nothing has occurred which has had or would reasonably be expected to have a
Material Adverse Effect on APF.
6.9 Litigation. Except as publicly disclosed by APF in its APF SEC Documents
or on Schedule 1, there is no suit, claim, action, proceeding or investigation
pending or, to the Knowledge of APF, threatened against APF or any of its
Subsidiaries or any of their respective properties or assets which (a) if
adversely determined, could reasonably be expected to have a Material Adverse
Effect on APF or (b) as of the date hereof, questions
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the validity of this Agreement or any action to be taken by APF in connection
with the consummation of the transactions contemplated hereby or could
otherwise prevent or delay the consummation of the transactions contemplated by
this Agreement. Except as publicly disclosed by APF in any APF SEC Document,
none of APF or its Subsidiaries is subject to any outstanding order, writ,
injunction or decree which, insofar as can be reasonably foreseen in the
future, could reasonably be expected to have a Material Adverse Effect on APF
or would prevent or delay the consummation of the transactions contemplated
hereby.
6.10 Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by APF for inclusion or incorporation by reference
in (i) the Registration Statement to be filed by APF with the SEC in connection
with the Merger will, at the time the Registration Statement becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading and (ii) the proxy statement sent by APF to its
shareholders pertaining to the Merger will, at the date mailed to shareholders
and at the times of the meeting of shareholders to be held in connection with
the Merger, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event with
respect to APF, its officers and directors or any of its Subsidiaries should
occur which is required to be described in an amendment of, or a supplement to,
the Registration Statement or the proxy statement, APF shall promptly so advise
the General Partners and such event shall be so described, and such amendment
or supplement (which the General Partners shall have a reasonable opportunity
to review) shall be promptly filed with the SEC. The Registration Statement
will comply as to form in all material respects with the provisions of the
Securities Act and the rules and regulations thereunder.
6.11 No Undisclosed Liabilities; Absence of Changes. Except as and to the
extent publicly disclosed by APF in its APF SEC Documents or disclosed in
Schedule 1, as of December 31, 1998, to APF's Knowledge, none of APF or its
Subsidiaries had any liabilities or obligations of any nature, whether or not
accrued, contingent or otherwise, and whether due or to become due or asserted
or unasserted, which are not fully reflected in, reserved against or otherwise
described in the consolidated balance sheet of APF and its consolidated
Subsidiaries (including the notes thereto) as of such date or which could
reasonably be expected to have a Material Adverse Effect on APF. Except as
publicly disclosed by APF in any reports filed by it with the APF SEC
Documents, since December 31, 1998, the business of APF and its Subsidiaries
has been carried on only in the ordinary and usual course, to APF's Knowledge,
none of APF or its Subsidiaries has incurred any liabilities of any nature,
whether or not accrued, contingent or otherwise, and whether due or to become
due or asserted or unasserted, which could reasonably be expected to have, and
there have been no events, changes or effects with respect to APF or its
Subsidiaries Known to APF having or which could reasonably be expected to have,
a Material Adverse Effect on APF.
6.12 Brokers' Fees. Except for the fees and expenses paid to Merrill Lynch &
Co. with respect to the delivery of the Fairness Opinion to the Special
Committee and in connection with the financial services provided by Salomon
Smith Barney, none of APF, the OP General Partner or the Operating Partnership
has any Liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this
Agreement.
6.13 Qualification as a REIT. APF is a "real estate investment trust" for
federal income tax purposes. The consummation of the transactions contemplated
by this Agreement will not cause APF to cease to qualify as a "real estate
investment trust" for federal income tax purposes.
6.14 Compliance with Applicable Law. Except as publicly disclosed by APF in
its APF SEC Documents, to APF's Knowledge, it and its Subsidiaries hold all
permits, licenses, variances, exemptions, order and approvals of all
governmental entities necessary for the lawful conduct of their respective
businesses, except for failures to hold such permits, licenses, variances,
exemptions, orders and approvals which could not reasonably be expected to have
a Material Adverse Effect on APF. Except as publicly disclosed by APF in its
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APF SEC Documents, to APF's Knowledge, APF and its Subsidiaries are in
compliance with the material terms of its permits, except where the failure so
to comply could not reasonably be expected to have a Material Adverse Effect on
APF. Except as publicly disclosed by APF, the businesses of APF and its
Subsidiaries are not, to APF's Knowledge, being conducted in violation of any
law, ordinance or regulation of any governmental entity except that no
representation or warranty is made in this Section 6.14 with respect to
environmental laws and except for violations or possible violations which do
not, and, insofar as reasonably can be foreseen, in the future will not, have a
Material Adverse Effect on APF. Except as publicly disclosed by APF in its APF
SEC Documents, no investigation or review by any governmental entity with
respect to APF or its Subsidiaries is pending or, to the Knowledge of APF,
threatened, nor, to the Knowledge of APF, has any government entity indicated
an intention to conduct the same, other than, in each case, those which APF
reasonably believes will not have a Material Adverse Effect on APF.
6.15 Intellectual Property.
(a) APF owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of APF as presently conducted. Each item of Intellectual Property
owned or used by APF immediately prior to the Closing hereunder will be owned
or available for use by APF on identical terms and conditions immediately
subsequent to the Closing hereunder. APF has taken all necessary action to
maintain and protect each item of Intellectual Property that it owns or uses.
(b) APF has not interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of third
parties, and none of APF's directors or officers (or employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that APF must
license or refrain from using any Intellectual Property rights of any third
party). No third party has interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of APF which
are material to the operation of APF's business.
(c) APF has no patent or registration which has been issued to APF with
respect to any of its Intellectual Property.
(d) Nothing will interfere with, infringe upon, misappropriate, or otherwise
come into conflict with, any Intellectual Property rights of third parties as a
result of the continued operation of APF's business as presently conducted.
6.16 Insurance. With respect to each current insurance policy to which APF
is a party, a named insured or is otherwise the beneficiary of coverage, to the
knowledge of APF: (i) the policy is legal, valid, binding, enforceable, and in
full force and effect; (ii) the policy will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the consummation of the transactions contemplated hereby; (iii) neither APF nor
any other party to the policy is in breach or default (including with respect
to the payment of premiums or the giving of notices), and no event has occurred
which, with notice or the lapse of time, would constitute such a breach or
default, or permit termination, modification, or acceleration, under the
policy; and (iv) no party to the policy has repudiated any provision thereof.
6.17 Tenants. To the Knowledge of APF and except as set forth on Schedule
1, no current tenant of a property owned by APF, which as of the date of APF's
most recent quarterly report on Form 10-Q represented more than 5% of APF's
total revenues, presently intends to materially change its relationship with
the owner of the property, either due to the transactions contemplated hereby
or otherwise.
6.18 Disclosure. APF is in compliance in all material respects with its
obligation under the Securities Exchange Act to publicly disclose material
information in a timely fashion.
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ARTICLE VII
Representations and Warranties Concerning the Fund
The General Partners and the Fund jointly and severally represent and
warrant to APF and the Operating Partnership that the statements contained in
this Article VII are correct and complete as of the date hereof, except as set
forth in the disclosure schedule delivered by the General Partners and the Fund
to APF and the Operating Partnership in accordance with the provisions of
Section 8.14 (the "Disclosure Schedule"). Nothing in the Disclosure Schedule
shall be deemed adequate to disclose an exception to a representation or
warranty made herein, however, unless the Disclosure Schedule identifies the
exception with particularity and describes the relevant facts in reasonable
detail. Without limiting the generality of the foregoing, the mere listing (or
inclusion of a copy) of a document or other item shall not be deemed adequate
to disclose an exception to a representation or warranty made herein (unless
the representation or warranty has to do with the existence of the document or
other item itself). The Disclosure Schedule will be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in this Article
VII.
7.1 Organization, Qualification, and Corporate Power. The Fund is a limited
partnership duly organized, validly existing, and in good standing under the
laws of Florida. The Fund is duly authorized to conduct business and is in good
standing under the laws of each jurisdiction where such qualification is
required, except where the failure to so qualify or obtain authorization would
not have a Material Adverse Effect on the Fund. Except as set forth in Section
7.1(a) of the Disclosure Schedule, the Fund has full limited partnership power
and authority and all licenses, permits, and authorizations necessary to carry
on the businesses in which it is engaged and to own and use the properties
owned and used by it, except where the failure to so qualify or obtain
authorization would not have a Material Adverse Effect on the Fund. Section
7.1(b) of the Disclosure Schedule lists the directors and officers of the
corporate General Partner. The General Partners have been made available to APF
and the Operating Partnership correct and complete copies of the certificate of
limited partnership and the limited partnership agreement of the Fund (as
amended to date). The minute books (containing the records of meetings of the
stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of the
corporate General Partner and any organizational records of the Fund have been
made available to APF and the Operating Partnership and are correct and
complete in all material respects. The Fund is not in default under or in
violation of any provision of its certificate of limited partnership or limited
partnership agreement.
7.2 Capitalization. All of the outstanding ownership interests in the Fund
(the "Fund Interests") consist of (i) one percent in general partnership
interests and (ii) 3,500,000 units of limited partnership interests. All of the
outstanding Fund Interests have been duly authorized, are validly issued, fully
paid, and nonassessable. There are no outstanding or authorized options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights, or other contracts or commitments that could require the Fund to issue,
sell, or otherwise cause to become outstanding any additional ownership
interests. There are no outstanding or authorized stock appreciation, phantom
stock, profit participation, or similar rights with respect to the Fund.
7.3 Authorization of Transaction. The Fund has full power and authority
(including full limited partnership power and authority) to execute and deliver
this Agreement and, upon the affirmative vote of a majority of the outstanding
limited partnership Fund Interests, will have full power and authority
(including limited partnership power and authority) to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of the Fund, enforceable in accordance with its terms and conditions, subject
to bankruptcy, insolvency, moratorium and rights of creditors generally. The
Fund is not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
7.4 Noncontravention. Except as set forth in Section 7.4 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby,
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will (i) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which the Fund is subject or any
provision of the certificate of limited partnership or limited partnership
agreement of the Fund or (ii) result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice or consent
under any agreement, contract, lease, license, instrument, or other arrangement
to which the Fund is a party or by which it is bound or to which any of its
assets is subject (or result in the imposition of any Security Interest upon
any of its assets).
7.5 Title to Assets. The Fund has good title to, or a valid leasehold
interest in, the properties and assets used by it, located on its premises, or
set forth in its most recent quarterly report on Form 10-Q filed with the SEC
(the "Most Recent 10-Q") or acquired after the date thereof, free and clear of
all Security Interests, except for properties and assets disposed of in the
Ordinary Course of Business since the date of the Most Recent 10-Q.
7.6 Subsidiaries. The Fund does not have any Subsidiaries, operating or
otherwise.
7.7 Reports and Financial Statements. The Fund has filed all required
reports, schedules, forms, statements and other documents with the SEC since
January 1, 1996 (along with any such documents filed subsequent to the date
hereof, the "Fund SEC Documents"). All of the Fund SEC Documents (other than
preliminary material), as of their respective filing dates, complied in all
material respects with all applicable requirements of the Securities Act and
the Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such Fund SEC Documents. None of the Fund SEC
Documents at the time of filing contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the extent
such statements have been modified or superseded by later filed Fund SEC
Documents. There is no unresolved violation by any governmental entity of which
the Fund has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to the Fund could have a Material
Adverse Effect on the Fund. The financial statements of the Fund included in
the Fund SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with GAAP
(except, the case of interim financial statements, as permitted by Forms 10-Q
and 8-K of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly presented, in
accordance with the applicable requirements of GAAP, the financial position of
the Fund as of the dates thereof and the results of operations and cash flows
of the Fund for the periods then ended (subject, in the case of interim
financial statements, to normal year-end adjustments).
7.8 Events Subsequent to the Most Recent 10-Q. Since the date of the Most
Recent 10-Q nothing has had a Material Adverse Effect on the Fund. Without
limiting the generality of the foregoing, since that date, except as set forth
in the appropriately lettered paragraph of Section 7.8 of the Disclosure
Schedule:
(a) the Fund has not sold, leased, transferred, or assigned any of its
assets, tangible or intangible, other than for a fair consideration (as
reasonably determined by the General Partners) in the Ordinary Course of
Business;
(b) the Fund has not entered into any agreement, contract, lease, or license
(or series of related agreements, contracts, leases, and licenses) involving
more than $50,000 except in the Ordinary Course of Business;
(c) no party (including the Fund) has accelerated, terminated, modified, or
canceled any agreement, contract, lease, or license (or series of related
agreements, contracts, leases, and licenses) to which the Fund is a party or by
which it is bound except in the Ordinary Course of Business;
(d) the Fund has not imposed any Security Interest upon any of its assets,
tangible or intangible except in the Ordinary Course of Business;
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(e) the Fund has not made any capital expenditure (or series of related
capital expenditures) involving more than $50,000 except in the Ordinary Course
of Business;
(f) the Fund has not made any capital investment in, any loan to, or any
acquisition of the securities or assets of any other Person (or series of
related capital investments, loans, and acquisitions) outside the Ordinary
Course of Business;
(g) the Fund has not issued any note, bond, or other debt security or
created, incurred, assumed, or guaranteed any indebtedness for borrowed money
or capitalized lease obligation outside the Ordinary Course of Business;
(h) the Fund has not delayed or postponed the payment of accounts payable
and other Liabilities outside the Ordinary Course of Business;
(i) the Fund has not canceled, compromised, waived, or released any right or
claim (or series of related rights and claims) outside the Ordinary Course of
Business;
(j) the Fund has not granted any license or sublicense of any rights under
or with respect to any Intellectual Property;
(k) there has been no change made or authorized in the certificate of
limited partnership or limited partnership agreement of the Fund;
(l) the Fund has not issued, sold, or otherwise disposed of any ownership
interests, or granted any options, warrants, or other rights to purchase or
obtain (including upon conversion, exchange, or exercise) any ownership
interests in the Fund;
(m) the Fund has not declared, set aside, or paid any dividend or made any
distribution with respect to its ownership interests (whether in cash or in
kind) or redeemed, purchased, or otherwise acquired any of its ownership
interests other than distributions consistent with past practices;
(n) the Fund has not experienced any material damage, destruction, or loss
(whether or not covered by insurance) to its property;
(o) the Fund has not made any loan to, or entered into any other transaction
with, any of the General Partners or the directors, officers, or employees of
the corporate General Partner outside the Ordinary Course of Business;
(p) the Fund has not entered into any employment contract or collective
bargaining agreement, written or oral, or modified the terms of any existing
such contract or agreement;
(q) the Fund has not made or pledged to make any charitable or other capital
contribution outside the Ordinary Course of Business;
(r) to the Knowledge of the General Partners, there has not been any other
material occurrence, event, incident, action, failure to act, or transaction
outside the Ordinary Course of Business involving the Fund; and
(s) the Fund is not under any legal obligation, whether written or oral, to
do any of the foregoing.
7.9 Undisclosed Liabilities. The Fund does not have any Liability (and, to
the Knowledge of the General Partners, there is no Basis for any present or
future action, suit, proceeding, hearing, investigation, charge, complaint,
claim, or demand against it giving rise to any Liability), except for (i)
Liabilities set forth on the face of the Most Recent Balance Sheet (rather than
in any notes thereto) and (ii) Liabilities which have arisen after the date of
the Most Recent Balance Sheet in the Ordinary Course of Business (none of which
results
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from, arises out of, relates to, is in the nature of, or was caused by any
breach of contract, breach of warranty, tort, infringement, or violation of
law) or which are not in the aggregate material.
7.10 Legal Compliance. Except as disclosed in the Fund SEC Documents, the
Fund has complied in all material respects with all applicable laws (including
rules, regulations, codes, plans, injunctions, judgments, orders, decrees,
rulings, and charges thereunder), the violation of which could cause a Material
Adverse Effect to the Fund, of federal, state, local, and foreign governments
(and all agencies thereof), and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has been filed or
commenced against it alleging any failure so to comply.
7.11 Tax Matters.
(a) The Fund has filed all material Tax Returns that it was required to
file, including, without limitation, any material Tax Returns required to be
filed with any state. All such Tax Returns were correct and complete in all
material respects. All Taxes owed by the Fund (as shown on any filed Tax
Return) have been paid. The Fund currently is not the beneficiary of any
extension of time within which to file any Tax Return. No claim has ever been
made by an authority in a jurisdiction where the Fund does not file Tax Returns
that it is or may be subject to taxation by that jurisdiction. There are no
Security Interests on any of the assets of the Fund that arose in connection
with any failure (or alleged failure) to pay any Tax.
(b) The Fund has withheld and, if due, paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any independent
contractor, creditor, Partner, or other third party.
(c) The General Partners do not expect any authority to assess any
additional Taxes for any period for which Tax Returns have been filed. There is
no dispute or claim concerning any Tax Liability of the Fund either (A) claimed
or raised by any authority in writing or (B) as to which any of the General
Partners has Knowledge. Section 7.11(c) of the Disclosure Schedule lists all
federal, state, local, and foreign income Tax Returns filed with respect to the
Fund for taxable periods ended on or after December 31, 1996, indicates those
Tax Returns that have been audited, and indicates those Tax Returns that
currently are the subject of audit. The General Partners have made available to
APF and the Operating Partnership correct and complete copies of all federal
income Tax Returns, examination reports, and statements of deficiencies
assessed against or agreed to by the Fund since December 31, 1996.
(d) The Fund has not waived any statute of limitations in respect of Taxes
or agreed to any extension of time with respect to a Tax assessment or
deficiency.
(e) The Fund has not filed a consent under Code (S)341(f) concerning
collapsible corporations. The Fund has not made any payments, is not obligated
to make any payments, and is not a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be
deductible under Code (S)280G. The Fund has disclosed on its federal income Tax
Returns all positions taken therein that could give rise to a substantial
understatement of federal income Tax within the meaning of Code (S)6662. The
Fund is not a party to any Tax allocation or sharing agreement. The Fund (A)
has not been a member of an Affiliated Group filing a consolidated federal
income Tax Return (other than a group the common parent of which was the Fund)
or (B) has any Liability for the Taxes of any Person (other than the Fund)
under Treas. Reg. (S)1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract, or otherwise.
7.12 Real Property.
Section 7.12(a) of the Disclosure Schedule lists and describes briefly all
real property owned, leased or subleased by the Fund. Section 7.12(b) of the
Disclosure Schedule lists all leases and subleases to which the Fund is a
party, and the General Partners have made available to APF correct and complete
copies of all such
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leases and subleases (as amended to date). With respect to each lease and
sublease listed in Section 7.12(b) of the Disclosure Schedule:
(a) the lease or, to the Knowledge of the General Partners, the sublease is
legal, valid, binding, enforceable, and in full force and effect, except as may
be affected by bankruptcy, insolvency, moratorium and the rights of creditors
generally;
(b) no consent is required with respect to the lease or sublease as a result
of this Agreement, and the actions contemplated by this Agreement will not
result in the change of any terms of the lease or sublease or otherwise affect
the ongoing validity of the lease or sublease;
(c) no party to the lease or sublease is in breach or default, and no event
has occurred which, with notice or lapse of time, would constitute a breach or
default or permit termination, modification, or acceleration thereunder;
(d) no party to the lease or, to knowledge of the General Partners, sublease
has repudiated any provision thereof;
(e) there are no disputes, oral agreements, or forbearance programs in
effect as to the lease or, to the Knowledge of the General Partners, sublease;
(f) the Fund has not assigned, transferred, conveyed, mortgaged, deeded in
trust, or encumbered any interest in the leasehold or subleasehold;
(g) all facilities leased or subleased thereunder have received all
approvals of governmental authorities (including licenses and permits) required
by the Fund in connection with the operation thereof and, to the Knowledge of
the General Partners, have been operated and maintained in all material
respects in accordance with applicable laws, rules, and regulations; and
(h) all facilities leased or subleased thereunder are supplied with
utilities and other services necessary for the operation of said facilities.
7.13 Intellectual Property.
(a) The Fund owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of the Fund as presently conducted. Each item of Intellectual
Property owned or used by the Fund immediately prior to the Closing hereunder
will be owned or available for use by the Fund on identical terms and
conditions immediately subsequent to the Closing hereunder. The Fund has taken
all necessary action to maintain and protect each item of Intellectual Property
that it owns or uses.
(b) The Fund has not Knowingly interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual Property
rights of third parties, and neither the General Partners nor any of the
corporate General Partner's directors and officers (and employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that the Fund
must license or refrain from using any Intellectual Property rights of any
third party). To the Knowledge of the General Partners, no third party has
interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Intellectual Property rights of the Fund which are material
to the operation of the Fund's business.
(c) The Fund has no patent or registration which has been issued to the Fund
with respect to any of its Intellectual Property.
(d) Section 7.13(d) of the Disclosure Schedule identifies each item of
Intellectual Property that any third party owns and that the Fund uses pursuant
to license, sublicense, agreement, or permission. The General
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Partners have made available to APF and the Operating Partnership correct and
complete copies of all such licenses, sublicenses, agreements, and permissions
(as amended to date).
(e) To the Knowledge of the General Partners, nothing will interfere with,
infringe upon, misappropriate, or otherwise come into conflict with, any
Intellectual Property rights of third parties as a result of the continued
operation of the Fund's business as presently conducted.
7.14 Tangible Assets. The Fund owns or leases all buildings, machinery,
equipment, and other tangible assets used in the conduct of its business as
presently conducted. Each such tangible asset is free from all material
defects, has been maintained in accordance with normal industry practice, is in
good operating condition and repair (subject to normal wear and tear), and is
suitable for the purposes for which it presently is used. The Most Recent
Balance Sheet sets forth all of the assets, in the opinion of the General
Partners, necessary to conduct the Fund's business as it is currently being
conducted.
7.15 Contracts. Section 7.15 of the Disclosure Schedule lists all of the
following types of contracts and other agreements to which the Fund is a party:
(a) any agreement (or group of related agreements) for the lease of personal
property to or from any Person providing for lease payments in excess of
$25,000 per annum;
(b) any agreement concerning a partnership or joint venture;
(c) any agreement (or group of related agreements) under which it has
created, incurred, assumed, or guaranteed any indebtedness for borrowed money,
or any capitalized lease obligation or under which it has imposed a Security
Interest on any of its assets, tangible or intangible;
(d) any agreement concerning confidentiality or noncompetition;
(e) any agreement with any General Partner or any of their Affiliates (other
than the Fund);
(f) any agreement under which it has advanced or loaned any amount to any of
the General Partners or the corporate General Partner's directors, officers,
and employees outside the Ordinary Course of Business; or
(g) any agreement under which the consequences of a default or termination
could have a Material Adverse Effect.
The General Partners have made available to APF and the Operating
Partnership a correct and complete copy of each written agreement listed in
Section 7.15 of the Disclosure Schedule (as amended to date) which is not
included as an exhibit to a Fund SEC Document and a written summary setting
forth the terms and conditions of each oral agreement referred to in Section
7.15 of the Disclosure Schedule. With respect to each agreement set forth in
Section 7.15 of the Disclosure Schedule or filed as an exhibit to a Fund SEC
Document: (A) the agreement is legal, valid, binding, enforceable, and in full
force and effect (except as may be affected by bankruptcy, insolvency,
moratorium or the rights of creditors generally); (B) the agreement will
continue to be legal, valid, binding, enforceable, and in full force and effect
on identical terms following the consummation of the transactions contemplated
hereby (except as may be affected by bankruptcy, insolvency, moratorium or the
rights of creditors generally); (C) no party is in breach or default, and no
event has occurred which with notice or lapse of time would constitute a breach
or default, or permit termination, modification, or acceleration, under the
agreement; and (D) no party has repudiated any provision of the agreement.
7.16 Notes and Accounts Receivable. All notes and accounts receivable of the
Fund are reflected properly on its books and records, are valid receivables
subject to no setoffs or counterclaims, and are current and collectible in
accordance with their terms at their recorded amounts, subject only to the
reserve for bad debts set forth on the face of the Most Recent Balance Sheet
(rather than in any notes thereto) as adjusted for the passage of time through
the Closing Date in accordance with the past custom and practice of the Fund.
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7.17 Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of the Fund.
7.18 Insurance. Section 7.18 of the Disclosure Schedule sets forth the
following information with respect to each insurance policy (including
policies providing property, casualty, liability, and workers' compensation
coverage and bond and surety arrangements) to which the Fund has been a party,
a named insured, or otherwise the beneficiary of coverage at any time within
the past five years (or such lesser periods as the Fund has actively engaged
in business or owned any material assets): (i) the name, address, and
telephone number of the agent; (ii) the name of the insurer, the name of the
policyholder, and the name of each covered insured; and (iii) the policy
number and the period of coverage. With respect to each current insurance
policy, to the Knowledge of the General Partners and the Fund: (A) the policy
is legal, valid, binding, enforceable, and in full force and effect; (B) the
policy will continue to be legal, valid, binding, enforceable, and in full
force and effect on identical terms following the consummation of the
transactions contemplated hereby; (C) neither the Fund nor any other party to
the policy is in breach or default (including with respect to the payment of
premiums or the giving of notices), and no event has occurred which, with
notice or the lapse of time, would constitute such a breach or default, or
permit termination, modification, or acceleration, under the policy; and (D)
no party to the policy has repudiated any provision thereof. The Fund has been
covered during the past five years (or such lesser periods as the Fund has
actively engaged in business or owned any material assets) by insurance in
scope and amount customary and reasonable for the businesses in which it has
engaged during the aforementioned period. Section 7.18 of the Disclosure
Schedule describes any self-insurance arrangements affecting the Fund.
7.19 Litigation. Section 7.19 of the Disclosure Schedule sets forth each
instance, not already disclosed in the Fund SEC Documents, in which the Fund
(i) is subject to any outstanding injunction, judgment, order, decree, ruling,
or charge or (ii) is a party to or, to its Knowledge, is threatened to be made
a party to any action, suit, proceeding, hearing, or investigation of, in, or
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator. None of the
actions, suits, proceedings, hearings, and investigations set forth in Section
7.19 of the Disclosure Schedule or the Fund SEC Documents could result in any
Material Adverse Effect on the Fund. None of the General Partners has any
reason to believe that any additional such action, suit, proceeding, hearing,
or investigation may be brought or threatened against the Fund.
7.20 Tenants. To the Knowledge of any of the General Partners, no current
tenant of a property owned by the Fund presently intends to materially change
its relationship with the owner of the property, either due to the
transactions contemplated hereby or otherwise.
7.21 Employees. The Fund does not have and has never had any employees,
officers or directors. The Fund is not and has never been a party to or had
any liability with respect to any Employee Benefit Plan.
7.22 Guaranties. The Fund is not a guarantor of and is not otherwise liable
for any liability or obligation (including indebtedness) of any other Person.
7.23 Registration Statement. The information furnished by the Fund for
inclusion in the Registration Statement will not, as of the effective date of
the Registration Statement, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
7.24 Environmental Matters. The Fund is currently in compliance with all
material environmental laws, ordinances, regulations and orders applicable to
its business or properties, and, to the Knowledge of the General Partners, the
tenants' present uses of the Fund's properties, whether leased or owned, do
not materially violate any such laws, ordinances, regulations or orders. The
Fund is not subject to any Liability or claim in connection with any
environmental law or any use, treatment, storage or disposal of any hazardous
substance or material or pollutant or any spill, leakage, discharge or release
of any hazardous substance or material or pollutant as a result of having
owned or operated any business prior to the Effective Time, which if a
violation existed would have a Material Adverse Effect on the Fund.
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7.25 Vote Required. The affirmative vote of at least a majority of the
outstanding Fund Interests is the only vote of any security holder in the Fund
(under applicable law or otherwise) required to approve the Merger, this
Agreement and the other transactions contemplated hereby.
7.26 Disclosure. The representations and warranties contained in this
Article VII do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Article VII not misleading.
ARTICLE VIII
Pre-Closing Covenants
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing.
8.1 General. Each of the Parties will use its reasonable best efforts to
take all action and to do all things necessary, proper, or advisable in order
to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions
set forth in Article X below).
8.2 Notices and Consents. The General Partners shall give any notices to
third parties and obtain any third party consents referred to in Sections 5.1,
5.2, 7.3 and 7.4 above and the related sections of the Disclosure Schedule.
APF, the OP General Partner and the Operating Partnership shall give any
notices to third parties and obtain any third party consents referred to in
Sections 6.4 and 6.5 above. Each of the Parties shall give any notices to, make
any filings with, and use its reasonable best efforts to obtain any
authorizations, consents, and approvals of governments and governmental
agencies in connection with the matters referred to in Sections 5.1, 6.4 and
7.3 above.
8.3 Maintenance of Business; Prohibited Acts. During the period from the
date of this Agreement to the Effective Time, the General Partners will not,
and will not cause the Fund to, take any action that adversely affects the
ability of the Fund (i) to pursue its business in the ordinary course, (ii) to
seek to preserve intact its current business organizations, and (iii) to
preserve its relationships with its tenants; and the General Partners will not
allow the Fund to, without the OP General Partner's prior written consent,
which consent shall not be unreasonably withheld:
(a) issue, deliver, sell, dispose of, pledge or otherwise encumber, or
authorize or propose the issuance, delivery, sale, disposition or pledge or
other encumbrance of (i) any additional ownership interests (including the Fund
Interests), or any securities or rights convertible into, exchangeable for or
evidencing the right to subscribe for any of its ownership interests, or any
rights, warrants, options, calls, commitments or any other agreements of any
character to purchase or acquire any of its ownership interests or any other
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for any of its ownership interests, or (ii) any other securities
in respect of, in lieu of or in substitution for the Fund Interests outstanding
on the date hereof;
(b) redeem, purchase or otherwise acquire, or propose to redeem, purchase or
otherwise acquire, any of its outstanding securities (including the Fund
Interests);
(c) split, combine, subdivide or reclassify any of its ownership interests
or otherwise make any payments to the Partners; provided, however, that nothing
shall prohibit: (i) the payment of any ordinary distribution in respect of its
ownership interests at such times and in such manner and amount as may be
consistent with the Fund's past practice (which in any event shall include any
and all compensation paid or payable or expenses reimbursed or reimbursable for
the period from December 31, 1998 through the Effective Time, to the extent not
otherwise paid or distributed to the Partners), or (ii) any distribution of
property necessary for the representation and warranty set forth in Section
7.11 to be true and correct;
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(d) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization (other
than the Merger);
(e) make any acquisition, by means of merger, consolidation or otherwise, of
any direct or indirect ownership interest in or assets comprising any business
enterprise or operation outside the Ordinary Course of Business;
(f) other than as may be necessary to consummate the Merger, adopt any
amendments to its certificate of limited partnership or limited partnership
agreement;
(g) incur any indebtedness for borrowed money or guarantee such indebtedness
or agree to become contingently liable, by guaranty or otherwise, for the
obligations or indebtedness of any other person or make any loans, advances or
capital contributions to, or investments in, any other corporation, any
partnership or other legal entity or to any other persons, outside the Ordinary
Course of Business;
(h) engage in the conduct of any business the nature of which is materially
different from the business in which the Fund is currently engaged;
(i) enter into any agreement providing for acceleration of payment or
performance or other consequence as a result of a change of control of the
Fund;
(j) forgive any indebtedness owed to the Fund or convert or contribute by
way of capital contribution any such indebtedness owed;
(k) authorize or enter into any agreement providing for management services
to be provided by the Fund to any third party or an increase in management fees
paid by any third party under existing management agreements;
(l) mortgage, pledge, encumber, sell, lease or transfer any material assets
of the Fund except as contemplated by this Agreement;
(m) authorize or announce an intention to do any of the foregoing, or enter
into any contract, agreement, commitment or arrangement to do any of the
foregoing; or
(n) perform any act or omit to take any action that would make any of the
representations made above inaccurate or materially misleading as of the
Effective Time.
8.4 Full Access. The General Partners shall permit representatives of APF
and the OP General Partner to have full access at all reasonable times, and in
a manner so as not to interfere with the normal business operations of the Fund
to all premises, properties, personnel, books, records (including Tax records),
contracts, and documents of or pertaining to the Fund. APF, the OP General
Partner and the Operating Partnership shall permit representatives of the
General Partners and the Fund to have full access at all reasonable times, and
in a manner so as not to interfere with the normal business operations of APF
and the Operating Partnership to all premises, properties, personnel, books,
records (including Tax records), contracts, and documents of or pertaining to
APF, the OP General Partner and the Operating Partnership. The Parties agree
that any information obtained in connection with the exercise of their rights
pursuant to this Section 8.4 shall be Confidential Information for purposes of
this Agreement.
8.5 Notice of Developments. Each Party will give prompt written notice to
the others of any material adverse development causing a breach of any of its
own representations and warranties in Articles V, VI or VII above, as
applicable. No disclosure by any Party pursuant to this Section 8.5, however,
shall be deemed to amend or supplement the Disclosure Schedule or to prevent or
cure any misrepresentation, breach of warranty, or breach of covenant.
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8.6 Reorganization. From and after the date hereof and prior to the
Effective Time, except for the transactions contemplated or permitted herein,
each of APF, the Operating Partnership, the General Partners and the Fund shall
use reasonable efforts to conduct its business and file Tax Returns in a manner
that would not jeopardize the qualification of APF after the Effective Time as
a real estate investment trust as defined within Section 856 of the Code.
8.7 Fund Partner Approval. The General Partners hereby agree to vote the
Fund Interests owned by them in favor of this Agreement and the transactions
contemplated hereby and agree, subject to the satisfaction of their fiduciary
duties as general partners under Florida law, as reasonably determined by the
General Partners, to recommend that the limited Partners of the Fund vote their
Fund Interests in favor of this Agreement and the transactions contemplated
hereby.
8.8 Delivery of Certain Financial Statements.
(a) In addition to disclosure in Fund SEC Documents required to be filed by
the Fund, promptly after they are available, and in any event not later than
the tenth business day prior to the Closing Date, the Fund shall provide to APF
and the OP General Partner with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by the Fund and each of the
General Partners that such balance sheets (including the related notes, if any)
present fairly, in all material respects, the financial position of the Fund as
of their respective dates, and the other related statements (including the
related notes, if any) included therein present fairly, in all material
respects, the results of its operations and cash flows for the respective
periods or as of the respective dates set forth therein, all in conformity with
GAAP consistently applied during the periods involved, except as otherwise
stated in the notes thereto, subject to normal year-end audit adjustments.
(b) In addition to disclosure in APF SEC Documents required to be filed by
APF, promptly after they are available, and in any event not later than the
tenth business day prior to the Closing Date, APF shall provide to the Fund and
the General Partners with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by APF that such balance
sheets (including the related notes, if any) present fairly, in all material
respects, the financial position of APF as of their respective dates, and the
other related statements (including the related notes, if any) included therein
present fairly, in all material respects, the results of its operations and
cash flows for the respective periods or as of the respective dates set forth
therein, all in conformity with GAAP consistently applied during the periods
involved, except as otherwise stated in the notes thereto, subject to normal
year-end audit adjustments.
8.9 State Takeover Statutes. APF, the APF Board of Directors, the Operating
Partnership, the Fund and the General Partners shall (i) take all action
necessary so that no "fair price," "business combination," "moratorium,"
"control share acquisition" or any other anti-takeover statute or similar
statute enacted under state or federal laws of the United States or similar
statute or regulation, including without limitation, the control share
acquisition provisions of Section 3-701 et seq. of the Maryland GCL and the
business combination provisions of Section 3-601 et seq of the Maryland GCL
(each, a "Takeover Statute"), is or becomes applicable to the Merger, this
Agreement or any of the other transactions contemplated by this Agreement, and
(ii) if any Takeover Statute becomes applicable to the Merger, this Agreement
or any other transaction contemplated by this Agreement, take all action
necessary to minimize the effect of such Takeover Statute on the Merger and the
other transactions contemplated by this Agreement.
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8.10 Exclusivity. None of the General Partners shall solicit, initiate, or
encourage the submission of any proposal or offer from any Person relating to
the acquisition of any capital stock or other voting securities or any
substantial portion of the assets of the Fund (including any acquisition
structured as a merger, consolidation, or share exchange). The General Partners
shall notify APF and the Operating Partnership immediately if any Person makes
any proposal, offer, inquiry, or contact with respect to any of the foregoing.
8.11 Listing. APF shall effect, at or before the issuance of any APF Common
Shares issued as Share Consideration pursuant to Article IV, authorization for
listing or quotation of such APF Common Shares on the NYSE, subject to official
notice of issuance.
8.12 Maintenance of APF's Business. During the period from the date of this
Agreement to the Effective Time, APF will not take any action that adversely
affects the ability of APF (i) to pursue its business in the ordinary course,
(ii) to seek to preserve intact its current business organizations (iii) to
preserve its relationships with its tenants and (iv) will not take any action
to affect it status as a REIT for federal income tax purposes.
8.13 Registration of Share Consideration. APF shall cause the Registration
Statement to become effective prior to the Closing Date.
8.14 Delivery and Approval of Disclosure Schedule and Schedule 1. Within
fifteen (15) business days after the date of this Agreement the General
Partners shall deliver to APF the Disclosure Schedule and APF shall deliver to
the General Partners Schedule 1. Within fifteen (15) business days after APF
receives the Disclosure Schedule it shall give the General Partners notice
either that the disclosures in the Disclosure Schedule are, as to substance,
satisfactory to APF, in its sole and absolute discretion, or that they are not
satisfactory and that APF terminate this Merger Agreement pursuant to Section
11.2. Likewise, within fifteen (15) business days after the General Partners
receive Schedule 1, the General Partners shall give APF notice either that the
disclosures in Schedule 1 are, as to substance, satisfactory to them, in their
sole and absolute discretion, or that they are not satisfactory and that such
General Partners terminate the Agreement pursuant to Section 11.2. In the case
of both APF and the General Partners, the failure of either to give the notice
specified above within the applicable fifteen (15) business day period shall
constitute approval of the Disclosure Schedule or Schedule 1, as applicable.
8.15 Certain Acquisitions. APF or its Subsidiaries shall acquire CNL Fund
Advisors, Inc., CNL Financial Corp. and CNL Financial Services, Inc.
(collective, the "CNL Restaurant Services Group") substantially in accordance
with the terms and conditions set forth in their respective merger agreements
dated on or about the date hereof or such other terms that are mutually agreed
to by the parties.
ARTICLE IX
Post-Closing Covenants
The Parties agree as follows with respect to the period following the
Closing:
9.1 General. In the event that at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of the Parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request, all at the sole cost and expense of the requesting
Party (unless the requesting Party is entitled to indemnification therefor
under Article XII below). The General Partners acknowledge and agree that from
and after the Closing, the Surviving Partnership will be entitled to possession
of all documents, books, records (including Tax records), agreements, and
financial data of any sort relating to the Fund.
9.2 Litigation Support. In the event and for so long as any Party actively
is contesting or defending against any action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand in connection
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with (i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Fund, each of the other Parties will
cooperate with it and its counsel in the contest or defense, make available
their personnel, and provide such testimony and access to their books and
records as shall be necessary in connection with the contest or defense, all at
the sole cost and expense of the contesting or defending Party (unless the
contesting or defending Party is entitled to indemnification therefor under
Article XII below).
9.3 Transition. The General Partners will not take any action that is
designed or intended to have the effect of discouraging any tenant, lessor,
licensor, customer, supplier, or other business associate of the Fund from
maintaining the same business relationships with the Surviving Partnership
after the Closing as it maintained with the Fund prior to the Closing.
9.4 Confidentiality.
(a) The General Partners and the Fund will treat and hold as such all of the
Confidential Information, refrain from using any of the Confidential
Information except in connection with this Agreement, and deliver promptly to
APF or the OP General Partner, as applicable, or destroy, at the request and
option of APF or the OP General Partner, as applicable, all tangible
embodiments (and all copies) of the Confidential Information which are in its
possession. In the event that any of the General Partners or the Fund is
requested or required (by oral question or request for information or documents
in any legal proceeding, interrogatory, subpoena, civil investigative demand,
or similar process) to disclose any Confidential Information, such General
Partner or the Fund, as applicable, will notify APF or the OP General Partner,
as applicable, promptly of the request or requirement so that such Party may
seek an appropriate protective order or waive compliance with the provisions of
this Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, such General Partner or the Fund is, on the advice of
counsel, compelled to disclose any Confidential Information to any tribunal or
else stand liable for contempt, then such General Partner or the Fund, as
applicable, may disclose the Confidential Information to such tribunal;
provided, however, that such General Partner or the Fund, as applicable, shall
use its best efforts to obtain, at the request of APF or the OP General
Partner, as applicable, an order or other assurance that confidential treatment
will be accorded to such portion of the Confidential Information required to be
disclosed as APF or the OP General Partner, as applicable, shall designate.
(b) APF, the OP General Partner and the Operating Partnership will treat and
hold as such all of the Confidential Information, refrain from using any of the
Confidential Information except in connection with this Agreement, and, if the
Closing does not occur, deliver promptly to the Fund General Partners, as
applicable, or destroy, at the request and option of the Fund or the General
Partners, as applicable, all tangible embodiments (and all copies) of the
Confidential Information which are in its possession. Prior to the Closing and
if the Closing does not occur, in the event that any of APF, the OP General
Partner or the Operating Partnership is requested or required (by oral question
or request for information or documents in any legal proceeding, interrogatory,
subpoena, civil investigative demand, or similar process) to disclose any
Confidential Information, APF, the OP General Partner or the Operating
Partnership, as applicable, will notify the Fund or the General Partners, as
applicable, promptly of the request or requirement so that such Party may seek
an appropriate protective order or waive compliance with the provisions of this
Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, APF, the OP General Partner or the Operating Partnership is,
on the advice of counsel, compelled to disclose any Confidential Information to
any tribunal or else stand liable for contempt, then APF, the OP General
Partner or the Operating Partnership, as applicable, may disclose the
Confidential Information to such tribunal; provided, however, that APF, the OP
General Partner or the Operating Partnership, as applicable, shall use its best
efforts to obtain, at the request of the Fund or the General Partners, as
applicable, an order or other assurance that confidential treatment will be
accorded to such portion of the Confidential Information required to be
disclosed as the Fund or the General Partners, as applicable, shall designate.
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9.5 Covenant Not to Compete. Unless employed by the Surviving Partnership or
APF after the Closing, for a period of three years from and after the Closing
Date, none of the General Partners will engage directly or indirectly in any
business serving the restaurant industry that the Surviving Partnership or APF
conducts as of the Closing Date, except existing restaurant businesses and
properties currently owned or advised by affiliates of CNL Group, Inc.,
including CNL Advisory Services, Inc. In addition, and not in lieu of the
foregoing, for a period of three years from and after the Closing Date, James
M. Seneff, Jr. hereby covenants and agrees not to engage or participate,
directly or indirectly, as principal, agent, executive, employee, employer,
consultant, stockholder, partner or in any other individual capacity
whatsoever, in the conduct or management of, or own any stock or any other
equity investment in or debt of, any business that relates to the ownership,
acquisition or development of "restaurant operations"; provided, however, for
the purposes of this Agreement, "restaurant operations" shall not include the
ownership, acquisition or development of hotel and health care properties that
contain restaurant operations and those entities set forth on Schedule 9.5, and
provided further, the noncompetition covenant shall not operate to preclude Mr.
Seneff's ownership of APF Common Shares and of up to 5% of the equity
securities of companies whose common stock is publicly traded that are engaged
in owning, operating, franchising or making are engaged in owning, operating,
franchising or making loans to restaurants and restaurant companies. If the
final judgment of a court of competent jurisdiction declares that any term or
provision of this Section 9.5 is invalid or unenforceable, the Parties agree
that the court making the determination of invalidity or unenforceability shall
have the power to reduce the scope, duration, or area of the term or provision,
to delete specific words or phrases, or to replace any invalid or unenforceable
term or provision with a term or provision that is valid and enforceable and
that comes closest to expressing the intention of the invalid or unenforceable
term or provision, and this Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment may be appealed.
9.6 Tax Matters.
(a) If there is an adjustment to any item reported on a pre-closing Tax
Return that results in an increase in the Taxes payable by the Fund or any of
the General Partners, and such adjustment results in a corresponding adjustment
to items reported on a post-closing Tax Return with the result that the Taxes
payable either by APF, any of its Subsidiaries, or by any consolidated group of
companies of which APF or any Subsidiary are then members are reduced, or a
refund of Taxes is increased, then any APF Indemnity Claim that the General
Partners or Fund owes APF or the Operating Partnership pursuant to Article XII
below shall be reduced by the amount by which such Taxes are reduced or such
refunds are increased.
(b) Any refund or credit of Taxes (including any statutory interest thereon)
received by APF or any of its Subsidiaries attributable to periods ending on or
prior to or including the Closing Date that were paid by the Fund pursuant to
this Agreement shall reduce any APF Indemnity Claim that the General Partners
or the Fund owes APF pursuant to Article XII below by an amount equal to the
amount of such refund or credit.
(c) In the event that APF or any of its Subsidiaries receives notice,
whether orally or in writing, of any pending or threatened federal, state,
local or foreign tax examinations, claims settlements, proposed adjustments or
related matters with respect to Taxes that could affect the Fund or the General
Partners, or if the Fund or any of the General Partners receives notice of such
matters that could affect APF or any of its Subsidiaries, the party receiving
such notice shall notify in writing the potentially affected party within ten
(10) days thereof. The failure of either party to give the notice required by
this Section shall not impair such party's rights under this Agreement except
to the extent that the other party demonstrates that it has been damaged
thereby.
(d) The General Partners shall have the responsibility for, and shall be
entitled, at their expense, to contest, control, compromise, reasonably settle
or appeal all proceedings with respect to pre-closing Taxes.
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ARTICLE X
Conditions to Obligation to Close
10.1 Conditions to Each Party's Obligation. The respective obligations of
APF, the OP General Partner, the Operating Partnership, the Fund and the
General Partners to consummate the transactions contemplated by this Agreement
are subject to the fulfillment at or prior to the Closing Date of each of the
following conditions, which conditions may be waived upon the written consent
of APF and the General Partners:
(a) Governmental Approvals and Consents. The Parties shall have received all
other authorizations, consents, and approvals of governments and governmental
agencies referred to in Sections 5.1, 6.4, and 7.3 above.
(b) No Injunction or Proceedings. There shall not be any action, suit, or
proceeding pending or threatened before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction or
before any arbitrator wherein an unfavorable injunction, judgment, order,
decree, ruling, or charge would, in the reasonable judgment of APF or the
General Partners, (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions contemplated
by this Agreement to be rescinded following consummation, or (C) materially
adversely affect the right of the Surviving Partnership to own its assets and
to operate its businesses (and no such injunction, judgment, order, decree,
ruling, or charge shall be in effect).
(c) No Suspension of Trading, Etc. At the Effective Time, there shall be no
declaration of a banking moratorium by federal or state authorities or any
suspension of payments by banks in the United States (whether mandatory or not)
or of the extension of credit by lending institutions in the United States, or
commencement of war or other international, armed hostility or national
calamity directly or indirectly involving the United States, which war,
hostility or calamity (or any material acceleration or worsening thereof), in
the sole judgment of APF, would have a Material Adverse Effect on the Fund or,
in the sole judgment of any of the General Partners, would have a Material
Adverse Effect on APF.
(d) Shareholder/Partner Approvals. The stockholders of APF shall have
approved APF's Amended and Restated Articles of Incorporation in the form
attached hereto as Exhibit A, and the Partners of the Fund shall have approved
the Merger Proposal, amendments to the partnership agreement, if any.
(e) Registration of Share Consideration. The Registration Statement shall
have become effective under the Securities Act and shall not be the subject of
any stop order or proceedings by the SEC seeking a stop order.
10.2 Conditions to Obligation of APF, the OP General Partner and the
Operating Partnership. The obligations of APF, the OP General Partner and the
Operating Partnership to consummate the transactions to be performed by them in
connection with the Closing are subject to satisfaction on or prior to December
31, 1999 of the following conditions:
(a) the General Partners and the Fund shall have delivered to APF and the OP
General Partner a certificate to the effect that:
(i) the representations and warranties set forth in Article V and
Article VII above are true and correct in all material respects at and as
of the Closing Date;
(ii) the General Partners and the Fund have performed and complied with
all of their covenants hereunder in all material respects at and as of the
Closing Date;
(iii) the General Partners and the Fund have procured all of the
material third-party consents specified in, respectively, Section 5.2 and
Section 7.4 above and the related sections of the Disclosure Schedule; and
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(iv) no action, suit, or proceeding is pending or, to their Knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation, or
(C) affect adversely the right of the Surviving Partnership to own its
assets and to operate its businesses (and no such injunction, judgment,
order, decree, ruling, or charge is in effect);
Notwithstanding the foregoing, APF's obligation to close as a result of a
breach of the representations and warranties contained in Section 7.24 shall
be governed solely by Section 10.2(e) below.
(b) since December 31, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of the Fund, such determination to be made in the
reasonable discretion of APF;
(c) APF and the Operating Partnership shall have received an opinion dated
as of the Closing Date from Baker and Hostetler LLP, counsel to the General
Partners and the Fund, taken as a whole, in form and substance reasonably
satisfactory to APF and the Operating Partnership;
(d) APF shall have received the Disclosure Schedule and approved it in
accordance with Section 8.14;
(e) There shall not exist an unlawful environmental condition on one or
more properties owned by the Fund, which in the opinion of a mutually
acceptable environmental engineer or consultant, would require APF to expend
in excess of $3,700,097 in order to remediate such unlawful environmental
condition and cause the subject property or properties to comply with
applicable environmental laws, ordinances, regulations or orders; and
(f) If each of the CNL Income Funds approves its respective Proposed
Acquisition, Merrill Lynch & Co. shall not have withdrawn its Fairness Opinion
issued in connection with the Merger. If a Proposed Acquisition is not
approved by the applicable CNL Income Fund, then the Special Committee of the
Board of Directors of APF shall have received a fairness opinion addressed to
APF and its stockholders from Merrill Lynch & Co. as to the fairness of the
Proposed Acquisitions that were approved by the respective CNL Income Fund,
including the consideration to be paid in connection therewith, to APF and its
stockholders from a financial point of view.
APF, the OP General Partner and the Operating Partnership may waive any
condition specified in this Section 10.2 if they execute a writing so stating
at or prior to the Closing.
10.3 Conditions to Obligation of the General Partners and the Fund. The
obligations of the General Partners and the Fund to consummate the
transactions to be performed by them in connection with the Closing are
subject to satisfaction on or prior to December 31, 1999 of the following
conditions:
(a) APF, the OP General Partner and the Operating Partnership shall have
delivered to the General Partners and the Fund a certificate to the effect
that:
(i) the representations and warranties set forth in Article VI above are
true and correct in all material respects at and as of the Closing Date;
(ii) APF, the OP General Partner and the Operating Partnership have
performed and complied with all of their covenants hereunder in all
material respects through the Closing; and
(iii) no action, suit, or proceeding is pending or, to their knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement or (B) cause any of the
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transactions contemplated by this Agreement to be rescinded following
consummation (and no such injunction, judgment, order, decree, ruling, or
charge is in effect);
(b) APF shall have delivered to the Fund for distribution to the Partners
the Share Consideration pursuant to Section 4.2 and, as applicable, the cash
and Notes pursuant to Section 4.4;
(c) since September 30, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of APF;
(d) APF shall have acquired the CNL Restaurant Services Group;
(e) the General Partners shall have received Schedule 1 and approved it in
accordance with Section 8.14;
(f) the APF Common Shares shall have been approved for listing on the NYSE
subject to official notice of issuance;
(g) the General Partners shall have received an opinion dated as of the
Closing Date from Shaw Pittman Potts & Trowbridge, counsel to APF and the
Operating Partnership, in form and substance reasonably satisfactory to the
General Partners; and
(h) Legg Mason Wood Walker Incorporated shall not have withdrawn the Fund
Fairness Opinion.
The General Partners and the Fund may waive any condition specified in this
Section 10.3 if they execute a writing so stating at or prior to the Closing.
ARTICLE XI
Termination
11.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by the General Partners, the limited partners of the Fund,
the OP General Partner or the stockholders of APF, respectively, either by the
mutual written consent of APF, the OP General Partner and the General Partners
or by mutual action of the General Partners and the Boards of Directors of
each of the corporate General Partner and the OP General Partner and the
Special Committee.
11.2 Termination by Individual Parties. This Agreement may be terminated
and the Merger may be abandoned (a) by action of the Special Committee and the
Board of Directors of the OP General Partner in the event of a failure of a
condition to the obligations of APF and the Operating Partnership set forth in
Section 10.2 of this Agreement; (b) by the General Partners in the event of a
failure of a condition to the obligations of General Partners or the Fund set
forth in Section 10.3 of this Agreement; (c) any Party if the Merger shall not
have occurred by December 31, 1999 or (d) if a United States federal or state
court of competent jurisdiction or United States federal or state governmental
agency shall have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other action
shall have become final and non-appealable; provided, in the case of a
termination pursuant to clause (a) or (b) above, that the terminating party
shall not have breached in any material respect its obligations under this
Agreement in any manner that shall have proximately contributed to the
occurrence of the failure referred to in said clause.
11.3 Effect of Termination and Abandonment. In the event of termination of
this Agreement and abandonment of the Merger pursuant to this Article XI, no
Party hereto (or any of its directors or officers) shall have any liability or
further obligation to any other Party to this Agreement, except that nothing
herein will relieve any Party from liability for any breach of this Agreement
or the obligations set forth in Sections 9.4 and 13.11.
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ARTICLE XII
Indemnification
12.1 Indemnity Obligations of the General Partners and the Fund. Subject to
Sections 12.5 and 12.6 hereof, each of the General Partners severally, in
accordance with its percentage interest in the Share Consideration and limited
in amount to the value of the APF Common Shares received by it, based upon the
average per share closing price of the APF Common Shares for the first twenty
trading days after the APF Common Shares are listed on NYSE (the "20 Day
Average Price"), agree to indemnify and hold APF, the OP General Partner and
the Surviving Partnership harmless from, and to reimburse APF, the OP General
Partner and the Surviving Partnership for, any APF Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "APF Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, obligation, suit, action, fee, cost, or expense
of any nature whatsoever resulting from (i) any breach of any representation
and warranty of any of the General Partners or the Fund which is contained in
this Agreement or any Schedule, Exhibit, or certificate delivered pursuant
hereto; (ii) any breach or non-fulfillment of, or any failure to perform, any
of the covenants, agreements, or undertakings of any of the General Partners or
the Fund which are contained in or made pursuant to this Agreement; and (iii)
all interest, penalties, costs, and expenses (including, without limitation,
all reasonable fees and disbursements of counsel) arising out of or related to
any indemnification made under this Section 12.1.
12.2 Indemnity Obligations of APF, the OP General Partner and the Operating
Partnership. Subject to Sections 12.5 and 12.6 hereof, APF, the OP General
Partner and the Operating Partnership (including in its capacity as the
Surviving Partnership) hereby jointly and severally agree to indemnify and hold
each of the General Partners and the Fund harmless from, and to reimburse each
of the General Partners and the Fund for, any Fund Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "Fund Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, suit, action, fee, cost, or expense of any nature
whatsoever incurred by any of the General Partners or the Fund resulting from
(i) any breach of any representation and warranty of APF, the OP General
Partner or the Operating Partnership which is contained in this Agreement or
any Schedule, Exhibit, or certificate delivered pursuant hereto; (ii) any
breach or non-fulfillment of, or failure to perform, any of the covenants,
agreements, or undertakings of APF, the OP General Partner and the Operating
Partnership which are contained in or made pursuant to the terms and conditions
of this Agreement; and (iii) all interest, penalties, costs, and expenses
(including, without limitation, all reasonable fees and disbursements of
counsel) arising out of or related to any indemnification made under this
Section 12.2.
12.3 Appointment of Representative. James M. Seneff, Jr. is hereby appointed
as the exclusive agent of the General Partners and the Fund to act on their
behalf with respect to any and all Fund Indemnity Claims and any and all APF
Indemnity Claims arising under this Agreement or such other representative as
may be hereafter appointed by the General Partners. Such agent is herein
referred to as the "Representative." The Representative shall take, and the
General Partners agree that the Representative shall take, any and all actions
which the Representative believes are necessary or appropriate under this
Agreement for and on behalf of the General Partners and the Fund, as fully as
if such parties were acting on their own behalf, including, without limitation,
asserting Fund Indemnity Claims against APF, the OP General Partner and the
Operating Partnership, defending all APF Indemnity Claims, consenting to,
compromising, or settling all Fund Indemnity Claims and APF Indemnity Claims,
conducting negotiations with APF, the OP General Partner and the Operating
Partnership and their representatives regarding such claims, taking any and all
other actions specified in or contemplated by this Agreement and engaging
counsel, accountants, or other representatives in connection with the foregoing
matters. APF, the OP General Partner and the Operating Partnership shall have
the right to rely upon all actions taken or omitted to be taken by the
Representative pursuant to this Agreement, all of which actions or omissions
shall be legally binding upon each of the General Partners and the Fund. The
Representative, acting pursuant to this Section 12.3, shall not be liable to
any of the General Partners or the Fund for any act or omission, except in
connection with any act or omission that was the result of the Representative's
bad faith or gross negligence.
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12.4 Notification of Claims. Subject to the provisions of Section 12.5, in
the event of the occurrence of an event which any Party asserts constitutes an
APF Indemnity Claim or a Fund Indemnity Claim, as applicable, such Party shall
provide the indemnifying party with prompt notice of such event and shall
otherwise make available to the indemnifying party all relevant information
which is material to the claim and which is in the possession of the
indemnified party. If such event involves the claim of any third party (a
"Third-Party Claim"), the indemnifying party shall have the right to elect to
join in the defense, settlement, adjustment, or compromise of any such Third-
Party Claim, and to employ counsel to assist such indemnifying party in
connection with the handling of such claim, at the sole expense of the
indemnifying party, and no such claim shall be settled, adjusted or
compromised, or the defense thereof terminated, without the prior consent of
the indemnifying party unless and until the indemnifying party shall have
failed, after the lapse of a reasonable period of time, but in no event more
than 30 days after written notice to it of the Third-Party Claim, to join in
the defense, settlement, adjustment, or compromise of the same. An indemnified
party's failure to give timely notice or to furnish the indemnifying party with
any relevant data and documents in connection with any Third-Party Claim shall
not constitute a defense (in part or in whole) to any claim for indemnification
by such Party, except and only to the extent that such failure shall result in
any material prejudice to the indemnifying party. Any indemnifying party may
elect, at such Party's sole expense, to assume control of the defense,
settlement, adjustment, or compromise of any Third-Party Claim, with counsel
reasonably acceptable to the indemnified parties, insofar as such claim relates
to the liability of the indemnifying party, provided that such indemnifying
party shall obtain the consent of all indemnified parties before entering into
any settlement, adjustment, or compromise of such claims, or ceasing to defend
against such claims, unless such settlement is a cash settlement and contains
an unconditional release of the indemnified party from all existing and future
claims with respect to the matter being contested. In connection with any
Third-Party Claim, the indemnified party, or the indemnifying party if it has
assumed the defense of such claim pursuant to the preceding sentence, shall
diligently pursue the defense of such Third-Party Claim.
12.5 Survival. All representations and warranties, and, except as otherwise
provided in this Agreement, all covenants and agreements of the parties
contained in or made pursuant to this Agreement, and the rights of the parties
to seek indemnification with respect thereto, shall survive until eighteen
months from the Closing Date; provided, however, the representations and
warranties contained in Sections 6.2, 6.3 and 7.11 shall survive until the
expiration of the applicable statute of limitations with respect to the matters
covered thereby. No claim shall be made after the applicable survival period.
12.6 Limitations. Notwithstanding the foregoing, any claim by an indemnified
party against any indemnifying party under this Agreement shall be payable by
the indemnifying party only in the event, and to the extent, that the
accumulated amount of the claims in respect of such indemnifying party's
obligations to indemnify under this Agreement shall and the other claims
described in Article XIII exceed in the aggregate the dollar amount specified
in Article XIII. As to APF Indemnity Claims, the liability of each General
Partner shall be limited as provided in Article XIII.
12.7 Exclusive Provisions; No Rescission. Except as set forth in this
Agreement, no Party hereto is making any representation, warranty, covenant, or
agreement with respect to the matters contained herein. Anything herein to the
contrary notwithstanding, no breach of any representation, warranty, covenant,
or agreement contained herein or in any certificate or other document delivered
pursuant hereto relating to the Merger shall give rise to any right on the part
of any Party hereto, after the consummation of the Merger, to rescind this
Agreement or the transactions contemplated by this Agreement. Following the
consummation of the Merger, the rights of the Parties under the provisions of
this Article XII shall be the sole and exclusive remedy available to the
Parties with respect to claims, assertions, events, or proceedings arising out
of or relating to the Merger.
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ARTICLE XIII
Limitation of Liability
13.1 Threshold. Notwithstanding anything to the contrary stated in this
Agreement, in no event (i) shall the General Partners or any of them have any
liability to APF and/or the OP General Partner and the Surviving Partnership on
account of any APF Indemnity Claim or for any claim for breach of warranty or
for misrepresentation, or any other claim whatsoever arising under this
Agreement or in connection with the transaction contemplated herein
(individually a "Claim" and collectively, "Claims") or for any loss, damage,
deficiency, liability, obligation, suit, action, judgment, fee, cost or expense
of any nature whatsoever directly resulting from Claims (collectively,
"Losses") unless, until and only to the extent that the accumulated amount of
all Losses exceeds the amount of $370,010 in the aggregate (the "Threshold")
nor (ii) shall the individual or aggregate liability of the General Partners on
account of Claims and Losses exceed the value of APF Common Shares actually
issued to the General Partners in the Merger valued at the 20 Day Average
Price. To the extent that any Claim is asserted against more than one General
Partner, each General Partner shall be liable only for such General Partner's
proportionate share of the Claim based on the percentage that the APF Common
Shares received by such General Partner in the Merger is of the total APF
Commons Shares comprising the Share Consideration. Any Claim against a General
Partner, including an APF Indemnity Claim, may be satisfied by such General
Partner, in its sole discretion, by surrendering to the claimant(s) APF Common
Shares at a value equal to the closing price per share of such shares on the
NYSE on the last trading day preceding the date such APF Common Shares are
surrendered.
13.2 Special Indemnification. APF agrees to indemnify, defend and hold
harmless the General Partners against any loss, damage, deficiency, liability,
obligation, suit, action, judgment, fee, cost or expense of any nature
whatsoever, including reasonable attorneys' fees, arising after the Effective
Time that would have arisen in their capacity as General Partners of the Fund
had the Merger not been consummated and that are the result of APF's alleged
actions or inactions. The Threshold described in Section 13.1 above shall not
apply to APF obligations to indemnify the General Partners pursuant to this
Section 13.2.
ARTICLE XIV
Miscellaneous
14.1 Press Releases and Public Announcements. No Party shall issue any press
release or make any public announcement relating to the subject matter of this
Agreement prior to the Closing without the prior written approval of APF and
the General Partners; provided, however, that any Party may make any public
disclosure it believes in good faith is required by applicable law or any
listing or trading agreement concerning its publicly-traded securities (in
which case the disclosing Party will use its best efforts to advise the other
Parties prior to making the disclosure).
14.2 No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
14.3 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
14.4 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior
written approval of APF and the General Partners.
14.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
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14.6 Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.7 Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given, as of the
date two business days after mailing, if it is sent by registered or certified
mail, return receipt requested, postage prepaid, and addressed to the intended
recipient as set forth below:
If to the Fund or the General Partners:
c/o James M. Seneff, Jr.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 423-2894
With copy to:
Baker & Hostetler LLP
Sun Trust Center, Suite 2300
200 South Orange Avenue
Orlando, Florida 32801
Attn: Kenneth C. Wright, Esq.
Telecopy: (407) 841-0168
If to APF or the Operating Partnership:
Curtis B. McWilliams
Executive Vice President
CNL American Properties, Inc.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 650-1000
With copy to:
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Attn: John M. McDonald, Esq.
Telecopy: (202) 663-8007
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth
above using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving the other Parties notice in the manner herein set forth.
14.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of Florida
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
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<PAGE>
14.9 Amendments and Waivers. No amendment of any provision of this Agreement
shall be valid unless the same shall be in writing and signed by APF, the OP
General Partner and the General Partners. No waiver by any Party of any
default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or
subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
14.10 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
14.11 Expenses. If the Closing occurs, APF will bear all costs and expenses
of the Parties incurred in connection with this Agreement and the transactions
contemplated hereby to the extent not already paid by the Fund or the General
Partners. If the Closing does not occur, APF, the OP General Partner and the
Operating Partnership will bear their own costs and expenses (including legal
fees and expenses) incurred in connection with this Agreement and the
transactions contemplated hereby, and the General Partners and the Fund will
divide their costs and expenses (including legal fees and expenses) as follows:
(i) the Fund shall bear that percentage of the costs and expenses equal to the
percentage obtained by dividing the number of Fund votes in favor of the Merger
by the sum of the total number of votes cast and the total number of
abstentions and (ii) the General Partners shall bear the remainder of the costs
and expenses.
14.12 Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.
14.13 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
14.14 Specific Performance. Each of the Parties acknowledges and agrees that
the other Parties would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Parties shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter (subject to the provisions set
forth in Section 13.15 below), in addition to any other remedy to which they
may be entitled, at law or in equity.
14.15 Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in and for Orange County,
Florida, in any action or proceeding arising out of or relating to this
Agreement and agrees that all claims in respect of the action or proceeding may
be heard and determined in any such court.
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IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
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 Prospectus/Consent Solicitation Statement.
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.
OVERVIEW
Pursuant to the Prospectus/Consent Solicitation Statement and this
Supplement, you are being asked to approve the Acquisition of your Income Fund
by APF. Your Income Fund is one of 18 limited partnerships (which we refer to
collectively as the Funds) that APF is seeking to acquire. Supplements have
also been prepared for each of the other Funds, copies of which may be obtained
without charge to 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 (or a REIT), formed in
1994, whose primary business, like that of the Funds, is the ownership of
restaurant properties leased to operators of national and regional restaurant
chains on a triple-net lease basis. As a full-service REIT, 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 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 shares of common stock (or APF Shares) will I receive if my Income
Fund is acquired by APF?
Your Income Fund will receive 4,243,243 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 $10.00 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
approximately 75 million APF Shares through three public offerings at offering
prices per APF share equal to the Exchange Value. At December 31, 1998, of the
approximately $750 million raised by APF, APF has used approximately $550
million to acquire restaurant properties and to make mortgage loans and had
approximately $120 million in uninvested proceeds which it expects to invest
during the first quarter of 1999. The remaining proceeds were used to pay fees
and other offering expenses.
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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
Fund?
Yes. Legg Mason Wood Walker, Incorporated 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 Funds, and (c) the method of allocating the APF
Shares among the Funds.
Do you, as the general partners of my Income Fund, recommend that I vote in
favor 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 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 how you want to vote, and sign
and mail it in the enclosed postage-paid return envelope as soon as possible,
so that at the Special Meeting of Limited Partners, your Units may be voted
"For" or "Against" APF's acquisition of your Income Fund. If you sign and send
in your consent form and do not indicate how you want to vote, your consent
form will be counted as a vote "For" the Acquisition. If you do not vote or you
abstain from voting, it will count as a vote "Against" the Acquisition.
In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to certain limitations. If you vote "Against" the Acquisition,
but your Income Fund is nevertheless acquired by APF, you may elect to receive
a payment (which we call the Cash/Notes Option) that is 10% in cash and 90% in
% Callable Notes due , 2006 (or Notes) based on the liquidation value
of your Income Fund, as determined by Valuation Associates, the appraisal firm
that we engaged in connection with the Acquisition. Such liquidation value will
be lower than the aggregate Exchange Value of the APF Shares offered to your
Income Fund in the Acquisition. The Notes will bear interest at a rate equal to
%, which was determined based on 120% of the applicable federal rate as of
, 1999. Please note that you may only receive the Cash/Notes Option if
you have voted "Against" the Acquisition and you elect to receive the
Cash/Notes Option on your consent form. You will receive APF Shares if your
Income Fund elects to be acquired in the Acquisition and you voted "For" the
Acquisition, or you voted "Against" the Acquisition and did not affirmatively
select the Cash/Notes Option. 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 (for example, 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 be based on the difference between the
value of the APF Shares or the tax basis of your Units. If you elect the
Cash/Notes Option, 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 and cash
received by your Income Fund over the tax basis of your Fund's net assets. Some
of the gain may be subject to the 25% rate of tax applicable to certain 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 $1,799. To
review the tax consequences to the Limited Partners of the
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<PAGE>
Funds in greater detail, see pages through of the Prospectus/Consent
Solicitation Statement 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 Funds acquired by APF.
Although the majority of APF's assets and the assets of the other Funds
acquired by APF are substantially similar to those of your Income Fund, the
restaurant properties owned by APF and the other 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 Funds' restaurant properties,
see "APF's Business and The Restaurant Properties--Business Objectives and
Strategies" and "--The Restaurant Properties--General" and "Business of the
Funds--Description of Restaurant Properties" in the Prospectus/Consent
Solicitation Statement.
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 Prospectus/Consent Solicitation Statement.
Investment Risks
. Uncertainty Regarding the Exchange Value and Trading Price of APF Shares
Following Listing. Your Income Fund will be receiving 4,243,243 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 is 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 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.
. Decrease in Distributions. In each of the years ended December 31, 1995,
1996 and 1997, your Income Fund made $910, $910, and $920, respectively,
in distributions, per $10,000 investment to you. Based on APF's pro forma
financial information, and assuming APF acquires only your Income Fund
and that each Limited Partner of your Income receives only APF Shares,
you would have received, for the year ended December 31, 1997, $606 in
distributions per $10,000 of original investment, which is 34.1% less
than the $920 distributed to you as Limited Partner during the same
period. 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 year
ended December 31, 1997 and for the nine months ended September 30, 1998
is not necessarily indicative of the distributions you will receive as a
stockholder of APF after the Acquisition. See "Cash Distributions to
Limited Partners of Your Fund."
. Conflicts of Interest in the Acquisition; Substantial Benefits to Related
Parties. There are certain conflicts of interest inherent in the
structure of the Acquisition of your Income Fund. We, James M.
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<PAGE>
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 that may or may not be aligned with your
interests as a Limited Partner of the Income Fund or with their own
positions as the general partners of your Income Fund. Assuming only your
Income Fund is acquired in the Acquisition, we will receive 38,555 APF
Shares. 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.
. Fundamental Change in Nature of 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 September 30, 1998), 405 restaurant properties. The risks inherent
in investing in an operating company such as APF include APF's ability to
invest in new restaurant properties that are not as profitable as APF
anticipated, the incurrence of substantial indebtedness to make future
acquisitions of restaurant properties which it may be unable to repay and
making mortgage loans to prospective operators of national and regional
restaurant chains which may not have the ability to repay.
As an APF stockholder, you will receive the benefits of your investment
through (i) dividend distributions on, and (ii) increases in the value of,
your APF Shares. In addition, 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 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 Cash/Notes Option). An
investment in APF may not outperform your investment in the Income Fund.
. Original Investment Timeframe. 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, 2019. 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 1999 and 2004. Because
your Income Fund is in the anticipated termination timeframe, we could
elect to liquidate your Income Fund. However, we have no current plans to
dispose of your Income Fund's restaurant properties if the Limited
Partners do not approve the Acquisition.
Real Estate/Business Risk
. Risk of Default on Mortgage Loans and Market Risks associated with
Securitizations. 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.
S-4
<PAGE>
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,) and 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 may 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.
. Risks Associated with Leverage. 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. At the time of the consummation of the
Acquisition, as a general policy, APF's Board of Directors will 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 funds from
operations and its ability to make distributions to its stockholders.
. Acquisition and Development Risks. APF plans to pursue its growth
strategy through the acquisition and development of additional restaurant
properties. To the extent that APF does pursue this growth strategy, we
do not know that it 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.
Tax Risks
. Failure of APF to Qualify as a REIT for Tax Purposes. 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.
S-5
<PAGE>
. Risks Associated with Distribution Requirements. 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 Tax Law. 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 Prospectus/Consent Solicitation Statement.
CONSIDERATION PAID TO INCOME FUND
The following table sets forth, for your Income Fund (i) the aggregate
amount of original Limited Partner investments in each Fund less any
distributions of net sales proceeds paid to the Limited Partners of that Fund,
(ii) the original amount of Limited Partner investments in each Fund less any
distributions of net sales proceeds per average $10,000 investment, (iii) the
number of APF Shares to be paid to your Income Fund, (iv) the estimated value
of the APF Shares paid to your Income Fund, (v) the estimated Acquisition
expenses allocated to your Income Fund, (vi) the estimated value, based on the
Exchange Value, of APF Shares paid to your Income Fund after deducting
Acquisition expenses, and (vii) the estimated value, based on the Exchange
Value, of APF Shares you will receive for each $10,000 of your original
investment:
<TABLE>
<CAPTION>
Original Limited
Partner Investments Estimated Value
Less Any Estimated of APF Shares
Original Limited Partner Distributions of Estimated Value of per
Investments 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) Fund(2) Fund(3) Expenses Expenses(3) Investment(3)
- ------------------------ ------------------- ---------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
$40,000,000............. $10,000 4,243,243 $42,432,430 $482,089 $41,950,341 $10,391
</TABLE>
- --------
(1) Income Fund has had no distributions of net sales proceeds.
(2) The APF Shares payable to each Fund as set forth in this chart will not
change if APF acquires fewer than all of the Funds in the Acquisition. This
number assumes that none of the Limited Partners of the Fund has elected
the Cash/Notes Option.
(3) 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.
Upon completion of the Acquisition of your Income Fund, the operations and
existence of your Income Fund will cease. For more detailed information, see
"The Acquisition" in the Prospectus/Consent Solicitation Statement. If your
Income Fund does not approve the Acquisition, we do not contemplate that your
Income Fund would be liquidated in the near future. The Acquisition, however,
does not result in an all-cash payment to you in the liquidation of your
investment. For example, if you are eligible for and choose the Cash/Notes
Option, you become a Noteholder of APF. You will have exchanged your Units for
unsecured debt obligations of APF which may not be retired in full until
, 2006, a date approximately seven years after the date the Acquisition
of your Income Fund occurs. On the other hand, if you exchange your Units for
APF Shares,
S-6
<PAGE>
you will receive an equity interest in APF whose marketability will depend upon
the market that may develop with respect to the APF Shares, which will be
listed on the NYSE.
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...................................................... $ 19,847
Appraisals and Valuation........................................ 7,939
Fairness Opinions............................................... 35,725
Registration, Listing and Filing Fees........................... --
Soliciting Dealer Fee........................................... 85,455
Financial Consulting Fees....................................... --
Environmental Fees.............................................. 49,618
Accounting and Other Fees....................................... 59,485
--------
Subtotal.................................................. 258,069
Closing Transaction Costs
Transfer Fees and Taxes......................................... 86,229
Legal Fees...................................................... 71,285
Recording Costs................................................. --
Other........................................................... 66,506
--------
Subtotal.................................................. 224,020
--------
Total........................................................... $482,089
========
</TABLE>
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 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
S-7
<PAGE>
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 as, in our opinion, market conditions permit), as contemplated by
the terms of the partnership agreement.
Special Meeting to Discuss the Acquisition
We have scheduled a special meeting of the Limited Partners of your Income
Fund to discuss the solicitation materials, which include the
Prospectus/Consent Solicitation Statement, 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 (as defined below) and to explain in person our reasons
for recommending that you vote "For" the Acquisition.
VOTING PROCEDURE
The Prospectus/Consent Solicitation Statement, 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.
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 Prospectus/Consent Solicitation
Statement. A copy of the Agreement and Plan of Merger dated March 11, 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 December 31, 1999. 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.
The consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and certain 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
(including the Acquisition), 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-8
<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. The partnership agreement also provide 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
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, 1995, 1996 and 1997 and the nine months
ended September 30, 1998, the aggregate amounts accrued or paid by your Income
Fund 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 years presented, are shown below under "Pro Forma":
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended
----------------------- September 30,
1995 1996 1997 1998
------- ------- ------- -------------
<S> <C> <C> <C> <C>
Historical:
General Partner Distributions.......... -- -- -- --
Broker/Dealer Commissions(1)...........
Due Diligence and Marketing Support
Fees.................................. -- -- -- --
Acquisition Fees.......................
Asset Management Fees..................
Real Estate Disposition Fees(2)........
------- ------- ------- -------
Total historical.....................
Pro Forma:
Cash Distributions on APF Shares....... $26,144 $29,221 $22,486 $17,584
Salary Compensation.................... -- -- -- --
------- ------- ------- -------
Total pro forma...................... $26,144 $29,221 $22,486 $17,584
</TABLE>
- --------
(1) A majority of the fees paid as broker-dealer commissions and due diligence
and marketing support fees were reallowed to other broker-dealers
participating in the offerings of the Income Fund's Units.
(2) 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-9
<PAGE>
CASH DISTRIBUTIONS TO LIMITED PARTNERS OF YOUR 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 the Acquisition--Prices for 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>
Nine Months Ended
Sept. 30, 1998
--------------------
1993 1994 1995 1996 1997 Historical Pro Forma
---- ---- ---- ---- ---- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income....... $875 $906 $879 $857 $874 $508 $457
Distributions from Return of
Capital(1)..................... -- -- 31 53 46 167 17
---- ---- ---- ---- ---- ---- ----
Total......................... $875 $906 $910 $910 $920 $675 $474
==== ==== ==== ==== ==== ==== ====
</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 $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 nine months ended September 30,
1998 is not necessarily indicative of the distributions you will receive as a
stockholder of APF after the Acquisition.
Assuming APF maintains its current level of debt for acquiring future
restaurant properties, the expected distribution rate per APF Share will be
8.8% (assuming a $10.00 per APF Share price based on the Exchange Value, the
annualized dividend per year is expected to be $0.88 per APF Share). Based on
the number of APF Shares that you would receive in the Acquisition per your
average $10,000 original investment and this distribution rate, you would
receive an annual distribution of approximately $914.
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
S-10
<PAGE>
and detriments of the Acquisition and certain 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 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 Cash/Note Option.
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, our relief 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 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 Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the Cash/Notes Option, constitutes 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 and is the best way to maximize the return on your
investment in light of the values of such consideration.
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 of Valuation Associates and
Legg Mason received fees for its services and notwithstanding that Legg Mason
has previously provided investment banking services to the Funds and to
Commercial Net Lease Realty, Inc., a former affiliate of ours. See "Reports,
Opinions and Appraisals" in the Prospectus/Consent Solicitation Statement.
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 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 cash and promissory notes option;
S-11
<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 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 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 Cash/Notes Option.
3. Valuation of Alternatives. Based on the appraisal of the Income Fund's
restaurant properties, we estimated the value of your Income Fund as an ongoing
concern and if liquidated. 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 Fund to 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
September 30, 1998 per $10,000 original investment. Since the calculation of
the book value was done on a GAAP basis, it is not indicative of the true fair
market value of your Income Fund. This figure was compared to the (i) value of
the Fund if it commenced an orderly liquidation of its investment portfolio on
December 31, 1998, (ii) value of the Fund if it continued to operate in
accordance with its existing partnership agreement and business plans, and
(iii) estimated value of the APF Shares, based on the Exchange Value, paid to
each Fund per average $10,000 invested.
Summary of Valuations
(per $10,000 original investment)
<TABLE>
<CAPTION>
Estimated Value
of APF Shares per
GAAP Going Average $10,000
Book Liquidation Concern Original Limited
Value Value(1) Value(1) Partner Investment(2)
------ ----------- -------- ----------------------
<S> <C> <C> <C> <C>
CNL Income Fund X, Ltd...... $8,602 $9,646 $10,350 $10,391
</TABLE>
- --------
(1) 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.
(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.
S-12
<PAGE>
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have an independent
obligation 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 Funds). James M. Seneff, Jr. and
Robert A. Bourne act as the individual general partners of all of the 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.
Substantial Benefits to General Partners
As a result of the Acquisition (assuming only your Income Fund is acquired),
we are expected to receive certain benefits, including that we will be relieved
from certain ongoing liabilities with respect to Funds that are acquired by
APF.
With respect to our ownership in your Income Fund, we may be issued up to
38,555 APF Shares in the aggregate in accordance with the terms of your Income
Fund's partnership agreement. The 38,555 APF Shares issued to us will have an
estimated value, based on the Exchange Value, of approximately $385,550
thousand.
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 Funds if the Acquisition does not occur.
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 the Cash/Notes Option, in which case you will
receive cash and 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-13
<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 Prospectus/Consent Solicitation Statement.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, the
assets (and any liabilities) of your Income Fund (if your Income Fund is
acquired by APF) will be transferred to APF in return for APF Shares or cash
and 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................................... $1,799
</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 Code, no gain or loss is recognized if (i)
property is transferred to a corporation by one more individuals or entities in
exchange for the stock of that corporation, and (ii) 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 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 the
Cash/Notes Option, 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 (1) the sum of (a) the fair
S-14
<PAGE>
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 (2) 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 Cash/Notes Option, your Income Fund will receive APF
Shares, cash and Notes in exchange for your Income Fund's assets. Because the
principal portion of the Notes will not be due until , 2006, 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 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 (without reduction for
any selling expenses) 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 are 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, cash 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" (i.e., real property and
depreciable assets used in a trade or business and held for more than one
year). Your share of gains or losses from the sale of section 1231 assets of
your Income Fund would be combined with any other section 1231 gains and losses
that you recognize in that year. If the result is a net loss, such loss is
characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property will be taxed as ordinary income to the extent of all
prior depreciation deductions taken by your Income Fund prior to sale. In
general, you may only use up to $3,000 of capital losses in excess of capital
gains to offset ordinary income in any taxable year. Any excess loss is carried
forward to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your Income Fund recognizes will be allocated to you and the other
Limited Partners in accordance with the terms of your Income Fund's partnership
agreement. Each Limited Partner will be allocated and must report his, her or
its allocable share of such gain, if any, pursuant to these terms, regardless
of the Limited Partner's decision to receive 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 Cash/Notes Option may
recognize gain in the year of the Acquisition despite the fact that they will
receive only a small amount of cash and no publicly-traded instruments 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 the Cash/Notes Option. See "--Tax Consequences of
Liquidation and Termination of Your Fund" below.
S-15
<PAGE>
Tax Consequences of the Liquidation and Termination of Your Fund. If your
Fund is acquired by APF, your Fund will be deemed to have liquidated and
distributed APF Shares and/or cash and 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 cash and 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 pro rata 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 (determined on the closing date of the Acquisition) and your
adjusted tax basis in your Units (adjusted by your distributive share of
income, gain, loss, deduction and credit for the final taxable year of your
Income Fund (including any such items recognized by your Income Fund as a
result of the Acquisition) as well as any distributions you receive in such
final taxable year (other than the distribution of the APF Shares)). 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 cash and Notes in the Acquisition, you will recognize gain to
the extent that the amount of cash you receive in the Acquisition exceeds your
adjusted basis in your Units (adjusted by your distributive share of income,
gain, loss, deduction and credit for the final taxable year of your Income Fund
(including any such items recognized by your Income Fund as a result of the
Acquisition) as well as any distributions you receive in such final taxable
year (other than the distributions of the cash and Notes)). Your basis in the
Notes distributed to you will equal your adjusted basis in your Units, reduced
(but not below zero) by the amount of any cash distributed to you 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 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.
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 cash and 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 Prospectus/Consent Solicitation
Statement.
S-16
<PAGE>
SUMMARY SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
APF, FUNDS, ADVISOR AND CNL RESTAURANT FINANCIAL SERVICES GROUP
Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
Historical Pro Forma
------------------------------------------------ -------------------------------
CNL
Restaurant
CNL Income Financial
Fund X, Services Combined Pro Forma Combined
APF Ltd. Advisor Group Historical Adjustments Pro Forma
------------ ----------- ---------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data Revenues:
Rental and earned
income................ $ 22,947,199 $ 1,944,202 $ -- $ -- $ 24,891,401 $ 9,635,208 (a)
200,382 (b) $ 34,726,991
Management fees........ -- -- 21,405,127 5,122,366 26,527,493 (21,011,835)(c)
(2,875,906)(d) 2,639,752
Interest and other
income................ 6,117,911 85,774 751 18,463,647 24,668,083 1,526,547 (e) 26,194,630
------------ ----------- ---------- ----------- ------------ ----------- ------------
Total revenue........ 29,065,110 2,029,976 21,405,878 23,586,013 76,086,977 (12,525,604) 63,561,373
Expenses:
General and
administrative........ 1,539,004 176,935 6,701,115 6,704,482 15,121,536 (1,308,058)(f)
(1,415,100)(g)
(34,787)(h) 12,363,591
Advisory fees.......... 1,248,393 -- -- 1,026,231 2,274,624 (2,274,624)(i) --
State taxes............ 397,569 10,520 15,226 220,180 643,495 56,534 (j) 700,029
Depreciation and
amortization.......... 2,693,020 187,745 131,539 1,000,493 4,012,797 3,074,752 (k)(l) 7,087,549
Interest expense....... -- -- 105,668 14,234,533 14,340,201 (68,670)(m) 14,271,531
Paid to affiliates..... -- -- 256,456 1,569,202 1,825,658 (1,825,658)(n) --
------------ ----------- ---------- ----------- ------------ ----------- ------------
Total expenses....... 5,877,986 375,200 7,210,004 24,755,121 38,218,311 (3,795,611) 34,422,700
------------ ----------- ---------- ----------- ------------ ----------- ------------
Net earnings (loss)
before equity in
earnings of joint
ventures/minority
interests, gain (loss)
on sale of properties,
gain on securitization,
and provision (credit)
for federal income
taxes.................. 23,187,124 1,654,776 14,195,874 (1,169,108) 37,868,666 (8,729,993) 29,138,673
------------ ----------- ---------- ----------- ------------ ----------- ------------
Equity in earnings of
joint ventures/minority
interests.............. (23,271) 206,840 -- 12,452 196,021 -- 196,021
Gain (loss) on sales of
properties............. -- 171,159 -- -- 171,159 -- 171,159
Gain on securitization.. -- -- -- 3,018,268 3,018,268 -- 3,018,268
Provision (credit) for
federal income taxes... -- -- 5,607,415 708,666 6,316,081 (6,316,081)(o) --
------------ ----------- ---------- ----------- ------------ ----------- ------------
Net earnings............ $ 23,163,853 $ 2,032,775 $8,588,459 $ 1,152,946 $ 34,938,033 $(2,413,912) $ 32,524,121
============ =========== ========== =========== ============ =========== ============
Other Data:
Weighted average number
of shares of common
stock outstanding
during period.......... 47,633,909 N/A N/A N/A N/A -- 73,933,192(p)
Total properties owned
at end of period....... 357 48 N/A N/A N/A -- 405
Funds from operations... $ 26,408,569 $ 2,212,513 N/A N/A N/A -- $ 37,140,090
Total cash distributions
declared............... $ 26,460,446 $ 2,700,003 N/A N/A N/A -- $ 37,140,090
Cash distributions
declared per $10,000
investment............. $ 572 $ 675 N/A N/A N/A -- $ 502
<CAPTION>
Historical Combined Pro Forma
September 30, 1998 Historical September 30, 1998
------------------------------------------------ ------------ -------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data
Real estate assets,
net.................... $407,663,180 $27,788,831 $ -- $ -- $435,452,011 $10,477,168
26,052,741 (r) $471,981,920
Mortgages/notes
receivable............. 33,523,506 -- $ -- 173,776,981 207,300,487 849,195 (r) 208,149,682
Accounts receivable,
net.................... 575,104 294 7,544,985 7,342,103 15,462,486 (7,854,879)(s) 7,607,607
Investment in/due from
joint ventures......... 631,374 3,437,666 -- -- 4,069,000 1,230,479 (q) 5,299,519
Total assets............ 566,383,967 35,540,019 8,429,809 197,528,789 807,882,584 31,054,059 838,936,643
Total
liabilities/minority
interest............... 14,478,585 1,133,204 5,049,152 185,998,045 206,658,986 (10,845,743)(s)(t) 195,813,243
Total equity............ 551,905,382 34,406,815 3,380,657 11,530,744 601,223,598 41,899,802 (q)(t) 643,123,400
</TABLE>
- -------
S-17
<PAGE>
(a) Represents rental and earned income as if 1) properties that had been
previously constructed and acquired from January 1, 1998 through November
30, 1998 had been acquired and leased on January 1, 1997 and 2) properties
that were developed by APF from January 1, 1998 through November 30, 1998
had been placed in service on May 1, 1997 (assumes a four month development
period).
<TABLE>
<S> <C>
Rental and earned income on Property Transactions by APF... $9,635,208
</TABLE>
(b) Represents $200,382 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, 1997.
(c) Represents the elimination of intercompany fees between APF, the Income
Fund, the Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees.......................................... $ (1,569,202)
Secured equipment lease fee............................... (44,426)
Advisory fees............................................. (1,722,383)
Reimbursement of administrative costs..................... (293,941)
Acquisition fees.......................................... (15,392,193)
Underwriting fees......................................... (254,945)
Administrative fees....................................... (148,491)
Executive fee............................................. (310,000)
Guarantee fees............................................ (93,750)
Servicing fee............................................. (1,014,117)
Development fees.......................................... (166,876)
Consulting fee............................................ (1,511)
------------
Total.................................................... $(21,011,835)
============
</TABLE>
(d) Represents the deferral of $2,875,906 in origination fees collected by CNL
Restaurant Financial Services Group that should be amortized over the term
of the loans originated (20 years) in accordance with the Statement of
Financial Accounting Standards #91 "Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases."
(e) Represents interest income of $1,318,870 earned from Other Investments
acquired and mortgage notes issued from January 1, 1998 through November
30, 1998 as if this had occurred on January 1, 1997 and the amortization of
$207,677 of deferred origination fees collected during the year ended
December 31, 1997 and during the nine months ended September 30, 1998,
which were capitalized and deferred in (d) above as if they had been
collected on January 1, 1997. These deferred fees are being amortized and
recorded as interest income.
(f) Represents the elimination of intercompany expenses paid between APF, the
Income Fund, the Advisor and the CNL Restaurant Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs..................... $ (293,941)
Servicing fee............................................. (1,014,117)
------------
$(1,308,058)
============
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by APF were subject
to capitalization during the entire period and 2) costs relating to
properties not developed by APF were subject to capitalization up through
the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs........................... $(1,415,100)
</TABLE>
(h) Represents savings of $34,787 in professional services and administrative
expenses resulting from reporting on one combined company versus 22
separate entities.
(i) Represents the elimination of fees between APF, the Income Fund, the
Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Advisory fees.............................................. $ (1,722,383)
Administrative fees........................................ (148,491)
Executive fee.............................................. (310,000)
Guarantee fees............................................. (93,750)
------------
$(2,274,624)
============
</TABLE>
(j) Represents additional state taxes of $56,534 resulting from assuming that
acquisitions from January 1, 1998 through November 30, 1998 had been
acquired on January 1, 1997 and assuming that the Income Fund had operated
under a REIT structure.
S-18
<PAGE>
(k) Represents an increase in depreciation of the building portion of the
properties acquired from January 1, 1998 through November 30, 1998 as if
they had been acquired on January 1, 1997 and the step up in basis referred
to in footnote (q) from acquiring the Income Fund portfolio using the
straight-line method over the estimated useful lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense.......................................... $1,512,427
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of the CNL
Restaurant Financial Services Group referred to in footnote (q).
<TABLE>
<S> <C>
Amortization of goodwill..................................... $1,562,325
</TABLE>
(m) Represents elimination of interest expense recorded for the amortization of
$350,000 in arrangement fees collected during the year ended December 31,
1997 which were eliminated in footnote (4), II(d ) in the Notes to the Pro
Forma Financial Statements attached to this Supplement.
<TABLE>
<S> <C>
Interest expense............................................... $(68,670)
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees incurred
between APF, the Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Origination fees........................................... $ (1,569,202)
Underwriting fees.......................................... (254,945)
Consulting fee............................................. (1,511)
------------
$(1,825,658)
============
</TABLE>
(o) Represents the elimination of $6,316,081 in the provision for income taxes
as a result of the acquisition. APF expects to continue to qualify as a
REIT and does not expect to incur federal income taxes.
(p) APF Shares issued during the period required to fund acquisitions as if
they had been acquired on January 1, 1997 were assumed to have been issued
and outstanding as of January 1, 1998. For purposes of the proforma
financial statements, it is assumed that the stockholders approved the
proposal to amend and restate APF's articles of incorporation to increase
the number of authorized APF Shares.
(q) Represents the payment of $482,089 in cash and the issuance of 16,495,034
APF shares in consideration for the purchase of the Income Fund, Advisor
and CNL Restaurant Financial Services Group at September 30, 1998 using the
Exchange Value of $10 per APF Share plus estimated transaction costs. The
acquisition of the CNL Income Fund and the CNL Restaurant Financial
Services Group have been accounted for under the purchase accounting method
and goodwill was recognized to the extent that the estimated value of the
consideration paid exceeded the fair value of the net tangible assets
acquired. As for the acquisition of the Advisor from a related party, the
consideration paid in excess of the fair value of the net tangible assets
received has been accounted for as costs incurred in acquiring the Advisor
from a related party because the Advisor has not been deemed to qualify as
a "business" for purposes of applying APB Opinion No. 16 "Business
Combinations." Upon consummation of the Acquisition, this expense will be
recorded as an operating expense on APF's statement of earnings. The
Company will not deduct this expense for purposes of calculating funds from
operations due to the nonrecurring and non-cash nature of the expense. As
of September 30, 1998, $249,403 of transaction costs had been incurred by
APF.
<TABLE>
<S> <C>
Income Fund................................................ $ 42,432,425
Advisor.................................................... 76,000,000
CNL Restaurant Financial Services Group.................... 47,000,000
------------
Total Purchase Price (cash and shares)..................... 165,432,425
Less cash paid to Income Fund.............................. (482,089)
------------
Share consideration........................................ 164,950,336
Transaction costs of APF................................... 8,933,000
------------
Total costs incurred....................................... $173,883,336
============
</TABLE>
In addition, APF i) used $8,933,000 in cash to pay the transaction costs
related to the Acquisition, ii) made an upward adjustment to the Income Fund
carrying value of land and building on operating leases by $6,563,919, net
investment in direct financing leases by $3,913,249, investment in joint
venture by $1,230,479, made downward adjustments to the carrying value of
accrued rental income of $1,348,243, and made downward adjustments to other
assets of $3,697,186 to adjust historical values to fair value, iii)
recorded goodwill of $41,661,989 for the acquisition of the CNL Restaurant
Financial Services Group, iv) reduced retained earnings by $76,723,182 for
the excess consideration paid over the net assets of the Advisor and removed
the historical common stock balance of $12,000, additional paid in capital
balance of $9,602,287, retained earnings balance of $5,297,114 and partners
capital balance of $34,406, 815 of the Income Fund, Advisor and CNL
Restaurant Financial Services Group.
(r) Represents the use of $26,901,936 in cash and cash equivalents at September
30, 1998 to acquire $26,052,741 in properties and issue $849,195 in
mortgage notes which occurred from October 1, 1998 through November 30,
1998.
S-19
<PAGE>
(s) Represents the elimination by the Income Fund of $5,500 in related party
payables recorded as receivables by the Advisor, the elimination by the CNL
Restaurant Financial Services Group of $6,641,379 in related party payables
recorded as receivables by CNL Restaurant Financial Services Group and the
elimination by APF of $1,208,000 in related party payables recorded as
receivables by the Advisor.
(t) Represents the elimination of income taxes payable of $2,990,864 from
liabilities assumed in the acquisition of the CNL Restaurant Businesses
since the acquisition agreements require that the Advisor and CNL
Restaurant Financial Services Group have no accumulated or current earnings
and profits for federal income tax purposes at the time of the acquisition.
S-20
<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>
Nine Months Ended
September 30, Year Ended December 31,
----------------------- -----------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues (1)............ $ 2,236,816 $ 2,837,853 $ 3,813,248 $ 3,871,869 $ 3,875,779
Net income (2).......... 2,032,775 2,673,599 3,531,381 3,461,812 3,552,067
Cash distributions
declared (3)........... 2,780,003 2,700,002 3,600,003 3,640,003 3,640,003
Net income per Unit
(2).................... 0.50 0.66 0.87 0.86 0.88
Cash distributions
declared per
Unit (3)............... 0.70 0.68 0.90 0.91 0.91
Weighted average number
of Limited Partner
Units outstanding...... 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000
<CAPTION>
September 30, December 31,
----------------------- -----------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total assets............ $35,540,019 $36,407,631 $36,289,727 $36,437,560 $36,563,796
Total partners'
capital................ 34,406,815 35,196,262 35,154,043 35,222,665 35,400,856
</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 nine months ended September 30, 1998 and 1997 include
$171,159 and $132,238, respectively, from gain on sale of land and
building. Net income for the years ended December 31, 1997 and 1995,
include $132,238 and $67,214, respectively, from gains on sale of land and
buildings.
(3) Distributions for the years ended December 31, 1996 and 1995, each includes
a special distribution to the Limited Partners of $40,000 which represented
cumulative excess operating reserves.
S-21
<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 September 30, 1998, the Income Fund owned 48 restaurant
properties, which included nine 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
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
The Income Fund's primary source of capital for the nine months ended
September 30, 1998 and 1997, 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
$2,774,783 and $2,748,032 for the nine months ended September 30, 1998 and
1997, respectively. The increase in cash from operations for the nine months
ended September 30, 1998, is primarily a result of changes in the Income Fund's
working capital.
Other sources and uses of capital included the following items during the
nine months ended September 30, 1998.
In January 1998, the Income Fund sold its restaurant 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 $163,349 for financial reporting purposes.
This restaurant 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
restaurant property for approximately $261,300 in excess of its original
purchase price. As of September 30, 1998, net sales proceeds of $1,230,672 plus
accrued interest of $29,594 were being held in an interest-bearing escrow
account pending the release of funds by the escrow agent to acquire an
additional restaurant property. We believe that the transaction, or a portion
thereof, relating to the sale of the restaurant property in Sacramento,
California, 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.
In addition, in March 1998, a vacant parcel of land relating to the
restaurant property in Austin, Texas, was sold to a third party who had
previously subleased the land from the Income Fund's lessee. In connection
therewith, the Income Fund received 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. The Income
Fund plans to reinvest the net sales proceeds from the sale of this restaurant
property in an additional restaurant property.
In November 1998, the Income Fund reinvested approximately $1,020,800 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. In connection therewith, the Income Fund entered into a long
term, triple-net lease with terms substantially the same as its other leases.
S-22
<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 to make distributions to the partners. At September 30, 1998, the
Income Fund had $1,662,186 invested in such short-term investments as compared
to $1,583,883 at December 31, 1997. The funds remaining at September 30, 1998,
after payment of distributions 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 $1,068,724 at September 30, 1998, from $1,071,183 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 operations, and for the nine months ended September 30,
1998, accumulated excess operating reserves, the Income Fund declared
distributions to Limited Partners of $2,780,003 and $2,700,002 for the nine
months ended September 30, 1998 and 1997, respectively ($900,001 for each of
the quarters ended September 30, 1998 and 1997). This represents distributions
of $0.70 and $0.68 per unit for the nine months ended September 30, 1998 and
1997, respectively ($0.23 per unit for each applicable quarter ended September
30, 1998 and 1997). No distributions were made to us for the quarters and nine
months ended September 30, 1998 and 1997. No amounts distributed to the Limited
Partners for the nine months ended September 30, 1998 and 1997, 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.
The Years Ended December 31, 1997, 1996 and 1995
The Income Fund's primary source of capital for the years ended December 31,
1997, 1996 and 1995, 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 $3,596,417, $3,695,802 and
$3,527,362 for the years ended December 31, 1997, 1996 and 1995, respectively.
The decrease in cash from operations during 1997, as compared to 1996, and the
increase in 1996, as compared to 1995, is primarily a result of changes in the
Income Fund's working capital during each of the respective years.
Other sources and uses of capital included the following items during the
years ended December 31, 1997, 1996 and 1995.
In July 1995, the Income Fund sold a small parcel of land as a result of an
easement relating to its restaurant property in Hendersonville, North Carolina,
for $7,200, resulting in a gain of $1,112 for financial reporting purposes. In
addition, in August 1995, the Income Fund sold its restaurant property in
Denver, Colorado, for $1,057,000 and received net sales proceeds of $1,050,186,
resulting in a gain of $66,102 for financial reporting purposes. This
restaurant property was originally acquired by the Income Fund in December 1991
and had a cost of approximately $977,000, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Income Fund sold the
restaurant property for approximately $73,200 in excess of its original
purchase price. In September 1995, the Income Fund reinvested $928,122 in a
Shoney's in Fort Myers Beach, Florida.
S-23
<PAGE>
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 from the subtenant, to the Income Fund. As
of February 28, 1998, the sale for the vacant parcel of land had not been
consummated and as a result, the net proceeds of $68,000 (representing the
original $69,000 received by the Income Fund, less $1,000 in costs incurred in
anticipation of the sale) were recorded as a deposit at December 31, 1997.
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, 1997, the Income Fund owned a 13.37% interest in this
restaurant property.
In September 1997, the Income Fund sold its restaurant property in Fremont,
California, to the franchisor, for $1,420,000 and received net sales proceeds
(net of $2,745 which represents amounts due to the former tenant for prorated
rent) of $1,363,805, resulting in a gain of $132,238 for financial reporting
purposes. This restaurant property was originally acquired by the Income Fund
in March 1992 and had a cost of approximately $1,116,900, excluding acquisition
fees and miscellaneous acquisition expenses; therefore, the Income Fund sold
the restaurant property for approximately $249,700 in excess of its original
purchase price. In October 1997, the Income Fund reinvested approximately
$1,277,300 of the net sales proceeds in a Boston Market restaurant property 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. 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, 1997, the Income Fund owned
a 6.69% interest in this restaurant property.
During 1997, the Income Fund entered into a contract to sell the restaurant
property in Sacramento, California, to the tenant. In January 1998, the Income
Fund sold this restaurant property for $1,250,000 and received net sales
proceeds of $1,234,175, resulting in a gain of approximately $163,300 for
financial reporting 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.
S-24
<PAGE>
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, 1997, the Income Fund had
$1,583,883 invested in such short-term investments as compared to $1,769,483 at
December 31, 1996. The decrease in cash is primarily attributable to the Income
Fund using approximately $130,400 that had been previously reserved for working
capital purposes, to invest in a restaurant property located in Miami, Florida,
with affiliates, as tenants-in-common, in December 1997.
During 1997, 1996 and 1995, certain of our affiliates incurred $86,327,
$112,363 and $100,249, respectively, for certain operating expenses. As of
December 31, 1997 and 1996, the Income Fund owed $4,946 and $1,609,
respectively, to affiliates for such amounts and accounting and administrative
services. As of February 28, 1998, the Income Fund had reimbursed the
affiliates all such amounts. Other liabilities, including distributions
payable, decreased to $1,066,237 at December 31, 1997, from $1,148,901 at
December 31, 1996, partially as the result of the Income Fund's accruing a
special distribution payable to the Limited Partners of $40,000 at December 31,
1996, which was paid in January 1997. Other liabilities also decreased due to a
decrease in escrowed real estate taxes payable and rents paid in advance at
December 31, 1997.
Based on cash from operations, and during the years ended December 31, 1996
and 1995, cumulative excess operating reserves, the Income Fund declared
distributions to the Limited Partners of $3,600,003 for the year ended December
31, 1997 and $3,640,003 for each of the years ended December 31, 1996 and 1995.
This represents distributions of $0.90 per Unit for the year ended December 31,
1997 and $0.91 per Unit for each of the years ended December 31, 1996 and 1995.
No amounts distributed to the Limited Partners for the years ended December 31,
1997, 1996 and 1995, 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.
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
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 1997, the Income Fund and its
consolidated joint venture, Allegan Real Estate Joint Venture, owned and leased
39 wholly-owned restaurant properties (including one restaurant property in
Fremont, California, which was sold in September 1997) and during the nine
months ended September 30, 1998, the Income Fund owned and leased 39 restaurant
properties (including one restaurant property in Sacramento, California, which
was sold in January 1998) to operators of fast-food and family-style restaurant
chains. In connection therewith, during the nine months ended September 30,
1998 and 1997, the Income Fund and Allegan Real Estate Joint Venture earned
$1,927,308 and $2,543,098, respectively, in rental income from operating leases
(net of adjustments to accrued rental income) and earned income from direct
financing leases from these restaurant properties, $840,010 and $847,929 of
which was earned during the
S-25
<PAGE>
quarters ended September 30, 1998 and 1997, respectively. The decrease in
rental and earned income during the nine months ended September 30, 1998, as
compared to the nine months ended September 30, 1997, is partially due to a
decrease of approximately $84,400 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
$139,600 during the nine months ended September 30, 1998, as compared to
approximately $22,700 during the nine months ended September 30, 1997. In
addition, rental and earned income decreased by approximately $172,900 during
the nine months ended September 30, 1998, as a result of the sale of the
restaurant properties in Fremont and Sacramento, California in September 1997
and January 1998. The decrease in rental and earned income for the nine months
ended September 30, 1998 was partially offset by an increase in rental and
earned income of approximately $97,300 during the nine months ended September
30, 1998, 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, the decrease during the nine months ended September 30, 1998,
as compared to the nine months ended September 30, 1997, was partially
attributable to the fact that in May 1998 the tenant of the restaurant
properties in Lancaster and Amherst, New York, filed for bankruptcy. As a
result, during the nine months ended September 30, 1998, 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). The Income Fund also increased the allowance for doubtful accounts
for past due rental amounts for these restaurant properties in the amount of
$14,100 for the nine months ended September 30, 1998, due to the fact that
collection of such amounts is questionable. The tenant has rejected the lease
relating to the restaurant property in Lancaster, New York, and as a result,
the Income Fund will not receive rental income from this restaurant property.
The tenant is currently in the process of deciding whether to affirm or reject
the lease for the restaurant property in Amherst, New York. If the lease for
the Amherst, New York restaurant property is rejected, the Income Fund
anticipates that rental income from this restaurant property will terminate.
However, we do not anticipate that any decrease in rental income due to lost
revenues relating to these restaurant properties will have a material effect on
the Income Fund's financial position or results of operations. We are currently
seeking either new tenants or purchasers for these restaurant properties.
In addition, the decrease in rental and earned income during the nine months
ended September 30, 1998 is partially attributable to the fact that in October
1998 the tenant of one Boston Market restaurant property filed for bankruptcy
and ceased operations relating to this restaurant property. As a result, during
the nine months ended September 30, 1998, the Income Fund wrote off
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). If the
lease is eventually rejected, the Income Fund anticipates that rental income
relating to this restaurant property will terminate 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. However, we do not
anticipate that any decrease in rental income due to lost revenues relating to
this restaurant property will have a material effect on the Income Fund's
financial position or results of operations.
The decrease in rental and earned income for the nine months ended September
30, 1998, as compared to the nine months ended September 30, 1997, is also
partially due to a decrease of approximately $13,200 for the nine months ended
September 30, 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.
S-26
<PAGE>
For the nine months ended September 30, 1998 and 1997, the Income Fund also
owned and leased eight restaurant properties indirectly through other joint
venture arrangements and one restaurant property as tenants-in-common with
certain of our affiliates, and for the nine months ended September 30, 1998,
the Income Fund owned and leased one additional restaurant property as tenants-
in-common with certain of our affiliates. In connection therewith, during the
nine months ended September 30, 1998 and 1997, the Income Fund earned $213,432
and $204,167, respectively, attributable to the net income earned by
unconsolidated joint ventures, $76,163 and $71,523 of which was earned during
the quarters ended September 30, 1998 and 1997, respectively. The increase in
net income earned by unconsolidated joint ventures during the quarter and nine
months ended September 30, 1998, as compared to the quarter and nine months
ended September 30, 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.
Operating expenses, including depreciation and amortization expense, were
$375,200 and $296,492 for the nine months ended September 30, 1998 and 1997,
respectively, of which $135,903 and $94,956 were incurred for the quarters
ended September 30, 1998 and 1997, respectively. The increase in operating
expenses during the quarter and nine months ended September 30, 1998, as
compared to the quarter and nine months ended September 30, 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 the quarter and nine months ended September 30, 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 bad debt expense and real estate tax expense 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. Due to the fact that the tenant rejected the lease in Lancaster, New
York and if the tenant rejects the lease in Amherst, New York, the Income Fund
will continue to incur certain expenses, such as real estate taxes, insurance,
and maintenance, until a new tenant or buyer for the restaurant properties are
located.
In addition, the increase in operating expenses during the quarter and nine
months ended September 30, 1998, as compared to the quarter and nine months
ended September 30, 1997, is partially attributable to the fact that during the
quarter and nine months ended September 30, 1998, the Income Fund recorded
approximately $14,000 in real estate tax expense due to the fact that in
October 1998 the tenant of the Boston Market restaurant property in Homewood,
Alabama filed for bankruptcy, as described above. If the tenant decides to
reject the lease, the Income Fund will continue to incur certain expenses, such
as real estate taxes, insurance and maintenance, until a new tenant or buyer
for the restaurant property is located.
As a result of the sale of the restaurant property in Sacramento,
California, 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 $171,159 for financial reporting purposes during the nine months ended
September 30, 1998. As a result of the sale of the restaurant property in
Fremont, California, the Income Fund recognized a gain of $132,238 for
financial reporting purposes for the quarter and nine months ended September
30, 1997.
The Years Ended December 31, 1997, 1996 and 1995
During 1995, the Income Fund owned and leased 39 wholly-owned restaurant
properties (including one restaurant property in Denver, Colorado, which was
sold in August 1995), during 1996, the Income Fund owned and leased 38 wholly-
owned restaurant properties, and during 1997, the Income Fund owned and leased
39 wholly-owned restaurant properties (including one restaurant property in
Fremont, California, which was sold in September 1997). In addition, during
1997, 1996 and 1995, the Income Fund was a co-venturer in three 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, the Income Fund owned and leased two
S-27
<PAGE>
restaurant properties with affiliates as tenants-in-common. As of December 31,
1997, the Income Fund owned, either directly or through joint venture
arrangements 49 restaurant properties which are subject to long-term, triple-
net leases. The leases of the restaurant properties provide for minimum base
annual rental amounts (payable in monthly installments) ranging from
approximately $26,200 to $198,500. All 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, 1997, 1996 and 1995, the Income Fund and
its consolidated joint venture, Allegan Real Estate Joint Venture, earned
$3,402,320, $3,481,139 and $3,474,227, 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 partially
attributable to the Income Fund increasing its allowance for doubtful accounts
by approximately $64,600 during 1997, for rental amounts relating to the
Perkins restaurant properties located in Lancaster and Amherst, New York, which
are leased by the same tenant, due to the financial difficulties the tenant is
experiencing. No such allowance was established during 1996. The Income Fund
intends to pursue collection of past due amounts from this tenant and will
recognize such amounts as income if collected. Rental and earned income also
decreased by approximately $36,600 during 1997, as compared to 1996, due to the
fact that the Income Fund sold its restaurant property in Fremont, California,
in September 1997. This decrease was partially offset by an increase of
approximately $28,100 in rental income as a result of reinvesting the majority
of these net sales proceeds in a restaurant property in Homewood, Alabama, in
October 1997.
During the years ended December 31, 1997, 1996 and 1995, the Income Fund
also earned $51,678, $45,126 and $53,189, respectively, in contingent rental
income. 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. The decrease in contingent rent during 1996, as compared to
1995, was primarily a result of decreases in gross sales relating to certain
restaurant properties during 1996.
For the years ended December 31, 1997, 1996 and 1995, the Income Fund also
earned $278,919, $278,371 and $267,799, 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 1996, as compared to 1995, is primarily attributable to the Income Fund
investing in a restaurant property in Clinton, North Carolina, in January 1996,
with certain of our affiliates as tenants-in-common, as described above in
"Liquidity and Capital Resources."
During at least one of the years ended December 31, 1997, 1996 and 1995,
three lessees (or group of affiliated lessees), of the Income Fund and its
consolidated joint venture, Golden Corral Corporation, Foodmaker, Inc. and
Flagstar Corporation, 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,
1997, Golden Corral Corporation was the lessee under leases relating to four
restaurants, Foodmaker, Inc. was the lessee under leases relating to six
restaurants and Flagstar Corporation was the lessee under leases relating to
nine restaurants. It is anticipated that based on the minimum rental payments
required by the leases, these three lessees (or groups of affiliated lessees)
each will continue to contribute more than 10% of the Income Fund's total
rental income during 1998 and subsequent years. In addition, during at least
one of the years ended December 31, 1997, 1996 and 1995, 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 subsequent years, it is anticipated that
these five restaurant chains each
S-28
<PAGE>
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 lessees or restaurant chains could materially affect the
Income Fund's income.
Operating expenses, including depreciation and amortization expense, were
$414,105, $410,057 and $390,926 for the years ended December 31, 1997, 1996 and
1995, respectively. The increase in operating expenses during 1997, as compared
to 1996, is partially a result of the Income Fund recording approximately
$9,700, for real estate taxes relating to the Perkins restaurant properties
located in Lancaster and Amherst, New York, which are leased by the same
tenant, due to the current financial difficulties of the tenant. Payment of
these taxes remains the responsibility of the tenant of this restaurant
property; however, we believe that the tenant's ability to pay these expenses
is doubtful. The Income Fund intends to pursue collection from the tenant of
any such amounts paid by the Income Fund and will recognize such amounts as
income if collected. The increase in operating expenses during 1997, as
compared to 1996, is partially offset by a decrease 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, is also
partially attributable to, and the increase during 1996, as compared to 1995,
is partially offset by a decrease in state taxes during 1996 as a result of
receiving a state tax refund from the state of New Hampshire during 1996, for
taxes paid in prior years.
Operating expenses increased during 1996, as compared to 1995, due to an
increase in accounting and administrative expenses associated with operating
the Income Fund and its restaurant properties and an increase in insurance
expense as a result of our obtaining contingent liability and restaurant
property coverage for the Income Fund beginning in May 1995. Operating expenses
also increased during 1996, as compared to 1995, due to an increase in
professional fees during the year ended December 31, 1996, as a result of
obtaining appraisal updates for 1996 and 1995, to prepare an annual statement
of unit valuation to qualified plans in accordance with the Income Fund's
partnership agreement.
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. In addition, as a result of the granting of an
easement relating to the restaurant property in Hendersonville, North Carolina,
and the sale of the restaurant property in Denver, Colorado, as described above
in "Liquidity and Capital Resources," the Income Fund recognized a gain for
financial reporting purposes of $67,214 during the year ended December 31,
1995. No restaurant properties were sold during the year ended December 31,
1996.
General
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Income Fund's financial position or results of operations.
The Income Fund's leases as of December 31, 1997, 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.
The Year 2000 problem is the result of information technology systems and
embedded systems (products which are made with microprocessor (computer) chips
such as HVAC systems, physical security systems and
S-29
<PAGE>
elevators) using a two-digit format, as opposed to four digits, to indicate the
year. Such information technology and embedded systems may be unable to
properly recognize and process date-sensitive information beginning January 1,
2000.
The Income Fund does not have any information technology systems. Certain of
our affiliates provide all services requiring the use of information technology
systems pursuant to a management agreement with the Income Fund. The
maintenance of embedded systems, if any, at the Income Fund's properties is the
responsibility of the tenants of the properties in accordance with the terms of
the Income Fund's leases. We and our affiliates have established a team
dedicated to reviewing the internal information technology systems used in the
operation of the Income Fund, and the information technology and embedded
systems and the Year 2000 compliance plans of the Income Fund's tenants,
significant suppliers, financial institutions and transfer agent.
The information technology infrastructure of our affiliates consists of a
network of personal computers and servers that were obtained from major
suppliers. The affiliates utilize various administrative and financial software
applications on that infrastructure to perform the business functions of the
Income Fund. Our inability and that of our affiliates to identify and timely
correct material Year 2000 deficiencies in the software and/or infrastructure
could result in an interruption in, or failure of, certain of the Income Fund's
business activities or operations. Accordingly, we and our affiliates have
requested and are evaluating documentation from the suppliers of the affiliates
regarding the Year 2000 compliance of their products that are used in the
business activities or operations of the Income Fund. The costs expected to be
incurred by us and our affiliates to become Year 2000 compliant will be
incurred by us and our affiliates; therefore, these costs will have no impact
on the Income Fund's financial position or results of operations.
The Income Fund has material third party relationships with its tenants,
financial institutions and 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. If
any of these third parties are unable to meet their obligations to the Income
Fund because of the Year 2000 deficiencies, such a failure may have a material
impact on the Income Fund. Accordingly, we have requested and are evaluating
documentation from the Income Fund's tenants, financial institutions, and
transfer agent relating to their Year 2000 compliance plans. At this time, we
have not yet received sufficient certifications to be assured that the tenants,
financial institutions, and transfer agent have fully considered and mitigated
any potential material impact of the Year 2000 deficiencies. Therefore, we do
not, at this time, know of the potential costs to the Income Fund of any
adverse impact or effect of any Year 2000 deficiencies by these third parties.
We currently expect that all Year 2000 compliance testing and any necessary
remedial measures on the information technology systems used in the business
activities and operations of the Income Fund will be completed prior to June
30, 1999. Based on the progress we and our affiliates have made in identifying
and addressing the Income Fund's Year 2000 issues and the plan and timeline to
complete the compliance program, we do not foresee significant risks associated
with the Income Fund's Year 2000 compliance at this time. Because we and our
affiliates are still evaluating the status of the systems used in business
activities and operations of the Income Fund and the systems of the third
parties with which the Income Fund conducts its business, we have not yet
developed a comprehensive contingency plan and are unable to identify "the most
reasonably likely worst case scenario" at this time. As we identify significant
risks related to the Income Fund's Year 2000 compliance or if the Income Fund's
Year 2000 compliance program's progress deviates substantially from the
anticipated timeline, we will develop appropriate contingency plans.
S-30
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997... F-1
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997.............................................. F-2
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997.............. F-3
Condensed Statements of Cash Flows for the Nine Months Ended September 30,
1998 and 1997............................................................ F-4
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997........................................ F-5
Report of Independent Accountants......................................... F-7
Balance Sheets as of December 31, 1997 and 1996........................... F-8
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995..................................................................... F-9
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995............................................................ F-10
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995..................................................................... F-11
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and 1995................................................................. F-12
Unaudited Pro Forma Financial Information................................. F-20
Unaudited Pro Forma Balance Sheet as of September 30, 1998................ F-21
Unaudited Pro Forma Income Statement for the Nine Months Ended September
30, 1998................................................................. F-22
Unaudited Pro Forma Income Statement for the Year Ended December 31,
1997..................................................................... F-23
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements............................................................... F-24
</TABLE>
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
ASSETS
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation of $1,300,992 and
$1,113,247.......................................... $17,037,038 $15,709,899
Net investment in direct financing leases............ 10,751,793 13,460,125
Investment in joint ventures......................... 3,437,666 3,505,326
Cash and cash equivalents............................ 1,662,186 1,583,883
Restricted cash...................................... 1,260,266 92,236
Receivables, less allowance for doubtful accounts of
$217,437 and $137,856............................... 294 123,903
Prepaid expenses..................................... 9,249 5,877
Accrued rental income, less allowance for doubtful
accounts of $257,225 and $117,593................... 1,348,423 1,775,374
Other assets......................................... 33,104 33,104
----------- -----------
$35,540,019 $36,289,727
=========== ===========
<CAPTION>
LIABILITIES AND PARTNERS' CAPITAL
<S> <C> <C>
Accounts payable..................................... $ 1,367 $ 6,033
Accrued and escrowed real estate taxes payable....... 71,478 27,784
Distributions payable................................ 900,001 900,001
Due to related parties............................... 5,500 4,946
Rents paid in advance and deposits................... 90,378 132,419
----------- -----------
Total liabilities.................................. 1,068,724 1,071,183
Minority interest.................................... 64,480 64,501
----------- -----------
Partners' capital.................................... 34,406,815 35,154,043
----------- -----------
$35,540,019 $36,289,727
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-1
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases..................... $ 499,787 $ 477,904 $1,396,043 $1,436,157
Adjustments to accrued
rental income.............. (13,155) (6,099) (445,370) (22,714)
Earned income from direct
financing leases........... 353,378 376,124 976,635 1,129,655
Contingent rental income.... 6,239 10,014 16,894 22,186
Interest and other income... 27,008 14,289 85,774 74,727
---------- ---------- ---------- ----------
873,257 872,232 2,029,976 2,640,011
---------- ---------- ---------- ----------
Expenses:
General operating and
administrative............. 43,273 37,138 126,834 112,266
Bad debt expense............ -- -- 5,887 --
Professional services....... 7,277 5,282 20,636 17,114
Real estate taxes........... 14,004 -- 23,578 --
State and other taxes....... -- -- 10,520 9,503
Depreciation and
amortization............... 71,349 52,536 187,745 157,609
---------- ---------- ---------- ----------
135,903 94,956 375,200 296,492
---------- ---------- ---------- ----------
Income Before Minority
Interest in Income of
Consolidated Joint Venture,
Equity in Earnings in
Unconsolidated Joint Ventures
and Gain on Sale of Land,
Building and Net Investment
in Direct Financing Lease.... 737,354 777,276 1,654,776 2,343,519
Minority Interest in Income of
Consolidated Joint Venture... (2,337) (2,271) (6,592) (6,325)
Equity in Earnings of
Unconsolidated Joint
Ventures..................... 76,163 71,523 213,432 204,167
Gain on Sale of Land, Building
and Net Investment in Direct
Financing Lease.............. -- 132,238 171,159 132,238
---------- ---------- ---------- ----------
Net Income.................... $ 811,180 $ 978,766 $2,032,775 $2,673,599
========== ========== ========== ==========
Allocation of Net Income:
General partners............ $ 8,112 $ 8,466 $ 18,616 $ 25,414
Limited partners............ 803,068 970,300 2,014,159 2,648,185
---------- ---------- ---------- ----------
$ 811,180 $ 978,766 $2,032,775 $2,673,599
========== ========== ========== ==========
Net Income Per Limited Partner
Unit......................... $ 0.20 $ 0.24 $ 0.50 $ 0.66
========== ========== ========== ==========
Weighted Average Number of
Limited Partner Units
Outstanding.................. 4,000,000 4,000,000 4,000,000 4,000,000
========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
General partners:
Beginning balance................................. $ 208,709 $ 174,718
Net income........................................ 18,616 33,991
----------- -----------
227,325 208,709
----------- -----------
Limited partners:
Beginning balance................................. 34,945,334 35,047,947
Net income........................................ 2,014,159 3,497,390
Distributions ($0.70 and $0.90 per limited partner
unit, respectively).............................. (2,780,003) (3,600,003)
----------- -----------
34,179,490 34,945,334
----------- -----------
Total partners' capital............................. $34,406,815 $35,154,043
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities.......... $ 2,774,783 $ 2,748,032
----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and building.......... 1,231,106 1,363,805
Increase in restricted cash...................... (1,140,970) (1,363,805)
----------- -----------
Net cash used in investing activities.......... 90,136 --
----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners................ (2,780,003) (2,740,001)
Distributions to holder of minority interest..... (6,613) (6,198)
----------- -----------
Net cash used in financing activities.......... (2,786,616) (2,746,199)
----------- -----------
Net Increase in Cash and Cash Equivalents............ 78,303 1,833
Cash and Cash Equivalents at Beginning of Period..... 1,583,883 1,769,483
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 1,662,186 $ 1,771,316
----------- -----------
Supplemental Schedule of Non-Cash Investing and
Financing Activities
Net investment in direct financing leases
reclassified to land and building on operating
leases as a result of lease amendments............ $ 2,024,000 $ --
----------- -----------
Distributions declared and unpaid at end of
period............................................ $ 900,001 $ 900,001
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, 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, 1997.
The Partnership accounts for its 88.26% interest in Allegan Real Estate
Joint Venture using the consolidation method. Minority interest represents the
minority joint venture partner's proportionate share of the equity in the
Partnership's consolidated joint venture. All significant intercompany accounts
and transactions have been eliminated.
Certain items in the prior year's financial statements have been
reclassified to conform to 1998 presentation. These reclassifications had no
effect on partners' capital or net income.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2. Land and Building on Operating Leases
In January 1998, the Partnership 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 $163,349 for financial reporting purposes.
This property was originally acquired by the Partnership in December 1991 and
had a cost of approximately $969,400, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Partnership sold the
property for approximately $261,300 in excess of its original purchase price.
In addition, 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 as a
deposit in 1995), resulting in a gain of $7,810 for financial reporting
purposes.
3. Net Investment in Direct Financing Leases
In March 1998, the Partnership sold its property in Sacramento, California,
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 2).
F-5
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
In August 1998, three of the Partnership's leases were amended. As a result,
the Partnership reclassified the leases 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.
4. Restricted Cash
As of September 30, 1998, the net sales proceeds of $1,230,672 from the sale
of the property in Sacramento, California, plus accrued interest of $29,594
were being held in an interest-bearing escrow account pending the release of
funds by the escrow agent to acquire an additional property.
5. Subsequent Event
In October 1998, the Partnership sold its 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.
In November 1998, the Partnership reinvested approximately $1,020,800 of the
net sales proceeds it received from the sale of the property in Sacramento,
California in a Jack in the Box property located in San Marcos, Texas. In
connection therewith, the Partnership entered into a long term, triple-net
lease with terms substantially the same as its other leases.
F-6
<PAGE>
Report of Independent Accountants
To the Partners
CNL Income Fund X, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund X, Ltd.
(a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. 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 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 Income Fund X, Ltd. as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
January 14, 1998
F-7
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
ASSETS
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation.............................. $15,709,899 $15,224,392
Net investment in direct financing leases.............. 13,460,125 14,219,805
Investment in joint ventures........................... 3,505,326 3,449,210
Cash and cash equivalents.............................. 1,583,883 1,769,483
Restricted cash........................................ 92,236 --
Receivables, less allowance for doubtful accounts of
$137,856 and $4,428................................... 123,903 52,470
Prepaid expenses....................................... 5,877 5,503
Accrued rental income, less allowance for doubtful
accounts of $117,593 and $88,781...................... 1,775,374 1,683,593
Other assets........................................... 33,104 33,104
----------- -----------
$36,289,727 $36,437,560
=========== ===========
<CAPTION>
LIABILITIES AND PARTNERS' CAPITAL
<S> <C> <C>
Accounts payable....................................... $ 6,033 $ 2,913
Escrowed real estate taxes payable..................... 27,784 45,060
Distributions payable.................................. 900,001 940,000
Due to related parties................................. 4,946 1,609
Rents paid in advance and deposits..................... 132,419 160,928
----------- -----------
Total liabilities.................................... 1,071,183 1,150,510
Commitments and Contingencies (Note 11)
Minority interest...................................... 64,501 64,385
Partners' capital...................................... 35,154,043 35,222,665
----------- -----------
$36,289,727 $36,437,560
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases..... $1,867,795 $1,832,781 $1,783,928
Earned income from direct financing
leases................................. 1,534,525 1,648,358 1,690,299
Contingent rental income................ 51,678 45,126 53,189
Interest and other income............... 88,853 75,896 89,630
---------- ---------- ----------
3,542,851 3,602,161 3,617,046
---------- ---------- ----------
Expenses:
General operating and administrative.... 153,672 166,049 150,157
Professional services................... 26,890 33,692 23,563
Real estate taxes....................... 9,703 -- --
State and other taxes................... 9,372 2,357 15,510
Depreciation and amortization........... 214,468 207,959 201,696
---------- ---------- ----------
414,105 410,057 390,926
---------- ---------- ----------
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.... 3,128,746 3,192,104 3,226,120
Minority Interest in Income of
Consolidated Joint Venture............... (8,522) (8,663) (9,066)
Equity in Earnings of Unconsolidated Joint
Ventures................................. 278,919 278,371 267,799
Gain on Sale of Land and Building......... 132,238 -- 67,214
---------- ---------- ----------
Net Income................................ $3,531,381 $3,461,812 $3,552,067
========== ========== ==========
Allocation of Net Income:
General partners........................ $ 33,991 $ 34,618 $ 35,491
Limited partners........................ 3,497,390 3,427,194 3,516,576
---------- ---------- ----------
$3,531,381 $3,461,812 $3,552,067
========== ========== ==========
Net Income per Limited Partner Unit....... $ 0.87 $ 0.86 $ 0.88
========== ========== ==========
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 X, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<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,
1994................... $1,000 $103,609 $40,000,000 $(10,083,130) $10,257,313 $(4,790,000) $35,488,792
Distributions to limited
partners ($0.91 per
limited partner unit).. -- -- -- (3,640,003) -- -- (3,640,003)
Net income.............. -- 35,491 -- -- 3,516,576 -- 3,552,067
------ -------- ----------- ------------ ----------- ----------- -----------
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
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows From Operating Activities:
Cash received from tenants........... $ 3,380,391 $ 3,491,064 $ 3,290,242
Distributions from unconsolidated
joint ventures...................... 353,207 354,648 341,527
Cash paid for expenses............... (190,902) (211,345) (177,007)
Interest received.................... 53,721 61,435 72,600
----------- ----------- -----------
Net cash provided by operating
activities......................... 3,596,417 3,695,802 3,527,362
----------- ----------- -----------
Cash Flows From Investing Activities:
Proceeds from sale of land and
building............................ 1,363,805 -- 1,057,386
Deposit received on contract for
sale of land........................ -- -- 69,000
Additions to land and buildings on
operating leases.................... (1,277,308) (978) (359,506)
Investment in direct financing
leases.............................. -- (1,542) (566,097)
Investment in joint venture.......... (130,404) (108,952) --
Increase in restricted cash.......... (89,702) -- --
----------- ----------- -----------
Net cash provided by (used in)
investing activities............... (133,609) (111,472) 200,783
----------- ----------- -----------
Cash Flows From Financing Activities:
Distributions to limited partners.... (3,640,002) (3,640,003) (3,700,003)
Distributions to holder of minority
interest............................ (8,406) (7,697) (7,998)
----------- ----------- -----------
Net cash used in financing activities.. (3,648,408) (3,647,700) (3,708,001)
----------- ----------- -----------
Net Increase (Decrease) in Cash and
Cash Equivalents...................... (185,600) (63,370) 20,144
Cash and Cash Equivalents at Beginning
of Year............................... 1,769,483 1,832,853 1,812,709
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year.................................. $ 1,583,883 $ 1,769,483 $ 1,832,853
=========== =========== ===========
Reconciliation of Net Income to Net
Cash Provided by Operating Activities:
Net income............................ $ 3,531,381 $ 3,461,812 $ 3,552,067
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation.......................... 214,468 206,497 199,696
Amortization.......................... -- 1,462 2,000
Minority interest in income of
consolidated joint venture........... 8,522 8,663 9,066
Equity in earnings of unconsolidated
joint ventures, net of
distributions........................ 74,288 75,898 73,630
Gain on sale of land and building..... (132,238) -- (67,214)
Decrease (increase) in receivables.... (71,222) 46,834 10,222
Increase in prepaid expenses.......... (374) (3,852) (664)
Decrease in net investment in direct
financing leases..................... 211,942 160,007 141,684
Increase in accrued rental income..... (201,022) (315,028) (309,574)
Increase (decrease) in accounts
payable and accrued expenses......... (14,156) 14,317 (1,057)
Increase (decrease) in due to related
parties.............................. 3,337 (5,395) 7,004
Increase (decrease) in rents paid in
advance and deposits................. (28,509) 44,587 (89,498)
----------- ----------- -----------
Total adjustments................... 65,036 233,990 (24,705)
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................ $ 3,596,417 $ 3,695,802 $ 3,527,362
=========== =========== ===========
Supplemental Schedule of Non-Cash
Financing Activities:
Distributions declared and unpaid at
December 31.......................... $ 900,001 $ 940,000 $ 940,000
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-11
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
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.
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.
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 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
F-12
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
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 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.
F-13
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. Land and Buildings on Operating Leases
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Land............................................ $ 9,947,295 $ 9,926,720
Buildings....................................... 6,875,851 6,196,451
----------- -----------
16,823,146 16,123,171
Less accumulated depreciation................... (1,113,247) (898,779)
----------- -----------
$15,709,899 $15,224,392
=========== ===========
</TABLE>
In September 1997, the Partnership sold its 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 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.
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, 1997, 1996 and 1995, the Partnership recognized $201,021, $315,029 and
$309,574, 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, 1997:
<TABLE>
<S> <C>
1998.......................................................... $ 1,796,664
1999.......................................................... 1,817,764
2000.......................................................... 1,830,536
2001.......................................................... 1,875,201
2002.......................................................... 2,004,123
Thereafter.................................................... 16,727,751
-----------
$26,052,039
===========
</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>
1997 1996
----------- -----------
<S> <C> <C>
Minimum lease payments receivable............... $25,273,063 $27,990,876
Estimated residual values....................... 4,225,008 4,375,790
Less unearned income............................ (16,037,946) (18,146,861)
----------- -----------
Net investment in direct financing leases....... $13,460,125 $14,219,805
=========== ===========
</TABLE>
F-14
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
In September 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).
The following is a schedule of future minimum lease payments to be received
on the direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998.......................................................... $ 1,758,896
1999.......................................................... 1,761,323
2000.......................................................... 1,762,806
2001.......................................................... 1,770,249
2002.......................................................... 1,800,446
Thereafter.................................................... 16,419,343
-----------
$25,273,063
===========
</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, 1996, one of the Partnership's leases was
amended. As a result of the lease amendment, the Partnership reclassified this
lease from a direct financing lease to an operating lease, whereby the property
was recorded at its net carrying value of $567,923.
5. Investment in Joint Ventures
The Partnership has a 50 percent, a 10.51% and a 41 percent interest in the
profits and losses of CNL Restaurant Investments III, Ashland Joint Venture and
Williston 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 1996, the Partnership acquired and leased a property in Clinton,
North Carolina, 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, 1997, the Partnership owned a 13.37% interest in this property.
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, 1997, the Partnership owned a 6.69% interest in this property.
F-15
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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
operator of national fast-food or family-style restaurants. The following
presents the joint ventures' combined, condensed financial information at
December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation......................... $9,573,341 $7,822,804
Net investment in direct financing lease.......... 661,991 658,422
Cash.............................................. 8,197 1,750
Receivables....................................... 26,766 8,164
Prepaid expenses.................................. 22,852 21,910
Liabilities....................................... 7,415 1,094
Partners' capital................................. 10,285,732 8,511,956
Revenues.......................................... 930,470 916,897
Net income........................................ 695,878 686,789
</TABLE>
The Partnership recognized income totalling $278,919, $278,371 and $267,799
for the years ended December 31, 1997, 1996 and 1995, 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.
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, 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 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.
During the year ended December 31, 1997, the Partnership declared
distributions to the limited partners of $3,600,003 and during each of the
years ended December 31, 1996 and 1995, the Partnership declared distributions
to the limited partners of $3,640,003. No distributions have been made to the
general partners to date.
F-16
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................. $3,531,381 $3,461,812 $3,552,067
Depreciation for tax reporting
purposes in excess of depreciation
for financial reporting purposes..... (289,098) (298,518) (304,027)
Direct financing leases recorded as
operating leases for tax reporting
purposes............................. 211,942 160,007 141,684
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............................. 15,294 10,839 12,592
Gain on sale of land and building for
financial reporting purposes in
excess of gain for tax reporting
purposes............................. (42,996) -- (16,395)
Allowance for doubtful accounts....... 133,428 -- --
Accrued rental income................. (201,022) (315,029) (309,574)
Rents paid in advance................. (22,593) 45,447 (80,403)
Minority interest in timing
differences of consolidated joint
venture.............................. 1,461 2,184 2,062
Other................................. -- (7,738) 9,613
---------- ---------- ----------
Net income for federal income tax
purposes............................. $3,337,797 $3,059,004 $3,007,619
========== ========== ==========
</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 parent company of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, served
as president of CNL Fund Advisors, Inc. through October 1997. CNL Income Fund
Advisors, Inc. was a wholly owned subsidiary of CNL Group, Inc. until its
merger, effective January 1, 1996, with CNL Fund Advisors, Inc. During the
years ended December 31, 1997, 1996 and 1995, CNL Income Fund Advisors, Inc.
and CNL Fund Advisors, Inc. (hereinafter referred to collectively as the
"Affiliates") each performed certain services for the Partnership, as described
below.
During the years ended December 31, 1997, 1996 and 1995, certain 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 Affiliates 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, 1997, 1996 and 1995.
Certain Affiliates are 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
F-17
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
or three percent of the sales price if the Affiliates provide 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, 1997, 1996 and 1995, the Affiliates
provided accounting and administrative services to the Partnership on a day-to-
day basis. The Partnership incurred $87,967, $94,496 and $76,108 for the years
ended December 31, 1997, 1996 and 1995, respectively, for such services.
The due to related parties at December 31, 1997 and 1996, totalled $4,946
and $1,609, respectively.
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.
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 at least one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Foodmaker, Inc............................... $646,477 $684,277 $686,417
Flagstar Enterprises, Inc. and Denny's,
Inc......................................... 602,913 668,919 674,611
Golden Corral Corporation.................... 548,399 568,164 567,654
</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 at least one of
the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Burger King................................... $777,378 $714,792 $721,870
Jack in the Box............................... 646,477 684,277 686,417
Golden Corral Family Steakhouse Restaurants... 548,399 568,164 567,654
Shoney's...................................... 441,052 439,330 354,457
Hardees....................................... 403,882 468,037 471,507
Perkins....................................... 336,983 393,046 449,149
</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. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
F-18
<PAGE>
CNL INCOME FUND X, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
11. Commitments and Contingencies
In October 1995, the tenant of the Partnership's 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, from the subtenant, to the Partnership.
As of December 31, 1997, the sale for the vacant parcel of land had not been
consummated and as a result, the net proceeds of $68,000 (representing the
original $69,000 received by the Partnership, less $1,000 in costs incurred in
anticipation of the sale) were recorded as a deposit at December 31, 1997. The
contract price of $69,000 exceeds the Partnership's cost attributable to the
parcel of land.
12. Subsequent Events
During 1997, the Partnership entered into a contract to sell the property in
Sacramento, California to the tenant. In January 1998, the Partnership sold
this property for $1,250,000 and received net sales proceeds of $1,234,175,
resulting in a gain of approximately $163,300 for financial reporting purposes.
The Partnership intends to reinvest the net sales proceeds in a replacement
property.
F-19
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to the
Company gives effect to the Acquisition, and is based on estimates and
assumptions set for the 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 the Company, the
historical combined financial information of CNL Income Fund X, Ltd., (the "CNL
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 the Company, the CNL Income
Fund, Advisor and CNL Restaurant Financial Services Group. The pro forma
balance sheet assumes that the Acquisition occurred on September 30, 1998; the
pro forma consolidated statements of earnings assume that the Property
Acquisitions (as defined on page ) and the Acquisition occurred on January
1, 1997.
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.
UNAUDITED PRO FORMA BALANCE SHEET
September 30, 1998
<TABLE>
<CAPTION>
Historical Pro Forma
----------------------------------------------------------------------------- ----------------------------
CNL Financial CNL
CNL Income Services, Financial Combined
APF Fund X, Ltd. Advisor Inc. Corp. Portfolios Adjustments Pro Forma
------------ ------------ ---------- ------------- ------------ ------------ ----------- ------------
ASSETS:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Land and
buildings on
operating
leases, net..... $298,967,972 $17,037,038 $ 0 $ 0 $ 0 $316,005,010 $ 6,563,919 (1)
26,052,741 (2) $348,621,670
Net investment in
direct financing
leases.......... 117,028,760 10,751,793 0 0 0 127,780,553 3,913,249 (1) 131,693,802
Mortgages and
notes
receivable...... 33,523,506 0 0 0 173,776,981 207,300,487 849,195 (2) 208,149,682
Other
Investments..... 16,200,316 0 200,000 0 6,561,628 22,961,944 -- 22,961,944
Investment in
joint ventures.. 631,374 3,437,666 0 0 0 4,069,040 1,230,479 (1) 5,299,519
Cash and cash
equivalents..... 90,674,289 2,922,452 283,300 599,997 5,098,033 99,578,071 (482,089)(1)
(8,933,000)(1)
(26,901,936)(2) 63,261,046
Receivables...... 575,104 294 7,544,985 6,824,632 517,471 15,462,486 (7,854,879)(3) 7,607,607
Accrued rental
income.......... 3,071,451 1,348,423 0 0 0 4,419,874 (1,348,423)(1) 3,071,451
Other assets..... 5,711,195 42,353 401,524 295,570 3,854,477 10,305,119 41,661,989 (1)
(3,697,186)(1) 48,269,922
------------ ----------- ---------- ---------- ------------ ------------ ----------- ------------
Total assets.... $566,383,967 $35,540,019 $8,429,809 $7,720,199 $189,808,590 $807,882,584 $31,054,059 (1) $838,936,643
============ =========== ========== ========== ============ ============ =========== ============
<CAPTION>
LIABILITIES &
EQUITY:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Accounts payable
and accrued
liabilities..... $ 379,496 $ 72,845 $ 449,751 $ 193,949 $ 1,236,138 $ 2,332,179 $ -- $ 2,332,179
Accrued
construction
costs payable... 3,045,304 0 0 0 0 3,045,304 -- 3,045,304
Distributions
payable......... 0 900,001 2,220,000 0 0 3,120,001 -- 3,120,001
Due to related
parties......... 2,552,411 5,500 0 1,452,512 6,556,920 10,567,343 (7,854,879)(3) 2,712,464
Income tax
payable......... 0 0 1,989,003 0 1,001,861 2,990,864 (2,990,864)(4) 0
Line of credit... 6,765,575 0 0 0 0 6,765,575 -- 6,765,575
Notes payable.... 0 0 390,398 28,462 175,528,203 175,947,063 -- 175,947,063
Deferred income.. 1,015,758 0 0 0 0 1,015,758 -- 1,015,758
Rents paid in
advance......... 437,497 90,378 0 0 0 527,875 -- 527,875
Minority
interest........ 282,544 64,480 0 0 0 347,024 -- 347,024
Common Stock..... 621,187 0 9,800 2,000 200 633,187 152,950 (1) 786,137
Additional paid
in capital...... 556,830,578 0 482,964 5,231,827 3,887,496 566,432,865 155,183,099 (1) 721,615,964
Accumulated
distributions in
excess of net
earnings........ (5,546,383) 0 2,887,893 811,449 1,597,772 (249,269) (82,020,296)(1)
2,990,864 (4) (79,278,701)
Partners
capital......... 0 34,406,815 0 0 0 34,406,815 (34,406,815)(1) 0
------------ ----------- ---------- ---------- ------------ ------------ ----------- ------------
Total
liabilities and
equity......... $566,383,967 $35,540,019 $8,429,809 $7,720,199 $189,808,590 $807,882,584 $31,054,059 $838,936,643
============ =========== ========== ========== ============ ============ =========== ============
</TABLE>
F-21
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA INCOME STATEMENT
September 30, 1998
<TABLE>
<CAPTION>
Historical Pro Forma
------------------------------------------------------------------------- ----------------------------
CNL
CNL Income Financial CNL
Fund X, Services, Financial Combined
APF Ltd. Advisor Inc. Corp. Portfolios Adjustments Pro Forma
----------- ---------- ----------- ----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and earned
income........... $22,947,199 $1,944,202 $ 0 $ 0 $ 0 $24,891,401 $ 9,635,208 (a)
200,382 (b) $34,726,991
Fees.............. 0 0 21,405,127 5,115,549 6,871 26,527,493 (21,011,835)(c)
(2,875,906)(d) 2,639,752
Interest and
other income..... 6,117,911 85,774 751 432,506 18,031,141 24,668,083 1,526,547 (c) 26,194,630
----------- ---------- ----------- ----------- ----------- ----------- ------------ -----------
Total revenue... 29,065,110 2,029,976 21,405,878 5,548,055 18,037,958 76,086,977 (12,525,604) 63,561,373
Expenses:
General and
administrative... 1,539,004 176,935 6,701,115 4,107,311 2,597,171 15,121,536 (1,308,058)(f)
(1,415,100)(g)
(34,787)(h) 12,363,591
Advisory fees..... 1,248,393 0 0 0 1,026,231 2,274,624 (2,274,624)(8) 0
Fees to
Restaurant
Financial
Services Group... 0 0 256,456 1,569,202 0 1,825,658 (1,825,658)(n) 0
Interest.......... 0 0 105,668 3,534 14,230,999 14,340,201 (68,670)(m) 14,271,531
State taxes....... 397,569 10,520 15,226 18,564 20,616 643,495 56,534 (j) 700,029
Depreciation--
other............ 0 0 75,607 55,056 0 130,663 0 130,663
Depreciation--
property......... 2,684,924 187,745 0 0 0 2,872,669 1,512,427 (k) 4,385,096
Amortization....... 8,096 0 55,932 138 945,299 1,009,465 1,562,325 2,571,790
----------- ---------- ----------- ----------- ----------- ----------- ------------ -----------
Total operating
expenses....... 5,877,986 375,200 7,210,004 5,753,805 19,001,316 38,218,311 (3,795,611) 34,422,700
----------- ---------- ----------- ----------- ----------- ----------- ------------ -----------
Operating earnings
(losses).......... 23,187,124 1,654,776 14,195,874 (205,750) (963,358) 37,868,666 (8,729,993) 29,138,673
Equity in
earnings of
joint
ventures/minority
interest (23,271) 206,840 0 12,452 0 196,021 0 196,021
Gain on sale of
properties....... 0 171,159 0 0 0 171,159 0 171,159
Gain on
securitization... 0 0 0 0 3,018,268 3,018,268 0 3,018,268
----------- ---------- ----------- ----------- ----------- ----------- ------------ -----------
Net earnings
(losses) before
income taxes...... 23,163,853 2,032,775 14,195,874 (193,298) 2,054,910 41,254,114 (8,729,993) 32,524,121
Provision
(credit) for
federal income
taxes............ 0 0 5,607,415 (81,229) 789,895 6,316,081 (6,316,081)(o) 0
Net income......... $23,163,853 $2,032,775 $ 8,588,459 $ (112,069) $ 1,265,015 $34,938,033 $ (2,413,912) $32,524,121
=========== ========== =========== =========== =========== =========== ============ ===========
Earnings per
share............. $ 0.49 $ 0.44
=========== ===========
Shares outstanding:
Weighted
average.......... 47,633,909 73,933,192(p)
=========== ===========
End of period..... 62,118,679 78,613,713
=========== ===========
</TABLE>
F-22
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA INCOME STATEMENT
For the year ended December 31, 1997
<TABLE>
<CAPTION>
Historical Pro Forma
-------------------------------------------------------------------------- ---------------------------
CNL Financial CNL
CNL Income Services, Financial Combined
APF Fund X, Ltd. Advisor Inc. Corp. Portfolio Adjustments Pro Forma
----------- ------------ ---------- ------------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and earned
income........... $15,490,615 $3,453,998 $ 0 $ 0 $ 0 $18,944,613 $24,048,982 (a)
203,314 (b) $43,196,909
Fees.............. 0 0 8,310,836 5,965,110 73,704 14,349,650 (9,077,347)(c)
(2,662,141)(d) 2,610,612
Interest and
other income..... 3,967,318 88,853 165,569 0 10,932,843 15,154,583 249,395 (e) 15,403,978
----------- ---------- ---------- ---------- ---------- ----------- ----------- -----------
Total Revenue... 19,457,933 3,542,851 8,476,405 5,965,110 11,006,547 48,448,846 12,762,203 61,211,049
Expenses:
General and
administrative... 1,010,725 190,265 4,266,169 1,889,904 828,848 8,185,911 (742,582)(f)
(1,619,238)(g)
(46,950)(h) 5,777,141
Advisory fees..... 804,879 0 0 0 1,802,532 2,607,411 (2,607,411)(i) 0
Fees to
Restaurant
Financial
Services Group... 0 0 151,041 594,041 0 745,082 (745,082)(n) 0
Interest.......... 0 0 162,153 183,315 8,320,000 8,665,468 (81,594)(m) 8,583,874
State taxes....... 251,358 9,372 12,084 1,294 1,600 275,708 22,601 (j) 298,309
Depreciation--
other............ 0 0 48,490 14,637 0 63,127 -- 63,127
Depreciation--
property......... 1,784,269 214,468 0 0 0 1,998,737 3,164,982 (k) 5,163,719
Amortization...... 10,793 0 18,093 61,324 916,577 1,006,787 2,08,099 (l) 3,089,886
----------- ---------- ---------- ---------- ---------- ----------- ----------- -----------
Total operating
expenses....... 3,862,024 414,105 4,658,030 2,744,515 11,869,557 23,548,231 (572,175) 22,976,056
----------- ---------- ---------- ---------- ---------- ----------- ----------- -----------
Operating earnings
(losses).......... 15,595,909 3,128,746 3,818,375 3,220,595 (863,010) 24,900,615 13,334,378 38,234,993
Equity in
earnings of
joint
ventures/minority
interest......... (31,453) 270,297 0 (126,627) 0 112,317 -- 112,317
Gain on sale of
properties....... 0 132,238 0 0 0 132,238 -- 132,218
----------- ---------- ---------- ---------- ---------- ----------- ----------- -----------
Net earnings before
income taxes...... 15,564,456 3,531,381 3,818,375 3,093,968 (863,010) 25,145,170 13,334,378 38,479,548
Provision
(credit) for
federal income
taxes............ 0 0 1,508,258 1,272,133 (317,785) 2,462,606 (2,462,606)(o) 0
Net earnings
(losses).......... $15,564,456 $3,531,381 $2,310,117 $1,821,835 $ (545,225) $22,682,564 $15,796,984 $38,479,548
=========== ========== ========== ========== ========== =========== =========== ===========
Earnings per
share............. $ 0.67 $ 0.52
=========== ===========
Shares outstanding:
Weighted
average.......... 23,423,868 74,606,589(p)
=========== ===========
End of period..... 36,192,971 74,606,589
=========== ===========
</TABLE>
F-23
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of September 30, 1998 reflects the
transactions of the acquisition of the CNL Income Fund, Advisor and CNL
Restaurant Financial Services Group (the "Acquisition Proposal") as set forth
in this Proxy Statement. The Pro Forma Statements of Earnings for the nine
months ended September 30, 1998, and for the year ended December 31, 1997, have
been prepared to reflect a) the issuance of additional shares and the property
acquisitions completed from January 1, 1997 through November 30, 1998
("Offering and Property Transactions") and b) the transactions of the
Acquisition Proposal as set forth in this Proxy Statement. This unaudited pro
forma financial information has been prepared utilizing the historical
financial statements of the Company and the historical combined financial
information of the CNL Income Fund, Advisor and CNL Restaurant Financial
Services Group and should be read in conjunction with the selected historical
financial data and accompanying notes of the Company, the CNL Income Fund,
Advisor and the CNL Restaurant Financial Services Group. The Pro Forma Balance
Sheet was prepared as if the Offering and Property Transactions and the
Acquisition Proposal occurred on September 30, 1998. The Pro Forma Statements
of Earnings were prepared as if the Property Acquisitions and the Acquisition
Proposal occurred as of January 1, 1997. The pro forma information is unaudited
and is not necessarily indicative of the consolidated operating results which
would have occurred if the Offering and Acquisition Transaction and the
Acquisition Proposal 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 Acquisition
Proposal have been made. Capitalized terms have the meanings as defined in the
Proxy Statement.
2. Method of Accounting
The acquisition of the CNL Income Fund and the CNL Restaurant Financial
Services Group will be accounted for under the purchase accounting method. The
Company 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, the Company 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 operating expense on the Company's consolidated statements of
earnings, but the Company will not deduct this expense for purposes of
calculating funds from operations due to the non-recurring and non-cash nature
of the expense.
All significant intercompany balances and transactions between the Company,
CNL Income Fund, Advisor and CNL Restaurant Financial Services Group have been
eliminated in the pro forma financial statements.
3. Adjustments to Pro Forma Balance Sheet
The following describes the pro forma adjustments to the Pro Forma Balance
Sheet as of September 30, 1998, as if the Acquisition was consummated on such
date. For purposes of the pro forma financial statements, it is assumed that at
an annual meeting of stockholders, the stockholders of the Company approved an
amendment to increase the number of authorized shares to an amount necessary to
enable the Company to issue the shares for the Acquisition.
(1) Represents the payment of $482,089 in cash and the issuance of
16,495,034 common shares in consideration for the purchase of the CNL
Income Fund, Advisor and CNL Restaurant Financial Services Group at
September 30, 1998 at a share price of $10 plus estimated transaction
costs.
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
The acquisition of the CNL Income Fund and the CNL Restaurant Financial
Services Group has been accounted for under the purchase accounting method and
goodwill was recognized to the related party, the consideration paid in excess
of the fair value of the net tangible assets received has been accounted for as
costs incurred in acquiring the Advisor from a related party because the
Advisor has not been deemed to qualify as a "business" for purposes of applying
APB Opinion No. 16 "Business Combinations." Upon consummation of the
Acquisition, this expense will be recorded as an operating expense on the
Company's statement of earnings. The Company will not deduct this expense for
purposes of calculating funds from operations due to the nonrecurring and non-
cash nature of the expense. As of September 30, 1998, $249,403 of transaction
costs had been incurred by the Company.
<TABLE>
<S> <C>
CNL Income Fund............................................. $ 42,432,425
Advisor..................................................... 76,000,000
CNL Restaurant Financial Services Group..................... 47,000,000
------------
Total Purchase Price (cash and shares).................... 165,432,425
Less cash paid to CNL Income Fund........................... (482,089)
------------
Share consideration....................................... 164,950,336
Transaction costs of the Company............................ 8,933,000
------------
Total costs incurred...................................... $173,883,336
============
</TABLE>
In addition, the Company i) used $8,933,000 in cash to pay the transaction
costs related to the Acquisition, ii) made an upward adjustment to the CNL
Income Fund carrying value of land and building on operating leases by
$6,563,919, net investment in direct financing leases by $3,913,249, investment
in joint venture by $1,230,479, made downward adjustments to the carrying value
of accrued rental income of $1,348,243, made downward adjustments to other
assets of $3,697,186 to adjust historical values to fair value, iii) recorded
goodwill of $41,661,989 for the acquisition of the CNL Restaurant Financial
Services Group, iv) reduced retained earnings by $76,723,182 for the excess
consideration paid over the net assets of the Advisor and removed the
historical common stock balance of $12,000, additional paid in capital balance
of $9,602,287, retained earnings balance of $5,297,114 and partners capital
balance of $34,406, 815 of the CNL Income Fund, Advisor and CNL Restaurant
Financial Services Group.
(2) Represents the use of $26,901,936 in cash and cash equivalents at
September 30, 1998 to acquire $26,052,741 in properties and issue $849,195
in mortgage notes which occurred from October 1, 1998 through November 30,
1998.
(3) Represents the elimination by the CNL Income Fund of $5,500 in
related party payables recorded as receivables by the Advisor, the
elimination by the CNL Restaurant Financial Services Group of $6,641,379 in
related party payables recorded as receivables by CNL Restaurant Financial
Services Group and the elimination by the Company of $1,208,000 in related
party payables recorded as receivables by the Advisor.
(4) Represents the elimination of income taxes payable of $2,990,864
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.
F-25
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
4. Adjustments to Pro Forma Income Statements
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the nine months ended September 30, 1998, as if
the Acquisition was consummated as of January 1, 1997.
(a) Represents rental and earned income as if 1) properties that had been
previously constructed and acquired from January 1, 1998 through
November 30, 1998 had been acquired and leased on January 1, 1997 and
2) properties that were developed by the Company from January 1, 1998
through November 30, 1998 had been placed in service on May 1, 1997
(assumes a four month development period).
<TABLE>
<S> <C>
Rental and earned income on Property Transactions by the
Company................................................... $9,635,208
</TABLE>
(b) Represents $200,382 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms
for the leases acquired from the CNL Income Fund as if the leases had
been acquired on January 1, 1997.
(c) Represents the elimination of intercompany fees between the Company,
the CNL Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Origination fees.......................................... $ (1,569,202)
Secured equipment lease fee............................... (44,426)
Advisory fees............................................. (1,722,383)
Reimbursement of administrative costs..................... (293,941)
Acquisition fees.......................................... (15,392,193)
Underwriting fees......................................... (254,945)
Administrative fees....................................... (148,491)
Executive fee............................................. (310,000)
Guarantee fees............................................ (93,750)
Servicing fee............................................. (1,014,117)
Development fees.......................................... (166,876)
Consulting fee............................................ (1,511)
------------
Total..................................................... $(21,011,835)
============
</TABLE>
(d) Represents the deferral of $2,875,906 in origination fees collected by
CNL Restaurant Financial Services Group that should be amortized over
the term of the loans originated (20 years) in accordance with the
Statement of Financial Accounting Standards #91 "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring
Loans and Initial Direct Costs of Leases."
(e) Represents interest income of $1,318,870 earned from Other Investments
acquired and mortgage notes issued from January 1, 1998 through
November 30, 1998 as if this had occurred on January 1, 1997 and the
amortization of $207,677 of deferred origination fees collected during
the year ended December 31, 1997 and during the nine months ended
September 30, 1998, which were capitalized and deferred in (d) above as
if they had been collected on January 1, 1997. These deferred fees are
being amortized and recorded as interest income.
(f) Represents the elimination of intercompany expenses paid between the
Company, the CNL Income Fund, the Advisor and the CNL Restaurant
Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs...................... $ (293,941)
Servicing fee.............................................. (1,014,117)
-----------
$(1,308,058)
===========
</TABLE>
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by the Company
were subject to capitalization during the entire period and 2) costs
relating to properties not developed by the Company were subject to
capitalization up through the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs........................... $(1,415,100)
</TABLE>
(h) Represents savings of $34,787 in professional services and
administrative expenses resulting from reporting on one combined
Company versus 22 separate entities.
(i) Represents the elimination of advisory fees between the Company, the
CNL Income Fund, the Advisor and the CNL Restaurant Financial Services
Group:
<TABLE>
<S> <C>
Advisory fees............................................... $(1,722,383)
Administrative fees......................................... (148,491)
Executive fee............................................... (310,000)
Guarantee fees.............................................. (93,750)
-----------
$(2,274,624)
===========
</TABLE>
(j) Represents additional income taxes of $56,534 resulting from assuming
that acquisitions from January 1, 1998 through November 30, 1998 had
been acquired on January 1, 1997 and assuming that the CNL Income Fund
had operated under a REIT structure.
(k) Represents an increase in depreciation of the building portion of the
properties acquired from January 1, 1998 through November 30, 1998 as
if they had been acquired on January 1, 1997 and the step up in basis
referred to in footnote (2) from acquiring the CNL Income Fund
portfolio using the straight-line method over the estimated useful
lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense.......................................... $1,512,427
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of the
CNL Restaurant Financial Services Group referred to in footnote (2)
<TABLE>
<S> <C>
Amortization of goodwill..................................... $1,562,325
</TABLE>
(m) Represents elimination of interest expense recorded for the
amortization of $350,000 in arrangement fees collected during the year
ended December 31, 1997 which were eliminated in II (d) below.
<TABLE>
<S> <C>
Interest expense............................................... $(68,670)
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees incurred
between the Company, the CNL Income Fund, the Advisor and the CNL
Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees............................................ $(1,569,202)
Underwriting fees........................................... (254,945)
Consulting fee.............................................. (1,511)
-----------
$(1,825,658)
===========
</TABLE>
(o) Represents the elimination of $6,316,081 in the provision for income
taxes as a result of the Acquisition. The Company expects to continue
to qualify as a REIT and does not expect to incur federal income taxes.
(p) Common shares issued during the period required to fund acquisitions as
if they had been acquired on January 1, 1997 were assumed to have been
issued and outstanding as of January 1, 1998. For purposes of the
proforma financial statements, it is assumed that the stockholders
approved the proposal to increase the number of authorized common
shares of the Company.
F-27
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
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, 1997, as if the
Acquisition was consummated as of January 1, 1997.
(a) Represents rental and earned income as if 1) properties that had been
previously constructed and acquired from January 1, 1998 through
November 30, 1998 had been acquired and leased on January 1, 1997 and
2) properties that were developed by the Company from January 1, 1997
through November 30, 1998 had been placed in service on May 1, 1997
(assumes a four month development period).
<TABLE>
<S> <C>
Rental and earned income on Property Transactions by the
Company.................................................. $24,048,982
</TABLE>
(b) Represents $203,314 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms
for the leases acquired from the CNL Income Fund as if the leases had
been acquired on January 1, 1997.
(c) Represents the elimination of intercompany fees between the Company,
the CNL Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Origination fees........................................... $ (594,041)
Secured equipment lease fee................................ (375,219)
Advisory fees.............................................. (1,775,680)
Reimbursement of administrative costs...................... (143,594)
Acquisition fees........................................... (3,887,483)
Underwriting fees.......................................... (151,041)
Administrative fees........................................ (269,231)
Executive fee.............................................. (250,000)
Guarantee fees............................................. (312,500)
Arrangement fees........................................... (350,000)
Servicing fee.............................................. (598,988)
Development fees........................................... (369,570)
-----------
Total...................................................... $(9,077,347)
===========
</TABLE>
(d) Represents the deferral of $2,662,141 in origination fees collected by
CNL Restaurant Financial Services Group that should be amortized over
the term of the loans originated (20 years) in accordance with the
Statement of Financial Accounting Standards #91 "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring
Loans and Initial Direct Costs of Leases."
(e) Represents the elimination of interest income of $1,931,331 earned
during the year ended December 31, 1997 assuming all monies raised
during 1997 and all cash held on January 1, 1997 was used to effect the
Acquisition on January 1, 1997, represents interest income of
$2,047,619 earned from Other Investments acquired and mortgage notes
issued from January 1, 1998 through November 30, 1998 as if this had
occurred on January 1, 1997 and the recognition of $133,107 of
origination fees collected during the year ended December 31, 1997
which were deferred in (d) and are being amortized and recorded as
interest income.
(f) Represents the elimination of intercompany expenses paid between the
Company, the CNL Income Fund, the Advisor and the CNL Restaurant
Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs........................ $(143,594)
Servicing fee................................................ (598,988)
---------
$(742,582)
=========
</TABLE>
F-28
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by the Company
were subject to capitalization during the entire period and 2) costs
relating to properties not developed by the Company were subject to
capitalization up through the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs........................... $(1,619,238)
</TABLE>
(h) Represents savings of $46,950 in professional services and
administrative expenses resulting from reporting on one combined
Company versus 22 separate entities.
(i) Represents the elimination of advisory fees between the Company, the
CNL Income Fund, the Advisor and the CNL Restaurant Financial Services
Group:
<TABLE>
<S> <C>
Advisory fees............................................... $(1,775,680)
Administrative fees......................................... (269,231)
Executive fee............................................... (250,000)
Guarantee fees.............................................. (312,500)
-----------
$(2,607,411)
===========
</TABLE>
(j) Represents additional income taxes of $22,601 resulting from assuming
that acquisitions from January 1, 1997 through November 30, 1998 had
been acquired on January 1, 1997 and assuming that the CNL Income Fund
had operated under a REIT structure.
(k) Represents increase in depreciation of the building portion of the
properties acquired from January 1, 1997 through November 30, 1998 as
if they had been acquired on January 1, 1997 and the step up in basis
referred to in footnote (2) from acquiring the CNL Income Fund
portfolio using the straight-line method over the estimated useful
lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense.......................................... $3,164,982
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of the
CNL Restaurant Financial Services Group referred to in footnote (2)
<TABLE>
<S> <C>
Amortization of goodwill..................................... $2,083,099
</TABLE>
(m) Represents elimination of yearly amortization of arrangement fees of
$350,000 capitalized as deferred costs and amortized as interest
expense and the capitalization of interest expense during the period
that properties were under development.
<TABLE>
<S> <C>
Amortization of arrangement fees............................. $ (24,144)
Capitalization of interest during development period......... (57,450)
---------
$ (81,594)
=========
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees incurred
between the Company, the CNL Income Fund, the Advisor and the CNL
Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees.............................................. $(594,041)
Underwriting fees............................................. (151,041)
---------
(745,082)
=========
</TABLE>
(o) Represents the elimination of $2,462,606 in the provision for income
taxes as a result of the Acquisition. The Company expects to continue
to qualify as a REIT and does not expect to incur federal income taxes.
(p) Common shares issued during the period were assumed to have been issued
and outstanding as of January 1, 1997. For purposes of the proforma
financial statement, it is assumed that the stockholders approved the
proposal to increase the number of authorized common shares of the
Company.
F-29
<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 eighteen 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
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-1
<PAGE>
"Affiliated Group" means any affiliated group within the meaning of Code
(S)1504, or any similar group defined under a similar provision of state, local
or foreign law.
"Agreement" means this Agreement, as amended from time to time.
"APF" has the meaning set forth in the preface above.
"APF Common Shares" shall mean the shares of common stock, par value $0.01,
of APF.
"APF Indemnity Claim" has the meaning set forth in Section 12.1 below.
"APF SEC Documents" has the meaning set forth in Section 6.7 below.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms the basis for any specified
consequence.
"Business Combination" has the meaning set forth in Section 4.1(b) below.
"Cash/Note Option" has the meaning set forth in Section 4.4 below.
"Closing" has the meaning set forth in Section 2.3 below.
"CNL Income Funds" has the meaning set forth in the second paragraph of the
Recitals above.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the businesses
and affairs of the Fund, the Operating Partnership or APF, if any, that is not
already generally available to the public.
"Delaware RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Disclosure Schedule" has the meaning set forth in the first paragraph of
Article VII below.
"Dissenting Partners" has the meaning set forth in Section 4.4 below.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
tax-qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) tax-qualified defined benefit retirement
plan or arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Fairness Opinion" has the meaning set forth in the third paragraph of the
Recitals above.
"Florida RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Fund" has the meaning set forth in the preface above.
"Fund Articles of Merger" has the meaning set forth in Section 2.2 below.
"Fund Fairness Opinion" has the meaning set forth in the fifth paragraph of
the recitals above.
B-2
<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-3
<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-4
<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.
B-5
<PAGE>
ARTICLE III
Certificate of Limited Partnership; Limited Partnership Agreement;and General
Partner of Surviving Partnership
3.1 Certificate of Limited Partnership. At the Effective Time, the
certificate of limited partnership of the Operating Partnership, as in effect
immediately prior to the Effective Time, shall be the certificate of limited
partnership of the Surviving Partnership until thereafter amended as provided
therein.
3.2 Limited Partnership Agreement. At the Effective Time, the limited
partnership agreement of the Operating Partnership, as in effect immediately
prior to the Effective Time, shall be the limited partnership agreement of the
Surviving Partnership.
3.3 General Partner. The general partner of the Operating Partnership
immediately prior to the Effective Time shall be the general partner of the
Surviving Partnership from and after the Effective Time until it is replaced or
it resigns in accordance with the limited partnership agreement of the
Surviving Partnership.
ARTICLE IV
Share Consideration; Payment of Share Consideration
4.1 Share Consideration; Conversion or Cancellation of Fund Interests in
Merger.
(a) At the Effective Time, by virtue of the Merger and without any action by
the Parties, all of the outstanding Fund Interests (i) shall be converted into
the right to receive up to 4,243,243 fully paid and nonassessable APF Common
Shares (2,121,622 APF Common Shares if the Reverse Split [defined below] occurs
before the Closing) (the "Share Consideration") pursuant to the terms of
Section 4.2 below, (ii) shall cease to be outstanding, and (iii) shall be
canceled and retired and shall cease to exist, and each Partner, as the holder
of such Fund Interests shall cease to have any rights with respect thereto,
except the right to receive either (A) APF Common Shares therefor in accordance
with this Section 4.1 and Section 4.3 or (B) the cash and Notes in accordance
with Section 4.4 below. Subject to the approval of the APF's shareholders of an
amendment to its article of incorporation, APF anticipates that prior to the
Closing it will effect a one for two reverse stock split (the "Reverse Split")
pursuant to which each two shares of APF Common Shares outstanding will be
exchanged for one share of APF Common Shares.
(b) Except for the Reverse Stock Split described in Section 4.1(a), prior to
the Effective Time, APF shall not split or combine the APF Common Shares, or
pay a stock dividend or other stock distribution in APF Common Shares, or in
rights or securities exchangeable for, convertible into or exercisable for APF
Common Shares, or otherwise change APF Common Shares into, or exchange APF
Common Shares for, any other securities (whether pursuant to or as part of a
merger, consolidation, acquisition of property or stock, separation,
reorganization, or liquidation of APF as a result of which APF stockholders
receive cash, stock, or other property in exchange for, or in connection with,
their APF Common Shares (a "Business Combination") or otherwise), or make any
other dividend or distribution on or of APF Common Shares (other than regular
quarterly cash dividends paid on APF Common Shares or any distribution pursuant
to APF's dividend reinvestment plan), without the parties hereto having first
entered into an amendment to this Agreement pursuant to which the Share
Consideration will be adjusted to reflect such split, combination, dividend,
distribution, Business Combination, or change.
(c) At the Effective Time, by virtue of the Merger and without any action by
holders thereof, all of the APF Common Shares issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding.
4.2 Payment of Share Consideration. At the Closing, subject to Section 4.4
below, the Partners shall receive the Share Consideration (less expenses paid
by APF on behalf of the Fund), distributed in accordance
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with the provisions of the Fund's limited partnership agreement as of the
Closing Date. For the purposes of this Agreement, the Share Consideration will
be reduced (i) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund and (ii) as provided
in Section 4.4 below.
4.3 Fractional APF Common Shares. No certificates representing fractional
APF Common Shares shall be issued upon conversion of any Fund Interests. Each
Partner of the Fund who would otherwise be entitled to fractional APF Common
Shares will receive one APF Common Share for a fractional interest representing
50% or more of one APF Common Share. No APF Common Shares will be issued for a
fractional interest representing less than 50% of one APF Common Share.
4.4 Cash/Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote against the
Merger and affirmatively elect the cash/note option (the "Cash/Note Option"),
such Dissenting Partners shall be entitled to receive, in lieu of the Share
Consideration, consideration based on such Dissenting Partners' percentage
interest (as determined by the Fund's partnership agreement) in the Fund's
asset liquidation value of $38,583,104, based on Valuation Associates'
appraisal. Such consideration shall be payable 10% in cash and 90% in Callable
Notes due in 2006 (the "Notes"). The Notes will bear interest at a fixed rate
equal to 120% of the applicable federal rate as of the date the consent
solicitation on Form S-4 is mailed to the limited partners. The Share
Consideration shall be reduced on a one-for-one basis for all APF Shares
otherwise distributable to Dissenting Partners had such Dissenting Partners not
elected the Cash/Note Option.
ARTICLE V
Representations and Warranties of The General Partners
Each General Partner severally represents and warrants to APF and the
Operating Partnership that the statements contained in this Article V are
correct and complete as of the date hereof and on the Closing Date:
5.1 Authorization of Transaction. The General Partner has full power and
authority (including, as applicable, full corporate power and authority) to
execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement constitutes the valid and legally binding obligation of the
General Partner, enforceable in accordance with its terms and conditions. The
General Partner does not need to give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or
governmental agency in order to consummate the transactions contemplated by
this Agreement, except in connection with federal securities laws and any
applicable "Blue Sky" or state securities laws.
5.2 Noncontravention. Except as set forth in Section 5.2 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, will violate any
constitution, statute, regulation, rule, injunction, judgment, order, decree,
ruling, charge, or other restriction of any government, governmental agency, or
court to which the General Partner is subject or, as applicable, any provision
of the General Partner's articles of incorporation, bylaws or other
organizational documents.
ARTICLE VI
Representations and Warranties of APF, The OPGeneral Partner and The Operating
Partnership
APF, the OP General Partner and the Operating Partnership jointly and
severally represent and warrant to the General Partners and the Fund that the
statements contained in this Article VI are correct and complete as of the date
hereof and the Closing Date:
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6.1 Organization. APF is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Maryland. APF is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where the failure to
so qualify or obtain authorization would not have a Material Adverse Effect on
APF. APF has full corporate power and authority and all licenses, permits, and
authorizations necessary to carry on the businesses in which it is engaged and
to own and use the properties owned and used by it. The OP General Partner is a
corporation duly organized, validly existing, and in good standing under the
laws of the state of Delaware. The Operating Partnership is a limited
partnership duly organized, validly existing, and in good standing under the
laws of the State of Delaware. The Operating Partnership is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction
where such qualification is required, except where the failure to so qualify or
obtain authorization would not have a Material Adverse Effect on the Operating
Partnership. The Operating Partnership has full limited partnership power and
authority and all licenses, permits, and authorizations necessary to carry on
the businesses in which it is engaged and to own and use the properties owned
and used by it. APF and the OP General Partner have delivered to the General
Partners and the Fund correct and complete copies of the certificate of
incorporation of APF and the OP General Partner and the certificate of limited
partnership and the limited partnership agreement of the Operating Partnership
(each as amended to date). The minute books (containing the records of meetings
of the stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of APF and
the OP General Partner and any organizational records of the Operating
Partnership have been made available to the General Partners and the Fund and
are correct and complete. APF is not in default under or in violation of any
provision of its certificate of incorporation, and the Operating Partnership is
not in default under or in violation of any provision of its certificate of
limited partnership or limited partnership agreement.
6.2 Capital Stock. The authorized capital stock of APF consists of
125,000,000 shares of common stock, $.01 par value (the "APF Common Shares"),
of which 74,696,927 shares are outstanding as of January 31, 1999. Since
January 31, 1999, APF has not issued any shares of capital stock. All
outstanding APF Common Shares are, and all APF Common Shares issuable under any
stock option plans of APF, will be when issued in accordance with the terms
thereof, duly authorized, validly issued, fully paid and nonassessable. Except
for the 56,756,757 APF Common Shares which may be issued in connection with
APF's acquisition of the other 17 CNL Income Funds in the Proposed Acquisitions
and the 12,300,000 APF Shares which may be issued in connection with APF's
acquisition of CNL Fund Advisors, Inc., CNL Financial Services, Inc. and CNL
Financial Corp., there are outstanding on the date hereof no options, warrants,
calls, rights, commitments or any other agreements of any character to which
APF is a party or by which it may be bound, requiring it to issue, transfer,
sell, purchase, register, redeem, or acquire any shares of capital stock or any
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for or acquire any shares of its capital stock. All of the
outstanding general partner interests of the Operating Partnership are owned by
the OP General Partner, and all of the outstanding limited partner interests of
the Operating Partnership are owned by the OP Limited Partnership, and there
are outstanding on the date hereof no options, warrants, rights, commitments or
any other agreements of any character to which the Operating Partnership or any
partner thereof is a party or which it may be bound requiring it to issue,
transfer, sell, purchase, register, redeem or acquire any interest in the
Operating Partnership.
6.3 Authorization for Common Stock. The Share Consideration will, when
issued, be duly authorized, validly issued, fully paid and nonassessable, and
no stockholder of APF will have any preemptive right or similar rights of
subscription or purchase in respect thereof. The Share Consideration will be
registered under the Securities Act and will be registered or exempt from
registration under all applicable state securities laws. The Share
Consideration will, when issued, be approved for listing on the NYSE, subject
to official notice of issuance.
6.4 Authorization of Transaction. APF, the OP General Partner and the
Operating Partnership have full power and authority (including full corporate
and limited partnership, as applicable, power and authority) to
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execute and deliver this Agreement and to perform their obligations hereunder.
The execution, delivery and performance by APF, the OP General Partner and the
Operating Partnership of this Agreement have been duly and validly authorized
by the boards of directors of APF and the OP General Partner. This Agreement
constitutes the valid and legally binding obligation of APF, the OP General
Partner and the Operating Partnership, enforceable in accordance with its terms
and conditions. None of APF, the OP General Partner or the Operating
Partnership needs to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
6.5 Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which, APF, the OP General Partner or the
Operating Partnership is subject or any provision of APF's or the OP General
Partner's articles of incorporation or by-laws or the Operating Partnership's
certificate of limited partnership or limited partnership agreement or (ii)
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice or consent under any agreement, contract, lease, license,
instrument, or other arrangement to which APF, the OP General Partner or the
Operating Partnership is a party or by which it is bound or to which any of its
assets is subject or (iii) result in the imposition of a Security Interest upon
any of its assets.
6.6 Title to Assets. APF has good title to, or a valid leasehold interest
in, the properties and assets used by it, located on its premises, or set forth
in its most recent quarterly report on Form 10-Q filed with the SEC or acquired
after the date thereof, free and clear of all Security Interests, except for
properties and assets disposed of in the Ordinary Course of Business since the
date of its most recent quarterly report on Form 10-Q.
6.7 Reports and Financial Statements. APF has filed all required reports,
schedules, forms, statements and other documents with the SEC since January 1,
1996 (along with any such documents filed subsequent to the date hereof, the
"APF SEC Documents"). All of the APF SEC Documents (other than preliminary
material), as of their respective filing dates, complied in all material
respects with all applicable requirements of the Securities Act and the
Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such APF SEC Documents. None of the APF SEC Documents
at the time of filing contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading, except to the extent such statements have
been modified or superseded by later filed APF SEC Documents. There is no
unresolved violation, criticism or exception by any governmental entity of
which APF has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to APF could have a Material Adverse
Effect on APF. The financial statements of APF included in the APF SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP (except, the case
of interim financial statements, as permitted by Forms 10-Q and 8-K of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly presented, in accordance with the
applicable requirements of GAAP, the financial position of APF as of the dates
thereof and the results of operations and cash flows of APF for the periods
then ended (subject, in the case of interim financial statements, to normal
year-end adjustments).
6.8 Events Subsequent to September 30, 1998. Since September 30, 1998,
nothing has occurred which has had or would reasonably be expected to have a
Material Adverse Effect on APF.
6.9 Litigation. Except as publicly disclosed by APF in its APF SEC Documents
or on Schedule 1, there is no suit, claim, action, proceeding or investigation
pending or, to the Knowledge of APF, threatened against APF or any of its
Subsidiaries or any of their respective properties or assets which (a) if
adversely determined, could reasonably be expected to have a Material Adverse
Effect on APF or (b) as of the date hereof, questions
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the validity of this Agreement or any action to be taken by APF in connection
with the consummation of the transactions contemplated hereby or could
otherwise prevent or delay the consummation of the transactions contemplated by
this Agreement. Except as publicly disclosed by APF in any APF SEC Document,
none of APF or its Subsidiaries is subject to any outstanding order, writ,
injunction or decree which, insofar as can be reasonably foreseen in the
future, could reasonably be expected to have a Material Adverse Effect on APF
or would prevent or delay the consummation of the transactions contemplated
hereby.
6.10 Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by APF for inclusion or incorporation by reference
in (i) the Registration Statement to be filed by APF with the SEC in connection
with the Merger will, at the time the Registration Statement becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading and (ii) the proxy statement sent by APF to its
shareholders pertaining to the Merger will, at the date mailed to shareholders
and at the times of the meeting of shareholders to be held in connection with
the Merger, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event with
respect to APF, its officers and directors or any of its Subsidiaries should
occur which is required to be described in an amendment of, or a supplement to,
the Registration Statement or the proxy statement, APF shall promptly so advise
the General Partners and such event shall be so described, and such amendment
or supplement (which the General Partners shall have a reasonable opportunity
to review) shall be promptly filed with the SEC. The Registration Statement
will comply as to form in all material respects with the provisions of the
Securities Act and the rules and regulations thereunder.
6.11 No Undisclosed Liabilities; Absence of Changes. Except as and to the
extent publicly disclosed by APF in its APF SEC Documents or disclosed in
Schedule 1, as of December 31, 1998, to APF's Knowledge, none of APF or its
Subsidiaries had any liabilities or obligations of any nature, whether or not
accrued, contingent or otherwise, and whether due or to become due or asserted
or unasserted, which are not fully reflected in, reserved against or otherwise
described in the consolidated balance sheet of APF and its consolidated
Subsidiaries (including the notes thereto) as of such date or which could
reasonably be expected to have a Material Adverse Effect on APF. Except as
publicly disclosed by APF in any reports filed by it with the APF SEC
Documents, since December 31, 1998, the business of APF and its Subsidiaries
has been carried on only in the ordinary and usual course, to APF's Knowledge,
none of APF or its Subsidiaries has incurred any liabilities of any nature,
whether or not accrued, contingent or otherwise, and whether due or to become
due or asserted or unasserted, which could reasonably be expected to have, and
there have been no events, changes or effects with respect to APF or its
Subsidiaries Known to APF having or which could reasonably be expected to have,
a Material Adverse Effect on APF.
6.12 Brokers' Fees. Except for the fees and expenses paid to Merrill Lynch &
Co. with respect to the delivery of the Fairness Opinion to the Special
Committee and in connection with the financial services provided by Salomon
Smith Barney, none of APF, the OP General Partner or the Operating Partnership
has any Liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this
Agreement.
6.13 Qualification as a REIT. APF is a "real estate investment trust" for
federal income tax purposes. The consummation of the transactions contemplated
by this Agreement will not cause APF to cease to qualify as a "real estate
investment trust" for federal income tax purposes.
6.14 Compliance with Applicable Law. Except as publicly disclosed by APF in
its APF SEC Documents, to APF's Knowledge, it and its Subsidiaries hold all
permits, licenses, variances, exemptions, order and approvals of all
governmental entities necessary for the lawful conduct of their respective
businesses, except for failures to hold such permits, licenses, variances,
exemptions, orders and approvals which could not reasonably be expected to have
a Material Adverse Effect on APF. Except as publicly disclosed by APF in its
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APF SEC Documents, to APF's Knowledge, APF and its Subsidiaries are in
compliance with the material terms of its permits, except where the failure so
to comply could not reasonably be expected to have a Material Adverse Effect on
APF. Except as publicly disclosed by APF, the businesses of APF and its
Subsidiaries are not, to APF's Knowledge, being conducted in violation of any
law, ordinance or regulation of any governmental entity except that no
representation or warranty is made in this Section 6.14 with respect to
environmental laws and except for violations or possible violations which do
not, and, insofar as reasonably can be foreseen, in the future will not, have a
Material Adverse Effect on APF. Except as publicly disclosed by APF in its APF
SEC Documents, no investigation or review by any governmental entity with
respect to APF or its Subsidiaries is pending or, to the Knowledge of APF,
threatened, nor, to the Knowledge of APF, has any government entity indicated
an intention to conduct the same, other than, in each case, those which APF
reasonably believes will not have a Material Adverse Effect on APF.
6.15 Intellectual Property.
(a) APF owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of APF as presently conducted. Each item of Intellectual Property
owned or used by APF immediately prior to the Closing hereunder will be owned
or available for use by APF on identical terms and conditions immediately
subsequent to the Closing hereunder. APF has taken all necessary action to
maintain and protect each item of Intellectual Property that it owns or uses.
(b) APF has not interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of third
parties, and none of APF's directors or officers (or employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that APF must
license or refrain from using any Intellectual Property rights of any third
party). No third party has interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of APF which
are material to the operation of APF's business.
(c) APF has no patent or registration which has been issued to APF with
respect to any of its Intellectual Property.
(d) Nothing will interfere with, infringe upon, misappropriate, or otherwise
come into conflict with, any Intellectual Property rights of third parties as a
result of the continued operation of APF's business as presently conducted.
6.16 Insurance. With respect to each current insurance policy to which APF
is a party, a named insured or is otherwise the beneficiary of coverage, to the
knowledge of APF: (i) the policy is legal, valid, binding, enforceable, and in
full force and effect; (ii) the policy will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the consummation of the transactions contemplated hereby; (iii) neither APF nor
any other party to the policy is in breach or default (including with respect
to the payment of premiums or the giving of notices), and no event has occurred
which, with notice or the lapse of time, would constitute such a breach or
default, or permit termination, modification, or acceleration, under the
policy; and (iv) no party to the policy has repudiated any provision thereof.
6.17 Tenants. To the Knowledge of APF and except as set forth on Schedule
1, no current tenant of a property owned by APF, which as of the date of APF's
most recent quarterly report on Form 10-Q represented more than 5% of APF's
total revenues, presently intends to materially change its relationship with
the owner of the property, either due to the transactions contemplated hereby
or otherwise.
6.18 Disclosure. APF is in compliance in all material respects with its
obligation under the Securities Exchange Act to publicly disclose material
information in a timely fashion.
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ARTICLE VII
Representations and Warranties Concerning the Fund
The General Partners and the Fund jointly and severally represent and
warrant to APF and the Operating Partnership that the statements contained in
this Article VII are correct and complete as of the date hereof, except as set
forth in the disclosure schedule delivered by the General Partners and the Fund
to APF and the Operating Partnership in accordance with the provisions of
Section 8.14 (the "Disclosure Schedule"). Nothing in the Disclosure Schedule
shall be deemed adequate to disclose an exception to a representation or
warranty made herein, however, unless the Disclosure Schedule identifies the
exception with particularity and describes the relevant facts in reasonable
detail. Without limiting the generality of the foregoing, the mere listing (or
inclusion of a copy) of a document or other item shall not be deemed adequate
to disclose an exception to a representation or warranty made herein (unless
the representation or warranty has to do with the existence of the document or
other item itself). The Disclosure Schedule will be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in this Article
VII.
7.1 Organization, Qualification, and Corporate Power. The Fund is a limited
partnership duly organized, validly existing, and in good standing under the
laws of Florida. The Fund is duly authorized to conduct business and is in good
standing under the laws of each jurisdiction where such qualification is
required, except where the failure to so qualify or obtain authorization would
not have a Material Adverse Effect on the Fund. Except as set forth in Section
7.1(a) of the Disclosure Schedule, the Fund has full limited partnership power
and authority and all licenses, permits, and authorizations necessary to carry
on the businesses in which it is engaged and to own and use the properties
owned and used by it, except where the failure to so qualify or obtain
authorization would not have a Material Adverse Effect on the Fund. Section
7.1(b) of the Disclosure Schedule lists the directors and officers of the
corporate General Partner. The General Partners have been made available to APF
and the Operating Partnership correct and complete copies of the certificate of
limited partnership and the limited partnership agreement of the Fund (as
amended to date). The minute books (containing the records of meetings of the
stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of the
corporate General Partner and any organizational records of the Fund have been
made available to APF and the Operating Partnership and are correct and
complete in all material respects. The Fund is not in default under or in
violation of any provision of its certificate of limited partnership or limited
partnership agreement.
7.2 Capitalization. All of the outstanding ownership interests in the Fund
(the "Fund Interests") consist of (i) one percent in general partnership
interests and (ii) 4,000,000 units of limited partnership interests. All of the
outstanding Fund Interests have been duly authorized, are validly issued, fully
paid, and nonassessable. There are no outstanding or authorized options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights, or other contracts or commitments that could require the Fund to issue,
sell, or otherwise cause to become outstanding any additional ownership
interests. There are no outstanding or authorized stock appreciation, phantom
stock, profit participation, or similar rights with respect to the Fund.
7.3 Authorization of Transaction. The Fund has full power and authority
(including full limited partnership power and authority) to execute and deliver
this Agreement and, upon the affirmative vote of a majority of the outstanding
limited partnership Fund Interests, will have full power and authority
(including limited partnership power and authority) to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of the Fund, enforceable in accordance with its terms and conditions, subject
to bankruptcy, insolvency, moratorium and rights of creditors generally. The
Fund is not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
7.4 Noncontravention. Except as set forth in Section 7.4 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby,
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will (i) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which the Fund is subject or any
provision of the certificate of limited partnership or limited partnership
agreement of the Fund or (ii) result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice or consent
under any agreement, contract, lease, license, instrument, or other arrangement
to which the Fund is a party or by which it is bound or to which any of its
assets is subject (or result in the imposition of any Security Interest upon
any of its assets).
7.5 Title to Assets. The Fund has good title to, or a valid leasehold
interest in, the properties and assets used by it, located on its premises, or
set forth in its most recent quarterly report on Form 10-Q filed with the SEC
(the "Most Recent 10-Q") or acquired after the date thereof, free and clear of
all Security Interests, except for properties and assets disposed of in the
Ordinary Course of Business since the date of the Most Recent 10-Q.
7.6 Subsidiaries. The Fund does not have any Subsidiaries, operating or
otherwise.
7.7 Reports and Financial Statements. The Fund has filed all required
reports, schedules, forms, statements and other documents with the SEC since
January 1, 1996 (along with any such documents filed subsequent to the date
hereof, the "Fund SEC Documents"). All of the Fund SEC Documents (other than
preliminary material), as of their respective filing dates, complied in all
material respects with all applicable requirements of the Securities Act and
the Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such Fund SEC Documents. None of the Fund SEC
Documents at the time of filing contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the extent
such statements have been modified or superseded by later filed Fund SEC
Documents. There is no unresolved violation by any governmental entity of which
the Fund has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to the Fund could have a Material
Adverse Effect on the Fund. The financial statements of the Fund included in
the Fund SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with GAAP
(except, the case of interim financial statements, as permitted by Forms 10-Q
and 8-K of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly presented, in
accordance with the applicable requirements of GAAP, the financial position of
the Fund as of the dates thereof and the results of operations and cash flows
of the Fund for the periods then ended (subject, in the case of interim
financial statements, to normal year-end adjustments).
7.8 Events Subsequent to the Most Recent 10-Q. Since the date of the Most
Recent 10-Q nothing has had a Material Adverse Effect on the Fund. Without
limiting the generality of the foregoing, since that date, except as set forth
in the appropriately lettered paragraph of Section 7.8 of the Disclosure
Schedule:
(a) the Fund has not sold, leased, transferred, or assigned any of its
assets, tangible or intangible, other than for a fair consideration (as
reasonably determined by the General Partners) in the Ordinary Course of
Business;
(b) the Fund has not entered into any agreement, contract, lease, or license
(or series of related agreements, contracts, leases, and licenses) involving
more than $50,000 except in the Ordinary Course of Business;
(c) no party (including the Fund) has accelerated, terminated, modified, or
canceled any agreement, contract, lease, or license (or series of related
agreements, contracts, leases, and licenses) to which the Fund is a party or by
which it is bound except in the Ordinary Course of Business;
(d) the Fund has not imposed any Security Interest upon any of its assets,
tangible or intangible except in the Ordinary Course of Business;
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(e) the Fund has not made any capital expenditure (or series of related
capital expenditures) involving more than $50,000 except in the Ordinary Course
of Business;
(f) the Fund has not made any capital investment in, any loan to, or any
acquisition of the securities or assets of any other Person (or series of
related capital investments, loans, and acquisitions) outside the Ordinary
Course of Business;
(g) the Fund has not issued any note, bond, or other debt security or
created, incurred, assumed, or guaranteed any indebtedness for borrowed money
or capitalized lease obligation outside the Ordinary Course of Business;
(h) the Fund has not delayed or postponed the payment of accounts payable
and other Liabilities outside the Ordinary Course of Business;
(i) the Fund has not canceled, compromised, waived, or released any right or
claim (or series of related rights and claims) outside the Ordinary Course of
Business;
(j) the Fund has not granted any license or sublicense of any rights under
or with respect to any Intellectual Property;
(k) there has been no change made or authorized in the certificate of
limited partnership or limited partnership agreement of the Fund;
(l) the Fund has not issued, sold, or otherwise disposed of any ownership
interests, or granted any options, warrants, or other rights to purchase or
obtain (including upon conversion, exchange, or exercise) any ownership
interests in the Fund;
(m) the Fund has not declared, set aside, or paid any dividend or made any
distribution with respect to its ownership interests (whether in cash or in
kind) or redeemed, purchased, or otherwise acquired any of its ownership
interests other than distributions consistent with past practices;
(n) the Fund has not experienced any material damage, destruction, or loss
(whether or not covered by insurance) to its property;
(o) the Fund has not made any loan to, or entered into any other transaction
with, any of the General Partners or the directors, officers, or employees of
the corporate General Partner outside the Ordinary Course of Business;
(p) the Fund has not entered into any employment contract or collective
bargaining agreement, written or oral, or modified the terms of any existing
such contract or agreement;
(q) the Fund has not made or pledged to make any charitable or other capital
contribution outside the Ordinary Course of Business;
(r) to the Knowledge of the General Partners, there has not been any other
material occurrence, event, incident, action, failure to act, or transaction
outside the Ordinary Course of Business involving the Fund; and
(s) the Fund is not under any legal obligation, whether written or oral, to
do any of the foregoing.
7.9 Undisclosed Liabilities. The Fund does not have any Liability (and, to
the Knowledge of the General Partners, there is no Basis for any present or
future action, suit, proceeding, hearing, investigation, charge, complaint,
claim, or demand against it giving rise to any Liability), except for (i)
Liabilities set forth on the face of the Most Recent Balance Sheet (rather than
in any notes thereto) and (ii) Liabilities which have arisen after the date of
the Most Recent Balance Sheet in the Ordinary Course of Business (none of which
results
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from, arises out of, relates to, is in the nature of, or was caused by any
breach of contract, breach of warranty, tort, infringement, or violation of
law) or which are not in the aggregate material.
7.10 Legal Compliance. Except as disclosed in the Fund SEC Documents, the
Fund has complied in all material respects with all applicable laws (including
rules, regulations, codes, plans, injunctions, judgments, orders, decrees,
rulings, and charges thereunder), the violation of which could cause a Material
Adverse Effect to the Fund, of federal, state, local, and foreign governments
(and all agencies thereof), and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has been filed or
commenced against it alleging any failure so to comply.
7.11 Tax Matters.
(a) The Fund has filed all material Tax Returns that it was required to
file, including, without limitation, any material Tax Returns required to be
filed with any state. All such Tax Returns were correct and complete in all
material respects. All Taxes owed by the Fund (as shown on any filed Tax
Return) have been paid. The Fund currently is not the beneficiary of any
extension of time within which to file any Tax Return. No claim has ever been
made by an authority in a jurisdiction where the Fund does not file Tax Returns
that it is or may be subject to taxation by that jurisdiction. There are no
Security Interests on any of the assets of the Fund that arose in connection
with any failure (or alleged failure) to pay any Tax.
(b) The Fund has withheld and, if due, paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any independent
contractor, creditor, Partner, or other third party.
(c) The General Partners do not expect any authority to assess any
additional Taxes for any period for which Tax Returns have been filed. There is
no dispute or claim concerning any Tax Liability of the Fund either (A) claimed
or raised by any authority in writing or (B) as to which any of the General
Partners has Knowledge. Section 7.11(c) of the Disclosure Schedule lists all
federal, state, local, and foreign income Tax Returns filed with respect to the
Fund for taxable periods ended on or after December 31, 1996, indicates those
Tax Returns that have been audited, and indicates those Tax Returns that
currently are the subject of audit. The General Partners have made available to
APF and the Operating Partnership correct and complete copies of all federal
income Tax Returns, examination reports, and statements of deficiencies
assessed against or agreed to by the Fund since December 31, 1996.
(d) The Fund has not waived any statute of limitations in respect of Taxes
or agreed to any extension of time with respect to a Tax assessment or
deficiency.
(e) The Fund has not filed a consent under Code (S)341(f) concerning
collapsible corporations. The Fund has not made any payments, is not obligated
to make any payments, and is not a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be
deductible under Code (S)280G. The Fund has disclosed on its federal income Tax
Returns all positions taken therein that could give rise to a substantial
understatement of federal income Tax within the meaning of Code (S)6662. The
Fund is not a party to any Tax allocation or sharing agreement. The Fund (A)
has not been a member of an Affiliated Group filing a consolidated federal
income Tax Return (other than a group the common parent of which was the Fund)
or (B) has any Liability for the Taxes of any Person (other than the Fund)
under Treas. Reg. (S)1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract, or otherwise.
7.12 Real Property.
Section 7.12(a) of the Disclosure Schedule lists and describes briefly all
real property owned, leased or subleased by the Fund. Section 7.12(b) of the
Disclosure Schedule lists all leases and subleases to which the Fund is a
party, and the General Partners have made available to APF correct and complete
copies of all such
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leases and subleases (as amended to date). With respect to each lease and
sublease listed in Section 7.12(b) of the Disclosure Schedule:
(a) the lease or, to the Knowledge of the General Partners, the sublease is
legal, valid, binding, enforceable, and in full force and effect, except as may
be affected by bankruptcy, insolvency, moratorium and the rights of creditors
generally;
(b) no consent is required with respect to the lease or sublease as a result
of this Agreement, and the actions contemplated by this Agreement will not
result in the change of any terms of the lease or sublease or otherwise affect
the ongoing validity of the lease or sublease;
(c) no party to the lease or sublease is in breach or default, and no event
has occurred which, with notice or lapse of time, would constitute a breach or
default or permit termination, modification, or acceleration thereunder;
(d) no party to the lease or, to knowledge of the General Partners, sublease
has repudiated any provision thereof;
(e) there are no disputes, oral agreements, or forbearance programs in
effect as to the lease or, to the Knowledge of the General Partners, sublease;
(f) the Fund has not assigned, transferred, conveyed, mortgaged, deeded in
trust, or encumbered any interest in the leasehold or subleasehold;
(g) all facilities leased or subleased thereunder have received all
approvals of governmental authorities (including licenses and permits) required
by the Fund in connection with the operation thereof and, to the Knowledge of
the General Partners, have been operated and maintained in all material
respects in accordance with applicable laws, rules, and regulations; and
(h) all facilities leased or subleased thereunder are supplied with
utilities and other services necessary for the operation of said facilities.
7.13 Intellectual Property.
(a) The Fund owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of the Fund as presently conducted. Each item of Intellectual
Property owned or used by the Fund immediately prior to the Closing hereunder
will be owned or available for use by the Fund on identical terms and
conditions immediately subsequent to the Closing hereunder. The Fund has taken
all necessary action to maintain and protect each item of Intellectual Property
that it owns or uses.
(b) The Fund has not Knowingly interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual Property
rights of third parties, and neither the General Partners nor any of the
corporate General Partner's directors and officers (and employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that the Fund
must license or refrain from using any Intellectual Property rights of any
third party). To the Knowledge of the General Partners, no third party has
interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Intellectual Property rights of the Fund which are material
to the operation of the Fund's business.
(c) The Fund has no patent or registration which has been issued to the Fund
with respect to any of its Intellectual Property.
(d) Section 7.13(d) of the Disclosure Schedule identifies each item of
Intellectual Property that any third party owns and that the Fund uses pursuant
to license, sublicense, agreement, or permission. The General
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<PAGE>
Partners have made available to APF and the Operating Partnership correct and
complete copies of all such licenses, sublicenses, agreements, and permissions
(as amended to date).
(e) To the Knowledge of the General Partners, nothing will interfere with,
infringe upon, misappropriate, or otherwise come into conflict with, any
Intellectual Property rights of third parties as a result of the continued
operation of the Fund's business as presently conducted.
7.14 Tangible Assets. The Fund owns or leases all buildings, machinery,
equipment, and other tangible assets used in the conduct of its business as
presently conducted. Each such tangible asset is free from all material
defects, has been maintained in accordance with normal industry practice, is in
good operating condition and repair (subject to normal wear and tear), and is
suitable for the purposes for which it presently is used. The Most Recent
Balance Sheet sets forth all of the assets, in the opinion of the General
Partners, necessary to conduct the Fund's business as it is currently being
conducted.
7.15 Contracts. Section 7.15 of the Disclosure Schedule lists all of the
following types of contracts and other agreements to which the Fund is a party:
(a) any agreement (or group of related agreements) for the lease of personal
property to or from any Person providing for lease payments in excess of
$25,000 per annum;
(b) any agreement concerning a partnership or joint venture;
(c) any agreement (or group of related agreements) under which it has
created, incurred, assumed, or guaranteed any indebtedness for borrowed money,
or any capitalized lease obligation or under which it has imposed a Security
Interest on any of its assets, tangible or intangible;
(d) any agreement concerning confidentiality or noncompetition;
(e) any agreement with any General Partner or any of their Affiliates (other
than the Fund);
(f) any agreement under which it has advanced or loaned any amount to any of
the General Partners or the corporate General Partner's directors, officers,
and employees outside the Ordinary Course of Business; or
(g) any agreement under which the consequences of a default or termination
could have a Material Adverse Effect.
The General Partners have made available to APF and the Operating
Partnership a correct and complete copy of each written agreement listed in
Section 7.15 of the Disclosure Schedule (as amended to date) which is not
included as an exhibit to a Fund SEC Document and a written summary setting
forth the terms and conditions of each oral agreement referred to in Section
7.15 of the Disclosure Schedule. With respect to each agreement set forth in
Section 7.15 of the Disclosure Schedule or filed as an exhibit to a Fund SEC
Document: (A) the agreement is legal, valid, binding, enforceable, and in full
force and effect (except as may be affected by bankruptcy, insolvency,
moratorium or the rights of creditors generally); (B) the agreement will
continue to be legal, valid, binding, enforceable, and in full force and effect
on identical terms following the consummation of the transactions contemplated
hereby (except as may be affected by bankruptcy, insolvency, moratorium or the
rights of creditors generally); (C) no party is in breach or default, and no
event has occurred which with notice or lapse of time would constitute a breach
or default, or permit termination, modification, or acceleration, under the
agreement; and (D) no party has repudiated any provision of the agreement.
7.16 Notes and Accounts Receivable. All notes and accounts receivable of the
Fund are reflected properly on its books and records, are valid receivables
subject to no setoffs or counterclaims, and are current and collectible in
accordance with their terms at their recorded amounts, subject only to the
reserve for bad debts set forth on the face of the Most Recent Balance Sheet
(rather than in any notes thereto) as adjusted for the passage of time through
the Closing Date in accordance with the past custom and practice of the Fund.
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7.17 Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of the Fund.
7.18 Insurance. Section 7.18 of the Disclosure Schedule sets forth the
following information with respect to each insurance policy (including
policies providing property, casualty, liability, and workers' compensation
coverage and bond and surety arrangements) to which the Fund has been a party,
a named insured, or otherwise the beneficiary of coverage at any time within
the past five years (or such lesser periods as the Fund has actively engaged
in business or owned any material assets): (i) the name, address, and
telephone number of the agent; (ii) the name of the insurer, the name of the
policyholder, and the name of each covered insured; and (iii) the policy
number and the period of coverage. With respect to each current insurance
policy, to the Knowledge of the General Partners and the Fund: (A) the policy
is legal, valid, binding, enforceable, and in full force and effect; (B) the
policy will continue to be legal, valid, binding, enforceable, and in full
force and effect on identical terms following the consummation of the
transactions contemplated hereby; (C) neither the Fund nor any other party to
the policy is in breach or default (including with respect to the payment of
premiums or the giving of notices), and no event has occurred which, with
notice or the lapse of time, would constitute such a breach or default, or
permit termination, modification, or acceleration, under the policy; and (D)
no party to the policy has repudiated any provision thereof. The Fund has been
covered during the past five years (or such lesser periods as the Fund has
actively engaged in business or owned any material assets) by insurance in
scope and amount customary and reasonable for the businesses in which it has
engaged during the aforementioned period. Section 7.18 of the Disclosure
Schedule describes any self-insurance arrangements affecting the Fund.
7.19 Litigation. Section 7.19 of the Disclosure Schedule sets forth each
instance, not already disclosed in the Fund SEC Documents, in which the Fund
(i) is subject to any outstanding injunction, judgment, order, decree, ruling,
or charge or (ii) is a party to or, to its Knowledge, is threatened to be made
a party to any action, suit, proceeding, hearing, or investigation of, in, or
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator. None of the
actions, suits, proceedings, hearings, and investigations set forth in Section
7.19 of the Disclosure Schedule or the Fund SEC Documents could result in any
Material Adverse Effect on the Fund. None of the General Partners has any
reason to believe that any additional such action, suit, proceeding, hearing,
or investigation may be brought or threatened against the Fund.
7.20 Tenants. To the Knowledge of any of the General Partners, no current
tenant of a property owned by the Fund presently intends to materially change
its relationship with the owner of the property, either due to the
transactions contemplated hereby or otherwise.
7.21 Employees. The Fund does not have and has never had any employees,
officers or directors. The Fund is not and has never been a party to or had
any liability with respect to any Employee Benefit Plan.
7.22 Guaranties. The Fund is not a guarantor of and is not otherwise liable
for any liability or obligation (including indebtedness) of any other Person.
7.23 Registration Statement. The information furnished by the Fund for
inclusion in the Registration Statement will not, as of the effective date of
the Registration Statement, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
7.24 Environmental Matters. The Fund is currently in compliance with all
material environmental laws, ordinances, regulations and orders applicable to
its business or properties, and, to the Knowledge of the General Partners, the
tenants' present uses of the Fund's properties, whether leased or owned, do
not materially violate any such laws, ordinances, regulations or orders. The
Fund is not subject to any Liability or claim in connection with any
environmental law or any use, treatment, storage or disposal of any hazardous
substance or material or pollutant or any spill, leakage, discharge or release
of any hazardous substance or material or pollutant as a result of having
owned or operated any business prior to the Effective Time, which if a
violation existed would have a Material Adverse Effect on the Fund.
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7.25 Vote Required. The affirmative vote of at least a majority of the
outstanding Fund Interests is the only vote of any security holder in the Fund
(under applicable law or otherwise) required to approve the Merger, this
Agreement and the other transactions contemplated hereby.
7.26 Disclosure. The representations and warranties contained in this
Article VII do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Article VII not misleading.
ARTICLE VIII
Pre-Closing Covenants
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing.
8.1 General. Each of the Parties will use its reasonable best efforts to
take all action and to do all things necessary, proper, or advisable in order
to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions
set forth in Article X below).
8.2 Notices and Consents. The General Partners shall give any notices to
third parties and obtain any third party consents referred to in Sections 5.1,
5.2, 7.3 and 7.4 above and the related sections of the Disclosure Schedule.
APF, the OP General Partner and the Operating Partnership shall give any
notices to third parties and obtain any third party consents referred to in
Sections 6.4 and 6.5 above. Each of the Parties shall give any notices to, make
any filings with, and use its reasonable best efforts to obtain any
authorizations, consents, and approvals of governments and governmental
agencies in connection with the matters referred to in Sections 5.1, 6.4 and
7.3 above.
8.3 Maintenance of Business; Prohibited Acts. During the period from the
date of this Agreement to the Effective Time, the General Partners will not,
and will not cause the Fund to, take any action that adversely affects the
ability of the Fund (i) to pursue its business in the ordinary course, (ii) to
seek to preserve intact its current business organizations, and (iii) to
preserve its relationships with its tenants; and the General Partners will not
allow the Fund to, without the OP General Partner's prior written consent,
which consent shall not be unreasonably withheld:
(a) issue, deliver, sell, dispose of, pledge or otherwise encumber, or
authorize or propose the issuance, delivery, sale, disposition or pledge or
other encumbrance of (i) any additional ownership interests (including the Fund
Interests), or any securities or rights convertible into, exchangeable for or
evidencing the right to subscribe for any of its ownership interests, or any
rights, warrants, options, calls, commitments or any other agreements of any
character to purchase or acquire any of its ownership interests or any other
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for any of its ownership interests, or (ii) any other securities
in respect of, in lieu of or in substitution for the Fund Interests outstanding
on the date hereof;
(b) redeem, purchase or otherwise acquire, or propose to redeem, purchase or
otherwise acquire, any of its outstanding securities (including the Fund
Interests);
(c) split, combine, subdivide or reclassify any of its ownership interests
or otherwise make any payments to the Partners; provided, however, that nothing
shall prohibit: (i) the payment of any ordinary distribution in respect of its
ownership interests at such times and in such manner and amount as may be
consistent with the Fund's past practice (which in any event shall include any
and all compensation paid or payable or expenses reimbursed or reimbursable for
the period from December 31, 1998 through the Effective Time, to the extent not
otherwise paid or distributed to the Partners), or (ii) any distribution of
property necessary for the representation and warranty set forth in Section
7.11 to be true and correct;
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(d) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization (other
than the Merger);
(e) make any acquisition, by means of merger, consolidation or otherwise, of
any direct or indirect ownership interest in or assets comprising any business
enterprise or operation outside the Ordinary Course of Business;
(f) other than as may be necessary to consummate the Merger, adopt any
amendments to its certificate of limited partnership or limited partnership
agreement;
(g) incur any indebtedness for borrowed money or guarantee such indebtedness
or agree to become contingently liable, by guaranty or otherwise, for the
obligations or indebtedness of any other person or make any loans, advances or
capital contributions to, or investments in, any other corporation, any
partnership or other legal entity or to any other persons, outside the Ordinary
Course of Business;
(h) engage in the conduct of any business the nature of which is materially
different from the business in which the Fund is currently engaged;
(i) enter into any agreement providing for acceleration of payment or
performance or other consequence as a result of a change of control of the
Fund;
(j) forgive any indebtedness owed to the Fund or convert or contribute by
way of capital contribution any such indebtedness owed;
(k) authorize or enter into any agreement providing for management services
to be provided by the Fund to any third party or an increase in management fees
paid by any third party under existing management agreements;
(l) mortgage, pledge, encumber, sell, lease or transfer any material assets
of the Fund except as contemplated by this Agreement;
(m) authorize or announce an intention to do any of the foregoing, or enter
into any contract, agreement, commitment or arrangement to do any of the
foregoing; or
(n) perform any act or omit to take any action that would make any of the
representations made above inaccurate or materially misleading as of the
Effective Time.
8.4 Full Access. The General Partners shall permit representatives of APF
and the OP General Partner to have full access at all reasonable times, and in
a manner so as not to interfere with the normal business operations of the Fund
to all premises, properties, personnel, books, records (including Tax records),
contracts, and documents of or pertaining to the Fund. APF, the OP General
Partner and the Operating Partnership shall permit representatives of the
General Partners and the Fund to have full access at all reasonable times, and
in a manner so as not to interfere with the normal business operations of APF
and the Operating Partnership to all premises, properties, personnel, books,
records (including Tax records), contracts, and documents of or pertaining to
APF, the OP General Partner and the Operating Partnership. The Parties agree
that any information obtained in connection with the exercise of their rights
pursuant to this Section 8.4 shall be Confidential Information for purposes of
this Agreement.
8.5 Notice of Developments. Each Party will give prompt written notice to
the others of any material adverse development causing a breach of any of its
own representations and warranties in Articles V, VI or VII above, as
applicable. No disclosure by any Party pursuant to this Section 8.5, however,
shall be deemed to amend or supplement the Disclosure Schedule or to prevent or
cure any misrepresentation, breach of warranty, or breach of covenant.
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8.6 Reorganization. From and after the date hereof and prior to the
Effective Time, except for the transactions contemplated or permitted herein,
each of APF, the Operating Partnership, the General Partners and the Fund shall
use reasonable efforts to conduct its business and file Tax Returns in a manner
that would not jeopardize the qualification of APF after the Effective Time as
a real estate investment trust as defined within Section 856 of the Code.
8.7 Fund Partner Approval. The General Partners hereby agree to vote the
Fund Interests owned by them in favor of this Agreement and the transactions
contemplated hereby and agree, subject to the satisfaction of their fiduciary
duties as general partners under Florida law, as reasonably determined by the
General Partners, to recommend that the limited Partners of the Fund vote their
Fund Interests in favor of this Agreement and the transactions contemplated
hereby.
8.8 Delivery of Certain Financial Statements.
(a) In addition to disclosure in Fund SEC Documents required to be filed by
the Fund, promptly after they are available, and in any event not later than
the tenth business day prior to the Closing Date, the Fund shall provide to APF
and the OP General Partner with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by the Fund and each of the
General Partners that such balance sheets (including the related notes, if any)
present fairly, in all material respects, the financial position of the Fund as
of their respective dates, and the other related statements (including the
related notes, if any) included therein present fairly, in all material
respects, the results of its operations and cash flows for the respective
periods or as of the respective dates set forth therein, all in conformity with
GAAP consistently applied during the periods involved, except as otherwise
stated in the notes thereto, subject to normal year-end audit adjustments.
(b) In addition to disclosure in APF SEC Documents required to be filed by
APF, promptly after they are available, and in any event not later than the
tenth business day prior to the Closing Date, APF shall provide to the Fund and
the General Partners with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by APF that such balance
sheets (including the related notes, if any) present fairly, in all material
respects, the financial position of APF as of their respective dates, and the
other related statements (including the related notes, if any) included therein
present fairly, in all material respects, the results of its operations and
cash flows for the respective periods or as of the respective dates set forth
therein, all in conformity with GAAP consistently applied during the periods
involved, except as otherwise stated in the notes thereto, subject to normal
year-end audit adjustments.
8.9 State Takeover Statutes. APF, the APF Board of Directors, the Operating
Partnership, the Fund and the General Partners shall (i) take all action
necessary so that no "fair price," "business combination," "moratorium,"
"control share acquisition" or any other anti-takeover statute or similar
statute enacted under state or federal laws of the United States or similar
statute or regulation, including without limitation, the control share
acquisition provisions of Section 3-701 et seq. of the Maryland GCL and the
business combination provisions of Section 3-601 et seq of the Maryland GCL
(each, a "Takeover Statute"), is or becomes applicable to the Merger, this
Agreement or any of the other transactions contemplated by this Agreement, and
(ii) if any Takeover Statute becomes applicable to the Merger, this Agreement
or any other transaction contemplated by this Agreement, take all action
necessary to minimize the effect of such Takeover Statute on the Merger and the
other transactions contemplated by this Agreement.
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8.10 Exclusivity. None of the General Partners shall solicit, initiate, or
encourage the submission of any proposal or offer from any Person relating to
the acquisition of any capital stock or other voting securities or any
substantial portion of the assets of the Fund (including any acquisition
structured as a merger, consolidation, or share exchange). The General Partners
shall notify APF and the Operating Partnership immediately if any Person makes
any proposal, offer, inquiry, or contact with respect to any of the foregoing.
8.11 Listing. APF shall effect, at or before the issuance of any APF Common
Shares issued as Share Consideration pursuant to Article IV, authorization for
listing or quotation of such APF Common Shares on the NYSE, subject to official
notice of issuance.
8.12 Maintenance of APF's Business. During the period from the date of this
Agreement to the Effective Time, APF will not take any action that adversely
affects the ability of APF (i) to pursue its business in the ordinary course,
(ii) to seek to preserve intact its current business organizations (iii) to
preserve its relationships with its tenants and (iv) will not take any action
to affect it status as a REIT for federal income tax purposes.
8.13 Registration of Share Consideration. APF shall cause the Registration
Statement to become effective prior to the Closing Date.
8.14 Delivery and Approval of Disclosure Schedule and Schedule 1. Within
fifteen (15) business days after the date of this Agreement the General
Partners shall deliver to APF the Disclosure Schedule and APF shall deliver to
the General Partners Schedule 1. Within fifteen (15) business days after APF
receives the Disclosure Schedule it shall give the General Partners notice
either that the disclosures in the Disclosure Schedule are, as to substance,
satisfactory to APF, in its sole and absolute discretion, or that they are not
satisfactory and that APF terminate this Merger Agreement pursuant to Section
11.2. Likewise, within fifteen (15) business days after the General Partners
receive Schedule 1, the General Partners shall give APF notice either that the
disclosures in Schedule 1 are, as to substance, satisfactory to them, in their
sole and absolute discretion, or that they are not satisfactory and that such
General Partners terminate the Agreement pursuant to Section 11.2. In the case
of both APF and the General Partners, the failure of either to give the notice
specified above within the applicable fifteen (15) business day period shall
constitute approval of the Disclosure Schedule or Schedule 1, as applicable.
8.15 Certain Acquisitions. APF or its Subsidiaries shall acquire CNL Fund
Advisors, Inc., CNL Financial Corp. and CNL Financial Services, Inc.
(collective, the "CNL Restaurant Services Group") substantially in accordance
with the terms and conditions set forth in their respective merger agreements
dated on or about the date hereof or such other terms that are mutually agreed
to by the parties.
ARTICLE IX
Post-Closing Covenants
The Parties agree as follows with respect to the period following the
Closing:
9.1 General. In the event that at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of the Parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request, all at the sole cost and expense of the requesting
Party (unless the requesting Party is entitled to indemnification therefor
under Article XII below). The General Partners acknowledge and agree that from
and after the Closing, the Surviving Partnership will be entitled to possession
of all documents, books, records (including Tax records), agreements, and
financial data of any sort relating to the Fund.
9.2 Litigation Support. In the event and for so long as any Party actively
is contesting or defending against any action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand in connection
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with (i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Fund, each of the other Parties will
cooperate with it and its counsel in the contest or defense, make available
their personnel, and provide such testimony and access to their books and
records as shall be necessary in connection with the contest or defense, all at
the sole cost and expense of the contesting or defending Party (unless the
contesting or defending Party is entitled to indemnification therefor under
Article XII below).
9.3 Transition. The General Partners will not take any action that is
designed or intended to have the effect of discouraging any tenant, lessor,
licensor, customer, supplier, or other business associate of the Fund from
maintaining the same business relationships with the Surviving Partnership
after the Closing as it maintained with the Fund prior to the Closing.
9.4 Confidentiality.
(a) The General Partners and the Fund will treat and hold as such all of the
Confidential Information, refrain from using any of the Confidential
Information except in connection with this Agreement, and deliver promptly to
APF or the OP General Partner, as applicable, or destroy, at the request and
option of APF or the OP General Partner, as applicable, all tangible
embodiments (and all copies) of the Confidential Information which are in its
possession. In the event that any of the General Partners or the Fund is
requested or required (by oral question or request for information or documents
in any legal proceeding, interrogatory, subpoena, civil investigative demand,
or similar process) to disclose any Confidential Information, such General
Partner or the Fund, as applicable, will notify APF or the OP General Partner,
as applicable, promptly of the request or requirement so that such Party may
seek an appropriate protective order or waive compliance with the provisions of
this Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, such General Partner or the Fund is, on the advice of
counsel, compelled to disclose any Confidential Information to any tribunal or
else stand liable for contempt, then such General Partner or the Fund, as
applicable, may disclose the Confidential Information to such tribunal;
provided, however, that such General Partner or the Fund, as applicable, shall
use its best efforts to obtain, at the request of APF or the OP General
Partner, as applicable, an order or other assurance that confidential treatment
will be accorded to such portion of the Confidential Information required to be
disclosed as APF or the OP General Partner, as applicable, shall designate.
(b) APF, the OP General Partner and the Operating Partnership will treat and
hold as such all of the Confidential Information, refrain from using any of the
Confidential Information except in connection with this Agreement, and, if the
Closing does not occur, deliver promptly to the Fund General Partners, as
applicable, or destroy, at the request and option of the Fund or the General
Partners, as applicable, all tangible embodiments (and all copies) of the
Confidential Information which are in its possession. Prior to the Closing and
if the Closing does not occur, in the event that any of APF, the OP General
Partner or the Operating Partnership is requested or required (by oral question
or request for information or documents in any legal proceeding, interrogatory,
subpoena, civil investigative demand, or similar process) to disclose any
Confidential Information, APF, the OP General Partner or the Operating
Partnership, as applicable, will notify the Fund or the General Partners, as
applicable, promptly of the request or requirement so that such Party may seek
an appropriate protective order or waive compliance with the provisions of this
Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, APF, the OP General Partner or the Operating Partnership is,
on the advice of counsel, compelled to disclose any Confidential Information to
any tribunal or else stand liable for contempt, then APF, the OP General
Partner or the Operating Partnership, as applicable, may disclose the
Confidential Information to such tribunal; provided, however, that APF, the OP
General Partner or the Operating Partnership, as applicable, shall use its best
efforts to obtain, at the request of the Fund or the General Partners, as
applicable, an order or other assurance that confidential treatment will be
accorded to such portion of the Confidential Information required to be
disclosed as the Fund or the General Partners, as applicable, shall designate.
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9.5 Covenant Not to Compete. Unless employed by the Surviving Partnership or
APF after the Closing, for a period of three years from and after the Closing
Date, none of the General Partners will engage directly or indirectly in any
business serving the restaurant industry that the Surviving Partnership or APF
conducts as of the Closing Date, except existing restaurant businesses and
properties currently owned or advised by affiliates of CNL Group, Inc.,
including CNL Advisory Services, Inc. In addition, and not in lieu of the
foregoing, for a period of three years from and after the Closing Date, James
M. Seneff, Jr. hereby covenants and agrees not to engage or participate,
directly or indirectly, as principal, agent, executive, employee, employer,
consultant, stockholder, partner or in any other individual capacity
whatsoever, in the conduct or management of, or own any stock or any other
equity investment in or debt of, any business that relates to the ownership,
acquisition or development of "restaurant operations"; provided, however, for
the purposes of this Agreement, "restaurant operations" shall not include the
ownership, acquisition or development of hotel and health care properties that
contain restaurant operations and those entities set forth on Schedule 9.5, and
provided further, the noncompetition covenant shall not operate to preclude Mr.
Seneff's ownership of APF Common Shares and of up to 5% of the equity
securities of companies whose common stock is publicly traded that are engaged
in owning, operating, franchising or making are engaged in owning, operating,
franchising or making loans to restaurants and restaurant companies. If the
final judgment of a court of competent jurisdiction declares that any term or
provision of this Section 9.5 is invalid or unenforceable, the Parties agree
that the court making the determination of invalidity or unenforceability shall
have the power to reduce the scope, duration, or area of the term or provision,
to delete specific words or phrases, or to replace any invalid or unenforceable
term or provision with a term or provision that is valid and enforceable and
that comes closest to expressing the intention of the invalid or unenforceable
term or provision, and this Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment may be appealed.
9.6 Tax Matters.
(a) If there is an adjustment to any item reported on a pre-closing Tax
Return that results in an increase in the Taxes payable by the Fund or any of
the General Partners, and such adjustment results in a corresponding adjustment
to items reported on a post-closing Tax Return with the result that the Taxes
payable either by APF, any of its Subsidiaries, or by any consolidated group of
companies of which APF or any Subsidiary are then members are reduced, or a
refund of Taxes is increased, then any APF Indemnity Claim that the General
Partners or Fund owes APF or the Operating Partnership pursuant to Article XII
below shall be reduced by the amount by which such Taxes are reduced or such
refunds are increased.
(b) Any refund or credit of Taxes (including any statutory interest thereon)
received by APF or any of its Subsidiaries attributable to periods ending on or
prior to or including the Closing Date that were paid by the Fund pursuant to
this Agreement shall reduce any APF Indemnity Claim that the General Partners
or the Fund owes APF pursuant to Article XII below by an amount equal to the
amount of such refund or credit.
(c) In the event that APF or any of its Subsidiaries receives notice,
whether orally or in writing, of any pending or threatened federal, state,
local or foreign tax examinations, claims settlements, proposed adjustments or
related matters with respect to Taxes that could affect the Fund or the General
Partners, or if the Fund or any of the General Partners receives notice of such
matters that could affect APF or any of its Subsidiaries, the party receiving
such notice shall notify in writing the potentially affected party within ten
(10) days thereof. The failure of either party to give the notice required by
this Section shall not impair such party's rights under this Agreement except
to the extent that the other party demonstrates that it has been damaged
thereby.
(d) The General Partners shall have the responsibility for, and shall be
entitled, at their expense, to contest, control, compromise, reasonably settle
or appeal all proceedings with respect to pre-closing Taxes.
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ARTICLE X
Conditions to Obligation to Close
10.1 Conditions to Each Party's Obligation. The respective obligations of
APF, the OP General Partner, the Operating Partnership, the Fund and the
General Partners to consummate the transactions contemplated by this Agreement
are subject to the fulfillment at or prior to the Closing Date of each of the
following conditions, which conditions may be waived upon the written consent
of APF and the General Partners:
(a) Governmental Approvals and Consents. The Parties shall have received all
other authorizations, consents, and approvals of governments and governmental
agencies referred to in Sections 5.1, 6.4, and 7.3 above.
(b) No Injunction or Proceedings. There shall not be any action, suit, or
proceeding pending or threatened before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction or
before any arbitrator wherein an unfavorable injunction, judgment, order,
decree, ruling, or charge would, in the reasonable judgment of APF or the
General Partners, (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions contemplated
by this Agreement to be rescinded following consummation, or (C) materially
adversely affect the right of the Surviving Partnership to own its assets and
to operate its businesses (and no such injunction, judgment, order, decree,
ruling, or charge shall be in effect).
(c) No Suspension of Trading, Etc. At the Effective Time, there shall be no
declaration of a banking moratorium by federal or state authorities or any
suspension of payments by banks in the United States (whether mandatory or not)
or of the extension of credit by lending institutions in the United States, or
commencement of war or other international, armed hostility or national
calamity directly or indirectly involving the United States, which war,
hostility or calamity (or any material acceleration or worsening thereof), in
the sole judgment of APF, would have a Material Adverse Effect on the Fund or,
in the sole judgment of any of the General Partners, would have a Material
Adverse Effect on APF.
(d) Shareholder/Partner Approvals. The stockholders of APF shall have
approved APF's Amended and Restated Articles of Incorporation in the form
attached hereto as Exhibit A, and the Partners of the Fund shall have approved
the Merger Proposal, amendments to the partnership agreement, if any.
(e) Registration of Share Consideration. The Registration Statement shall
have become effective under the Securities Act and shall not be the subject of
any stop order or proceedings by the SEC seeking a stop order.
10.2 Conditions to Obligation of APF, the OP General Partner and the
Operating Partnership. The obligations of APF, the OP General Partner and the
Operating Partnership to consummate the transactions to be performed by them in
connection with the Closing are subject to satisfaction on or prior to December
31, 1999 of the following conditions:
(a) the General Partners and the Fund shall have delivered to APF and the OP
General Partner a certificate to the effect that:
(i) the representations and warranties set forth in Article V and
Article VII above are true and correct in all material respects at and as
of the Closing Date;
(ii) the General Partners and the Fund have performed and complied with
all of their covenants hereunder in all material respects at and as of the
Closing Date;
(iii) the General Partners and the Fund have procured all of the
material third-party consents specified in, respectively, Section 5.2 and
Section 7.4 above and the related sections of the Disclosure Schedule; and
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(iv) no action, suit, or proceeding is pending or, to their Knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation, or
(C) affect adversely the right of the Surviving Partnership to own its
assets and to operate its businesses (and no such injunction, judgment,
order, decree, ruling, or charge is in effect);
Notwithstanding the foregoing, APF's obligation to close as a result of a
breach of the representations and warranties contained in Section 7.24 shall
be governed solely by Section 10.2(e) below.
(b) since December 31, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of the Fund, such determination to be made in the
reasonable discretion of APF;
(c) APF and the Operating Partnership shall have received an opinion dated
as of the Closing Date from Baker and Hostetler LLP, counsel to the General
Partners and the Fund, taken as a whole, in form and substance reasonably
satisfactory to APF and the Operating Partnership;
(d) APF shall have received the Disclosure Schedule and approved it in
accordance with Section 8.14;
(e) There shall not exist an unlawful environmental condition on one or
more properties owned by the Fund, which in the opinion of a mutually
acceptable environmental engineer or consultant, would require APF to expend
in excess of $4,243,243 in order to remediate such unlawful environmental
condition and cause the subject property or properties to comply with
applicable environmental laws, ordinances, regulations or orders; and
(f) If each of the CNL Income Funds approves its respective Proposed
Acquisition, Merrill Lynch & Co. shall not have withdrawn its Fairness Opinion
issued in connection with the Merger. If a Proposed Acquisition is not
approved by the applicable CNL Income Fund, then the Special Committee of the
Board of Directors of APF shall have received a fairness opinion addressed to
APF and its stockholders from Merrill Lynch & Co. as to the fairness of the
Proposed Acquisitions that were approved by the respective CNL Income Fund,
including the consideration to be paid in connection therewith, to APF and its
stockholders from a financial point of view.
APF, the OP General Partner and the Operating Partnership may waive any
condition specified in this Section 10.2 if they execute a writing so stating
at or prior to the Closing.
10.3 Conditions to Obligation of the General Partners and the Fund. The
obligations of the General Partners and the Fund to consummate the
transactions to be performed by them in connection with the Closing are
subject to satisfaction on or prior to December 31, 1999 of the following
conditions:
(a) APF, the OP General Partner and the Operating Partnership shall have
delivered to the General Partners and the Fund a certificate to the effect
that:
(i) the representations and warranties set forth in Article VI above are
true and correct in all material respects at and as of the Closing Date;
(ii) APF, the OP General Partner and the Operating Partnership have
performed and complied with all of their covenants hereunder in all
material respects through the Closing; and
(iii) no action, suit, or proceeding is pending or, to their knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement or (B) cause any of the
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transactions contemplated by this Agreement to be rescinded following
consummation (and no such injunction, judgment, order, decree, ruling, or
charge is in effect);
(b) APF shall have delivered to the Fund for distribution to the Partners
the Share Consideration pursuant to Section 4.2 and, as applicable, the cash
and Notes pursuant to Section 4.4;
(c) since September 30, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of APF;
(d) APF shall have acquired the CNL Restaurant Services Group;
(e) the General Partners shall have received Schedule 1 and approved it in
accordance with Section 8.14;
(f) the APF Common Shares shall have been approved for listing on the NYSE
subject to official notice of issuance;
(g) the General Partners shall have received an opinion dated as of the
Closing Date from Shaw Pittman Potts & Trowbridge, counsel to APF and the
Operating Partnership, in form and substance reasonably satisfactory to the
General Partners; and
(h) Legg Mason Wood Walker Incorporated shall not have withdrawn the Fund
Fairness Opinion.
The General Partners and the Fund may waive any condition specified in this
Section 10.3 if they execute a writing so stating at or prior to the Closing.
ARTICLE XI
Termination
11.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by the General Partners, the limited partners of the Fund,
the OP General Partner or the stockholders of APF, respectively, either by the
mutual written consent of APF, the OP General Partner and the General Partners
or by mutual action of the General Partners and the Boards of Directors of
each of the corporate General Partner and the OP General Partner and the
Special Committee.
11.2 Termination by Individual Parties. This Agreement may be terminated
and the Merger may be abandoned (a) by action of the Special Committee and the
Board of Directors of the OP General Partner in the event of a failure of a
condition to the obligations of APF and the Operating Partnership set forth in
Section 10.2 of this Agreement; (b) by the General Partners in the event of a
failure of a condition to the obligations of General Partners or the Fund set
forth in Section 10.3 of this Agreement; (c) any Party if the Merger shall not
have occurred by December 31, 1999 or (d) if a United States federal or state
court of competent jurisdiction or United States federal or state governmental
agency shall have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other action
shall have become final and non-appealable; provided, in the case of a
termination pursuant to clause (a) or (b) above, that the terminating party
shall not have breached in any material respect its obligations under this
Agreement in any manner that shall have proximately contributed to the
occurrence of the failure referred to in said clause.
11.3 Effect of Termination and Abandonment. In the event of termination of
this Agreement and abandonment of the Merger pursuant to this Article XI, no
Party hereto (or any of its directors or officers) shall have any liability or
further obligation to any other Party to this Agreement, except that nothing
herein will relieve any Party from liability for any breach of this Agreement
or the obligations set forth in Sections 9.4 and 13.11.
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ARTICLE XII
Indemnification
12.1 Indemnity Obligations of the General Partners and the Fund. Subject to
Sections 12.5 and 12.6 hereof, each of the General Partners severally, in
accordance with its percentage interest in the Share Consideration and limited
in amount to the value of the APF Common Shares received by it, based upon the
average per share closing price of the APF Common Shares for the first twenty
trading days after the APF Common Shares are listed on NYSE (the "20 Day
Average Price"), agree to indemnify and hold APF, the OP General Partner and
the Surviving Partnership harmless from, and to reimburse APF, the OP General
Partner and the Surviving Partnership for, any APF Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "APF Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, obligation, suit, action, fee, cost, or expense
of any nature whatsoever resulting from (i) any breach of any representation
and warranty of any of the General Partners or the Fund which is contained in
this Agreement or any Schedule, Exhibit, or certificate delivered pursuant
hereto; (ii) any breach or non-fulfillment of, or any failure to perform, any
of the covenants, agreements, or undertakings of any of the General Partners or
the Fund which are contained in or made pursuant to this Agreement; and (iii)
all interest, penalties, costs, and expenses (including, without limitation,
all reasonable fees and disbursements of counsel) arising out of or related to
any indemnification made under this Section 12.1.
12.2 Indemnity Obligations of APF, the OP General Partner and the Operating
Partnership. Subject to Sections 12.5 and 12.6 hereof, APF, the OP General
Partner and the Operating Partnership (including in its capacity as the
Surviving Partnership) hereby jointly and severally agree to indemnify and hold
each of the General Partners and the Fund harmless from, and to reimburse each
of the General Partners and the Fund for, any Fund Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "Fund Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, suit, action, fee, cost, or expense of any nature
whatsoever incurred by any of the General Partners or the Fund resulting from
(i) any breach of any representation and warranty of APF, the OP General
Partner or the Operating Partnership which is contained in this Agreement or
any Schedule, Exhibit, or certificate delivered pursuant hereto; (ii) any
breach or non-fulfillment of, or failure to perform, any of the covenants,
agreements, or undertakings of APF, the OP General Partner and the Operating
Partnership which are contained in or made pursuant to the terms and conditions
of this Agreement; and (iii) all interest, penalties, costs, and expenses
(including, without limitation, all reasonable fees and disbursements of
counsel) arising out of or related to any indemnification made under this
Section 12.2.
12.3 Appointment of Representative. James M. Seneff, Jr. is hereby appointed
as the exclusive agent of the General Partners and the Fund to act on their
behalf with respect to any and all Fund Indemnity Claims and any and all APF
Indemnity Claims arising under this Agreement or such other representative as
may be hereafter appointed by the General Partners. Such agent is herein
referred to as the "Representative." The Representative shall take, and the
General Partners agree that the Representative shall take, any and all actions
which the Representative believes are necessary or appropriate under this
Agreement for and on behalf of the General Partners and the Fund, as fully as
if such parties were acting on their own behalf, including, without limitation,
asserting Fund Indemnity Claims against APF, the OP General Partner and the
Operating Partnership, defending all APF Indemnity Claims, consenting to,
compromising, or settling all Fund Indemnity Claims and APF Indemnity Claims,
conducting negotiations with APF, the OP General Partner and the Operating
Partnership and their representatives regarding such claims, taking any and all
other actions specified in or contemplated by this Agreement and engaging
counsel, accountants, or other representatives in connection with the foregoing
matters. APF, the OP General Partner and the Operating Partnership shall have
the right to rely upon all actions taken or omitted to be taken by the
Representative pursuant to this Agreement, all of which actions or omissions
shall be legally binding upon each of the General Partners and the Fund. The
Representative, acting pursuant to this Section 12.3, shall not be liable to
any of the General Partners or the Fund for any act or omission, except in
connection with any act or omission that was the result of the Representative's
bad faith or gross negligence.
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12.4 Notification of Claims. Subject to the provisions of Section 12.5, in
the event of the occurrence of an event which any Party asserts constitutes an
APF Indemnity Claim or a Fund Indemnity Claim, as applicable, such Party shall
provide the indemnifying party with prompt notice of such event and shall
otherwise make available to the indemnifying party all relevant information
which is material to the claim and which is in the possession of the
indemnified party. If such event involves the claim of any third party (a
"Third-Party Claim"), the indemnifying party shall have the right to elect to
join in the defense, settlement, adjustment, or compromise of any such Third-
Party Claim, and to employ counsel to assist such indemnifying party in
connection with the handling of such claim, at the sole expense of the
indemnifying party, and no such claim shall be settled, adjusted or
compromised, or the defense thereof terminated, without the prior consent of
the indemnifying party unless and until the indemnifying party shall have
failed, after the lapse of a reasonable period of time, but in no event more
than 30 days after written notice to it of the Third-Party Claim, to join in
the defense, settlement, adjustment, or compromise of the same. An indemnified
party's failure to give timely notice or to furnish the indemnifying party with
any relevant data and documents in connection with any Third-Party Claim shall
not constitute a defense (in part or in whole) to any claim for indemnification
by such Party, except and only to the extent that such failure shall result in
any material prejudice to the indemnifying party. Any indemnifying party may
elect, at such Party's sole expense, to assume control of the defense,
settlement, adjustment, or compromise of any Third-Party Claim, with counsel
reasonably acceptable to the indemnified parties, insofar as such claim relates
to the liability of the indemnifying party, provided that such indemnifying
party shall obtain the consent of all indemnified parties before entering into
any settlement, adjustment, or compromise of such claims, or ceasing to defend
against such claims, unless such settlement is a cash settlement and contains
an unconditional release of the indemnified party from all existing and future
claims with respect to the matter being contested. In connection with any
Third-Party Claim, the indemnified party, or the indemnifying party if it has
assumed the defense of such claim pursuant to the preceding sentence, shall
diligently pursue the defense of such Third-Party Claim.
12.5 Survival. All representations and warranties, and, except as otherwise
provided in this Agreement, all covenants and agreements of the parties
contained in or made pursuant to this Agreement, and the rights of the parties
to seek indemnification with respect thereto, shall survive until eighteen
months from the Closing Date; provided, however, the representations and
warranties contained in Sections 6.2, 6.3 and 7.11 shall survive until the
expiration of the applicable statute of limitations with respect to the matters
covered thereby. No claim shall be made after the applicable survival period.
12.6 Limitations. Notwithstanding the foregoing, any claim by an indemnified
party against any indemnifying party under this Agreement shall be payable by
the indemnifying party only in the event, and to the extent, that the
accumulated amount of the claims in respect of such indemnifying party's
obligations to indemnify under this Agreement shall and the other claims
described in Article XIII exceed in the aggregate the dollar amount specified
in Article XIII. As to APF Indemnity Claims, the liability of each General
Partner shall be limited as provided in Article XIII.
12.7 Exclusive Provisions; No Rescission. Except as set forth in this
Agreement, no Party hereto is making any representation, warranty, covenant, or
agreement with respect to the matters contained herein. Anything herein to the
contrary notwithstanding, no breach of any representation, warranty, covenant,
or agreement contained herein or in any certificate or other document delivered
pursuant hereto relating to the Merger shall give rise to any right on the part
of any Party hereto, after the consummation of the Merger, to rescind this
Agreement or the transactions contemplated by this Agreement. Following the
consummation of the Merger, the rights of the Parties under the provisions of
this Article XII shall be the sole and exclusive remedy available to the
Parties with respect to claims, assertions, events, or proceedings arising out
of or relating to the Merger.
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ARTICLE XIII
Limitation of Liability
13.1 Threshold. Notwithstanding anything to the contrary stated in this
Agreement, in no event (i) shall the General Partners or any of them have any
liability to APF and/or the OP General Partner and the Surviving Partnership on
account of any APF Indemnity Claim or for any claim for breach of warranty or
for misrepresentation, or any other claim whatsoever arising under this
Agreement or in connection with the transaction contemplated herein
(individually a "Claim" and collectively, "Claims") or for any loss, damage,
deficiency, liability, obligation, suit, action, judgment, fee, cost or expense
of any nature whatsoever directly resulting from Claims (collectively,
"Losses") unless, until and only to the extent that the accumulated amount of
all Losses exceeds the amount of $424,324 in the aggregate (the "Threshold")
nor (ii) shall the individual or aggregate liability of the General Partners on
account of Claims and Losses exceed the value of APF Common Shares actually
issued to the General Partners in the Merger valued at the 20 Day Average
Price. To the extent that any Claim is asserted against more than one General
Partner, each General Partner shall be liable only for such General Partner's
proportionate share of the Claim based on the percentage that the APF Common
Shares received by such General Partner in the Merger is of the total APF
Commons Shares comprising the Share Consideration. Any Claim against a General
Partner, including an APF Indemnity Claim, may be satisfied by such General
Partner, in its sole discretion, by surrendering to the claimant(s) APF Common
Shares at a value equal to the closing price per share of such shares on the
NYSE on the last trading day preceding the date such APF Common Shares are
surrendered.
13.2 Special Indemnification. APF agrees to indemnify, defend and hold
harmless the General Partners against any loss, damage, deficiency, liability,
obligation, suit, action, judgment, fee, cost or expense of any nature
whatsoever, including reasonable attorneys' fees, arising after the Effective
Time that would have arisen in their capacity as General Partners of the Fund
had the Merger not been consummated and that are the result of APF's alleged
actions or inactions. The Threshold described in Section 13.1 above shall not
apply to APF obligations to indemnify the General Partners pursuant to this
Section 13.2.
ARTICLE XIV
Miscellaneous
14.1 Press Releases and Public Announcements. No Party shall issue any press
release or make any public announcement relating to the subject matter of this
Agreement prior to the Closing without the prior written approval of APF and
the General Partners; provided, however, that any Party may make any public
disclosure it believes in good faith is required by applicable law or any
listing or trading agreement concerning its publicly-traded securities (in
which case the disclosing Party will use its best efforts to advise the other
Parties prior to making the disclosure).
14.2 No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
14.3 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
14.4 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior
written approval of APF and the General Partners.
14.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
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<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 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 Prospectus/ Consent Solicitation Statement.
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.
OVERVIEW
Pursuant to the Prospectus/Consent Solicitation Statement and this
Supplement, you are being asked to approve the Acquisition of your Income Fund
by APF. Your Income Fund is one of 18 limited partnerships (which we refer to
collectively as the Funds) that APF is seeking to acquire. Supplements have
also been prepared for each of the other Funds, copies of which may be obtained
without charge to 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 (or a REIT), formed in
1994, whose primary business, like that of the Funds, is the ownership of
restaurant properties leased to operators of national and regional restaurant
chains on a triple-net lease basis. As a full-service REIT, 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 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 shares of common stock (or APF Shares) will I receive if my Income
Fund is acquired by APF?
Your Income Fund will receive 4,394,196 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 $10.00 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
approximately 75 million APF Shares through three public offerings at offering
prices per APF share equal to the Exchange Value. At December 31, 1998, of the
approximately $750 million raised by APF, APF has used approximately $550
million to acquire restaurant properties and to make mortgage loans and had
approximately $120 million in uninvested proceeds which it expects to invest
during the first quarter of 1999. The remaining proceeds were used to pay fees
and other offering expenses.
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<PAGE>
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
Fund?
Yes. Legg Mason Wood Walker, Incorporated 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 Funds, and (c) the method of allocating the APF
Shares among the Funds.
Do you, as the general partners of my Income Fund, recommend that I vote in
favor 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 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 how you want to vote, and sign
and mail it in the enclosed postage-paid return envelope as soon as possible,
so that at the Special Meeting of Limited Partners, your Units may be voted
"For" or "Against" APF's acquisition of your Income Fund. If you sign and send
in your consent form and do not indicate how you want to vote, your consent
form will be counted as a vote "For" the Acquisition. If you do not vote or you
abstain from voting, it will count as a vote "Against" the Acquisition.
In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to certain limitations. If you vote "Against" the Acquisition,
but your Income Fund is nevertheless acquired by APF, you may elect to receive
a payment (which we call the Cash/Notes Option) that is 10% in cash and 90% in
% Callable Notes due , 2006 (or Notes) based on the liquidation value
of your Income Fund, as determined by Valuation Associates, the appraisal firm
that we engaged in connection with the Acquisition. Such liquidation value will
be lower than the aggregate Exchange Value of the APF Shares offered to your
Income Fund in the Acquisition. The Notes will bear interest at a rate equal to
%, which was determined based on 120% of the applicable federal rate as of
, 1999. Please note that you may only receive the Cash/Notes Option if
you have voted "Against" the Acquisition and you elect to receive the
Cash/Notes Option on your consent form. You will receive APF Shares if your
Income Fund elects to be acquired in the Acquisition and you voted "For" the
Acquisition, or you voted "Against" the Acquisition and did not affirmatively
select the Cash/Notes Option. 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 (for example, 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 be based on the difference between the
value of the APF Shares or the tax basis of your Units. If you elect the
Cash/Notes Option, 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, Notes and
cash received by your Income Fund over the tax basis of your Fund's net assets.
Some of the gain may be subject to the 25% rate of tax applicable to certain
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 $2,109. To review the
tax consequences to the Limited Partners of the Funds in
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<PAGE>
greater detail, see pages through of the Prospectus/Consent Solicitation
Statement 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 Funds acquired by APF.
Although the majority of APF's assets and the assets of the other Funds
acquired by APF are substantially similar to those of your Income Fund, the
restaurant properties owned by APF and the other 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 Funds' restaurant properties,
see "APF's Business and The Restaurant Properties--Business Objectives and
Strategies" and "--The Restaurant Properties--General" and "Business of the
Funds--Description of Restaurant Properties" in the Prospectus/Consent
Solicitation Statement.
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 Prospectus/Consent Solicitation Statement.
Investment Risks
. Uncertainty Regarding the Exchange Value and Trading Price of APF Shares
Following Listing. Your Income Fund will be receiving 4,394,196 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 is 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 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.
. Decrease in Distributions. In each of the years ended December 31, 1995,
1996 and 1997, your Income Fund made $885 in distributions per $10,000
investment to you. Based on APF's pro forma financial information, and
assuming APF acquires only your Income Fund and that each Limited Partner
of your Income receives only APF Shares, you would have received, for the
year ended December 31, 1997, $626 in distributions per $10,000 of
original investment, which is 29.3% less than the $885 distributed to you
as Limited Partner during the same period. 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 year ended December 31, 1997 and for the nine months
ended September 30, 1998 is not necessarily indicative of the
distributions you will receive as a stockholder of APF after the
Acquisition. See "Cash Distributions to Limited Partners of Your Fund."
. Conflicts of Interest in the Acquisition; Substantial Benefits to Related
Parties. There are certain conflicts of interest inherent in the structure
of the Acquisition of your Income Fund. 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
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<PAGE>
the Acquisition that may or may not be aligned with your interests as a
Limited Partner of the Income Fund or with their own positions as the
general partners of your Income Fund. Assuming only your Income Fund is
acquired in the Acquisition, we will receive 41,846 APF Shares. 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.
. Fundamental Change in Nature of 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
September 30, 1998), 396 restaurant properties. The risks inherent in
investing in an operating company such as APF include APF's ability to
invest in new restaurant properties that are not as profitable as APF
anticipated, the incurrence of substantial indebtedness to make future
acquisitions of restaurant properties which it may be unable to repay and
making mortgage loans to prospective operators of national and regional
restaurant chains which may not have the ability to repay.
As an APF stockholder, you will receive the benefits of your investment
through (i) dividend distributions on, and (ii) increases in the value
of, your APF Shares. In addition, 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 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 Cash/Notes
Option). An investment in APF may not outperform your investment in the
Income Fund.
. Original Investment Timeframe. 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 1999 and 2004. We have no current plans to
dispose of your Income Fund's restaurant properties if the Limited
Partners do not approve the Acquisition.
Real Estate/Business Risks
. Risk of Default on Mortgage Loans and Market Risks associated with
Securitizations. 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.
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
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securitize (thereby remaining exposed to the related credit and repayment
risks on such mortgage loans,) and 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 may 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.
. Risks Associated with Leverage. 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. At the time of the consummation of the Acquisition, as a
general policy, APF's Board of Directors will 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 funds from operations and its ability to make
distributions to its stockholders.
. Acquisition and Development Risks. APF plans to pursue its growth strategy
through the acquisition and development of additional restaurant
properties. To the extent that APF does pursue this growth strategy, we do
not know that it 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.
Tax Risks
. Failure of APF to Qualify as a REIT for Tax Purposes. 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.
. Risks Associated with Distribution Requirements. 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
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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 Tax Law. 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 Prospectus/Consent Solicitation Statement.
CONSIDERATION PAID TO INCOME FUND
The following table sets forth, for your Income Fund (i) the aggregate
amount of original Limited Partner investments in each Fund less any
distributions of net sales proceeds paid to the Limited Partners of that Fund,
(ii) the original amount of Limited Partner investments in each Fund less any
distributions of net sales proceeds per average $10,000 investment, (iii) the
number of APF Shares to be paid to your Income Fund, (iv) the estimated value
of the APF Shares paid to your Income Fund, (v) the estimated Acquisition
expenses allocated to your Income Fund, (vi) the estimated value, based on the
Exchange Value, of APF Shares paid to your Income Fund after deducting
Acquisition expenses, and (vii) the estimated value, based on the Exchange
Value, of APF Shares you will receive for each $10,000 of your original
investment:
<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) Fund(2) Fund(3) Expenses Expenses(3) Investment(3)
- ------------- ------------------- ---------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
$40,000,000 $10,000 4,394,196 $43,941,960 $485,944 $43,456,016 $10,759
</TABLE>
- --------
(1) Income Fund has had no distributions of net sales proceeds.
(2) The APF Shares payable to each Fund as set forth in this chart will not
change if APF acquires fewer than all of the Funds in the Acquisition. This
number assumes that none of the Limited Partners of the Fund has elected
the Cash/Notes Option.
(3) 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.
Upon completion of the Acquisition of your Income Fund, the operations and
existence of your Income Fund will cease. For more detailed information, see
"The Acquisition" in the Prospectus/Consent Solicitation Statement. If your
Income Fund does not approve the Acquisition, we do not contemplate that your
Income Fund would be liquidated in the near future. The Acquisition, however,
does not result in an all-cash payment to you in the liquidation of your
investment. For example, if you are eligible for and choose the Cash/Notes
Option, you become a Noteholder of APF. You will have exchanged your Units for
unsecured debt obligations of APF which may not be retired in full until
, 2006, a date approximately seven years after the date the Acquisition
of your Income Fund occurs. On the other hand, if you exchange your Units for
APF Shares, you will receive an equity interest in APF whose marketability will
depend upon the market that may develop with respect to the APF Shares, which
will be listed on the NYSE.
S-6
<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...................................................... $ 20,530
Appraisals and Valuation........................................ 8,212
Fairness Opinions............................................... 36,954
Registration, Listing and Filing Fees........................... --
Soliciting Dealer Fee........................................... 85,901
Financial Consulting Fees....................................... --
Environmental Fees.............................................. 51,325
Accounting and Other Fees....................................... 59,502
--------
Subtotal...................................................... 262,424
Closing Transaction Costs
Transfer Fees and Taxes......................................... 82,384
Legal Fees...................................................... 72,351
Recording Costs................................................. --
Other........................................................... 68,785
--------
Subtotal...................................................... 223,520
--------
Total........................................................... $485,944
========
</TABLE>
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 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
S-7
<PAGE>
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 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 as, in our opinion, market
conditions permit), as contemplated by the terms of the partnership agreement.
Special Meeting to Discuss the Acquisition
We have scheduled a special meeting of the Limited Partners of your Income
Fund to discuss the solicitation materials, which include the
Prospectus/Consent Solicitation Statement, 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 (as defined below) and to explain in person our reasons
for recommending that you vote "For" the Acquisition.
VOTING PROCEDURE
The Prospectus/Consent Solicitation Statement, 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.
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 Prospectus/Consent Solicitation
S-8
<PAGE>
Statement. A copy of the Agreement and Plan of Merger dated March 11, 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 December 31, 1999. 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.
The consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and certain 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
(including the Acquisition), 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. The partnership agreement also provide 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
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, 1995, 1996 and 1997 and the nine months
ended September 30, 1998, the aggregate amounts accrued or paid by your Income
Fund to us are shown below under "Historical"
S-9
<PAGE>
and the estimated amounts of compensation that would have been paid had the
Acquisition been in effect for the years presented, are shown below under "Pro
Forma":
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended
----------------------- September 30,
1995 1996 1997 1998
------- ------- ------- -------------
<S> <C> <C> <C> <C>
Historical:
General Partner Distributions.......... -- -- -- --
Property Management Fees............... $36,930 $37,293 $37,974 $28,975
Broker/Dealer Commissions(1)........... -- -- -- --
Due Diligence and Marketing Support
Fees.................................. -- -- -- --
Acquisition Fees....................... -- -- -- --
Asset Management Fees.................. -- -- -- --
Real Estate Disposition Fees(2)........ -- -- -- --
------- ------- ------- -------
Total historical..................... 36,930 37,293 37,974 28,975
Pro Forma:
Cash Distributions on APF Shares....... 29,239 31,381 24,353 19,366
Salary Compensation.................... N/A N/A N/A N/A
------- ------- ------- -------
Total pro forma...................... $29,239 $31,381 $24,353 $19,366
</TABLE>
- --------
(1) A majority of the fees paid as broker-dealer commissions and due diligence
and marketing support fees were reallowed to other broker-dealers
participating in the offering of the Income Fund's Units.
(2) 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 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 the Acquisition--Prices for 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>
Nine Months Ended
September 30, 1998
--------------------
1993 1994 1995 1996 1997 Historical Pro Forma
---- ---- ---- ---- ---- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income....... $800 $810 $793 $858 $816 $606 $475
Distributions from Return of
Capital........................ 31 46 92 27 69 50 23
---- ---- ---- ---- ---- ---- ----
Total......................... $831 $856 $885 $885 $885 $656 $498
==== ==== ==== ==== ==== ==== ====
</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 nine months ended September 30,
1998 is not necessarily indicative of the distributions you will receive as a
stockholder of APF after the Acquisition.
Assuming APF maintains its current level of debt for acquiring future
restaurant properties, the expected distribution rate per APF Share will be
8.8% (assuming a $10.00 per APF Share price based on the Exchange Value, the
annualized dividend per year is expected to be $0.88 per APF Share). Based on
the number of APF Shares that you would receive in the Acquisition per your
average $10,000 original investment and this distribution rate, you would
receive an annual distribution of approximately $947.
S-10
<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 certain 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 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 Cash/Note Option.
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, our relief 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 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 Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the Cash/Notes Option, constitutes 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 and is the best way to maximize the return on your
investment in light of the values of such consideration.
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
S-11
<PAGE>
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 of Valuation Associates and
Legg Mason received fees for its services and notwithstanding that Legg Mason
has previously provided investment banking services to the Funds and to
Commercial Net Lease Realty, Inc., a former affiliate of ours. See "Reports,
Opinions and Appraisals" in the Prospectus/Consent Solicitation Statement.
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 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 cash and promissory 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 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 Cash/Notes Option.
3. Valuation of Alternatives. Based on the appraisal of the Income Fund's
restaurant properties, we estimated the value of your Income Fund as an ongoing
concern and if liquidated. 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 Fund to 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
September 30, 1998 per $10,000 original investment. Since the calculation of
the book value was done on a GAAP basis, it is not indicative of the true fair
market value of your Income Fund. This figure was compared to the (i) value of
the Fund if it commenced an orderly liquidation of its investment portfolio on
December 31, 1998, (ii) value of the Fund if it continued to operate in
accordance with its existing partnership agreement and business plans, and
(iii) estimated value of the APF Shares, based on the Exchange Value, paid to
each Fund per average $10,000 invested.
S-12
<PAGE>
Summary of Valuations
(per $10,000 original investment)
<TABLE>
<CAPTION>
Estimated
Value of APF
Shares per
GAAP Going Average $10,000
Book Liquidation Concern Original Limited
Value Value(1) Value(1) Partner Investment(2)
------ ----------- -------- ---------------------
<S> <C> <C> <C> <C>
CNL Income Fund XI, Ltd. .... $8,517 $10,000 $10,730 $10,759
</TABLE>
- --------
(1) 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.
(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.
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have an independent
obligation 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 Funds). James M. Seneff, Jr. and
Robert A. Bourne act as the individual general partners of all of the 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.
Substantial Benefits to General Partners
As a result of the Acquisition (assuming only your Income Fund is acquired),
we are expected to receive certain benefits, including that we will be relieved
from certain ongoing liabilities with respect to Funds that are acquired by
APF.
With respect to our ownership in your Income Fund, we may be issued up to
41,846 APF Shares in the aggregate in accordance with the terms of your Income
Fund's partnership agreement. The 41,846 APF Shares issued to us will have an
estimated value, based on the Exchange Value, of approximately $418,460
thousand.
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. Furthermore, they will be entitled to receive stock
options, under APF's stock option plan. 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 Funds if the Acquisition does not occur.
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
S-13
<PAGE>
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 the Cash/Notes Option, in which
case you will receive cash and 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 Prospectus/Consent Solicitation Statement.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, the
assets (and any liabilities) of your Income Fund (if your Income Fund is
acquired by APF) will be transferred to APF in return for APF Shares and/or
cash and 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 XI, Ltd. ................................. $2,109
</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 Code, no gain or loss is recognized if (i)
property is transferred to a corporation by one more individuals or entities in
exchange for the stock of that corporation, and (ii) immediately after the
exchange, such individuals or entities are in control of the corporation. For
purposes of
S-14
<PAGE>
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
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 the
Cash/Notes Option, 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 (1) 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 (2) 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 Cash/Notes Option, your Income Fund will receive APF
Shares, cash and Notes in exchange for your Income Fund's assets. Because the
principal portion of the Notes will not be due until , 2006, 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 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 (without reduction for
any selling expenses) 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 are 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, cash 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" (i.e., real property and
depreciable assets used in a trade or business and held for more than one
year). Your share of gains or losses from the sale of section 1231 assets of
your Income Fund would be combined with any other section 1231 gains and losses
that you recognize in that year. If the result is a net loss, such loss is
characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property will be taxed as ordinary income to the extent of all
prior depreciation deductions taken by your Income Fund prior to sale. In
general, you may only use up to $3,000 of capital losses in excess of capital
gains to offset ordinary income in any taxable year. Any excess loss is carried
forward to future years subject to the same limitations.
S-15
<PAGE>
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your Income Fund recognizes will be allocated to you and the other
Limited Partners in accordance with the terms of your Income Fund's partnership
agreement. Each Limited Partner will be allocated and must report his, her or
its allocable share of such gain, if any, pursuant to these terms, regardless
of the Limited Partner's decision to receive cash and Notes rather than APF
Shares. Even though a Limited Partner's election of the Cash/Notes Option may
decrease the amount of gain your Income Fund recognizes, the electing Limited
Partner still will be required to take into account his, her or its share of
your Income Fund's gain as determined under the partnership agreement of your
Income Fund. Therefore, Limited Partners who elect the Cash/Notes Option may
recognize gain in the year of the Acquisition despite the fact that they will
receive only a small amount of cash and no publicly-traded instruments 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 the Cash/Notes Option. See "--Tax Consequences of
Liquidation and Termination of Your Fund" below.
Tax Consequences of the Liquidation and Termination of Your Fund. If your
Fund is acquired by APF, your Fund will be deemed to have liquidated and
distributed APF Shares and/or cash and 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 cash and 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 pro rata 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 (determined on the closing date of the Acquisition) and your
adjusted tax basis in your Units (adjusted by your distributive share of
income, gain, loss, deduction and credit for the final taxable year of your
Income Fund (including any such items recognized by your Income Fund as a
result of the Acquisition) as well as any distributions you receive in such
final taxable year (other than the distribution of the APF Shares)). 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 cash and Notes in the Acquisition, you will recognize gain to
the extent that the amount of cash you receive in the Acquisition exceeds your
adjusted basis in your Units (adjusted by your distributive share of income,
gain, loss, deduction and credit for the final taxable year of your Income Fund
(including any such items recognized by your Income Fund as a result of the
Acquisition) as well as any distributions you receive in such final taxable
year (other than the distributions of the cash and Notes)). Your basis in the
Notes distributed to you will equal your adjusted basis in your Units, reduced
(but not below zero) by the amount of any cash distributed to you 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 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-16
<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 that are acquired
by APF will equal the fair market value of the APF Shares plus the cash and 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 Prospectus/Consent Solicitation
Statement.
S-17
<PAGE>
SUMMARY SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
APF, FUNDS, ADVISOR AND CNL RESTAURANT FINANCIAL SERVICES GROUP
Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
Historical Pro Forma
---------------------------------------------------- --------------------------------
CNL Income CNL Restaurant
Fund XI, Financial Combined Pro Forma Combined Pro
APF Ltd. Advisor Services Group Historical Adjustments Forma
------------ ----------- ----------- -------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data
Revenues:
Rental and earned
income.............. $ 22,947,199 $ 2,746,082 $ -- $ -- $ 25,693,281 $ 9,635,208 (a)
46,259 (b) $ 35,374,748
Management fees...... -- -- 21,405,127 5,122,366 26,527,493 (21,039,623)(c)
(2,875,906)(d) 2,611,964
Interest and other
income.............. 6,117,911 114,469 751 18,463,647 24,696,778 1,526,547 (e) 26,223,325
------------ ----------- ----------- ----------- ------------ ------------ ------------
Total revenue........ 29,065,110 2,860,551 21,405,878 23,586,013 76,917,552 (12,707,515) 64, 210,037
Expenses:
General and
administrative...... 1,539,004 143,658 6,701,115 6,704,482 15,088,259 (1,306,871)(f)
(1,415,100)(g)
(34,952)(h) 12,331,336
Advisory fees........ 1,248,393 28,975 -- 1,026,231 2,303,599 (2,303,599)(i) --
State taxes.......... 397,569 24,370 15,226 220,180 657,345 57,979 (j) 715,324
Depreciation and
amortization........ 2,693,020 343,995 131,539 1,000,493 4,169,047 3,146,798 (k)(l) 7,315,845
Interest expense..... -- -- 105,668 14,234,533 14,340,201 (68,670)(m) 14,271,531
Paid to affiliates... -- -- 256,456 1,569,202 1,825,658 (1,825,658)(n) --
------------ ----------- ----------- ----------- ------------ ------------ ------------
Total expenses....... 5,877,986 540,998 7,210,004 24,755,121 38,384,109 (3,750,073) 34,634, 036
------------ ----------- ----------- ----------- ------------ ------------ ------------
Net earnings (loss)
before equity in
earnings of joint
ventures/minority
interests, gain
(loss) on sale of
properties, gain on
securitization, and
provision (credit)
for federal income
taxes................ 23,187,124 2,319,553 14,195,874 (1,169,108) 38,533,443 (8,957,442) 29,576,001
------------ ----------- ----------- ----------- ------------ ------------ ------------
Equity in earnings of
joint
ventures/minority
interests............ (23,271) 105,651 -- 12,452 94,832 -- 94,832
Gain (loss) on sales
of properties........ -- -- -- -- -- -- --
Gain on
securitization....... -- -- -- 3,018,268 3,018,268 -- 3,018,268
Provision (credit) for
federal income taxes -- -- 5,607,415 708,666 6,316,081 (6,316,081)(o) --
------------ ----------- ----------- ----------- ------------ ------------ ------------
Net earnings.......... $ 23,163,853 $ 2,425,204 $ 8,588,459 $ 1,152,946 $ 35,330,462 $ (2,641,361) $ 32,689,101
============ =========== =========== =========== ============ ============ ============
Other Data:
Weighted average
number of shares of
common stock
outstanding during
period.............. 47,633,909 N/A N/A N/A N/A -- 74,084,132 (p)
Total properties owned
at end of period..... 357 39 N/A N/A N/A -- 396
Funds from
operations........... $ 26,408,569 $ 2,841,354 N/A N/A N/A -- $ 37,613,528
Total cash
distributions
declared............. $ 26,460,446 $ 2,625,018 N/A N/A N/A -- $ 37,613,528
Cash distributions
declared per $10,000
investment........... $ 572 $ 656 N/A N/A N/A -- $ 508
<CAPTION>
Combined Pro Forma September 30,
Historical September 30, 1998 Historical 1998
---------------------------------------------------- ------------ --------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data
Real estate assets,
net.................. $407,663,180 $29,756,528 $ -- $ -- $437,419,708 $ 12,898,407 (q)
26,052,741 (r) $476,370,856
Mortgages/notes
receivable........... 33,523,506 -- -- 173,776,981 207,300,487 849,195 (r) 208,149,682
Accounts receivable,
net.................. 575,104 28,202 7,544,985 7,342,103 15,490,394 (7,854,642)(s) 7,635,752
Investment in/due from
joint ventures....... 631,374 2,528,168 -- -- 3,159,542 1,071,052 (q) 4,230,594
Total assets.......... 566,383,967 35,549,591 8,429,809 197,528,789 807,892,156 32,935,476 840,827,632
Total
liabilities/minority
interest............. 14,478,585 1,481,173 5,049,152 185,998,045 207,006,955 (10,845,506)(s)(t) 196,161,449
Total equity.......... 551,905,382 34,068,418 3,380,657 11,530,744 600,885,201 43,780,982 (q)(t) 644,666,183
</TABLE>
- --------
S-18
<PAGE>
(a) Represents rental and earned income as if 1) properties that had been
previously constructed and acquired from January 1, 1998 through November
30, 1998 had been acquired and leased on January 1, 1997 and 2) properties
that were developed by APF from January 1, 1998 through November 30, 1998
had been placed in service on May 1, 1997 (assumes a four month development
period.)
<TABLE>
<S> <C>
Rental and earned income on Property Transactions by APF.... $9,635,208
</TABLE>
(b) Represents $46,259 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, 1997.
(c) Represents the elimination of intercompany fees between APF, the Income
Fund, the Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees.......................................... $ (1,569,202)
Secured equipment lease fee............................... (44,426)
Advisory fees............................................. (1,751,358)
Reimbursement of administrative costs..................... (292,754)
Acquisition fees.......................................... (15,392,193)
Underwriting fees......................................... (254,945)
Administrative fees....................................... (148,491)
Executive fee............................................. (310,000)
Guarantee fees............................................ (93,750)
Servicing fee............................................. (1,014,117)
Development fees.......................................... (166,876)
Consulting fee............................................ (1,511)
------------
Total.................................................... $(21,039,623)
============
</TABLE>
(d) Represents the deferral of $2,875,906 in origination fees collected by CNL
Restaurant Financial Services Group that should be amortized over the term
of the loans originated (20 years) in accordance with the Statement of
Financial Accounting Standards #91 "Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases."
(e) Represents interest income of $1,318,870 earned from Other Investments
acquired and mortgage notes issued from January 1, 1998 through November
30, 1998 as if this had occurred on January 1, 1997 and the amortization of
$207,677 of deferred origination fees collected during the year ended
December 31, 1997 and during the nine months ended September 30, 1998,
which were capitalized and deferred in (d) above as if they had been
collected on January 1, 1997. These deferred fees are being amortized and
recorded as interest income.
(f) Represents the elimination of intercompany expenses paid between APF, the
Income Fund, the Advisor and the CNL Restaurant Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs...................... $ (292,754)
Servicing fee.............................................. (1,014,117)
-----------
$(1,306,871)
===========
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by APF were subject
to capitalization during the entire period and 2) costs relating to
properties not developed by APF were subject to capitalization up through
the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs............................ $(1,415,100)
</TABLE>
(h) Represents savings of $34,952 in professional services and administrative
expenses resulting from reporting on one combined company versus 22
separate entities.
(i) Represents the elimination of fees between APF, the Income Fund, the
Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Advisory fees............................................... $(1,751,358)
Administrative fees......................................... (148,491)
Executive fee............................................... (310,000)
Guarantee fees.............................................. (93,750)
-----------
$(2,303,599)
===========
</TABLE>
(j) Represents additional state taxes of $57,979 resulting from assuming that
acquisitions from January 1, 1998 through November 30, 1998 had been
acquired on January 1, 1997 and assuming that the Income Fund had operated
under a REIT structure.
S-19
<PAGE>
(k) Represents an increase in depreciation of the building portion of the
properties acquired from January 1, 1998 through November 30, 1998 as if
they had been acquired on January 1, 1997 and the step up in basis referred
to in footnote (q) from acquiring the Income Fund portfolio using the
straight-line method over the estimated useful lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense.......................................... $1,585,334
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of the CNL
Restaurant Financial Services Group referred to in footnote (q).
<TABLE>
<S> <C>
Amortization of goodwill...................................... $1,561,464
</TABLE>
(m) Represents elimination of interest expense recorded for the amortization of
$350,000 in arrangement fees collected during the year ended December 31,
1997 which were eliminated in footnote (4), II (d ) in the Notes to the Pro
Forma Financial Statements attached to this Supplement.
<TABLE>
<S> <C>
Interest expense............................................... $(68,670)
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees incurred
between APF, the Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Origination fees............................................ $(1,569,202)
Underwriting fees........................................... (254,945)
Consulting fee.............................................. (1,511)
-----------
$(1,825,658)
===========
</TABLE>
(o) Represents the elimination of $6,316,081 in the provision for income taxes
as a result of the acquisition. APF expects to continue to qualify as a
REIT and does not expect to incur federal income taxes.
(p) APF Shares issued during the period required to fund acquisitions as if
they had been acquired on January 1, 1997 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 the
proposal to amend and restate APF's articles of incorporation to increase
the number of authorized APF Shares.
(q) Represents the payment of $485,944 in cash and the issuance of 16,645,601
APF Shares in consideration for the purchase of the Income Fund, Advisor
and CNL Restaurant Financial Services Group at September 30, 1998 using the
Exchange Value of $10 per APF Share plus estimated transaction costs. The
acquisitions of the Income Fund and the CNL Restaurant Financial Services
Group have been accounted for under the purchase accounting method and
goodwill was recognized to the extent the estimated value of the
consideration paid exceeded the fair value of the net tangible assets
acquired. As for the acquisition of the Advisor from a related party, the
consideration paid in excess of the fair value of the net tangible assets
received has been accounted for as costs incurred in acquiring the Advisor
from a related party because the Advisor has not been deemed to qualify as
a "business" for purposes of applying APB Opinion No. 16 "Business
Combinations." Upon consummation of the Acquisition, this expense will be
recorded as an operating expense on APF's statement of earnings. APF will
not deduct this expense for purposes of calculating funds from operations
due to the nonrecurring and non-cash nature of the expense. As of September
30, 1998, $249,403 of transaction costs had been incurred by APF.
<TABLE>
<S> <C>
Income Fund............................................... $ 43,941,955
Advisor................................................... 76,000,000
CNL Restaurant Financial Services Group................... 47,000,000
------------
Total Purchase Price (cash and shares)................... 166,941,955
Less cash paid to Income Fund............................. (485,944)
------------
Share consideration...................................... 166,456,011
Transaction costs of APF.................................. 8,933,000
------------
Total costs incurred..................................... $175,389,011
============
</TABLE>
In addition, APF i) used $8,933,000 in cash to pay the transaction costs
related to the Acquisition, ii) made an upward adjustment to the Income Fund
carrying value of land and building on operating leases by $10,447,559, net
investment in direct financing leases by $2,450,848, investment in joint
venture by $1,071,052, made downward adjustments to the carrying value of
accrued rental income of $1,607,969, and made downward adjustments to other
assets of $3,791,469 to adjust historical values to fair value, iii)
recorded goodwill of $41,639,041 for the acquisition of the CNL Restaurant
Financial Services Group, iv) reduced retained earnings by $76,686,074 for
the excess consideration paid over the net assets of the Advisor and removed
the historical common stock balance of $12,000, additional paid in capital
balance of $9,602,287, retained earnings balance of $5,297,114 and partners
capital balance of $34,068,418 of the Income Fund, Advisor and CNL
Restaurant Financial Services Group.
S-20
<PAGE>
(r) Represents the use of $26,901,936 in cash and cash equivalents at September
30, 1998 to acquire $26,052,741 in properties and issue $849,195 in
mortgage notes which occurred from October 1, 1998 through November 30,
1998.
(s) Represents the elimination by the Income Fund of $5,263 in related party
payables recorded as receivables by the Advisor, the elimination by the CNL
Restaurant Financial Services Group of $6,641,379 in related party payables
recorded as receivables by CNL Restaurant Financial Services Group and the
elimination by APF of $1,208,000 in related party payables recorded as
receivables by the Advisor.
(t) Represents the elimination of income taxes payable of $2,990,864 from
liabilities assumed in the acquisition of the CNL Restaurant Businesses
since the acquisition agreements require that the Advisor and CNL
Restaurant Financial Services Group have no accumulated or current earnings
and profits for federal income tax purposes at the time of the acquisition.
S-21
<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>
Nine Months Ended
September 30, Year Ended December 31,
----------------------- -----------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue (1)............. $ 2,966,202 $ 2,936,115 $ 3,998,538 $ 3,976,787 $ 3,920,528
Net income (2).......... 2,425,204 2,403,064 3,295,079 3,464,705 3,202,176
Cash distributions
declared (3)........... 2,665,018 2,625,018 3,500,024 3,540,024 3,540,023
Net income per Unit (2)
....................... 0.60 0.59 0.82 0.86 0.79
Cash distributions
declared per
Unit (3) .............. 0.67 0.66 0.88 0.89 0.89
Weighted average number
of Limited Partner
Units outstanding...... 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000
<CAPTION>
September 30, December 31,
----------------------- -----------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total assets ........... $35,549,591 $35,775,010 $35,785,538 $36,003,045 $36,086,683
Total partners'
capital................ 34,068,418 34,291,223 34,308,232 34,513,177 34,588,496
</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 year ended December 31, 1996, includes $213,685 from a
gain on sale of land and building.
(3) 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-22
<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 September 30, 1998, the Income Fund owned 39 restaurant
properties, which included four 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
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
The Income Fund's primary source of capital for the nine months ended
September 30, 1998 and 1997, 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
$2,934,890 and $2,743,042 for the nine months ended September 30, 1998 and
1997, respectively. The increase in cash from operations for the nine months
ended September 30, 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, 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 the partners. At September 30, 1998, the
Income Fund had $1,492,088 invested in such short-term investments, as compared
to $1,272,386 at December 31, 1997. The funds remaining at September 30, 1998,
after payment of distributions and other liabilities, will be used to meet the
Income Fund's working capital and other needs.
In October 1998, the Income Fund sold its restaurant 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 $461,862 for financial reporting purposes.
The Income Fund intends to reinvest the net sales proceeds in a replacement
restaurant property.
Total liabilities of the Income Fund, including distributions payable,
increased to $979,258 at September 30, 1998, from $975,905 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 operations, and for the nine months ended September 30,
1998, accumulated excess operating reserves, the Income Fund declared
distributions to the Limited Partners of $2,665,018 and $2,625,018 for the nine
months ended September 30, 1998 and 1997, respectively ($875,006 for each of
the quarters ended September 30, 1998 and 1997). This represents distributions
of $0.67 and $0.66 per unit for the nine months ended September 30, 1998 and
1997, respectively ($0.22 per unit for each applicable quarter). No
distributions were made to us for the quarters and nine months ended September
30, 1998 and 1997. No amounts distributed to the Limited Partners for the nine
months ended September 30, 1998 and 1997, 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.
S-23
<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.
The Years Ended December 31, 1997, 1996 and 1995
The Income Fund's primary source of capital for the years ended December 31,
1997, 1996 and 1995, 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 $3,642,796, $3,601,714 and
$3,652,185 for the years ended December 31, 1997, 1996 and 1995, respectively.
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 the decrease during 1996, as compared to 1995, is
primarily a result of changes in the Income Fund's working capital during each
of the respective years.
Other sources and uses of capital included the following items during the
years ended December 31, 1997, 1996 and 1995.
In November 1996, the Income Fund sold its restaurant property in
Philadelphia, Pennsylvania, for $1,050,000 and received net sales proceeds of
$1,044,750, resulting in a gain of $213,685 for financial reporting purposes.
This restaurant property was originally acquired by the Income Fund in
September 1992, and had a cost of approximately $877,900, excluding acquisition
fees and miscellaneous acquisition expenses; therefore, the Income Fund sold
the restaurant property for approximately $166,900 in excess of its original
purchase price. As of December 31, 1996, the net sales proceeds of $1,044,750,
plus accrued interest of $3,072, were being held in an interest-bearing escrow
account pending the release of funds by the escrow agent to acquire an
additional restaurant property. The sale of this restaurant property was
structured to qualify as a like-kind exchange transaction in accordance with
Section 1031 of the Internal Revenue Code. As a result, no gain was recognized
for federal income tax purposes. Therefore, the Income Fund was not required to
distribute any of the net sales proceeds from the sale of this restaurant
property to Limited Partners for the purpose of paying federal and state income
taxes.
In January 1997, the Income Fund reinvested the net sales proceeds from the
1996 sale of the restaurant property in Philadelphia, Pennsylvania, in a Black-
eyed Pea restaurant property located in Corpus Christi, Texas, with one of our
affiliates as tenants-in-common. In connection therewith, the Income Fund and
the affiliate entered into an agreement whereby each co-venturer will share in
the profits and losses of the restaurant property in proportion to its
applicable percentage interest. As of December 31, 1997, the Income Fund owned
a 72.5% 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 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.
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, 1997, the Income Fund had
$1,272,386 invested in such short-term investments as compared to $1,225,860 at
December 31, 1996.
During 1997, 1996 and 1995, certain of our affiliates incurred $83,747,
$105,643 and $92,276, respectively, for certain operating expenses. As of
December 31, 1997 and 1996, the Income Fund owed $6,648
S-24
<PAGE>
and $2,121, respectively, to affiliates for such amounts, accounting and
administrative services and management fees. As of February 28, 1998, the
Income Fund had reimbursed the affiliates all such amounts. Other liabilities,
including distributions payable, decreased to $969,257 at December 31, 1997,
from $999,977 at December 31, 1996, partially as the result of the Income
Fund's accruing a special distribution payable to the Limited Partners of
$40,000 at December 31, 1996, which was paid in January 1997.
During 1996, the Income Fund entered into an agreement with an unrelated
third party to sell the Burger King restaurant property in Nashua, New
Hampshire. As discussed above, in October 1998, the Income Fund sold its
restaurant property in Nashua, New Hampshire to a third party for $1,748,000.
Based on cash from operations, and during the years ended December 31, 1996
and 1995, cumulative excess operating reserves, the Income Fund declared
distributions to the Limited Partners of $3,500,024, $3,540,024 and $3,540,023
for the years ended December 31, 1997, 1996 and 1995, respectively. This
represents a distribution of $0.88 per Unit for the year ended December 31,
1997 and $0.89 per Unit for each of the years ended December 31, 1996 and 1995.
We anticipate that the Income Fund will declare a special distribution to the
Limited Partners during the quarter ending March 31, 1998, representing
cumulative excess operating reserves. No amounts distributed to the Limited
Partners for the years ended December 31, 1997, 1996 and 1995, 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.
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
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 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
nine months ended September 30, 1998, the Income Fund and its consolidated
joint ventures owned and leased 37 wholly-owned restaurant properties
(including one restaurant property in Columbus, Ohio exchanged for one
restaurant property in Danbury, Connecticut), to operators of fast-food and
family-style restaurant chains. In connection therewith, during the nine months
ended September 30, 1998 and 1997, the Income Fund, Denver Joint Venture and
CNL/Airport Joint Venture earned $2,632,415 and $2,655,818, respectively, in
rental income from operating leases and earned income from direct financing
leases, $868,028 and $883,882 of which was earned during the quarters ended
September 30, 1998 and 1997, respectively.
In addition, for the nine months ended September 30, 1998 and 1997, 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. In connection therewith, during the nine months
ended September 30, 1998 and 1997, the Income Fund earned $156,335 and
$163,945, respectively, attributable to net income earned by unconsolidated
joint ventures, $58,730 and $58,782 of which was earned during the quarters
ended September 30, 1998 and 1997, respectively. Net income earned by joint
ventures decreased
S-25
<PAGE>
during the nine months ended September 30, 1998, as compared to the nine months
ended September 30, 1997, due to Ashland Joint Venture adjusting estimated
contingent rental amounts accrued at December 31, 1997, to actual amounts
billed during the nine months ended September 30, 1998.
During the nine months ended September 30, 1998 and 1997, the Income Fund
earned $114,469 and $53,455, respectively, in interest and other income,
$16,421 and $25,999 of which was earned during the quarters ended September 30,
1998 and 1997, respectively. The increase in interest and other income during
the nine months ended September 30, 1998 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
$540,998 and $533,051 for the nine months ended September 30, 1998 and 1997,
respectively, $179,596 and $166,842 of which were incurred during the quarters
ended September 30, 1998 and 1997, respectively.
The Years Ended December 31, 1997, 1996 and 1995
During the years ended December 31, 1996 and 1995, the Income Fund owned and
leased 35 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 owned and leased 34 wholly-owned
restaurant properties. In addition, during 1997, 1996 and 1995, the Income Fund
was a co-venturer in four separate joint ventures that each owned and leased
one restaurant property, and during 1997, the Income Fund owned and leased one
restaurant property with an affiliate as tenants-in-common. As of December 31,
1997, the Income Fund owned, either directly or through joint venture
arrangements, 39 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 $45,600 to $183,600. 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 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, 1997, 1996 and 1995, the Income Fund and
its consolidated joint ventures, Denver Joint Venture and CNL/Airport Joint
Venture, earned $3,543,984, $3,615,977 and $3,609,385, 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, 1997, 1996 and 1995, the Income Fund also
earned $225,888, $251,312 and $200,198, respectively, in contingent rental
income. The decrease during 1997, as compared to 1996, is primarily due to the
sale of the restaurant property in Philadelphia, Pennsylvania. The increase in
contingent rental income during 1996, as compared to 1995, is primarily due to
an increase in gross sales of certain restaurant properties whose leases
require the payment of contingent rental income.
In addition, for the years ended December 31, 1997, 1996 and 1995, the
Income Fund earned $236,103, $118,211 and $118,384, 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
venture 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."
S-26
<PAGE>
During at least one of the years ended December 31, 1997, 1996 and 1995,
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 Flagstar Corporation, 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, 1997, 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 eight restaurants, Flagstar Corporation was the
lessee under leases relating to nine 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
lessees or groups of affiliated lessees, each will continue to contribute more
than 10% of the Income Fund's total rental income during 1998 and subsequent
years. In addition, during at least one of the years ended December 31, 1997,
1996 and 1995 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 subsequent years, 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.
Operating expenses, including depreciation and amortization expense, were
$703,459, $725,767 and $718,352 for the years ended December 31, 1997, 1996 and
1995, respectively. 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.
The increase in operating expenses during 1996, as compared to 1995, is
primarily the result of an increase in accounting and administrative expenses
associated with operating the Income Fund and its restaurant properties, and an
increase in insurance expense as a result of our obtaining contingent liability
and property coverage for the Income Fund beginning in May 1995.
The increase in operating expenses during 1996, as compared to 1995, was
partially offset by the Income Fund receiving a state tax refund during 1996,
for state taxes paid in prior years and by a decrease in depreciation expense
as a result of the sale of the restaurant property in Philadelphia,
Pennsylvania, in November 1996, as described above in "Liquidity and Capital
Resources."
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
years ended December 31, 1997 or 1995.
General
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Income Fund's financial position or results of operations.
The Income Fund's leases as of September 30, 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.
S-27
<PAGE>
The Year 2000 problem is the result of information technology systems and
embedded systems (products which are made with microprocessor (computer) chips
such as HVAC systems, physical security systems and elevators) using a two-
digit format, as opposed to four digits, to indicate the year. Such information
technology and embedded systems may be unable to properly recognize and process
date-sensitive information beginning January 1, 2000.
The Income Fund does not have any information technology systems. Certain of
our affiliates provide all services requiring the use of information technology
systems pursuant to a management agreement with the Income Fund. The
maintenance of embedded systems, if any, at the Income Fund's properties is the
responsibility of the tenants of the properties in accordance with the terms of
the Income Fund's leases. We and our affiliates have established a team
dedicated to reviewing the internal information technology systems used in the
operation of the Income Fund, and the information technology and embedded
systems and the Year 2000 compliance plans of the Income Fund's tenants,
significant suppliers, financial institutions and transfer agent.
The information technology infrastructure of our affiliates consists of a
network of personal computers and servers that were obtained from major
suppliers. The affiliates utilize various administrative and financial software
applications on that infrastructure to perform the business functions of the
Income Fund. Our inability and that of our affiliates to identify and timely
correct material Year 2000 deficiencies in the software and/or infrastructure
could result in an interruption in, or failure of, certain of the Income Fund's
business activities or operations. Accordingly, we and our affiliates have
requested and are evaluating documentation from the suppliers of the affiliates
regarding the Year 2000 compliance of their products that are used in the
business activities or operations of the Income Fund. The costs expected to be
incurred by us and our affiliates to become Year 2000 compliant will be
incurred by us and our affiliates; therefore, these costs will have no impact
on the Income Fund's financial position or results of operations.
The Income Fund has material third party relationships with its tenants,
financial institutions and 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. If
any of these third parties are unable to meet their obligations to the Income
Fund because of the Year 2000 deficiencies, such a failure may have a material
impact on the Income Fund. Accordingly, we have requested and are evaluating
documentation from the Income Fund's tenants, financial institutions, and
transfer agent relating to their Year 2000 compliance plans. At this time, we
have not yet received sufficient certifications to be assured that the tenants,
financial institutions, and transfer agent have fully considered and mitigated
any potential material impact of the Year 2000 deficiencies. Therefore, we do
not, at this time, know of the potential costs to the Income Fund of any
adverse impact or effect of any Year 2000 deficiencies by these third parties.
We currently expect that all Year 2000 compliance testing and any necessary
remedial measures on the information technology systems used in the business
activities and operations of the Income Fund will be completed prior to June
30, 1999. Based on the progress we and our affiliates have made in identifying
and addressing the Income Fund's Year 2000 issues and the plan and timeline to
complete the compliance program, we do not foresee significant risks associated
with the Income Fund's Year 2000 compliance at this time. Because we and our
affiliates are still evaluating the status of the systems used in business
activities and operations of the Income Fund and the systems of the third
parties with which the Income Fund conducts its business, we have not yet
developed a comprehensive contingency plan and are unable to identify "the most
reasonably likely worst case scenario" at this time. As we identify significant
risks related to the Income Fund's Year 2000 compliance or if the Income Fund's
Year 2000 compliance program's progress deviates substantially from the
anticipated timeline, we will develop appropriate contingency plans.
S-28
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997... F-1
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997.............................................. F-2
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997 ............. F-3
Condensed Statements of Cash Flows for the Nine Months Ended September 30,
1998 and 1997............................................................ F-4
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997 ....................................... F-5
Report of Independent Accountants......................................... F-6
Balance Sheets as of December 31, 1997 and 1996........................... F-7
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995..................................................................... F-8
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995............................................................ F-9
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995..................................................................... F-10
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and 1995................................................................. F-11
Unaudited Pro Forma Financial Information................................. F-18
Unaudited Pro Forma Balance Sheet as of September 30, 1998................ F-19
Unaudited Pro Forma Income Statement for the Nine Months Ended September
30, 1998................................................................. F-20
Unaudited Pro Forma Income Statement for the Year Ended December 31,
1997..................................................................... F-21
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements............................................................... F-22
</TABLE>
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September December 31,
30, 1998 1997
----------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $2,799,124 and
$2,455,129............................................ $23,217,022 $23,561,017
Net investment in direct financing leases.............. 6,539,506 6,611,661
Investment in joint ventures........................... 2,528,168 2,567,786
Cash and cash equivalents.............................. 1,492,088 1,272,386
Receivables, less allowance for doubtful accounts of
$20,283 in 1998 ...................................... 28,202 119,575
Prepaid expenses....................................... 14,612 13,363
Accrued rental income.................................. 1,607,969 1,517,726
Other assets........................................... 122,024 122,024
----------- -----------
$35,549,591 $35,785,538
=========== ===========
<CAPTION>
LIABILITIES AND PARTNERS' CAPITAL
<S> <C> <C>
Accounts payable....................................... $ 4,393 $ 6,508
Escrowed real estate taxes payable..................... 24,764 19,410
Distributions payable.................................. 875,006 875,006
Due to related parties................................. 5,263 6,648
Rents paid in advance and deposits..................... 69,832 68,333
----------- -----------
Total liabilities.................................... 979,258 975,905
Minority interest...................................... 501,915 501,401
Partners' capital...................................... 34,068,418 34,308,232
----------- -----------
$35,549,591 $35,785,538
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-1
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
-------------------- ----------------------
1998 1997 1998 1997
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases........................ $ 672,887 $ 675,491 $2,023,869 $2,026,676
Earned income from direct
financing leases.............. 195,141 208,391 608,546 629,142
Contingent rental income....... 50,903 46,040 113,667 115,123
Interest and other income...... 16,421 25,999 114,469 53,455
--------- --------- ---------- ----------
935,352 955,921 2,860,551 2,824,396
--------- --------- ---------- ----------
Expenses:
General operating and
administrative................ 43,130 36,804 117,587 111,662
Professional services.......... 9,699 6,046 23,892 23,451
Management fees to related
parties....................... 9,923 9,327 28,975 27,575
Real estate taxes.............. 2,179 -- 2,179 --
State and other taxes.......... -- -- 24,370 25,779
Depreciation and amortization.. 114,665 114,665 343,995 344,584
--------- --------- ---------- ----------
179,596 166,842 540,998 533,051
--------- --------- ---------- ----------
Income Before Minority Interest
in Income of Consolidated Joint
Ventures and Equity in Earnings
of Unconsolidated Joint
Ventures........................ 755,756 789,079 2,319,553 2,291,345
Minority Interest in Income of
Consolidated Joint Ventures..... (16,760) (17,628) (50,684) (52,226)
Equity in Earnings of
Unconsolidated Joint Ventures... 58,730 58,782 156,335 163,945
--------- --------- ---------- ----------
Net Income....................... $ 797,726 $ 830,233 $2,425,204 $2,403,064
========= ========= ========== ==========
Allocation of Net Income:
General partners............... $ 7,977 $ 8,303 $ 24,252 $ 24,031
Limited partners............... 789,749 821,930 2,400,952 2,379,033
--------- --------- ---------- ----------
$ 797,726 $ 830,233 $2,425,204 $2,403,064
========= ========= ========== ==========
Net Income Per Limited Partner
Unit............................ $ 0.20 $ 0.21 $ 0.60 $ 0.59
========= ========= ========== ==========
Weighted Average Number of
Limited Partner Units
Outstanding..................... 4,000,000 4,000,000 4,000,000 4,000,000
========= ========= ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
General partners:
Beginning balance................................. $ 176,232 $ 143,281
Net income........................................ 24,252 32,951
----------- -----------
200,484 176,232
----------- -----------
Limited partners:
Beginning balance................................. 34,132,000 34,369,896
Net income........................................ 2,400,952 3,262,128
Distributions ($0.67 and $0.88 limited partner
unit, respectively).............................. (2,665,018) (3,500,024)
----------- -----------
33,867,934 34,132,000
----------- -----------
Total partners' capital............................. $34,068,418 $34,308,232
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities.......... $ 2,934,890 $ 2,743,042
----------- -----------
Cash Flows from Investing Activities:
Investment in joint ventures..................... -- (1,044,750)
Decrease in restricted cash...................... -- 1,044,750
----------- -----------
Net cash provided by investing activities...... -- --
----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners................ (2,665,018) (2,665,018)
Distributions to holders of minority interests... (50,170) (41,783)
----------- -----------
Net cash used in financing activities.......... (2,715,188) (2,706,801)
----------- -----------
Net Increase in Cash and Cash Equivalents............ 219,702 36,241
Cash and Cash Equivalents at Beginning of Period..... 1,272,386 1,225,860
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 1,492,088 $ 1,262,101
=========== ===========
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Land and building under operating lease exchanged
for land and building under operating lease....... $ 850,381 $ --
=========== ===========
Distributions declared and unpaid at end of
period............................................ $ 875,006 $ 875,006
=========== ===========
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, 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, 1997.
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.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2. Land and Building on Operating Leases
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.
3. Subsequent Event
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 $461,862 for financial reporting purposes.
F-5
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners
CNL Income Fund XI, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund XI, Ltd.
(a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. 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 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 Income Fund XI, Ltd. as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
January 16, 1998
F-6
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
ASSETS
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation............................. $23,561,017 $24,019,677
Net investment in direct financing leases............. 6,611,661 6,686,367
Investment in joint ventures.......................... 2,567,786 1,537,430
Cash and cash equivalents............................. 1,272,386 1,225,860
Restricted cash....................................... -- 1,047,822
Receivables, less allowance for doubtful accounts
$14,746 in 1996...................................... 119,575 92,546
Prepaid expenses...................................... 13,363 13,227
Organization costs, less accumulated amortization of
$10,000 and $9,411................................... -- 589
Accrued rental income................................. 1,517,726 1,257,503
Other assets.......................................... 122,024 122,024
----------- -----------
$35,785,538 $36,003,045
=========== ===========
<CAPTION>
LIABILITIES AND PARTNERS CAPITAL
<S> <C> <C>
Accounts payable...................................... $ 6,508 $ 2,202
Escrowed real estate taxes payable.................... 19,410 21,573
Distributions payable................................. 875,006 915,006
Due to related parties................................ 6,648 2,121
Rents paid in advance and deposits.................... 68,333 61,196
----------- -----------
Total liabilities................................... 975,905 1,002,098
Commitment (Note 11)
Minority interests.................................... 501,401 487,770
Partners' capital..................................... 34,308,232 34,513,177
----------- -----------
$35,785,538 $36,003,045
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases...... $2,702,558 $2,765,327 $2,774,204
Earned income from direct financing
leases.................................. 841,426 850,650 835,181
Contingent rental income................. 225,888 251,312 200,198
Interest and other income................ 62,440 61,403 62,599
---------- ---------- ----------
3,832,312 3,928,692 3,872,182
---------- ---------- ----------
Expenses:
General operating and administrative..... 148,380 164,642 135,605
Professional services.................... 32,077 30,984 22,995
Management fees to related parties....... 37,974 37,293 36,930
State and other taxes.................... 25,779 14,650 41,596
Depreciation and amortization............ 459,249 478,198 481,226
---------- ---------- ----------
703,459 725,767 718,352
---------- ---------- ----------
Income Before Minority Interests in Income
of Consolidated Joint Ventures, Equity in
Earnings of Unconsolidated Joint Ventures
and Gain on Sale of Land and Building..... 3,128,853 3,202,925 3,153,830
Minority Interests in Income of
Consolidated Joint Ventures............... (69,877) (70,116) (70,038)
Equity in Earnings of Unconsolidated Joint
Ventures.................................. 236,103 118,211 118,384
Gain on Sale of Land and Building.......... -- 213,685 --
---------- ---------- ----------
Net Income................................. $3,295,079 $3,464,705 $3,202,176
========== ========== ==========
Allocation of Net Income:
General partners......................... $ 32,951 $ 33,356 $ 32,021
Limited partners......................... 3,262,128 3,431,349 3,170,155
---------- ---------- ----------
$3,295,079 $3,464,705 $3,202,176
========== ========== ==========
Net Income Per Limited Partner Unit........ $ 0.82 $ 0.86 $ 0.79
========== ========== ==========
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-8
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<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,
1994................... $1,000 $ 76,904 $40,000,000 $ (7,975,039) $ 7,613,478 $(4,790,000) $ 34,926,343
Distributions to
limited partners
($0.89 per limited
partner unit)......... -- -- -- (3,540,023) -- -- (3,540,023)
Net income............. -- 32,021 -- -- 3,170,155 -- 3,202,176
------ -------- ----------- ------------ ----------- ----------- ------------
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) $34,30 8,232
====== ======== =========== ============ =========== =========== ============
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash received from tenants............. $ 3,585,979 $ 3,657,138 $ 3,693,039
Distributions from unconsolidated
joint ventures........................ 250,497 148,375 141,377
Cash paid for expenses................. (237,312) (251,408) (233,423)
Interest received...................... 43,632 47,609 51,192
----------- ----------- -----------
Net cash provided by operating
activities.......................... 3,642,796 3,601,714 3,652,185
----------- ----------- -----------
Cash Flows From Investing Activities:
Proceeds from sale of land and
building.............................. -- 1,044,750 --
Investment in joint venture............ (1,044,750) -- --
Decrease (increase) in restricted
cash.................................. 1,044,750 (1,044,750) --
----------- ----------- -----------
Net cash provided by investing
activities.......................... -- -- --
----------- ----------- -----------
Cash Flows From Financing Activities:
Distributions to limited partners...... (3,540,024) (3,540,024) (3,500,023)
Distributions to holders of minority
interests............................. (56,246) (58,718) (54,227)
----------- ----------- -----------
Net cash used in financing
activities.......................... (3,596,270) (3,598,742) (3,554,250)
----------- ----------- -----------
Net Increase in Cash and Cash
Equivalents............................ 46,526 2,972 97,935
Cash and Cash Equivalents at Beginning
of Year................................ 1,225,860 1,222,888 1,124,953
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 1,272,386 $ 1,225,860 $ 1,222,888
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................. $ 3,295,079 $ 3,464,705 $ 3,202,176
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation........................... 458,660 476,198 479,226
Amortization........................... 589 2,000 2,000
Gain on sale of land building.......... -- (213,685) --
Minority interests in income of
consolidated joint ventures........... 69,877 70,116 70,038
Equity in earnings of unconsolidated
joint ventures, net of
distributions......................... 14,394 30,164 22,993
Decrease (increase) in receivables..... (23,957) 25,855 58,262
Decrease (increase) in prepaid
expenses.............................. (136) 151 (1,003)
Decrease in net investment in direct
financing leases...................... 74,706 62,366 55,203
Increase in accrued rental income...... (260,223) (296,439) (269,953)
Increase (decrease) in accounts
payable and accrued expenses.......... 2,143 4,280 (28,847)
Increase (decrease) in due to related
parties............................... 4,527 (4,386) 5,106
Increase (decrease) in rents paid in
advance and deposits.................. 7,137 (19,611) 56,984
----------- ----------- -----------
Total adjustments.................... 347,717 137,009 450,009
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. $ 3,642,796 $ 3,601,714 $ 3,652,185
=========== =========== ===========
Supplemental Schedule of Non-Cash
Financing Activities:
Distributions declared and unpaid at
December 31........................... $ 875,006 $ 915,006 $ 915,006
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
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.
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.
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 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-11
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
Organization Costs--Organization costs are 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 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 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.
F-12
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. Land and Buildings on Operating Leases
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Land............................................ $12,269,964 $12,269,964
Buildings....................................... 13,746,182 13,746,182
----------- -----------
26,016,146 26,016,146
Less accumulated depreciation................... (2,455,129) (1,996,469)
----------- -----------
$23,561,017 $24,019,677
=========== ===========
</TABLE>
In November 1996, the Partnership sold its 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 property
was originally acquired by the Partnership in September 1992, and had a cost of
approximately $877,900, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Partnership sold the property for
approximately $166,900 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, 1997, 1996 and 1995, the Partnership recognized $260,223, $296,439 and
$269,953, 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, 1997:
<TABLE>
<S> <C>
1998.......................................................... $ 2,584,403
1999.......................................................... 2,592,664
2000.......................................................... 2,592,664
2001.......................................................... 2,601,669
2002.......................................................... 2,650,408
Thereafter.................................................... 19,991,002
-----------
$33,012,810
===========
</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>
1997 1996
----------- ------------
<S> <C> <C>
Minimum lease payments receivable.............. $13,834,907 $ 14,744,153
Estimated residual values...................... 2,144,114 2,144,114
Less unearned income........................... (9,367,360) (10,201,900)
----------- ------------
Net investment in direct financing leases...... $ 6,611,661 $ 6,686,367
=========== ============
</TABLE>
F-13
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following is a schedule of future minimum lease payments to be received
on the direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998.......................................................... $ 921,552
1999.......................................................... 921,552
2000.......................................................... 921,552
2001.......................................................... 921,552
2002.......................................................... 926,847
Thereafter.................................................... 9,221,852
-----------
$13,834,907
===========
</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 72.5% 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.
Ashland Joint Venture, Des Moines 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 restaurants. The following
presents the joint ventures' combined, condensed financial information at
December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation........................ $3,511,507 $2,152,524
Cash............................................. 621 722
Receivables...................................... 21,638 --
Prepaid expenses................................. 6,939 6,606
Accrued rental income............................ 99,429 59,917
Liabilities...................................... 466 343
Partners' capital................................ 3,639,668 2,219,426
Revenues......................................... 430,923 239,454
Net income....................................... 334,962 169,376
</TABLE>
The Partnership recognized income totalling $236,103, $118,211 and $118,384
for the years ended December 31, 1997, 1996 and 1995, respectively, from these
joint ventures.
6. Restricted Cash
As of December 31, 1996, the net sales proceeds of $1,044,750 from the sale
of the property in Philadelphia, Pennsylvania, 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 property. In January 1997
these proceeds were reinvested in a Black-eyed Pea property in Corpus Christi,
Texas, as tenants-in-common with an affiliate of the general partners (see Note
5).
F-14
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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, 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 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.
During the years ended December 31, 1997, 1996 and 1995, the Partnership
declared distributions to the limited partners of $3,500,024, $3,540,024 and
$3,540,023, 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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................. $3,295,079 $3,464,705 $3,202,176
Depreciation for tax reporting
purposes in excess of depreciation
for financial reporting purposes..... (43,077) (39,035) (37,935)
Gain on sale of land and building for
financial reporting purposes in
excess of gain for tax reporting
purposes............................. -- (213,685) --
Direct financing leases recorded as
operating leases for tax reporting
purposes............................. 74,706 62,366 55,203
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............................. (13,296) (606) (7,207)
Accrued rental income................. (260,223) (296,439) (269,953)
Rents paid in advance................. 22,436 (19,611) 11,087
Minority interests in timing
differences of consolidated joint
ventures............................. 14,430 15,933 17,613
Other................................. (14,746) (8,114) 14,237
---------- ---------- ----------
Net income for federal income tax
purposes............................. $3,075,309 $2,965,514 $2,985,221
========== ========== ==========
</TABLE>
F-15
<PAGE>
CNL INCOME FUND XI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 parent company of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, served
as president of CNL Fund Advisors, Inc. through October 1997. CNL Income Fund
Advisors, Inc. was a wholly owned subsidiary of CNL Group, Inc. until its
merger, effective January 1, 1996, with CNL Fund Advisors, Inc. During the
years ended December 31, 1997, 1996 and 1995, CNL Income Fund Advisors, Inc.
and CNL Fund Advisors, Inc. (hereinafter referred to collectively as the
"Affiliates") each performed certain services for the Partnership as described
below.
During the years ended December 31, 1997, 1996 and 1995, certain 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 Affiliates 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 Affiliates. The Partnership incurred management fees of
$37,974, $37,293 and $36,930 for the years ended December 31, 1997, 1996 and
1995, respectively.
Certain Affiliates are 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 Affiliates provide 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, 1997, 1996 and 1995, Affiliates provided
accounting and administrative services to the Partnership on a day-to-day
basis. The Partnership incurred $88,667, $95,845 and $69,156 for the years
ended December 31, 1997, 1996 and 1995, respectively, for such services.
The due to related parties at December 31, 1997 and 1996, totalled $6,648
and $2,121, respectively.
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.
F-16
<PAGE>
CNL INCOME FUND XI, LTD.
(A Limited Florida Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 at lease one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Flagstar Enterprises, Inc., Denny's, Inc. and
Quincy's Restaurants, Inc................... $780,502 $774,347 $785,556
Foodmaker, Inc............................... 768,032 768,032 768,032
Burger King Corporation and BK Acquisition,
Inc......................................... 733,620 712,334 712,334
Golden Corral Corporation.................... 538,871 538,355 529,854
DenAmerica Corporation....................... 489,623 381,129 --
</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
and the property held as tenants-in-common with an affiliate of the general
partners), for the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Burger King............................. $1,198,027 $1,271,606 $1,237,483
Jack in the Box......................... 768,032 768,032 768,032
Denny's................................. 854,141 747,341 821,011
Golden Corral Family Steakhouse
Restaurants............................ 538,871 538,355 529,854
</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. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
11. Commitment
During 1996, the Partnership entered into an agreement with an unrelated
third party to sell the Burger King property in Nashua, New Hampshire. The
general partners believe that the anticipated sales price will exceed the
Partnership's cost attributable to the property; however, as of January 16,
1998, the sale had not occurred.
F-17
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to the
Company gives effect to the Acquisition, and is based on estimates and
assumptions set for the 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 the Company, the
historical combined financial information of CNL Income Fund XI, Ltd., (the
"CNL 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 the Company, the
CNL Income Fund, Advisor and CNL Restaurant Financial Services Group. The pro
forma balance sheet assumes that the Acquisition occurred on September 30,
1998; the pro forma consolidated statements of earnings assume that the
Property Acquisitions (as defined on page ) and the Acquisition occurred on
January 1, 1997.
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-18
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA BALANCE SHEET
September 30, 1998
<TABLE>
<CAPTION>
Historical
----------------------------------------------------------------------------------
CNL Income CNL Financial CNL Combined
APF Fund XI, Ltd. Advisor Services, Inc. Financial Corp. Portfolios
------------ ------------- ---------- -------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Land and
buildings on
operating
leases, net..... $298,967,972 $23,217,022 $ 0 $ 0 $ $322,184,994
Net investment in
direct financing
leases.......... 117,028,760 6,539,506 0 0 0 123,586,266
Mortgages and
notes
receivable...... 33,523,506 0 0 0 173,776,981 207,30,487
Other
Investments..... 16,200,316 0 200,000 0 6,561,628 22,961,944
Investment in
joint ventures.. 631,374 2,528,168 0 0 0 3,159,542
Cash and cash
equivalents..... 90,674,289 1,492,088 283,300 599,997 5,098,033 98,147,707
Receivables...... 575,104 28,202 7,544,985 6,824,632 517,471 15,490,394
Accrued rental
income.......... 3,071,451 1,607,969 0 0 0 4,679,420
Other assets..... 5,711,195 136,636 401,524 295,570 3,854,477 10,399,402
------------ ----------- ---------- ---------- ------------ ------------
Total assets.... $566,383,967 $35,549,591 $8,429,809 $7,720,199 $189,808,590 $807,892,156
============ =========== ========== ========== ============ ============
LIABILITIES &
EQUITY:
Accounts payable
and accrued
liabilities..... $ 379,496 $ 29,157 $ 449,751 $ 193,949 $ 1,236,138 $ 2,288,491
Accrued
construction
costs payable... 3,045,304 0 0 0 0 3,045,304
Distributions
payable......... 0 875,006 2,220,000 0 0 3,095,006
Due to related
parties......... 2,552,411 5,263 0 1,452,512 6,556,902 10,567,106
Income tax
payable......... 0 0 1,989,003 0 1,001,861 2,990,864
Line of credit... 6,765,575 0 0 0 0 6,765,575
Notes payable.... 0 0 390,398 28,462 175,528,203 175,947,063
Deferred income.. 1,015,758 0 0 0 0 1,015,758
Rents paid in
advance......... 437,497 69,832 0 0 0 507,329
Minority
interest........ 282,544 501,915 0 0 0 784,459
Common Stock..... 621,187 0 9,800 2,000 200 633,187
Additional paid
in capital...... 556,830,578 0 482,964 5,231,827 3,887,496 566,432,865
Accumulated
distributions in
excess of net
earnings........ (5,546,383) 0 2,887,893 811,449 1,597,772 (249,269)
Partners
capital......... 0 34,068,418 0 0 0 34,068,418
------------ ----------- ---------- ---------- ------------ ------------
Total
liabilities and
equity......... $566,383,967 $35,549,591 $8,429,809 $7,720,199 $189,808,590 $807,892,156
============ =========== ========== ========== ============ ============
<CAPTION>
Pro Forma
------------------------------
Adjustments Pro Forma
---------------- -------------
<S> <C> <C>
ASSETS:
Land and
buildings on
operating
leases, net..... $ 10,447,559 (1)
26,052,741 (2) $358,685,294
Net investment in
direct financing
leases.......... 2,450,848 (1) 126,019,114
Mortgages and
notes
receivable...... 849,195 (2) 208,149,682
Other
Investments..... -- 22,961,944
Investment in
joint ventures.. 1,071,052 (1) 4,230,594
Cash and cash
equivalents..... (485,944)(1)
(8,933,000)(1)
(26,901,936)(2) 61,826,827
Receivables...... (7,854,642)(3) 7,635,752
Accrued rental
income.......... (1,607,969)(1) 3,071,451
Other assets..... 41,639,041)(1)
(3,791,469)(1) 48,246,974
---------------- -------------
Total assets.... $ 32,935,476 $840,827,632
================ =============
LIABILITIES &
EQUITY:
Accounts payable
and accrued
liabilities..... $ -- $ 2,288,491
Accrued
construction
costs payable... -- 3,045,304
Distributions
payable......... -- 3,095,006
Due to related
parties......... (7,854,642)(3) 2,712,464
Income tax
payable......... (2,990,864)(4) 0
Line of credit... -- 6,765,575
Notes payable.... -- 175,947,063
Deferred income.. -- 1,015,758
Rents paid in
advance......... -- 507,329
Minority
interest........ -- 784,459
Common Stock..... 154,456 (1) 787,643
Additional paid
in capital...... 156,687,268 (1) 723,120,133
Accumulated
distributions in
excess of net
earnings........ (81,983,188)(1)
2,990,864 (4) (79,241,593)
Partners
capital......... (34,068,418)(1) 0
---------------- -------------
Total
liabilities and
equity......... $ 32,935,476 $840,827,632
================ =============
</TABLE>
F-19
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA INCOME STATEMENT
September 30, 1998
<TABLE>
<CAPTION>
Historical
--------------------------------------------------------------------------------
CNL Income CNL Financial CNL Combined
APF Fund XI, Ltd. Advisor Services, Inc. Financial Corp. Portfolios
----------- ------------- ----------- -------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and earned
income........... $22,947,199 $2,746,082 $ 0 $ 0 $ 0 $25,693,281
Fees.............. 0 0 21,405,127 5,115,549 6,817 26,527,493
Interest and
other income..... 6,117,911 114,469 751 432,506 18,031,141 24,696,778
----------- ---------- ----------- ---------- ----------- -----------
Total revenue... 29,065,110 2,860,551 21,405,878 5,548,055 18,037,958 76,917,552
Expenses:
General and
administrative... 1,539,004 143,658 6,701,115 4,107,311 2,597,171 15,088,259
Advisory fees..... 1,248,393 28,975 0 0 1,026,231 2,303,599
Fees to
Restaurant
Financial
Services Group... 0 0 256,456 1,569,202 0 1,825,658
Interest.......... 0 0 105,668 3,534 14,230,999 14,340,201
State taxes....... 397,569 24,370 15,226 18,564 201,616 657,345
Depreciation--
other............ 0 0 75,607 55,056 0 130,663
Depreciation--
property......... 2,684,924 343,995 0 0 0 3,028,919
Amortization...... 8,096 0 55,932 138 945,299 1,009,465
----------- ---------- ----------- ---------- ----------- -----------
Total operating
expenses....... 5,877,986 540,998 7,210,004 5,753,805 19,001,316 38,384,109
----------- ---------- ----------- ---------- ----------- -----------
Operating earnings
(losses).......... 23,187,124 2,319,553 14,195,874 (205,750) (963,358) 38,533,443
Equity in
earnings of
joint
ventures/minority
interest......... (23,271) 105,651 0 12,452 0 94,832
Gain on
securitization... 0 0 0 0 3,018,268 3,018,268
----------- ---------- ----------- ---------- ----------- -----------
Net earnings
(losses) before
income taxes...... 23,163,853 2,425,204 14,195,874 (193,298) 2,054,910 41,646,543
Provision
(credit) for
federal income
taxes............ 0 0 5,607,415 (81,229) 789,895 6,316,081
----------- ---------- ----------- ---------- ----------- -----------
Net income......... $23,163,853 $2,425,204 $ 8,588,459 $ (112,069) $ 1,265,015 $35,330,462
=========== ========== =========== ========== =========== ===========
Earnings per
share............. $ 0.49
===========
Shares outstanding:
Weighted
average.......... 47,633,909
===========
End of period..... 62,118,679
===========
<CAPTION>
Pro Forma
-------------------------------
Adjustments Pro Forma
---------------- --------------
<S> <C> <C>
Revenues:
Rental and earned
income........... $ 9,635,208 (a)
46,259 (b) $35,374,748
Fees.............. (21,039,623)(c)
(2,875,906)(d) 2,611,964
Interest and
other income..... 1,526,547 (e) 26,223,325
---------------- --------------
Total revenue... (12,707,515) 64,210,037
Expenses:
General and
administrative... (1,306,871)(f)
(1,415,100)(g)
(34,952)(h) 12,331,336
Advisory fees..... (2,303,599)(i) 0
Fees to
Restaurant
Financial
Services Group... (1,825,638)(n) 0
Interest.......... (68,670)(m) 14,271,531
State taxes....... 57,979 (j) 715,324
Depreciation--
other............ 0 130,663
Depreciation--
property......... 1,585,334 (k) 4,614,253
Amortization...... 1,561,464 (l) 2,570,929
---------------- --------------
Total operating
expenses....... (3,750,073) 34,634,036
---------------- --------------
Operating earnings
(losses).......... (8,957,442) 29,576,001
Equity in
earnings of
joint
ventures/minority
interest......... 0 94,832
Gain on
securitization... 0 3,018,268
---------------- --------------
Net earnings
(losses) before
income taxes...... (8,957,442) 32,689,101
Provision
(credit) for
federal income
taxes............ (6,316,081)(o) 0
---------------- --------------
Net income......... $ (2,641,361) $32,689,101
================ ==============
Earnings per
share............. $ 0.44
==============
Shares outstanding:
Weighted
average.......... 74,084,132(p)
==============
End of period..... 78,764,280
==============
</TABLE>
F-20
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA INCOME STATEMENT
For the year ended December 31, 1997
<TABLE>
<CAPTION>
Historical Pro Forma
----------------------------------------------------------------------------- ---------------------------
CNL Financial
CNL Income Services, CNL Financial Combined
APF Fund XI, Ltd. Advisor Inc. Corp. Portfolios Adjustments Pro Forma
----------- ------------- ---------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and earned
income........... $15,490,615 $3,769,872 $ 0 $ 0 $ 0 $19,260,487 $24,048,982 (a)
61,679 (b) $43,371,148
Fees.............. 0 0 8,310,836 5,965,110 73,704 14,349,650 (9,115,360)(c)
(2,662,141)(d) 2,572,149
Interest and
other income..... 3,967,318 62,440 165,569 0 10,932,843 15,128,170 249,395 (c) 15,377,565
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Total Revenue... 19,457,933 3,832,312 8,476,405 5,965,110 11,006,547 48,738,307 12,582,555 61,320,862
Expenses:
General and
administrative... 1,010,725 180,457 4,266,169 1,889,904 828,848 8,176,103 (742,621)(f)
(1,619,238)(g)
(43,393)(h) 5,770,851
Advisory fees..... 804,879 37,974 0 0 1,802,532 2,645,385 (2,645,385)(i) 0
Fees to
Restaurant
Financial
Services Group... 0 0 151,041 594,041 0 745,082 (745,082)(n) 0
Interest.......... 0 0 162,153 183,315 8,320,000 8,665,468 (81,594)(m) 8,583,874
State taxes....... 251,358 25,779 12,084 1,294 1,600 292,115 (22,415)(j) 314,530
Depreciation--
other............ 0 0 48,490 14,637 0 63,127 -- 63,127
Depreciation--
property......... 1,784,269 458,660 0 0 0 2,242,929 3,262,191 (k) 5,505,120
Amortization...... 10,793 589 18,093 61,324 916,577 1,007,376 2,081,952 (l) 3,089,328
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Total operating
expenses....... 3,862,024 703,459 4,658,030 2,744,515 11,869,557 23,837,585 (510,755) 23,326,830
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Operating earnings
(losses).......... 15,595,909 3,128,853 3,818,375 3,220,595 (863,010) 24,900,722 13,093,310 37,994,032
Equity in
earnings of
joint
ventures/minority
interest......... (31,453) 166,226 0 (126,627) 0 8,146 -- 8,146
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Net earnings before
income taxes...... 15,564,456 3,295,079 3,818,375 3,093,968 (863,010) 24,908,868 13,093,310 38,002,178
Provision
(credit) for
federal income
taxes............ 0 0 1,508,258 1,272,133 (317,785) 2,462,606 (2,462,606)(o) 0
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Net earnings
(losses).......... $15,564,456 $3,295,079 $2,310,117 $1,821,835 $ (545,225) $22,446,262 $15,555,916 $38,002,178
=========== ========== ========== ========== =========== =========== =========== ===========
Earnings per
share............. $ 0.66 $ 0.51
=========== ===========
Shares outstanding:
Weighted
average.......... 23,423,868 74,757,589(p)
=========== ===========
End of period..... 36,192,971 74,757,589
=========== ===========
</TABLE>
F-21
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of September 30, 1998 reflects the
transactions of the acquisition of the CNL Income Fund, Advisor and CNL
Restaurant Financial Services Group (the "Acquisition Proposal") as set forth
in this Proxy Statement. The Pro Forma Statements of Earnings for the nine
months ended September 30, 1998, and for the year ended December 31, 1997, have
been prepared to reflect a) the issuance of additional shares and the property
acquisitions completed from January 1, 1997 through November 30, 1998
("Offering and Property Transactions") and b) the transactions of the
Acquisition Proposal as set forth in this Proxy Statement. This unaudited pro
forma financial information has been prepared utilizing the historical
financial statements of the Company and the historical combined financial
information of the CNL Income Fund, Advisor and CNL Restaurant Financial
Services Group and should be read in conjunction with the selected historical
financial data and accompanying notes of the Company, the CNL Income Fund,
Advisor and the CNL Restaurant Financial Services Group. The Pro Forma Balance
Sheet was prepared as if the Offering and Property Transactions and the
Acquisition Proposal occurred on September 30, 1998. The Pro Forma Statements
of Earnings were prepared as if the Property Acquisitions and the Acquisition
Proposal occurred as of January 1, 1997. The pro forma information is unaudited
and is not necessarily indicative of the consolidated operating results which
would have occurred if the Offering and Acquisition Transaction and the
Acquisition Proposal 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 Acquisition
Proposal have been made. Capitalized terms have the meanings as defined in the
Proxy Statement.
2. Method of Accounting
The acquisition of the CNL Income Fund and the CNL Restaurant Financial
Services Group will be accounted for under the purchase accounting method. The
Company 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, the Company 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 operating expense on the Company's consolidated statements of
earnings, but the Company will not deduct this expense for purposes of
calculating funds from operations due to the non-recurring and non-cash nature
of the expense.
All significant intercompany balances and transactions between the Company,
CNL Income Fund, Advisor and CNL Restaurant Financial Services Group have been
eliminated in the pro forma financial statements.
3. Adjustments to Pro Forma Balance Sheet
The following describes the pro forma adjustments to the Pro Forma Balance
Sheet as of September 30, 1998, as if the Acquisition was consummated on such
date. For purposes of the pro forma financial statements, it is assumed that at
an annual meeting of stockholders, the stockholders of the Company approved an
amendment to increase the number of authorized shares to an amount necessary to
enable the Company to issue the shares for the Acquisition.
(1) Represents the payment of $485,944 in cash and the issuance of
16,645,601 common shares in consideration for the purchase of the CNL Income
Fund, Advisor and CNL Restaurant Financial Services Group at September 30,
1998 at a share price of $10 plus estimated transaction costs. The
acquisition of the CNL Income Fund and the CNL Restaurant Financial Services
Group has been accounted for under the purchase accounting method and
goodwill was recognized to the extent that the consideration paid exceeded
F-22
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
the fair value of the net tangible assets acquired. As for the acquisition of
the Advisor from a related party, the consideration paid in excess of the
fair value of the net tangible assets received has been accounted for as
costs incurred in acquiring the Advisor from a related party because the
Advisor has not been deemed to qualify as a "business" for purposes of
applying APB Opinion No. 16 "Business Combinations." Upon consummation of the
Acquisition, this expense will be recorded as an operating expense on the
Company's statement of earnings. The Company will not deduct this expense for
purposes of calculating funds from operations due to the nonrecurring and
non-cash nature of the expense. As of September 30, 1998, $249,403 of
transaction costs had been incurred by the Company.
<TABLE>
<S> <C>
CNL Income Fund............................................. $ 43,941,955
Advisor..................................................... 76,000,000
CNL Restaurant Financial Services Group..................... 47,000,000
------------
Total Purchase Price (cash and shares).................... 166,941,955
Less cash paid to CNL Income Fund........................... (485,944)
------------
Share consideration....................................... 166,456,011
Transaction costs of the Company............................ 8,933,000
------------
Total costs incurred...................................... $175,389,011
============
</TABLE>
In addition, the Company i) used $8,933,000 in cash to pay the
transaction costs related to the Acquisition, ii) made an upward adjustment
to the CNL Income Fund carrying value of land and building on operating
leases by $10,447,559, net investment in direct financing leases by
$2,450,848, investment in joint venture by $1,071,052, made downward
adjustments to the carrying value of accrued rental income of $1,607,969,
made downward adjustments to other assets of $3,791,469 to adjust
historical values to fair value, iii) recorded goodwill of $41,639,041 for
the acquisition of the CNL Restaurant Financial Services Group, iv) reduced
retained earnings by $76,686,074 for the excess consideration paid over the
net assets of the Advisor and removed the historical common stock balance
of $12,000, additional paid in capital balance of $9,602,287, retained
earnings balance of $5,297,114 and partners capital balance of $34,068,418
of the CNL Income Fund, Advisor and CNL Restaurant Financial Services
Group.
(2) Represents the use of $26,901,936 in cash and cash equivalents at
September 30, 1998 to acquire $26,052,741 in properties and issue $849,195
in mortgage notes which occurred from October 1, 1998 through November 30,
1998.
(3) Represents the elimination by the CNL Income Fund of $5,263 in
related party payables recorded as receivables by the Advisor, the
elimination by the CNL Restaurant Financial Services Group of $6,641,379 in
related party payables recorded as receivables by CNL Restaurant Financial
Services Group and the elimination by the Company of $1,208,000 in related
party payables recorded as receivables by the Advisor.
(4) Represents the elimination of income taxes payable of $2,990,864
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.
F-23
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
4. Adjustments to Pro Forma Income Statements
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the nine months ended September 30, 1998, as if
the Acquisition was consummated as of January 1, 1997.
(a) Represents rental and earned income as if 1) properties that had been
previously constructed and acquired from January 1, 1998 through
November 30, 1998 had been acquired and leased on January 1, 1997 and
2) properties that were developed by the Company from January 1, 1998
through November 30, 1998 had been placed in service on May 1, 1997
(assumes a four month development period).
<TABLE>
<S> <C>
Rental and earned income on Property Transactions by the
Company................................................... $9,635,208
</TABLE>
(b) Represents $46,259 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms
for the leases acquired from the CNL Income Fund as if the leases had
been acquired on January 1, 1997.
(c) Represents the elimination of intercompany fees between the Company,
the CNL Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Origination fees.......................................... $ (1,569,202)
Secured equipment lease fee............................... (44,426)
Advisory fees............................................. (1,751,358)
Reimbursement of administrative costs..................... (292,754)
Acquisition fees.......................................... (15,392,193)
Underwriting fees......................................... (254,945)
Administrative fees....................................... (148,491)
Executive fee............................................. (310,000)
Guarantee fees............................................ (93,750)
Servicing fee............................................. (1,014,117)
Development fees.......................................... (166,876)
Consulting fee............................................ (1,511)
------------
Total................................................... $(21,039,623)
============
</TABLE>
(d) Represents the deferral of $2,875,906 in origination fees collected by
CNL Restaurant Financial Services Group that should be amortized over
the term of the loans originated (20 years) in accordance with the
Statement of Financial Accounting Standards #91 "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring
Loans and Initial Direct Costs of Leases."
(e) Represents interest income of $1,318,870 earned from Other Investments
acquired and mortgage notes issued from January 1, 1998 through
November 30, 1998 as if this had occurred on January 1, 1997 and the
amortization of $207,677 of deferred origination fees collected during
the year ended December 31, 1997 and during the nine months ended
September 30, 1998, which were capitalized and deferred in (d) above as
if they had been collected on January 1, 1997. These deferred fees are
being amortized and recorded as interest income.
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(f) Represents the elimination of intercompany expenses paid between the
Company, the CNL Income Fund, the Advisor and the CNL Restaurant
Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs...................... $ (292,754)
Servicing fee.............................................. (1,014,117)
-----------
$(1,306,871)
===========
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by the Company
were subject to capitalization during the entire period and 2) costs
relating to properties not developed by the Company were subject to
capitalization up through the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs........................... $(1,415,100)
</TABLE>
(h) Represents savings of $34,952 in professional services and
administrative expenses resulting from reporting on one combined
Company versus 22 separate entities.
(i) Represents the elimination of advisory fees between the Company, the
CNL Income Fund, the Advisor and the CNL Restaurant Financial Services
Group:
<TABLE>
<S> <C>
Advisory fees............................................... $(1,751,358)
Administrative fees......................................... (148,491)
Executive fee............................................... (310,000)
Guarantee fees.............................................. (93,750)
-----------
$(2,303,599)
===========
</TABLE>
(j) Represents additional income taxes of $57,979 resulting from assuming
that acquisitions from January 1, 1998 through November 30, 1998 had
been acquired on January 1, 1997 and assuming that the CNL Income Fund
had operated under a REIT structure.
(k) Represents an increase in depreciation of the building portion of the
properties acquired from January 1, 1998 through November 30, 1998 as
if they had been acquired on January 1, 1997 and the step up in basis
referred to in footnote (2) from acquiring the CNL Income Fund
portfolio using the straight-line method over the estimated useful
lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense.......................................... $1,595,334
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of the
CNL Restaurant Financial Services Group referred to in footnote (2)
<TABLE>
<S> <C>
Amortization of goodwill..................................... $1,561,464
</TABLE>
(m) Represents elimination of interest expense recorded for the
amortization of $350,000 in arrangement fees collected during the year
ended December 31, 1997 which were eliminated in II (d ) below.
<TABLE>
<S> <C>
Interest expense............................................... $(68,670)
</TABLE>
F-25
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(n) Represents the elimination of fees paid to affiliates for fees incurred
between the Company, the CNL Income Fund, the Advisor and the CNL
Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees............................................ $(1,569,202)
Underwriting fees........................................... (254,945)
Consulting fee.............................................. (1,511)
-----------
$(1,825,658)
===========
</TABLE>
(o) Represents the elimination of $6,316,081 in the provision for income
taxes as a result of the Acquisition. The Company expects to continue
to qualify as a REIT and does not expect to incur federal income taxes.
(p) Common shares issued during the period required to fund acquisitions as
if they had been acquired on January 1, 1997 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 the proposal to increase the number of authorized common
shares of the Company.
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the year ended December 31, 1997, as if the
Acquisition was consummated as of January 1, 1997.
(a) Represents rental and earned income as if 1) properties that had been
previously constructed and acquired from January 1, 1998 through
November 30, 1998 had been acquired and leased on January 1, 1997 and
2) properties that were developed by the Company from January 1, 1997
through November 30, 1998 had been placed in service on May 1, 1997
(assumes a four month development period).
<TABLE>
<S> <C>
Rental and earned income on Property Transactions by the
Company.................................................. $24,048,982
</TABLE>
(b) 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 CNL Income Fund as if the leases had
been acquired on January 1, 1997.
(c) Represents the elimination of intercompany fees between the Company,
the CNL Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Origination fees........................................... $ (594,041)
Secured equipment lease fee................................ (375,219)
Advisory fees.............................................. (1,813,654)
Reimbursement of administrative costs...................... (143,633)
Acquisition fees........................................... (3,887,483)
Underwriting fees.......................................... (151,041)
Administrative fees........................................ (269,231)
Executive fee.............................................. (250,000)
Guarantee fees............................................. (312,500)
Arrangement fees........................................... (350,000)
Servicing fee.............................................. (598,988)
Development fees........................................... (369,570)
-----------
Total.................................................... $(9,115,360)
===========
</TABLE>
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(d) Represents the deferral of $2,662,141 in origination fees collected by
CNL Restaurant Financial Services Group that should be amortized over
the term of the loans originated (20 years) in accordance with the
Statement of Financial Accounting Standards #91 "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring
Loans and Initial Direct Costs of Leases."
(e) Represents the elimination of interest income of $1,931,331 earned
during the year ended December 31, 1997 assuming all monies raised
during 1997 and all cash held on January 1, 1997 was used to effect the
Acquisition on January 1, 1997, represents interest income of
$2,047,619 earned from Other Investments acquired and mortgage notes
issued from January 1, 1998 through November 30, 1998 as if this had
occurred on January 1, 1997 and the recognition of $133,107 of
origination fees collected during the year ended December 31, 1997
which were deferred in (d) and are being amortized and recorded as
interest income.
(f) Represents the elimination of intercompany expenses paid between the
Company, the CNL Income Fund, the Advisor and the CNL Restaurant
Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs........................ $(143,633)
Servicing fee................................................ (598,988)
---------
$(742,621)
=========
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by the Company
were subject to capitalization during the entire period and 2) costs
relating to properties not developed by the Company were subject to
capitalization up through the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs........................... $(1,619,238)
</TABLE>
(h) Represents savings of $43,393 in professional services and
administrative expenses resulting from reporting on one combined
Company versus 22 separate entities.
(i) Represents the elimination of advisory fees between the Company, the
CNL Income Fund, the Advisor and the CNL Restaurant Financial Services
Group:
<TABLE>
<S> <C>
Advisory fees............................................... $(1,813,654)
Administrative fees......................................... (269,231)
Executive fee............................................... (250,000)
Guarantee fees.............................................. (312,500)
-----------
$(2,645,385)
===========
</TABLE>
(j) Represents additional income taxes of $22,415 resulting from assuming
that acquisitions from January 1, 1997 through November 30, 1998 had
been acquired on January 1, 1997 and assuming that the CNL Income Fund
had operated under a REIT structure.
(k) Represents increase in depreciation of the building portion of the
properties acquired from January 1, 1997 through November 30, 1998 as
if they had been acquired on January 1, 1997 and the step up in basis
referred to in footnote (2) from acquiring the CNL Income Fund
portfolio using the straight-line method over the estimated useful
lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense.......................................... $3,262,191
</TABLE>
F-27
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(l) Represents the amortization of the goodwill on the acquisition of the
CNL Restaurant Financial Services Group referred to in footnote (2)
<TABLE>
<S> <C>
Amortization of goodwill..................................... $2,081,952
</TABLE>
(m) Represents elimination of yearly amortization of arrangement fees of
$350,000 capitalized as deferred costs and amortized as interest
expense and the capitalization of interest expense during the period
that properties were under development.
<TABLE>
<S> <C>
Amortization of arrangement fees.............................. $(24,144)
Capitalization of interest during development period.......... (57,450)
--------
$(81,594)
========
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees incurred
between the Company, the CNL Income Fund, the Advisor and the CNL
Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees.............................................. $(594,041)
Underwriting fees............................................. (151,041)
---------
$(745,082)
=========
</TABLE>
(o) Represents the elimination of $2,462,606 in the provision for income
taxes as a result of the Acquisition. The Company expects to continue
to qualify as a REIT and does not expect to incur federal income taxes.
(p) Common shares issued during the period were assumed to have been issued
and outstanding as of January 1, 1997. For purposes of the pro forma
financial statement, it is assumed that the stockholders approved the
proposal to increase the number of authorized common shares of the
Company.
F-28
<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 eighteen 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
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.
B-1
<PAGE>
"Affiliated Group" means any affiliated group within the meaning of Code
(S)1504, or any similar group defined under a similar provision of state, local
or foreign law.
"Agreement" means this Agreement, as amended from time to time.
"APF" has the meaning set forth in the preface above.
"APF Common Shares" shall mean the shares of common stock, par value $0.01,
of APF.
"APF Indemnity Claim" has the meaning set forth in Section 12.1 below.
"APF SEC Documents" has the meaning set forth in Section 6.7 below.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms the basis for any specified
consequence.
"Business Combination" has the meaning set forth in Section 4.1(b) below.
"Cash/Note Option" has the meaning set forth in Section 4.4 below.
"Closing" has the meaning set forth in Section 2.3 below.
"CNL Income Funds" has the meaning set forth in the second paragraph of the
Recitals above.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the businesses
and affairs of the Fund, the Operating Partnership or APF, if any, that is not
already generally available to the public.
"Delaware RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Disclosure Schedule" has the meaning set forth in the first paragraph of
Article VII below.
"Dissenting Partners" has the meaning set forth in Section 4.4 below.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
tax-qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) tax-qualified defined benefit retirement
plan or arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Fairness Opinion" has the meaning set forth in the third paragraph of the
Recitals above.
"Florida RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Fund" has the meaning set forth in the preface above.
"Fund Articles of Merger" has the meaning set forth in Section 2.2 below.
"Fund Fairness Opinion" has the meaning set forth in the fifth paragraph of
the recitals above.
B-2
<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-3
<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 4,394,196 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
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execute and deliver this Agreement and to perform their obligations hereunder.
The execution, delivery and performance by APF, the OP General Partner and the
Operating Partnership of this Agreement have been duly and validly authorized
by the boards of directors of APF and the OP General Partner. This Agreement
constitutes the valid and legally binding obligation of APF, the OP General
Partner and the Operating Partnership, enforceable in accordance with its terms
and conditions. None of APF, the OP General Partner or the Operating
Partnership needs to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
6.5 Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which, APF, the OP General Partner or the
Operating Partnership is subject or any provision of APF's or the OP General
Partner's articles of incorporation or by-laws or the Operating Partnership's
certificate of limited partnership or limited partnership agreement or (ii)
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice or consent under any agreement, contract, lease, license,
instrument, or other arrangement to which APF, the OP General Partner or the
Operating Partnership is a party or by which it is bound or to which any of its
assets is subject or (iii) result in the imposition of a Security Interest upon
any of its assets.
6.6 Title to Assets. APF has good title to, or a valid leasehold interest
in, the properties and assets used by it, located on its premises, or set forth
in its most recent quarterly report on Form 10-Q filed with the SEC or acquired
after the date thereof, free and clear of all Security Interests, except for
properties and assets disposed of in the Ordinary Course of Business since the
date of its most recent quarterly report on Form 10-Q.
6.7 Reports and Financial Statements. APF has filed all required reports,
schedules, forms, statements and other documents with the SEC since January 1,
1996 (along with any such documents filed subsequent to the date hereof, the
"APF SEC Documents"). All of the APF SEC Documents (other than preliminary
material), as of their respective filing dates, complied in all material
respects with all applicable requirements of the Securities Act and the
Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such APF SEC Documents. None of the APF SEC Documents
at the time of filing contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading, except to the extent such statements have
been modified or superseded by later filed APF SEC Documents. There is no
unresolved violation, criticism or exception by any governmental entity of
which APF has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to APF could have a Material Adverse
Effect on APF. The financial statements of APF included in the APF SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP (except, the case
of interim financial statements, as permitted by Forms 10-Q and 8-K of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly presented, in accordance with the
applicable requirements of GAAP, the financial position of APF as of the dates
thereof and the results of operations and cash flows of APF for the periods
then ended (subject, in the case of interim financial statements, to normal
year-end adjustments).
6.8 Events Subsequent to September 30, 1998. Since September 30, 1998,
nothing has occurred which has had or would reasonably be expected to have a
Material Adverse Effect on APF.
6.9 Litigation. Except as publicly disclosed by APF in its APF SEC Documents
or on Schedule 1, there is no suit, claim, action, proceeding or investigation
pending or, to the Knowledge of APF, threatened against APF or any of its
Subsidiaries or any of their respective properties or assets which (a) if
adversely determined, could reasonably be expected to have a Material Adverse
Effect on APF or (b) as of the date hereof, questions
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the validity of this Agreement or any action to be taken by APF in connection
with the consummation of the transactions contemplated hereby or could
otherwise prevent or delay the consummation of the transactions contemplated by
this Agreement. Except as publicly disclosed by APF in any APF SEC Document,
none of APF or its Subsidiaries is subject to any outstanding order, writ,
injunction or decree which, insofar as can be reasonably foreseen in the
future, could reasonably be expected to have a Material Adverse Effect on APF
or would prevent or delay the consummation of the transactions contemplated
hereby.
6.10 Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by APF for inclusion or incorporation by reference
in (i) the Registration Statement to be filed by APF with the SEC in connection
with the Merger will, at the time the Registration Statement becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading and (ii) the proxy statement sent by APF to its
shareholders pertaining to the Merger will, at the date mailed to shareholders
and at the times of the meeting of shareholders to be held in connection with
the Merger, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event with
respect to APF, its officers and directors or any of its Subsidiaries should
occur which is required to be described in an amendment of, or a supplement to,
the Registration Statement or the proxy statement, APF shall promptly so advise
the General Partners and such event shall be so described, and such amendment
or supplement (which the General Partners shall have a reasonable opportunity
to review) shall be promptly filed with the SEC. The Registration Statement
will comply as to form in all material respects with the provisions of the
Securities Act and the rules and regulations thereunder.
6.11 No Undisclosed Liabilities; Absence of Changes. Except as and to the
extent publicly disclosed by APF in its APF SEC Documents or disclosed in
Schedule 1, as of December 31, 1998, to APF's Knowledge, none of APF or its
Subsidiaries had any liabilities or obligations of any nature, whether or not
accrued, contingent or otherwise, and whether due or to become due or asserted
or unasserted, which are not fully reflected in, reserved against or otherwise
described in the consolidated balance sheet of APF and its consolidated
Subsidiaries (including the notes thereto) as of such date or which could
reasonably be expected to have a Material Adverse Effect on APF. Except as
publicly disclosed by APF in any reports filed by it with the APF SEC
Documents, since December 31, 1998, the business of APF and its Subsidiaries
has been carried on only in the ordinary and usual course, to APF's Knowledge,
none of APF or its Subsidiaries has incurred any liabilities of any nature,
whether or not accrued, contingent or otherwise, and whether due or to become
due or asserted or unasserted, which could reasonably be expected to have, and
there have been no events, changes or effects with respect to APF or its
Subsidiaries Known to APF having or which could reasonably be expected to have,
a Material Adverse Effect on APF.
6.12 Brokers' Fees. Except for the fees and expenses paid to Merrill Lynch &
Co. with respect to the delivery of the Fairness Opinion to the Special
Committee and in connection with the financial services provided by Salomon
Smith Barney, none of APF, the OP General Partner or the Operating Partnership
has any Liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this
Agreement.
6.13 Qualification as a REIT. APF is a "real estate investment trust" for
federal income tax purposes. The consummation of the transactions contemplated
by this Agreement will not cause APF to cease to qualify as a "real estate
investment trust" for federal income tax purposes.
6.14 Compliance with Applicable Law. Except as publicly disclosed by APF in
its APF SEC Documents, to APF's Knowledge, it and its Subsidiaries hold all
permits, licenses, variances, exemptions, order and approvals of all
governmental entities necessary for the lawful conduct of their respective
businesses, except for failures to hold such permits, licenses, variances,
exemptions, orders and approvals which could not reasonably be expected to have
a Material Adverse Effect on APF. Except as publicly disclosed by APF in its
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APF SEC Documents, to APF's Knowledge, APF and its Subsidiaries are in
compliance with the material terms of its permits, except where the failure so
to comply could not reasonably be expected to have a Material Adverse Effect on
APF. Except as publicly disclosed by APF, the businesses of APF and its
Subsidiaries are not, to APF's Knowledge, being conducted in violation of any
law, ordinance or regulation of any governmental entity except that no
representation or warranty is made in this Section 6.14 with respect to
environmental laws and except for violations or possible violations which do
not, and, insofar as reasonably can be foreseen, in the future will not, have a
Material Adverse Effect on APF. Except as publicly disclosed by APF in its APF
SEC Documents, no investigation or review by any governmental entity with
respect to APF or its Subsidiaries is pending or, to the Knowledge of APF,
threatened, nor, to the Knowledge of APF, has any government entity indicated
an intention to conduct the same, other than, in each case, those which APF
reasonably believes will not have a Material Adverse Effect on APF.
6.15 Intellectual Property.
(a) APF owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of APF as presently conducted. Each item of Intellectual Property
owned or used by APF immediately prior to the Closing hereunder will be owned
or available for use by APF on identical terms and conditions immediately
subsequent to the Closing hereunder. APF has taken all necessary action to
maintain and protect each item of Intellectual Property that it owns or uses.
(b) APF has not interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of third
parties, and none of APF's directors or officers (or employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that APF must
license or refrain from using any Intellectual Property rights of any third
party). No third party has interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of APF which
are material to the operation of APF's business.
(c) APF has no patent or registration which has been issued to APF with
respect to any of its Intellectual Property.
(d) Nothing will interfere with, infringe upon, misappropriate, or otherwise
come into conflict with, any Intellectual Property rights of third parties as a
result of the continued operation of APF's business as presently conducted.
6.16 Insurance. With respect to each current insurance policy to which APF
is a party, a named insured or is otherwise the beneficiary of coverage, to the
knowledge of APF: (i) the policy is legal, valid, binding, enforceable, and in
full force and effect; (ii) the policy will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the consummation of the transactions contemplated hereby; (iii) neither APF nor
any other party to the policy is in breach or default (including with respect
to the payment of premiums or the giving of notices), and no event has occurred
which, with notice or the lapse of time, would constitute such a breach or
default, or permit termination, modification, or acceleration, under the
policy; and (iv) no party to the policy has repudiated any provision thereof.
6.17 Tenants. To the Knowledge of APF and except as set forth on Schedule
1, no current tenant of a property owned by APF, which as of the date of APF's
most recent quarterly report on Form 10-Q represented more than 5% of APF's
total revenues, presently intends to materially change its relationship with
the owner of the property, either due to the transactions contemplated hereby
or otherwise.
6.18 Disclosure. APF is in compliance in all material respects with its
obligation under the Securities Exchange Act to publicly disclose material
information in a timely fashion.
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ARTICLE VII
Representations and Warranties Concerning the Fund
The General Partners and the Fund jointly and severally represent and
warrant to APF and the Operating Partnership that the statements contained in
this Article VII are correct and complete as of the date hereof, except as set
forth in the disclosure schedule delivered by the General Partners and the Fund
to APF and the Operating Partnership in accordance with the provisions of
Section 8.14 (the "Disclosure Schedule"). Nothing in the Disclosure Schedule
shall be deemed adequate to disclose an exception to a representation or
warranty made herein, however, unless the Disclosure Schedule identifies the
exception with particularity and describes the relevant facts in reasonable
detail. Without limiting the generality of the foregoing, the mere listing (or
inclusion of a copy) of a document or other item shall not be deemed adequate
to disclose an exception to a representation or warranty made herein (unless
the representation or warranty has to do with the existence of the document or
other item itself). The Disclosure Schedule will be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in this Article
VII.
7.1 Organization, Qualification, and Corporate Power. The Fund is a limited
partnership duly organized, validly existing, and in good standing under the
laws of Florida. The Fund is duly authorized to conduct business and is in good
standing under the laws of each jurisdiction where such qualification is
required, except where the failure to so qualify or obtain authorization would
not have a Material Adverse Effect on the Fund. Except as set forth in Section
7.1(a) of the Disclosure Schedule, the Fund has full limited partnership power
and authority and all licenses, permits, and authorizations necessary to carry
on the businesses in which it is engaged and to own and use the properties
owned and used by it, except where the failure to so qualify or obtain
authorization would not have a Material Adverse Effect on the Fund. Section
7.1(b) of the Disclosure Schedule lists the directors and officers of the
corporate General Partner. The General Partners have been made available to APF
and the Operating Partnership correct and complete copies of the certificate of
limited partnership and the limited partnership agreement of the Fund (as
amended to date). The minute books (containing the records of meetings of the
stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of the
corporate General Partner and any organizational records of the Fund have been
made available to APF and the Operating Partnership and are correct and
complete in all material respects. The Fund is not in default under or in
violation of any provision of its certificate of limited partnership or limited
partnership agreement.
7.2 Capitalization. All of the outstanding ownership interests in the Fund
(the "Fund Interests") consist of (i) one percent in general partnership
interests and (ii) 4,000,000 units of limited partnership interests. All of the
outstanding Fund Interests have been duly authorized, are validly issued, fully
paid, and nonassessable. There are no outstanding or authorized options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights, or other contracts or commitments that could require the Fund to issue,
sell, or otherwise cause to become outstanding any additional ownership
interests. There are no outstanding or authorized stock appreciation, phantom
stock, profit participation, or similar rights with respect to the Fund.
7.3 Authorization of Transaction. The Fund has full power and authority
(including full limited partnership power and authority) to execute and deliver
this Agreement and, upon the affirmative vote of a majority of the outstanding
limited partnership Fund Interests, will have full power and authority
(including limited partnership power and authority) to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of the Fund, enforceable in accordance with its terms and conditions, subject
to bankruptcy, insolvency, moratorium and rights of creditors generally. The
Fund is not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
7.4 Noncontravention. Except as set forth in Section 7.4 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby,
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will (i) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which the Fund is subject or any
provision of the certificate of limited partnership or limited partnership
agreement of the Fund or (ii) result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice or consent
under any agreement, contract, lease, license, instrument, or other arrangement
to which the Fund is a party or by which it is bound or to which any of its
assets is subject (or result in the imposition of any Security Interest upon
any of its assets).
7.5 Title to Assets. The Fund has good title to, or a valid leasehold
interest in, the properties and assets used by it, located on its premises, or
set forth in its most recent quarterly report on Form 10-Q filed with the SEC
(the "Most Recent 10-Q") or acquired after the date thereof, free and clear of
all Security Interests, except for properties and assets disposed of in the
Ordinary Course of Business since the date of the Most Recent 10-Q.
7.6 Subsidiaries. The Fund does not have any Subsidiaries, operating or
otherwise.
7.7 Reports and Financial Statements. The Fund has filed all required
reports, schedules, forms, statements and other documents with the SEC since
January 1, 1996 (along with any such documents filed subsequent to the date
hereof, the "Fund SEC Documents"). All of the Fund SEC Documents (other than
preliminary material), as of their respective filing dates, complied in all
material respects with all applicable requirements of the Securities Act and
the Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such Fund SEC Documents. None of the Fund SEC
Documents at the time of filing contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the extent
such statements have been modified or superseded by later filed Fund SEC
Documents. There is no unresolved violation by any governmental entity of which
the Fund has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to the Fund could have a Material
Adverse Effect on the Fund. The financial statements of the Fund included in
the Fund SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with GAAP
(except, the case of interim financial statements, as permitted by Forms 10-Q
and 8-K of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly presented, in
accordance with the applicable requirements of GAAP, the financial position of
the Fund as of the dates thereof and the results of operations and cash flows
of the Fund for the periods then ended (subject, in the case of interim
financial statements, to normal year-end adjustments).
7.8 Events Subsequent to the Most Recent 10-Q. Since the date of the Most
Recent 10-Q nothing has had a Material Adverse Effect on the Fund. Without
limiting the generality of the foregoing, since that date, except as set forth
in the appropriately lettered paragraph of Section 7.8 of the Disclosure
Schedule:
(a) the Fund has not sold, leased, transferred, or assigned any of its
assets, tangible or intangible, other than for a fair consideration (as
reasonably determined by the General Partners) in the Ordinary Course of
Business;
(b) the Fund has not entered into any agreement, contract, lease, or license
(or series of related agreements, contracts, leases, and licenses) involving
more than $50,000 except in the Ordinary Course of Business;
(c) no party (including the Fund) has accelerated, terminated, modified, or
canceled any agreement, contract, lease, or license (or series of related
agreements, contracts, leases, and licenses) to which the Fund is a party or by
which it is bound except in the Ordinary Course of Business;
(d) the Fund has not imposed any Security Interest upon any of its assets,
tangible or intangible except in the Ordinary Course of Business;
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(e) the Fund has not made any capital expenditure (or series of related
capital expenditures) involving more than $50,000 except in the Ordinary Course
of Business;
(f) the Fund has not made any capital investment in, any loan to, or any
acquisition of the securities or assets of any other Person (or series of
related capital investments, loans, and acquisitions) outside the Ordinary
Course of Business;
(g) the Fund has not issued any note, bond, or other debt security or
created, incurred, assumed, or guaranteed any indebtedness for borrowed money
or capitalized lease obligation outside the Ordinary Course of Business;
(h) the Fund has not delayed or postponed the payment of accounts payable
and other Liabilities outside the Ordinary Course of Business;
(i) the Fund has not canceled, compromised, waived, or released any right or
claim (or series of related rights and claims) outside the Ordinary Course of
Business;
(j) the Fund has not granted any license or sublicense of any rights under
or with respect to any Intellectual Property;
(k) there has been no change made or authorized in the certificate of
limited partnership or limited partnership agreement of the Fund;
(l) the Fund has not issued, sold, or otherwise disposed of any ownership
interests, or granted any options, warrants, or other rights to purchase or
obtain (including upon conversion, exchange, or exercise) any ownership
interests in the Fund;
(m) the Fund has not declared, set aside, or paid any dividend or made any
distribution with respect to its ownership interests (whether in cash or in
kind) or redeemed, purchased, or otherwise acquired any of its ownership
interests other than distributions consistent with past practices;
(n) the Fund has not experienced any material damage, destruction, or loss
(whether or not covered by insurance) to its property;
(o) the Fund has not made any loan to, or entered into any other transaction
with, any of the General Partners or the directors, officers, or employees of
the corporate General Partner outside the Ordinary Course of Business;
(p) the Fund has not entered into any employment contract or collective
bargaining agreement, written or oral, or modified the terms of any existing
such contract or agreement;
(q) the Fund has not made or pledged to make any charitable or other capital
contribution outside the Ordinary Course of Business;
(r) to the Knowledge of the General Partners, there has not been any other
material occurrence, event, incident, action, failure to act, or transaction
outside the Ordinary Course of Business involving the Fund; and
(s) the Fund is not under any legal obligation, whether written or oral, to
do any of the foregoing.
7.9 Undisclosed Liabilities. The Fund does not have any Liability (and, to
the Knowledge of the General Partners, there is no Basis for any present or
future action, suit, proceeding, hearing, investigation, charge, complaint,
claim, or demand against it giving rise to any Liability), except for (i)
Liabilities set forth on the face of the Most Recent Balance Sheet (rather than
in any notes thereto) and (ii) Liabilities which have arisen after the date of
the Most Recent Balance Sheet in the Ordinary Course of Business (none of which
results
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from, arises out of, relates to, is in the nature of, or was caused by any
breach of contract, breach of warranty, tort, infringement, or violation of
law) or which are not in the aggregate material.
7.10 Legal Compliance. Except as disclosed in the Fund SEC Documents, the
Fund has complied in all material respects with all applicable laws (including
rules, regulations, codes, plans, injunctions, judgments, orders, decrees,
rulings, and charges thereunder), the violation of which could cause a Material
Adverse Effect to the Fund, of federal, state, local, and foreign governments
(and all agencies thereof), and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has been filed or
commenced against it alleging any failure so to comply.
7.11 Tax Matters.
(a) The Fund has filed all material Tax Returns that it was required to
file, including, without limitation, any material Tax Returns required to be
filed with any state. All such Tax Returns were correct and complete in all
material respects. All Taxes owed by the Fund (as shown on any filed Tax
Return) have been paid. The Fund currently is not the beneficiary of any
extension of time within which to file any Tax Return. No claim has ever been
made by an authority in a jurisdiction where the Fund does not file Tax Returns
that it is or may be subject to taxation by that jurisdiction. There are no
Security Interests on any of the assets of the Fund that arose in connection
with any failure (or alleged failure) to pay any Tax.
(b) The Fund has withheld and, if due, paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any independent
contractor, creditor, Partner, or other third party.
(c) The General Partners do not expect any authority to assess any
additional Taxes for any period for which Tax Returns have been filed. There is
no dispute or claim concerning any Tax Liability of the Fund either (A) claimed
or raised by any authority in writing or (B) as to which any of the General
Partners has Knowledge. Section 7.11(c) of the Disclosure Schedule lists all
federal, state, local, and foreign income Tax Returns filed with respect to the
Fund for taxable periods ended on or after December 31, 1996, indicates those
Tax Returns that have been audited, and indicates those Tax Returns that
currently are the subject of audit. The General Partners have made available to
APF and the Operating Partnership correct and complete copies of all federal
income Tax Returns, examination reports, and statements of deficiencies
assessed against or agreed to by the Fund since December 31, 1996.
(d) The Fund has not waived any statute of limitations in respect of Taxes
or agreed to any extension of time with respect to a Tax assessment or
deficiency.
(e) The Fund has not filed a consent under Code (S)341(f) concerning
collapsible corporations. The Fund has not made any payments, is not obligated
to make any payments, and is not a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be
deductible under Code (S)280G. The Fund has disclosed on its federal income Tax
Returns all positions taken therein that could give rise to a substantial
understatement of federal income Tax within the meaning of Code (S)6662. The
Fund is not a party to any Tax allocation or sharing agreement. The Fund (A)
has not been a member of an Affiliated Group filing a consolidated federal
income Tax Return (other than a group the common parent of which was the Fund)
or (B) has any Liability for the Taxes of any Person (other than the Fund)
under Treas. Reg. (S)1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract, or otherwise.
7.12 Real Property.
Section 7.12(a) of the Disclosure Schedule lists and describes briefly all
real property owned, leased or subleased by the Fund. Section 7.12(b) of the
Disclosure Schedule lists all leases and subleases to which the Fund is a
party, and the General Partners have made available to APF correct and complete
copies of all such
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leases and subleases (as amended to date). With respect to each lease and
sublease listed in Section 7.12(b) of the Disclosure Schedule:
(a) the lease or, to the Knowledge of the General Partners, the sublease is
legal, valid, binding, enforceable, and in full force and effect, except as may
be affected by bankruptcy, insolvency, moratorium and the rights of creditors
generally;
(b) no consent is required with respect to the lease or sublease as a result
of this Agreement, and the actions contemplated by this Agreement will not
result in the change of any terms of the lease or sublease or otherwise affect
the ongoing validity of the lease or sublease;
(c) no party to the lease or sublease is in breach or default, and no event
has occurred which, with notice or lapse of time, would constitute a breach or
default or permit termination, modification, or acceleration thereunder;
(d) no party to the lease or, to knowledge of the General Partners, sublease
has repudiated any provision thereof;
(e) there are no disputes, oral agreements, or forbearance programs in
effect as to the lease or, to the Knowledge of the General Partners, sublease;
(f) the Fund has not assigned, transferred, conveyed, mortgaged, deeded in
trust, or encumbered any interest in the leasehold or subleasehold;
(g) all facilities leased or subleased thereunder have received all
approvals of governmental authorities (including licenses and permits) required
by the Fund in connection with the operation thereof and, to the Knowledge of
the General Partners, have been operated and maintained in all material
respects in accordance with applicable laws, rules, and regulations; and
(h) all facilities leased or subleased thereunder are supplied with
utilities and other services necessary for the operation of said facilities.
7.13 Intellectual Property.
(a) The Fund owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of the Fund as presently conducted. Each item of Intellectual
Property owned or used by the Fund immediately prior to the Closing hereunder
will be owned or available for use by the Fund on identical terms and
conditions immediately subsequent to the Closing hereunder. The Fund has taken
all necessary action to maintain and protect each item of Intellectual Property
that it owns or uses.
(b) The Fund has not Knowingly interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual Property
rights of third parties, and neither the General Partners nor any of the
corporate General Partner's directors and officers (and employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that the Fund
must license or refrain from using any Intellectual Property rights of any
third party). To the Knowledge of the General Partners, no third party has
interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Intellectual Property rights of the Fund which are material
to the operation of the Fund's business.
(c) The Fund has no patent or registration which has been issued to the Fund
with respect to any of its Intellectual Property.
(d) Section 7.13(d) of the Disclosure Schedule identifies each item of
Intellectual Property that any third party owns and that the Fund uses pursuant
to license, sublicense, agreement, or permission. The General
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Partners have made available to APF and the Operating Partnership correct and
complete copies of all such licenses, sublicenses, agreements, and permissions
(as amended to date).
(e) To the Knowledge of the General Partners, nothing will interfere with,
infringe upon, misappropriate, or otherwise come into conflict with, any
Intellectual Property rights of third parties as a result of the continued
operation of the Fund's business as presently conducted.
7.14 Tangible Assets. The Fund owns or leases all buildings, machinery,
equipment, and other tangible assets used in the conduct of its business as
presently conducted. Each such tangible asset is free from all material
defects, has been maintained in accordance with normal industry practice, is in
good operating condition and repair (subject to normal wear and tear), and is
suitable for the purposes for which it presently is used. The Most Recent
Balance Sheet sets forth all of the assets, in the opinion of the General
Partners, necessary to conduct the Fund's business as it is currently being
conducted.
7.15 Contracts. Section 7.15 of the Disclosure Schedule lists all of the
following types of contracts and other agreements to which the Fund is a party:
(a) any agreement (or group of related agreements) for the lease of personal
property to or from any Person providing for lease payments in excess of
$25,000 per annum;
(b) any agreement concerning a partnership or joint venture;
(c) any agreement (or group of related agreements) under which it has
created, incurred, assumed, or guaranteed any indebtedness for borrowed money,
or any capitalized lease obligation or under which it has imposed a Security
Interest on any of its assets, tangible or intangible;
(d) any agreement concerning confidentiality or noncompetition;
(e) any agreement with any General Partner or any of their Affiliates (other
than the Fund);
(f) any agreement under which it has advanced or loaned any amount to any of
the General Partners or the corporate General Partner's directors, officers,
and employees outside the Ordinary Course of Business; or
(g) any agreement under which the consequences of a default or termination
could have a Material Adverse Effect.
The General Partners have made available to APF and the Operating
Partnership a correct and complete copy of each written agreement listed in
Section 7.15 of the Disclosure Schedule (as amended to date) which is not
included as an exhibit to a Fund SEC Document and a written summary setting
forth the terms and conditions of each oral agreement referred to in Section
7.15 of the Disclosure Schedule. With respect to each agreement set forth in
Section 7.15 of the Disclosure Schedule or filed as an exhibit to a Fund SEC
Document: (A) the agreement is legal, valid, binding, enforceable, and in full
force and effect (except as may be affected by bankruptcy, insolvency,
moratorium or the rights of creditors generally); (B) the agreement will
continue to be legal, valid, binding, enforceable, and in full force and effect
on identical terms following the consummation of the transactions contemplated
hereby (except as may be affected by bankruptcy, insolvency, moratorium or the
rights of creditors generally); (C) no party is in breach or default, and no
event has occurred which with notice or lapse of time would constitute a breach
or default, or permit termination, modification, or acceleration, under the
agreement; and (D) no party has repudiated any provision of the agreement.
7.16 Notes and Accounts Receivable. All notes and accounts receivable of the
Fund are reflected properly on its books and records, are valid receivables
subject to no setoffs or counterclaims, and are current and collectible in
accordance with their terms at their recorded amounts, subject only to the
reserve for bad debts set forth on the face of the Most Recent Balance Sheet
(rather than in any notes thereto) as adjusted for the passage of time through
the Closing Date in accordance with the past custom and practice of the Fund.
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7.17 Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of the Fund.
7.18 Insurance. Section 7.18 of the Disclosure Schedule sets forth the
following information with respect to each insurance policy (including
policies providing property, casualty, liability, and workers' compensation
coverage and bond and surety arrangements) to which the Fund has been a party,
a named insured, or otherwise the beneficiary of coverage at any time within
the past five years (or such lesser periods as the Fund has actively engaged
in business or owned any material assets): (i) the name, address, and
telephone number of the agent; (ii) the name of the insurer, the name of the
policyholder, and the name of each covered insured; and (iii) the policy
number and the period of coverage. With respect to each current insurance
policy, to the Knowledge of the General Partners and the Fund: (A) the policy
is legal, valid, binding, enforceable, and in full force and effect; (B) the
policy will continue to be legal, valid, binding, enforceable, and in full
force and effect on identical terms following the consummation of the
transactions contemplated hereby; (C) neither the Fund nor any other party to
the policy is in breach or default (including with respect to the payment of
premiums or the giving of notices), and no event has occurred which, with
notice or the lapse of time, would constitute such a breach or default, or
permit termination, modification, or acceleration, under the policy; and (D)
no party to the policy has repudiated any provision thereof. The Fund has been
covered during the past five years (or such lesser periods as the Fund has
actively engaged in business or owned any material assets) by insurance in
scope and amount customary and reasonable for the businesses in which it has
engaged during the aforementioned period. Section 7.18 of the Disclosure
Schedule describes any self-insurance arrangements affecting the Fund.
7.19 Litigation. Section 7.19 of the Disclosure Schedule sets forth each
instance, not already disclosed in the Fund SEC Documents, in which the Fund
(i) is subject to any outstanding injunction, judgment, order, decree, ruling,
or charge or (ii) is a party to or, to its Knowledge, is threatened to be made
a party to any action, suit, proceeding, hearing, or investigation of, in, or
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator. None of the
actions, suits, proceedings, hearings, and investigations set forth in Section
7.19 of the Disclosure Schedule or the Fund SEC Documents could result in any
Material Adverse Effect on the Fund. None of the General Partners has any
reason to believe that any additional such action, suit, proceeding, hearing,
or investigation may be brought or threatened against the Fund.
7.20 Tenants. To the Knowledge of any of the General Partners, no current
tenant of a property owned by the Fund presently intends to materially change
its relationship with the owner of the property, either due to the
transactions contemplated hereby or otherwise.
7.21 Employees. The Fund does not have and has never had any employees,
officers or directors. The Fund is not and has never been a party to or had
any liability with respect to any Employee Benefit Plan.
7.22 Guaranties. The Fund is not a guarantor of and is not otherwise liable
for any liability or obligation (including indebtedness) of any other Person.
7.23 Registration Statement. The information furnished by the Fund for
inclusion in the Registration Statement will not, as of the effective date of
the Registration Statement, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
7.24 Environmental Matters. The Fund is currently in compliance with all
material environmental laws, ordinances, regulations and orders applicable to
its business or properties, and, to the Knowledge of the General Partners, the
tenants' present uses of the Fund's properties, whether leased or owned, do
not materially violate any such laws, ordinances, regulations or orders. The
Fund is not subject to any Liability or claim in connection with any
environmental law or any use, treatment, storage or disposal of any hazardous
substance or material or pollutant or any spill, leakage, discharge or release
of any hazardous substance or material or pollutant as a result of having
owned or operated any business prior to the Effective Time, which if a
violation existed would have a Material Adverse Effect on the Fund.
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7.25 Vote Required. The affirmative vote of at least a majority of the
outstanding Fund Interests is the only vote of any security holder in the Fund
(under applicable law or otherwise) required to approve the Merger, this
Agreement and the other transactions contemplated hereby.
7.26 Disclosure. The representations and warranties contained in this
Article VII do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Article VII not misleading.
ARTICLE VIII
Pre-Closing Covenants
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing.
8.1 General. Each of the Parties will use its reasonable best efforts to
take all action and to do all things necessary, proper, or advisable in order
to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions
set forth in Article X below).
8.2 Notices and Consents. The General Partners shall give any notices to
third parties and obtain any third party consents referred to in Sections 5.1,
5.2, 7.3 and 7.4 above and the related sections of the Disclosure Schedule.
APF, the OP General Partner and the Operating Partnership shall give any
notices to third parties and obtain any third party consents referred to in
Sections 6.4 and 6.5 above. Each of the Parties shall give any notices to, make
any filings with, and use its reasonable best efforts to obtain any
authorizations, consents, and approvals of governments and governmental
agencies in connection with the matters referred to in Sections 5.1, 6.4 and
7.3 above.
8.3 Maintenance of Business; Prohibited Acts. During the period from the
date of this Agreement to the Effective Time, the General Partners will not,
and will not cause the Fund to, take any action that adversely affects the
ability of the Fund (i) to pursue its business in the ordinary course, (ii) to
seek to preserve intact its current business organizations, and (iii) to
preserve its relationships with its tenants; and the General Partners will not
allow the Fund to, without the OP General Partner's prior written consent,
which consent shall not be unreasonably withheld:
(a) issue, deliver, sell, dispose of, pledge or otherwise encumber, or
authorize or propose the issuance, delivery, sale, disposition or pledge or
other encumbrance of (i) any additional ownership interests (including the Fund
Interests), or any securities or rights convertible into, exchangeable for or
evidencing the right to subscribe for any of its ownership interests, or any
rights, warrants, options, calls, commitments or any other agreements of any
character to purchase or acquire any of its ownership interests or any other
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for any of its ownership interests, or (ii) any other securities
in respect of, in lieu of or in substitution for the Fund Interests outstanding
on the date hereof;
(b) redeem, purchase or otherwise acquire, or propose to redeem, purchase or
otherwise acquire, any of its outstanding securities (including the Fund
Interests);
(c) split, combine, subdivide or reclassify any of its ownership interests
or otherwise make any payments to the Partners; provided, however, that nothing
shall prohibit: (i) the payment of any ordinary distribution in respect of its
ownership interests at such times and in such manner and amount as may be
consistent with the Fund's past practice (which in any event shall include any
and all compensation paid or payable or expenses reimbursed or reimbursable for
the period from December 31, 1998 through the Effective Time, to the extent not
otherwise paid or distributed to the Partners), or (ii) any distribution of
property necessary for the representation and warranty set forth in Section
7.11 to be true and correct;
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(d) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization (other
than the Merger);
(e) make any acquisition, by means of merger, consolidation or otherwise, of
any direct or indirect ownership interest in or assets comprising any business
enterprise or operation outside the Ordinary Course of Business;
(f) other than as may be necessary to consummate the Merger, adopt any
amendments to its certificate of limited partnership or limited partnership
agreement;
(g) incur any indebtedness for borrowed money or guarantee such indebtedness
or agree to become contingently liable, by guaranty or otherwise, for the
obligations or indebtedness of any other person or make any loans, advances or
capital contributions to, or investments in, any other corporation, any
partnership or other legal entity or to any other persons, outside the Ordinary
Course of Business;
(h) engage in the conduct of any business the nature of which is materially
different from the business in which the Fund is currently engaged;
(i) enter into any agreement providing for acceleration of payment or
performance or other consequence as a result of a change of control of the
Fund;
(j) forgive any indebtedness owed to the Fund or convert or contribute by
way of capital contribution any such indebtedness owed;
(k) authorize or enter into any agreement providing for management services
to be provided by the Fund to any third party or an increase in management fees
paid by any third party under existing management agreements;
(l) mortgage, pledge, encumber, sell, lease or transfer any material assets
of the Fund except as contemplated by this Agreement;
(m) authorize or announce an intention to do any of the foregoing, or enter
into any contract, agreement, commitment or arrangement to do any of the
foregoing; or
(n) perform any act or omit to take any action that would make any of the
representations made above inaccurate or materially misleading as of the
Effective Time.
8.4 Full Access. The General Partners shall permit representatives of APF
and the OP General Partner to have full access at all reasonable times, and in
a manner so as not to interfere with the normal business operations of the Fund
to all premises, properties, personnel, books, records (including Tax records),
contracts, and documents of or pertaining to the Fund. APF, the OP General
Partner and the Operating Partnership shall permit representatives of the
General Partners and the Fund to have full access at all reasonable times, and
in a manner so as not to interfere with the normal business operations of APF
and the Operating Partnership to all premises, properties, personnel, books,
records (including Tax records), contracts, and documents of or pertaining to
APF, the OP General Partner and the Operating Partnership. The Parties agree
that any information obtained in connection with the exercise of their rights
pursuant to this Section 8.4 shall be Confidential Information for purposes of
this Agreement.
8.5 Notice of Developments. Each Party will give prompt written notice to
the others of any material adverse development causing a breach of any of its
own representations and warranties in Articles V, VI or VII above, as
applicable. No disclosure by any Party pursuant to this Section 8.5, however,
shall be deemed to amend or supplement the Disclosure Schedule or to prevent or
cure any misrepresentation, breach of warranty, or breach of covenant.
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8.6 Reorganization. From and after the date hereof and prior to the
Effective Time, except for the transactions contemplated or permitted herein,
each of APF, the Operating Partnership, the General Partners and the Fund shall
use reasonable efforts to conduct its business and file Tax Returns in a manner
that would not jeopardize the qualification of APF after the Effective Time as
a real estate investment trust as defined within Section 856 of the Code.
8.7 Fund Partner Approval. The General Partners hereby agree to vote the
Fund Interests owned by them in favor of this Agreement and the transactions
contemplated hereby and agree, subject to the satisfaction of their fiduciary
duties as general partners under Florida law, as reasonably determined by the
General Partners, to recommend that the limited Partners of the Fund vote their
Fund Interests in favor of this Agreement and the transactions contemplated
hereby.
8.8 Delivery of Certain Financial Statements.
(a) In addition to disclosure in Fund SEC Documents required to be filed by
the Fund, promptly after they are available, and in any event not later than
the tenth business day prior to the Closing Date, the Fund shall provide to APF
and the OP General Partner with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by the Fund and each of the
General Partners that such balance sheets (including the related notes, if any)
present fairly, in all material respects, the financial position of the Fund as
of their respective dates, and the other related statements (including the
related notes, if any) included therein present fairly, in all material
respects, the results of its operations and cash flows for the respective
periods or as of the respective dates set forth therein, all in conformity with
GAAP consistently applied during the periods involved, except as otherwise
stated in the notes thereto, subject to normal year-end audit adjustments.
(b) In addition to disclosure in APF SEC Documents required to be filed by
APF, promptly after they are available, and in any event not later than the
tenth business day prior to the Closing Date, APF shall provide to the Fund and
the General Partners with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by APF that such balance
sheets (including the related notes, if any) present fairly, in all material
respects, the financial position of APF as of their respective dates, and the
other related statements (including the related notes, if any) included therein
present fairly, in all material respects, the results of its operations and
cash flows for the respective periods or as of the respective dates set forth
therein, all in conformity with GAAP consistently applied during the periods
involved, except as otherwise stated in the notes thereto, subject to normal
year-end audit adjustments.
8.9 State Takeover Statutes. APF, the APF Board of Directors, the Operating
Partnership, the Fund and the General Partners shall (i) take all action
necessary so that no "fair price," "business combination," "moratorium,"
"control share acquisition" or any other anti-takeover statute or similar
statute enacted under state or federal laws of the United States or similar
statute or regulation, including without limitation, the control share
acquisition provisions of Section 3-701 et seq. of the Maryland GCL and the
business combination provisions of Section 3-601 et seq of the Maryland GCL
(each, a "Takeover Statute"), is or becomes applicable to the Merger, this
Agreement or any of the other transactions contemplated by this Agreement, and
(ii) if any Takeover Statute becomes applicable to the Merger, this Agreement
or any other transaction contemplated by this Agreement, take all action
necessary to minimize the effect of such Takeover Statute on the Merger and the
other transactions contemplated by this Agreement.
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8.10 Exclusivity. None of the General Partners shall solicit, initiate, or
encourage the submission of any proposal or offer from any Person relating to
the acquisition of any capital stock or other voting securities or any
substantial portion of the assets of the Fund (including any acquisition
structured as a merger, consolidation, or share exchange). The General Partners
shall notify APF and the Operating Partnership immediately if any Person makes
any proposal, offer, inquiry, or contact with respect to any of the foregoing.
8.11 Listing. APF shall effect, at or before the issuance of any APF Common
Shares issued as Share Consideration pursuant to Article IV, authorization for
listing or quotation of such APF Common Shares on the NYSE, subject to official
notice of issuance.
8.12 Maintenance of APF's Business. During the period from the date of this
Agreement to the Effective Time, APF will not take any action that adversely
affects the ability of APF (i) to pursue its business in the ordinary course,
(ii) to seek to preserve intact its current business organizations (iii) to
preserve its relationships with its tenants and (iv) will not take any action
to affect it status as a REIT for federal income tax purposes.
8.13 Registration of Share Consideration. APF shall cause the Registration
Statement to become effective prior to the Closing Date.
8.14 Delivery and Approval of Disclosure Schedule and Schedule 1. Within
fifteen (15) business days after the date of this Agreement the General
Partners shall deliver to APF the Disclosure Schedule and APF shall deliver to
the General Partners Schedule 1. Within fifteen (15) business days after APF
receives the Disclosure Schedule it shall give the General Partners notice
either that the disclosures in the Disclosure Schedule are, as to substance,
satisfactory to APF, in its sole and absolute discretion, or that they are not
satisfactory and that APF terminate this Merger Agreement pursuant to Section
11.2. Likewise, within fifteen (15) business days after the General Partners
receive Schedule 1, the General Partners shall give APF notice either that the
disclosures in Schedule 1 are, as to substance, satisfactory to them, in their
sole and absolute discretion, or that they are not satisfactory and that such
General Partners terminate the Agreement pursuant to Section 11.2. In the case
of both APF and the General Partners, the failure of either to give the notice
specified above within the applicable fifteen (15) business day period shall
constitute approval of the Disclosure Schedule or Schedule 1, as applicable.
8.15 Certain Acquisitions. APF or its Subsidiaries shall acquire CNL Fund
Advisors, Inc., CNL Financial Corp. and CNL Financial Services, Inc.
(collective, the "CNL Restaurant Services Group") substantially in accordance
with the terms and conditions set forth in their respective merger agreements
dated on or about the date hereof or such other terms that are mutually agreed
to by the parties.
ARTICLE IX
Post-Closing Covenants
The Parties agree as follows with respect to the period following the
Closing:
9.1 General. In the event that at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of the Parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request, all at the sole cost and expense of the requesting
Party (unless the requesting Party is entitled to indemnification therefor
under Article XII below). The General Partners acknowledge and agree that from
and after the Closing, the Surviving Partnership will be entitled to possession
of all documents, books, records (including Tax records), agreements, and
financial data of any sort relating to the Fund.
9.2 Litigation Support. In the event and for so long as any Party actively
is contesting or defending against any action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand in connection
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with (i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Fund, each of the other Parties will
cooperate with it and its counsel in the contest or defense, make available
their personnel, and provide such testimony and access to their books and
records as shall be necessary in connection with the contest or defense, all at
the sole cost and expense of the contesting or defending Party (unless the
contesting or defending Party is entitled to indemnification therefor under
Article XII below).
9.3 Transition. The General Partners will not take any action that is
designed or intended to have the effect of discouraging any tenant, lessor,
licensor, customer, supplier, or other business associate of the Fund from
maintaining the same business relationships with the Surviving Partnership
after the Closing as it maintained with the Fund prior to the Closing.
9.4 Confidentiality.
(a) The General Partners and the Fund will treat and hold as such all of the
Confidential Information, refrain from using any of the Confidential
Information except in connection with this Agreement, and deliver promptly to
APF or the OP General Partner, as applicable, or destroy, at the request and
option of APF or the OP General Partner, as applicable, all tangible
embodiments (and all copies) of the Confidential Information which are in its
possession. In the event that any of the General Partners or the Fund is
requested or required (by oral question or request for information or documents
in any legal proceeding, interrogatory, subpoena, civil investigative demand,
or similar process) to disclose any Confidential Information, such General
Partner or the Fund, as applicable, will notify APF or the OP General Partner,
as applicable, promptly of the request or requirement so that such Party may
seek an appropriate protective order or waive compliance with the provisions of
this Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, such General Partner or the Fund is, on the advice of
counsel, compelled to disclose any Confidential Information to any tribunal or
else stand liable for contempt, then such General Partner or the Fund, as
applicable, may disclose the Confidential Information to such tribunal;
provided, however, that such General Partner or the Fund, as applicable, shall
use its best efforts to obtain, at the request of APF or the OP General
Partner, as applicable, an order or other assurance that confidential treatment
will be accorded to such portion of the Confidential Information required to be
disclosed as APF or the OP General Partner, as applicable, shall designate.
(b) APF, the OP General Partner and the Operating Partnership will treat and
hold as such all of the Confidential Information, refrain from using any of the
Confidential Information except in connection with this Agreement, and, if the
Closing does not occur, deliver promptly to the Fund General Partners, as
applicable, or destroy, at the request and option of the Fund or the General
Partners, as applicable, all tangible embodiments (and all copies) of the
Confidential Information which are in its possession. Prior to the Closing and
if the Closing does not occur, in the event that any of APF, the OP General
Partner or the Operating Partnership is requested or required (by oral question
or request for information or documents in any legal proceeding, interrogatory,
subpoena, civil investigative demand, or similar process) to disclose any
Confidential Information, APF, the OP General Partner or the Operating
Partnership, as applicable, will notify the Fund or the General Partners, as
applicable, promptly of the request or requirement so that such Party may seek
an appropriate protective order or waive compliance with the provisions of this
Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, APF, the OP General Partner or the Operating Partnership is,
on the advice of counsel, compelled to disclose any Confidential Information to
any tribunal or else stand liable for contempt, then APF, the OP General
Partner or the Operating Partnership, as applicable, may disclose the
Confidential Information to such tribunal; provided, however, that APF, the OP
General Partner or the Operating Partnership, as applicable, shall use its best
efforts to obtain, at the request of the Fund or the General Partners, as
applicable, an order or other assurance that confidential treatment will be
accorded to such portion of the Confidential Information required to be
disclosed as the Fund or the General Partners, as applicable, shall designate.
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9.5 Covenant Not to Compete. Unless employed by the Surviving Partnership or
APF after the Closing, for a period of three years from and after the Closing
Date, none of the General Partners will engage directly or indirectly in any
business serving the restaurant industry that the Surviving Partnership or APF
conducts as of the Closing Date, except existing restaurant businesses and
properties currently owned or advised by affiliates of CNL Group, Inc.,
including CNL Advisory Services, Inc. In addition, and not in lieu of the
foregoing, for a period of three years from and after the Closing Date, James
M. Seneff, Jr. hereby covenants and agrees not to engage or participate,
directly or indirectly, as principal, agent, executive, employee, employer,
consultant, stockholder, partner or in any other individual capacity
whatsoever, in the conduct or management of, or own any stock or any other
equity investment in or debt of, any business that relates to the ownership,
acquisition or development of "restaurant operations"; provided, however, for
the purposes of this Agreement, "restaurant operations" shall not include the
ownership, acquisition or development of hotel and health care properties that
contain restaurant operations and those entities set forth on Schedule 9.5, and
provided further, the noncompetition covenant shall not operate to preclude Mr.
Seneff's ownership of APF Common Shares and of up to 5% of the equity
securities of companies whose common stock is publicly traded that are engaged
in owning, operating, franchising or making are engaged in owning, operating,
franchising or making loans to restaurants and restaurant companies. If the
final judgment of a court of competent jurisdiction declares that any term or
provision of this Section 9.5 is invalid or unenforceable, the Parties agree
that the court making the determination of invalidity or unenforceability shall
have the power to reduce the scope, duration, or area of the term or provision,
to delete specific words or phrases, or to replace any invalid or unenforceable
term or provision with a term or provision that is valid and enforceable and
that comes closest to expressing the intention of the invalid or unenforceable
term or provision, and this Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment may be appealed.
9.6 Tax Matters.
(a) If there is an adjustment to any item reported on a pre-closing Tax
Return that results in an increase in the Taxes payable by the Fund or any of
the General Partners, and such adjustment results in a corresponding adjustment
to items reported on a post-closing Tax Return with the result that the Taxes
payable either by APF, any of its Subsidiaries, or by any consolidated group of
companies of which APF or any Subsidiary are then members are reduced, or a
refund of Taxes is increased, then any APF Indemnity Claim that the General
Partners or Fund owes APF or the Operating Partnership pursuant to Article XII
below shall be reduced by the amount by which such Taxes are reduced or such
refunds are increased.
(b) Any refund or credit of Taxes (including any statutory interest thereon)
received by APF or any of its Subsidiaries attributable to periods ending on or
prior to or including the Closing Date that were paid by the Fund pursuant to
this Agreement shall reduce any APF Indemnity Claim that the General Partners
or the Fund owes APF pursuant to Article XII below by an amount equal to the
amount of such refund or credit.
(c) In the event that APF or any of its Subsidiaries receives notice,
whether orally or in writing, of any pending or threatened federal, state,
local or foreign tax examinations, claims settlements, proposed adjustments or
related matters with respect to Taxes that could affect the Fund or the General
Partners, or if the Fund or any of the General Partners receives notice of such
matters that could affect APF or any of its Subsidiaries, the party receiving
such notice shall notify in writing the potentially affected party within ten
(10) days thereof. The failure of either party to give the notice required by
this Section shall not impair such party's rights under this Agreement except
to the extent that the other party demonstrates that it has been damaged
thereby.
(d) The General Partners shall have the responsibility for, and shall be
entitled, at their expense, to contest, control, compromise, reasonably settle
or appeal all proceedings with respect to pre-closing Taxes.
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ARTICLE X
Conditions to Obligation to Close
10.1 Conditions to Each Party's Obligation. The respective obligations of
APF, the OP General Partner, the Operating Partnership, the Fund and the
General Partners to consummate the transactions contemplated by this Agreement
are subject to the fulfillment at or prior to the Closing Date of each of the
following conditions, which conditions may be waived upon the written consent
of APF and the General Partners:
(a) Governmental Approvals and Consents. The Parties shall have received all
other authorizations, consents, and approvals of governments and governmental
agencies referred to in Sections 5.1, 6.4, and 7.3 above.
(b) No Injunction or Proceedings. There shall not be any action, suit, or
proceeding pending or threatened before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction or
before any arbitrator wherein an unfavorable injunction, judgment, order,
decree, ruling, or charge would, in the reasonable judgment of APF or the
General Partners, (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions contemplated
by this Agreement to be rescinded following consummation, or (C) materially
adversely affect the right of the Surviving Partnership to own its assets and
to operate its businesses (and no such injunction, judgment, order, decree,
ruling, or charge shall be in effect).
(c) No Suspension of Trading, Etc. At the Effective Time, there shall be no
declaration of a banking moratorium by federal or state authorities or any
suspension of payments by banks in the United States (whether mandatory or not)
or of the extension of credit by lending institutions in the United States, or
commencement of war or other international, armed hostility or national
calamity directly or indirectly involving the United States, which war,
hostility or calamity (or any material acceleration or worsening thereof), in
the sole judgment of APF, would have a Material Adverse Effect on the Fund or,
in the sole judgment of any of the General Partners, would have a Material
Adverse Effect on APF.
(d) Shareholder/Partner Approvals. The stockholders of APF shall have
approved APF's Amended and Restated Articles of Incorporation in the form
attached hereto as Exhibit A, and the Partners of the Fund shall have approved
the Merger Proposal, amendments to the partnership agreement, if any.
(e) Registration of Share Consideration. The Registration Statement shall
have become effective under the Securities Act and shall not be the subject of
any stop order or proceedings by the SEC seeking a stop order.
10.2 Conditions to Obligation of APF, the OP General Partner and the
Operating Partnership. The obligations of APF, the OP General Partner and the
Operating Partnership to consummate the transactions to be performed by them in
connection with the Closing are subject to satisfaction on or prior to December
31, 1999 of the following conditions:
(a) the General Partners and the Fund shall have delivered to APF and the OP
General Partner a certificate to the effect that:
(i) the representations and warranties set forth in Article V and
Article VII above are true and correct in all material respects at and as
of the Closing Date;
(ii) the General Partners and the Fund have performed and complied with
all of their covenants hereunder in all material respects at and as of the
Closing Date;
(iii) the General Partners and the Fund have procured all of the
material third-party consents specified in, respectively, Section 5.2 and
Section 7.4 above and the related sections of the Disclosure Schedule; and
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(iv) no action, suit, or proceeding is pending or, to their Knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation, or
(C) affect adversely the right of the Surviving Partnership to own its
assets and to operate its businesses (and no such injunction, judgment,
order, decree, ruling, or charge is in effect);
Notwithstanding the foregoing, APF's obligation to close as a result of a
breach of the representations and warranties contained in Section 7.24 shall
be governed solely by Section 10.2(e) below.
(b) since December 31, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of the Fund, such determination to be made in the
reasonable discretion of APF;
(c) APF and the Operating Partnership shall have received an opinion dated
as of the Closing Date from Baker and Hostetler LLP, counsel to the General
Partners and the Fund, taken as a whole, in form and substance reasonably
satisfactory to APF and the Operating Partnership;
(d) APF shall have received the Disclosure Schedule and approved it in
accordance with Section 8.14;
(e) There shall not exist an unlawful environmental condition on one or
more properties owned by the Fund, which in the opinion of a mutually
acceptable environmental engineer or consultant, would require APF to expend
in excess of $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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<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-29
<PAGE>
ARTICLE XIII
Limitation of Liability
13.1 Threshold. Notwithstanding anything to the contrary stated in this
Agreement, in no event (i) shall the General Partners or any of them have any
liability to APF and/or the OP General Partner and the Surviving Partnership on
account of any APF Indemnity Claim or for any claim for breach of warranty or
for misrepresentation, or any other claim whatsoever arising under this
Agreement or in connection with the transaction contemplated herein
(individually a "Claim" and collectively, "Claims") or for any loss, damage,
deficiency, liability, obligation, suit, action, judgment, fee, cost or expense
of any nature whatsoever directly resulting from Claims (collectively,
"Losses") unless, until and only to the extent that the accumulated amount of
all Losses exceeds the amount of $439,420 in the aggregate (the "Threshold")
nor (ii) shall the individual or aggregate liability of the General Partners on
account of Claims and Losses exceed the value of APF Common Shares actually
issued to the General Partners in the Merger valued at the 20 Day Average
Price. To the extent that any Claim is asserted against more than one General
Partner, each General Partner shall be liable only for such General Partner's
proportionate share of the Claim based on the percentage that the APF Common
Shares received by such General Partner in the Merger is of the total APF
Commons Shares comprising the Share Consideration. Any Claim against a General
Partner, including an APF Indemnity Claim, may be satisfied by such General
Partner, in its sole discretion, by surrendering to the claimant(s) APF Common
Shares at a value equal to the closing price per share of such shares on the
NYSE on the last trading day preceding the date such APF Common Shares are
surrendered.
13.2 Special Indemnification. APF agrees to indemnify, defend and hold
harmless the General Partners against any loss, damage, deficiency, liability,
obligation, suit, action, judgment, fee, cost or expense of any nature
whatsoever, including reasonable attorneys' fees, arising after the Effective
Time that would have arisen in their capacity as General Partners of the Fund
had the Merger not been consummated and that are the result of APF's alleged
actions or inactions. The Threshold described in Section 13.1 above shall not
apply to APF obligations to indemnify the General Partners pursuant to this
Section 13.2.
ARTICLE XIV
Miscellaneous
14.1 Press Releases and Public Announcements. No Party shall issue any press
release or make any public announcement relating to the subject matter of this
Agreement prior to the Closing without the prior written approval of APF and
the General Partners; provided, however, that any Party may make any public
disclosure it believes in good faith is required by applicable law or any
listing or trading agreement concerning its publicly-traded securities (in
which case the disclosing Party will use its best efforts to advise the other
Parties prior to making the disclosure).
14.2 No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
14.3 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
14.4 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior
written approval of APF and the General Partners.
14.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
B-30
<PAGE>
14.6 Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.7 Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given, as of the
date two business days after mailing, if it is sent by registered or certified
mail, return receipt requested, postage prepaid, and addressed to the intended
recipient as set forth below:
If to the Fund or the General Partners:
c/o James M. Seneff, Jr.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 423-2894
With copy to:
Baker & Hostetler LLP
Sun Trust Center, Suite 2300
200 South Orange Avenue
Orlando, Florida 32801
Attn: Kenneth C. Wright, Esq.
Telecopy: (407) 841-0168
If to APF or the Operating Partnership:
Curtis B. McWilliams
Executive Vice President
CNL American Properties, Inc.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 650-1000
With copy to:
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Attn: John M. McDonald, Esq.
Telecopy: (202) 663-8007
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth
above using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving the other Parties notice in the manner herein set forth.
14.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of Florida
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
B-31
<PAGE>
14.9 Amendments and Waivers. No amendment of any provision of this Agreement
shall be valid unless the same shall be in writing and signed by APF, the OP
General Partner and the General Partners. No waiver by any Party of any
default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or
subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
14.10 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
14.11 Expenses. If the Closing occurs, APF will bear all costs and expenses
of the Parties incurred in connection with this Agreement and the transactions
contemplated hereby to the extent not already paid by the Fund or the General
Partners. If the Closing does not occur, APF, the OP General Partner and the
Operating Partnership will bear their own costs and expenses (including legal
fees and expenses) incurred in connection with this Agreement and the
transactions contemplated hereby, and the General Partners and the Fund will
divide their costs and expenses (including legal fees and expenses) as follows:
(i) the Fund shall bear that percentage of the costs and expenses equal to the
percentage obtained by dividing the number of Fund votes in favor of the Merger
by the sum of the total number of votes cast and the total number of
abstentions and (ii) the General Partners shall bear the remainder of the costs
and expenses.
14.12 Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.
14.13 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
14.14 Specific Performance. Each of the Parties acknowledges and agrees that
the other Parties would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Parties shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter (subject to the provisions set
forth in Section 13.15 below), in addition to any other remedy to which they
may be entitled, at law or in equity.
14.15 Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in and for Orange County,
Florida, in any action or proceeding arising out of or relating to this
Agreement and agrees that all claims in respect of the action or proceeding may
be heard and determined in any such court.
B-32
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
By: /s/ James M. Seneff, Jr.
Its: Chief Executive Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
By: /s/ Robert A. Bourne
Its: President
CNL APF GP Corp.
By: /s/ Robert A. Bourne
Its: President
CNL INCOME FUND 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
B-33
<PAGE>
Appendix C
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF LIMITED PARTNERSHIP
OF
CNL INCOME FUND XI, LTD.
- --------------------------------------------------------------------------------
(Insert name currently on file with Florida Dept. of State)
Pursuant to the provisions of section 620.109, Florida Statutes, this Florida
limited partnership, whose certificate was filed with the Florida Department of
State on August 20, 1991, adopts the following certificate of amendment to its
certificate of limited partnership:
FIRST: Amendment(s): (indicate article number(s) being amended, added, or
deleted)
Article XX, Section 21.5 is deleted in its entirety, and all cross references
to such section are deleted in their entirety.
SECOND: This certificate of amendment shall be effective at the time of its
filing with the Florida Department of State.
THIRD: Signature(s)
Signature of current general partner(s):
-------------------------------------
James M. Seneff, Jr.
-------------------------------------
Robert A. Bourne
CNL REALTY CORPORATION
By: _________________________________
Name:
Signature(s) of new general partner(s), if applicable: N/A
C-1
<PAGE>
Appendix D
[FORM OF OPINION]
, 1999
James M. Seneff, Jr.
Robert A. Bourne
400 East South Street
Orlando, Florida 32801
Gentlemen:
We have acted as counsel to CNL Income Fund XI, Ltd., a Florida limited
partnership (the "Partnership") of which you are the general partners (the
"General Partners"), in connection with the proposed amendment (the "Proposed
Amendment") to the Amended and Restated Agreement of Limited Partnership of CNL
Income Fund XI, Ltd. (the "Partnership Agreement"). The Partnership Agreement
requires that in connection with any proposed amendment to the Partnership
Agreement (other than ministerial amendments and those amendments dealing with
the transfer of a limited partner's partnership interest or the admission of
substituted or additional limited partners), the General Partners must obtain
an opinion of counsel concerning whether such proposed amendment would result
in changing the Partnership to a general partnership. The Proposed Amendment
would delete the provision in the Partnership Agreement that prohibits the
Partnership from participating in any transaction involving (i) the
acquisition, merger, conversion, or consolidation, either directly or
indirectly, of the Partnership, and (ii) the issuance of securities of any
other partnership, real estate investment trust, corporation trust or other
entity that would be created or would survive after the successful completion
of such transaction.
This opinion is furnished pursuant to the Partnership Agreement. In
rendering our opinion, we have examined and relied on the Partnership
Agreement, the Proposed Amendment, and the Certificate of Limited Partnership
of the Partnership. We have, in addition, made such other inquiries of fact and
examinations of law as we have deemed necessary for purposes of rendering this
opinion.
We are members of the Bar of the State of Florida and do not hold ourselves
out as being conversant with the laws of any jurisdiction other than those of
the State of Florida and are expressing no opinion as to the laws of any
jurisdiction other than those of the State of Florida and our opinion is so
limited.
In rendering the opinion set forth below, we have assumed: the genuineness
of all signatures on records, certificates, instruments, agreements and other
documents submitted to us for examination; the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified, photostatic, facsimile, reproduced, or
conformed copies and the authenticity of the originals of such latter
documents; the accuracy and completeness of all factual representations made in
the above-referenced documents; and the legal capacity of all natural persons.
Based upon the foregoing and subject to the limitations and qualifications
hereinafter set forth, we are of the opinion that the Proposed Amendment to the
Partnership Agreement would not result in changing the Partnership to a general
partnership.
This opinion letter is based upon and limited to laws of the State of
Florida as in effect on the date of this letter and to our current knowledge of
facts in existence as of the date of this letter and material to the opinions
expressed in this letter. This opinion letter is rendered as of the date
hereof, and does not purport to analyze, evaluate or consider the legal effect
of any event, legal or factual, occurring after such date that may alter the
validity, effect or contents of this opinion, and we assume no obligation to
update the opinion set forth herein.
<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 Prospectus/Consent Solicitation Statement.
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.
OVERVIEW
Pursuant to the Prospectus/Consent Solicitation Statement and this
Supplement, you are being asked to approve the Acquisition of your Income Fund
by APF. Your Income Fund is one of 18 limited partnerships (which we refer to
collectively as the Funds) that APF is seeking to acquire. Supplements have
also been prepared for each of the other Funds, copies of which may be obtained
without charge to 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 (or a REIT), formed in
1994, whose primary business, like that of the Funds, is the ownership of
restaurant properties leased to operators of national and regional restaurant
chains on a triple-net lease basis. As a full-service REIT, 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 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 shares of common stock (or APF Shares) will I receive if my Income
Fund is acquired by APF?
Your Income Fund will receive 4,768,496 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 $10.00 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
approximately 75 million APF Shares through three public offerings at offering
prices per APF share equal to the Exchange Value. At December 31, 1998, of the
approximately $750 million raised by APF, APF has used approximately $550
million to acquire restaurant properties and to make mortgage loans and had
approximately $120 million in uninvested proceeds which it expects to invest
during the first quarter of 1999. The remaining proceeds were used to pay fees
and other offering expenses.
S-1
<PAGE>
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
Fund?
Yes. Legg Mason Wood Walker, Incorporated 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 Funds, and (c) the method of allocating the APF
Shares among the Funds.
Do you, as the general partners of my Income Fund, recommend that I vote in
favor 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 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 how you want to vote, and sign
and mail it in the enclosed postage-paid return envelope as soon as possible,
so that at the Special Meeting of Limited Partners, your Units may be voted
"For" or "Against" APF's acquisition of your Income Fund. If you sign and send
in your consent form and do not indicate how you want to vote, your consent
form will be counted as a vote "For" the Acquisition. If you do not vote or you
abstain from voting, it will count as a vote "Against" the Acquisition.
In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to certain limitations. If you vote "Against" the Acquisition,
but your Income Fund is nevertheless acquired by APF, you may elect to receive
a payment (which we call the Cash/Notes Option) that is 10% in cash and 90% in
% Callable Notes due , 2006 (or Notes) based on the liquidation value
of your Income Fund, as determined by Valuation Associates, the appraisal firm
that we engaged in connection with the Acquisition. Such liquidation value will
be lower than the aggregate Exchange Value of the APF Shares offered to your
Income Fund in the Acquisition. The Notes will bear interest at a rate equal to
%, which was determined based on 120% of the applicable federal rate as of
, 1999 the applicable federal rate. Please note that you may only
receive the Cash/Notes Option if you have voted "Against" the Acquisition and
you elect to receive the Cash/Notes Option on your consent form. You will
receive APF Shares if your Income Fund elects to be acquired in the Acquisition
and you voted "For" the Acquisition, or you voted "Against" the Acquisition and
did not affirmatively select the Cash/Notes Option. 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 (for example, 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 be based on the difference between the
value of the APF Shares or the tax basis of your Units. If you elect the
Cash/Notes Option, your tax will be based upon your allocable share of the gain
which will be
S-2
<PAGE>
recognized by your Income Fund; your Income Fund's gain will generally equal
the excess, if any, of the value of the APF Shares and cash received by your
Income Fund over the tax basis of your Fund's net assets. Some of the gain may
be subject to the 25% rate of tax applicable to certain 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 $1,669. To
review the tax consequences to the Limited Partners of the Funds in greater
detail, see pages through of the Prospectus/Consent Solicitation
Statement 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 Funds acquired by APF.
Although the majority of APF's assets and the assets of the other Funds
acquired by APF are substantially similar to those of your Income Fund, the
restaurant properties owned by APF and the other 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 Funds' restaurant properties,
see "APF's Business and The Restaurant Properties -- Business Objectives and
Strategies" and "-- The Restaurant Properties -- General" and "Business of the
Funds-- Description of Restaurant Properties" in the Prospectus/Consent
Solicitation Statement.
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 Prospectus/Consent Solicitation Statement.
Investment Risks
. Uncertainty Regarding the Exchange Value and Trading Price of APF Shares
Following Listing. Your Income Fund will be receiving 4,768,496 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 is 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 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.
. Decrease in Distributions. In each of the years ended December 31, 1995,
1996 and 1997, your Income Fund made $860, $850 and $850 respectively, in
distributions per $10,000 investment to you. Based on APF's pro forma
financial information, and assuming APF acquires only your Income Fund and
that each Limited Partner of your Income receives only APF Shares, you would
have received, for the year ended December 31, 1997, $610 in distributions
per $10,000 of original investment, which is 28.2% less than the $850
distributed to you as Limited Partner during the same period. 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
S-3
<PAGE>
APF stockholders for the year ended December 31, 1997 and for the nine
months ended September 30, 1998 is not necessarily indicative of the
distributions you will receive as a stockholder of APF after the
Acquisition. See "Cash Distributions to Limited Partners of Your Fund."
. Conflicts of Interest in the Acquisition; Substantial Benefits to Related
Parties. There are certain conflicts of interest inherent in the structure
of the Acquisition of your Income Fund. 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
that may or may not be aligned with your interests as a Limited Partner of
the Income Fund or with their own positions as the general partners of your
Income Fund. Assuming only your Income Fund is acquired in the Acquisition,
we will receive 35,314 APF Shares. 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.
. Fundamental Change in Nature of 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 September
30, 1998), 406 restaurant properties. The risks inherent in investing in an
operating company such as APF include APF's ability to invest in new
restaurant properties that are not as profitable as APF anticipated, the
incurrence of substantial indebtedness to make future acquisitions of
restaurant properties which it may be unable to repay and making mortgage
loans to prospective operators of national and regional restaurant chains
which may not have the ability to repay.
As an APF stockholder, you will receive the benefits of your investment
through (i) dividend distributions on, and (ii) increases in the value of,
your APF Shares. In addition, 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 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 Cash/Notes Option). An investment in APF may not
outperform your investment in the Income Fund.
. Original Investment Timeframe. 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 2000 and 2005. We currently have no current
plans to dispose of your Income Fund's restaurant properties if the Limited
Partners do not approve the Acquisition.
Real Estate/Business Risks
. Risk of Default on Mortgage Loans and Market Risks associated with
Securitizations. 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.
S-4
<PAGE>
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,) and 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 may 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.
. Risks Associated with Leverage. 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. At the time of the consummation of the Acquisition, as a
general policy, APF's Board of Directors will 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 funds from operations and its ability to make
distributions to its stockholders.
. Acquisition and Development Risks. APF plans to pursue its growth strategy
through the acquisition and development of additional restaurant
properties. To the extent that APF does pursue this growth strategy, we do
not know that it 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.
Tax Risks
. Failure of APF to Qualify as a REIT for Tax Purposes. 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.
S-5
<PAGE>
. Risks Associated with Distribution Requirements. 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 Tax Law. 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 Prospectus/Consent Solicitation Statement.
CONSIDERATION PAID TO INCOME FUND
The following table sets forth, for your Income Fund (i) the aggregate
amount of original Limited Partner investments in each Fund less any
distributions of net sales proceeds paid to the Limited Partners of that Fund,
(ii) the original amount of Limited Partner investments in each Fund less any
distributions of net sales proceeds per average $10,000 investment, (iii) the
number of APF Shares to be paid to your Income Fund, (iv) the estimated value
of the APF Shares paid to your Income Fund, (v) the estimated Acquisition
expenses allocated to your Income Fund, (vi) the estimated value, based on the
Exchange Value, of APF Shares paid to your Income Fund after deducting
Acquisition expenses, and (vii) the estimated value, based on the Exchange
Value, of APF Shares you will receive for each $10,000 of your original
investment:
<TABLE>
<CAPTION>
Original
Limited
Partner Estimated
Original Investments Value of APF
Limited Less Any Shares per
Partner Distributions Number of Estimated Average
Investments of Net Sales APF Estimated Value of $10,000
Less Any Proceeds per Shares Value of APF Shares Original
Distributions $10,000 Offered APF Shares Estimated after Limited
of Net Sales Original to Payable to Acquisition Acquisition Partner
Proceeds Investment(1) Fund(2) Fund(3) Expenses Expenses(3) Investment(3)
- ------------- ------------- --------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
$45,000,000 $10,000 4,768,496 $47,684,960 $532,871 $47,152,089 $10,400
</TABLE>
- --------
(1) Income fund has made no distributions of net sales proceeds.
(2) The APF Shares payable to each Fund as set forth in this chart will not
change if APF acquires fewer than all of the Funds in the Acquisition. This
number assumes that none of the Limited Partners of the Fund has elected
the Cash/Notes Option.
(3) 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.
Upon completion of the Acquisition of your Income Fund, the operations and
existence of your Income Fund will cease. For more detailed information, see
"The Acquisition" in the Prospectus/Consent Solicitation Statement. If your
Income Fund does not approve the Acquisition, we do not contemplate that your
Income Fund would be liquidated in the near future. The Acquisition, however,
does not result in an all-cash payment to you in the liquidation of your
investment. For example, if you are eligible for and choose the Cash/Notes
Option, you become a Noteholder of APF. You will have exchanged your Units for
unsecured debt obligations of APF which may not be retired in full until
, 2006, a date approximately seven years after the date
S-6
<PAGE>
the Acquisition of your Income Fund occurs. On the other hand, if you exchange
your Units for APF Shares, you will receive an equity interest in APF whose
marketability will depend upon the market that may develop with respect to the
APF Shares, which will be listed on the NYSE.
EXPENSES OF THE ACQUISITON
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......................................................... $ 23,734
Appraisals and Valuation........................................... 9,493
Fairness Opinions.................................................. 42,721
Registration, Listing and Filing Fees.............................. --
Soliciting Dealer Fee.............................................. 98,043
Financial Consulting Fees.......................................... --
Environmental Fees................................................. 59,335
Accounting and Other Fees.......................................... 68,501
--------
Subtotal...................................................... 301,827
Closing Transaction Costs
Transfer Fees and Taxes............................................ 77,717
Legal Fees......................................................... 73,988
Recording Costs.................................................... --
Other.............................................................. 79,339
--------
Subtotal...................................................... 231,044
--------
Total.............................................................. $532,871
========
</TABLE>
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 Income Fund's restaurant properties acquired within two
years of the initial date of the prospectus (October 1992). Because the
Acquisition of your Income Fund is a Liquidating Sale within the meaning of the
partnership agreement, it may not be consummated without the approval of
Limited Partners representing 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:
S-7
<PAGE>
. 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 as, in our opinion, market conditions permit), as
contemplated by the terms of the partnership agreement.
Special Meeting to Discuss the Acquisition
We have scheduled a special meeting of the Limited Partners of your Income
Fund to discuss the solicitation materials, which include the
Prospectus/Consent Solicitation Statement, 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 (as defined below) and to explain in person our reasons
for recommending that you vote "For" the Acquisition.
S-8
<PAGE>
VOTING PROCEDURE
The Prospectus/Consent Solicitation Statement, 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.
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 Prospectus/Consent Solicitation
Statement. A copy of the Agreement and Plan of Merger dated March 11, 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 December 31, 1999. 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.
The consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and certain 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
(including the Acquisition), 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. The partnership agreement also provide 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-9
<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
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, 1995, 1996 and 1997 and the nine months
ended September 30, 1998, the aggregate amounts accrued or paid by your Income
Fund 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 years presented, are shown below under "Pro Forma":
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended
----------------------- September 30,
1995 1996 1997 1998
------- ------- ------- -------------
<S> <C> <C> <C> <C>
Historical:
General Partner Distributions.......... -- -- -- --
Property Management Fees............... $40,774 $40,244 $40,218 $31,871
Broker/Dealer Commissions(1)........... -- -- -- --
Due Diligence and Marketing Support
Fees.................................. -- -- -- --
Acquisition Fees....................... -- -- -- --
Asset Management Fees.................. -- -- -- --
Real Estate Disposition Fees(2)........ -- -- -- --
------- ------- ------- -------
Total historical..................... $40,774 $40,244 $40,218 $31,871
Pro Forma:
Cash Distributions on APF Shares....... 23,700 26,427 20,714 16,183
Salary Compensation.................... -- -- -- --
------- ------- ------- -------
Total pro forma...................... $23,700 $26,427 $20,714 $16,183
</TABLE>
- --------
(1) A majority of the fees paid as broker-dealer commissions and due diligence
and marketing support fees were reallowed to other broker-dealers
participating in the offering of the Income Fund's Units.
(2) 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 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 the Acquisition -- Prices for 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>
Nine Months
Ended Sept. 30,
1998
----------------
Pro
1993 1994 1995 1996 1997 Historical Forma
---- ---- ---- ---- ---- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income........... $638 $850 $860 $850 $850 $516 $457
Distributions from Return of
Capital............................ -- -- -- -- -- 122 20
---- ---- ---- ---- ---- ---- ----
Total............................... $638 $850 $860 $850 $850 $638 $477
==== ==== ==== ==== ==== ==== ====
</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-10
<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 nine months ended September 30,
1998 is not necessarily indicative of the distributions you will receive as a
stockholder of APF after the Acquisition.
Assuming APF maintains its current level of debt for acquiring future
restaurant properties, the expected distribution rate per APF Share will be
8.8% (assuming a $10.00 per APF Share price based on the Exchange Value, the
annualized dividend per year is expected to be $0.88 per APF Share). Based on
the number of APF Shares that you would receive in the Acquisition per your
average $10,000 original investment and this distribution rate, you would
receive an annual distribution of approximately $915.
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 certain 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 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 Cash/Note Option.
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, our relief 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 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 Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the Cash/Notes Option, constitutes 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 and is the best way to maximize the return on your
investment in light of the values of such consideration.
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
S-11
<PAGE>
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 of Valuation Associates and Legg Mason
received fees for its services and notwithstanding that Legg Mason has
previously provided investment banking services to the Funds and to Commercial
Net Lease Realty, Inc., a former affiliate of ours. See "Reports, Opinions and
Appraisals" in the Prospectus/Consent Solicitation Statement.
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 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 cash and promissory notes option;
. 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 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 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 Cash/Notes Option.
3. Valuation of Alternatives. Based on the appraisal of the Income Fund's
restaurant properties, we estimated the value of your Income Fund as an ongoing
concern and if liquidated. 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 Fund to 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
September 30, 1998 per $10,000 original investment. Since the calculation of
the book value was done on a GAAP basis, it is not indicative of the true fair
market value of your Income Fund. This figure was compared to the (i) value of
the Fund if it commenced an orderly liquidation of its investment portfolio on
December 31, 1998, (ii) value of the Fund if it continued to operate in
accordance with its existing partnership agreement and business plans, and
(iii) estimated value of the APF Shares, based on the Exchange Value, paid to
each Fund per average $10,000 invested.
S-12
<PAGE>
Summary of Valuations
(per $10,000 original investment)
<TABLE>
<CAPTION>
Estimated Range
of Values of APF
Shares per
Average $10,000
Going Original Limited
GAAP Book Liquidation Concern Partners
Value Value(1) Value(1) Investment(2)
--------- ----------- -------- ----------------
<S> <C> <C> <C> <C>
CNL Income Fund XII, Ltd....... $8,860 $9,500 $10,357 $10,400
</TABLE>
- --------
(1) 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.
(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.
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have an independent
obligation 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 Funds). James M. Seneff, Jr. and
Robert A. Bourne act as the individual general partners of all of the 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.
Benefits to General Partners
As a result of the Acquisition (assuming only your Income Fund is acquired),
we are expected to receive certain benefits, including that we will be relieved
from certain ongoing liabilities with respect to the Funds that are acquired by
APF.
With respect to our ownership in your Income Fund, we may be issued up to
35,314 APF Shares in the aggregate in accordance with the terms of your Income
Fund's partnership agreement. The 0 APF Shares issued to us will have an
estimated value, based on the Exchange Value, of approximately $353,140
thousand.
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 Funds if the Acquisition does not occur.
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
S-13
<PAGE>
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 the Cash/Notes Option, in which
case you will receive cash and 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 Prospectus/Consent Solicitation Statement.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, the
assets (and any liabilities) of your Income Fund (if your Income Fund is
acquired by APF) will be transferred to APF in return for APF Shares and/or
cash and 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....................................... $1,669
</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-14
<PAGE>
Under section 351(a) of the Code, no gain or loss is recognized if (i)
property is transferred to a corporation by one more individuals or entities in
exchange for the stock of that corporation, and (ii) 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 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 the
Cash/Notes Option, 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 (1) 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 (2) 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 Cash/Notes Option, your Income Fund will receive APF
Shares, cash and Notes in exchange for your Income Fund's assets. Because the
principal portion of the Notes will not be due until , 2006, 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 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 (without reduction for
any selling expenses) 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 are 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, cash 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" (i.e., real property and
depreciable assets used in a trade or business and held for more than one
year). Your share of gains or losses from the sale of section 1231 assets of
your Income Fund would be combined with any other section 1231 gains and losses
that you recognize in that year. If the result is a net loss, such loss is
characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property
S-15
<PAGE>
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 Cash/Notes Option may
recognize gain in the year of the Acquisition despite the fact that they will
receive only a small amount of cash and no publicly-traded instruments 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 the Cash/Notes Option. See "-- Tax Consequences of
Liquidation and Termination of Your Fund" below.
Tax Consequences of the Liquidation and Termination of Your Fund. If your
Fund is acquired by APF, your Fund will be deemed to have liquidated and
distributed APF Shares and/or cash and 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 cash and 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 pro rata 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 (determined on the closing date of the Acquisition) and your
adjusted tax basis in your Units (adjusted by your distributive share of
income, gain, loss, deduction and credit for the final taxable year of your
Income Fund (including any such items recognized by your Income Fund as a
result of the Acquisition) as well as any distributions you receive in such
final taxable year (other than the distribution of the APF Shares)). 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 cash and Notes in the Acquisition, you will recognize gain to
the extent that the amount of cash you receive in the Acquisition exceeds your
adjusted basis in your Units (adjusted by your distributive share of income,
gain, loss, deduction and credit for the final taxable year of your Income Fund
(including any such items recognized by your Income Fund as a result of the
Acquisition) as well as any distributions you receive in such final taxable
year (other than the distributions of the cash and Notes)). Your basis in the
Notes distributed to you will equal your adjusted basis in your Units, reduced
(but not below zero) by the amount of any cash distributed to you 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
S-16
<PAGE>
section 514, and you are not 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.
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 cash and 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 Prospectus/Consent Solicitation
Statement.
S-17
<PAGE>
SUMMARY SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
APF, FUNDS, ADVISOR AND CNL RESTAURANT FINANCIAL SERVICES GROUP
Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
Historical Pro Forma
----------------------------------------------- -------------------------------
CNL
CNL Restaurant
Income Financial
Fund XII, Services Combined Pro Forma Combined
APF Ltd. Advisor Group Historical Adjustments Pro Forma
------------ ----------- ---------- ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data Revenues:
Rental and earned
income................ $ 22,947,199 $ 2,842,502 $ -- $ -- $ 25,789,701 $ 9,635,208 (a)
84,471 (b) $ 35,509,380
Management fees........ -- -- 21,405,127 5,122,366 26,527,493 (21,046,727)(c)
(2,875,906)(d) 2,604,860
Interest and other
income................ 6,117,911 51,713 751 18,463,647 24,634,022 1,526,547 (e) 26,160,569
------------ ----------- ---------- ----------- ------------ ----------- ------------
Total revenue........ 29,065,110 2,894,215 21,405,878 23,586,013 76,951,216 (12,676,407) 64, 274,809
Expenses:
General and
administrative........ 1,539,004 356,640 6,701,115 6,704,482 15,301,241 (1,311,079)(f)
(1,415,100)(g)
(36,361)(h) 12,538,701
Advisory fees.......... 1,248,393 31,871 -- 1,026,231 2,306,495 (2,306,495)(i) --
State taxes............ 397,569 17,653 15,226 220,180 650,628 65,410 (j) 716,038
Depreciation and
amortization.......... 2,693,020 252,185 131,539 1,000,493 4,077,237 3,077,776 (k)(l) 7,155,013
Interest expense....... -- -- 105,668 14,234,533 14,340,201 (68,670)(m) 14,271,531
Paid to affiliates..... -- -- 256,456 1,569,202 1,825,658 (1,825,658)(n) --
------------ ----------- ---------- ----------- ------------ ----------- ------------
Total expenses....... 5,877,986 658,349 7,210,004 24,755,121 38,501,460 (3,820,177) 34,681,283
============ =========== ========== =========== ============ =========== ============
Net earnings (loss)
before equity in
earnings of joint
ventures/minority
interests, gain (loss)
on sale of properties,
gain on securitization,
and provision (credit)
for federal income
taxes.................. 23,187,124 2,235,866 14,195,874 (1,169,108) 38,449,756 (8,856,230) 29,593,526
------------ ----------- ---------- ----------- ------------ ----------- ------------
Equity in earnings of
joint ventures/minority
interests.............. (23,271) 85,604 -- 12,452 74,785 -- 74,785
Gain (loss) on sales
of properties......... -- -- -- -- -- -- --
Gain on
securitization........ -- -- -- 3,018,268 3,018,268 -- 3,018,268
Provision (credit) for
federal income taxes -- -- 5,607,415 708,666 6,316,081 (6,316,081)(o) --
------------ ----------- ---------- ----------- ------------ ----------- ------------
Net earnings............ $ 23,163,853 $ 2,321,470 $8,588,459 $ 1,152,946 $ 35,226,728 $(2,540,149) $ 32,686,579
============ =========== ========== =========== ============ =========== ============
Other Data:
Weighted average number
of shares of common
stock outstanding
during period.......... 47,633,909 N/A N/A N/A N/A -- 74,458,279(p)
Total properties owned
at end of period....... 357 49 N/A N/A N/A -- 406
Funds from operations... $ 26,408,569 $ 2,706,287 N/A N/A N/A -- $ 37,510,651
Total cash distributions
declared............... $ 26,460,446 $ 2,868,756 N/A N/A N/A -- $ 37,510,651
Cash distributions
declared per $10,000
investment............. $ 572 $ 638 N/A N/A N/A -- $ 504
<CAPTION>
Historical Combined Pro Forma
September 30, 1998 Historical September 30, 1998
----------------------------------------------- ------------ -------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data
Real estate assets,
net.................... $407,663,180 $34,093,179 $ -- $ -- $441,756,359 $11,990,016 (q)
26,052,741 (r) $479,799,116
Mortgages/notes
receivable............. 33,523,506 -- -- 173,776,981 207,300,487 849,195 (r) 208,149,682
Accounts receivable,
net.................... 575,104 346 7,544,985 7,342,103 15,462,538 (7,855,601)(s) 7,606,937
Investment in/due from
joint ventures......... 631,374 2,532,807 -- -- 3,164,181 835,018 (q) 3,999,199
Total assets............ 566,383,967 40,925,908 8,429,809 197,528,789 813,268,473 30,918,171 844,186,644
Total
liabilities/minority
interest............... 14,478,585 1,055,882 5,049,152 185,998,045 206,581,664 (10,846,465)(s)(t) 195,735,199
Total equity............ 551,905,382 39,870,026 3,380,657 11,530,744 606,686,809 41,764,636 (q)(t) 648,451,445
</TABLE>
- -------------------
S-18
<PAGE>
(a) Represents rental and earned income as if 1) properties that had been
previously constructed and acquired from January 1, 1998 through November
30, 1998 had been acquired and leased on January 1, 1997 and 2) properties
that were developed by APF from January 1, 1998 through November 30, 1998
had been placed in service on May 1, 1997 (assumes a four month development
period.)
<TABLE>
<S> <C>
Rental and earned income on Property Transactions by APF........ $9,635,208
</TABLE>
(b) Represents $84,471 in accrued rental income resulting from the straight-
lining of scheduled rent increases throughout the lease terms for the
leases acquired from the CNL Income Fund as if the leases had been acquired
on January 1, 1997.
(c) Represents the elimination of intercompany fees between APF, the Income
Fund, the Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees............................................ $ (1,569,202)
Secured equipment lease fee................................. (44,426)
Advisory fees............................................... (1,754,254)
Reimbursement of administrative costs....................... (296,962)
Acquisition fees............................................ (15,392,193)
Underwriting fees........................................... (254,945)
Administrative fees......................................... (148,491)
Executive fee............................................... (310,000)
Guarantee fees.............................................. (93,750)
Servicing fee............................................... (1,014,117)
Development fees............................................ (166,876)
Consulting fee.............................................. (1,511)
------------
Total................................................... $(21,046,727)
============
</TABLE>
(d) Represents the deferral of $2,875,906 in origination fees collected by CNL
Restaurant Financial Services Group that should be amortized over the term
of the loans originated (20 years) in accordance with the Statement of
Financial Accounting Standards #91 "Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases."
(e) Represents interest income of $1,318,870 earned from Other Investments
acquired and mortgage notes issued from January 1, 1998 through November
30, 1998 as if this had occurred on January 1, 1997 and the amortization of
$207,677 of deferred origination fees collected during the year ended
December 31, 1997 and during the nine months ended September 30, 1998,
which were capitalized and deferred in (d) above as if they had been
collected on January 1, 1997. These deferred fees are being amortized and
recorded as interest income.
(f) Represents the elimination of intercompany expenses paid between APF, the
Income Fund, the Advisor and the CNL Restaurant Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs....................... $ (296,962)
Servicing fee............................................... (1,014,117)
------------
$ (1,311,079)
============
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by APF were subject
to capitalization during the entire period and 2) costs relating to
properties not developed by APF were subject to capitalization up through
the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs.............................. $(1,415,100)
</TABLE>
(h) Represents savings of $36,361 in professional services and administrative
expenses resulting from reporting on one combined company versus 22
separate entities.
(i) Represents the elimination of advisory fees between APF, the Income Fund,
the Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Advisory fees................................................ $ (1,754,254)
Administrative fees.......................................... (148,491)
Executive fee................................................ (310,000)
Guarantee fees............................................... (93,750)
------------
$ (2,306,495)
============
</TABLE>
S-19
<PAGE>
(j) Represents additional state taxes of $65,410 resulting from assuming that
acquisitions from January 1, 1998 through November 30, 1998 had been
acquired on January 1, 1997 and assuming that the Income Fund had operated
under a REIT structure.
(k) Represents an increase in depreciation of the building portion of the
properties acquired from January 1, 1998 through November 30, 1998 as if
they had been acquired on January 1, 1997 and the step up in basis referred
to in footnote (q) from acquiring the Income Fund portfolio using the
straight-line method over the estimated useful lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense........................................... $ 1,518,380
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of the CNL
Restaurant Financial Services Group referred to in footnote (q).
<TABLE>
<S> <C>
Amortization of goodwill...................................... $ 1,559,396
</TABLE>
(m) Represents elimination of interest expense recorded for the amortization of
$350,000 in arrangement fees collected during the year ended December 31,
1997 which were eliminated in footnote (4), II (d ) in the Notes to the Pro
Forma Financial Statements attached to this Supplement.
<TABLE>
<S> <C>
Interest expense.............................................. $ (68,670)
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees incurred
between APF, the Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Origination fees.............................................. $(1,569,202)
Underwriting fees............................................. (254,945)
Consulting fee................................................ (1,511)
-----------
$(1,825,658)
===========
</TABLE>
(o) Represents the elimination of $6,316,081 in the provision for income taxes
as a result of the acquisition. APF expects to continue to qualify as a
REIT and does not expect to incur federal income taxes.
(p) APF Shares issued during the period required to fund acquisitions as if
they had been acquired on January 1, 1997 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 the
proposal to amend and restate APF's articles of incorporation to increase
the number of authorized APF Shares.
(q) Represents the payment of $532,871 in cash and the issuance of 17,015,209
APF Shares in consideration for the purchase of the Income Fund, Advisor
and CNL Restaurant Financial Services Group at September 30, 1998 using the
Exchange Value of $10 per APF Share plus estimated transaction costs. The
acquisitions of the Income Fund and the CNL Restaurant Financial Services
Group have been accounted for under the purchase accounting method and
goodwill was recognized to the extent the estimated value of the
consideration paid exceeded the fair value of the net tangible assets
acquired. As for the acquisition of the Advisor from a related party, the
consideration paid in excess of the fair value of the net tangible assets
received has been accounted for as costs incurred in acquiring the Advisor
from a related party because the Advisor has not been deemed to qualify as
a "business" for purposes of applying APB Opinion No. 16 "Business
Combinations." Upon consummation of the Acquisition, this expense will be
recorded as an operating expense on APF's statement of earnings. APF will
not deduct this expense for purposes of calculating funds from operations
due to the nonrecurring and non-cash nature of the expense. As of September
30, 1998, $249,403 of transaction costs had been incurred by APF.
<TABLE>
<S> <C>
Income Fund.................................................. $ 47,684,963
Advisor...................................................... 76,000,000
CNL Restaurant Financial Services Group...................... 47,000,000
------------
Total Purchase Price (cash and shares)..................... 170,684,963
Less cash paid to Income Fund................................ (532,871)
------------
Share consideration........................................ 170,152,092
Transaction costs of APF..................................... 8,933,000
------------
Total costs incurred....................................... $179,085,092
============
</TABLE>
In addition, APF i) used $8,933,000 in cash to pay the transaction costs
related to the Acquisition, ii) made an upward adjustment to the CNL Income
Fund carrying value of land and building on operating leases by $7,681,844,
net investment in direct financing leases by $4,308,172, investment in
joint venture by $835,018, made downward adjustments to the carrying value
of accrued rental income of $2,475,477, and made downward adjustments to
other assets of $3,693,804 to adjust historical values to fair value, iii)
recorded goodwill of $41,583,890 for the acquisition of the CNL Restaurant
Financial Services Group, iv) reduced retained earnings by $76,596,893 for
the excess consideration paid over the net assets of the Advisor and
removed the historical common stock balance of $12,000, additional paid in
capital balance of $9,602,287, retained earnings balance of $5,297,114 and
partners capital balance of $39,870,026 of the CNL Income Fund, Advisor and
CNL Restaurant Financial Services Group.
(r) Represents the use of $26,901,936 in cash and cash equivalents at September
30, 1998 to acquire $26,052,741 in properties and issue $849,195 in
mortgage notes which occurred from October 1, 1998 through November 30,
1998.
S-20
<PAGE>
(s) Represents the elimination by the Income Fund of $6,222 in related party
payables recorded as receivables by the Advisor, the elimination by the CNL
Restaurant Financial Services Group of $6,641,379 in related party payables
recorded as receivables by CNL Restaurant Financial Services Group and the
elimination by APF of $1,208,000 in related party payables recorded as
receivables by the Advisor.
(t) Represents the elimination of income taxes payable of $2,990,864 from
liabilities assumed in the acquisition of the CNL Restaurant Businesses
since the acquisition agreements require that the Advisor and CNL
Restaurant Financial Services Group have no accumulated or current earnings
and profits for federal income tax purposes at the time of the acquisition.
S-21
<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>
Nine Months Ended
September 30, Year Ended December 31,
----------------------- -----------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues (1)............ $ 2,979,819 $ 3,370,040 $ 4,522,216 $ 4,553,058 $ 4,570,571
Net income (2).......... 2,321,470 2,941,412 3,952,214 3,943,043 4,014,372
Cash distributions
declared (3)........... 2,868,756 2,868,756 3,825,008 3,825,008 3,870,007
Net income per Unit
(2).................... 0.51 0.65 0.87 0.87 0.88
Cash distributions
declared per
Unit (3)............... 0.64 0.64 0.85 0.85 0.86
Weighted average number
of Limited Partner
Units outstanding...... 4,500,000 4,500,000 4,500,000 4,500,000 4,500,000
<CAPTION>
September 30, December 31,
----------------------- -----------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total assets............ $40,925,908 $41,508,301 $41,430,990 $41,343,138 $41,229,132
Total partners'
capital................ 39,870,026 40,362,762 40,417,312 40,290,106 40,172,071
</TABLE>
- --------
(1) Revenues include equity in earnings of joint ventures.
(2) Net income for the year ended December 31, 1996, includes $15,355 from a
loss on sale of land and building.
(3) Distributions for the year ended December 31, 1995, include a special
distribution to the Limited Partners of $45,000, which represented
cumulative excess operating reserves.
S-22
<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 September 30, 1998, the Income Fund owned 49 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
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
The Income Fund's primary source of capital for the nine months ended
September 30, 1998 and 1997, 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
$3,066,225 and $2,955,295 for the nine months ended September 30, 1998 and
1997, respectively. The increase in cash from operations for the nine months
ended September 30, 1998, as compared to the nine months ended September 30,
1997, is primarily a result of changes in the Income Fund's working capital.
Other sources and uses of capital included the following during the nine
months ended September 30, 1998.
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 September 30, 1998, the Income Fund had
contributed $115,256 to purchase land and pay for construction costs relating
to the joint venture. When construction is completed, the Income Fund will have
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 the Income Fund's use of such funds to pay Income Fund
expenses or to make distributions to the partners. At September 30, 1998, the
Income Fund had $1,785,128 invested in such short-term investments, as compared
to $1,706,415 at December 31, 1997. The funds remaining at September 30, 1998,
after payment of distributions and other liabilities, will be used to meet the
Income Fund's working capital and other needs.
Total liabilities of the Income Fund increased to $1,055,882 at September
30, 1998, from $1,013,678 at December 31, 1997, primarily as the result of the
Income Fund accruing real estate taxes in connection with certain Long John
Silver's restaurant properties, as described below in "Results of Operations."
We believe that the Income Fund has sufficient cash on hand to meet its current
working capital needs.
Based on cash from operations, the Income Fund declared distributions to the
Limited Partners of $2,868,756 for each of the nine months ended September 30,
1998 and 1997 ($956,252 for each of the quarters ended September 30, 1998 and
1997). This represents distributions for each applicable nine months of $0.64
per unit ($0.21 per unit for each applicable quarter). No distributions were
made to us for the quarters and nine months ended September 30, 1998 and 1997.
No amounts distributed to the Limited Partners for the nine months ended
September 30, 1998 and 1997, 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.
S-23
<PAGE>
The Income Fund's investment strategy of acquiring restaurant properties for
cash and leasing them under triple-net leases to operators who generally meet
specified financial standards minimizes the Income Fund's operating expenses.
We believe that the leases will continue to generate cash flow in excess of
operating expenses.
We have the right, but not the obligation, to make additional capital
contributions if we deem it appropriate in connection with the operations of
the Income Fund.
The Years Ended December 31, 1997, 1996 and 1995
The Income Fund's primary source of capital for the years ended December 31,
1997, 1996 and 1995, 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 $3,806,988, $3,951,689 and
$3,819,362 for the years ended December 31, 1997, 1996 and 1995, respectively.
The decrease in cash from operations during 1997, as compared to 1996, and the
increase during 1996, as compared to 1995, are 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, 1997, 1996 and 1995.
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 during the year ended December 31, 1997. The
renovations were completed in May 1997.
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.
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, 1997, the Income Fund had
$1,706,415 invested in such short-term investments as compared to $1,800,601 at
December 31, 1996.
During 1997, 1996 and 1995, certain of our affiliates incurred on behalf of
the Income Fund $97,078, $118,929 and $105,019, respectively, for certain
operating expenses. As of December 31, 1997 and 1996, the Income Fund owed
$6,887 and $2,981, respectively, to affiliates for such amounts and accounting
and administrative services. As of February 28, 1998, the Income Fund had
reimbursed the affiliates all such
S-24
<PAGE>
amounts. Other liabilities including distributions payable decreased to
$1,006,791 at December 31, 1997, from $1,050,051 at December 31, 1996,
primarily as the result of a decrease in rents paid in advance at December 31,
1997.
Based on cash from operations, the Income Fund declared distributions to the
Limited Partners of $3,825,008 for each of the years ended December 31, 1997
and 1996, and $3,870,007 for the year ended December 31, 1995. This represents
a distribution of $0.85 per Unit for each of the years ended December 31, 1997
and 1996, and $0.86 per Unit for the year ended December 31, 1995. No amounts
distributed or to be distributed to the Limited Partners for the years ended
December 31, 1997, 1996 and 1995, 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.
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
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 1998 and 1997, the Income Fund
owned and leased 44 wholly-owned restaurant properties to operators of fast-
food and family-style restaurant chains. In connection therewith, during the
nine months ended September 30, 1998 and 1997, the Income Fund earned
$2,822,747 and $3,061,061, respectively, in rental income from operating leases
(net of adjustments to accrued rental income) and earned income from direct
financing leases from these restaurant properties, $963,925 and $1,031,166 of
which was earned during the quarters ended September 30, 1998 and 1997,
respectively. The decrease in rental and earned income during the quarter and
nine months ended September 30, 1998, as compared to the quarter and nine
months ended September 30, 1997, is primarily attributable to the fact that in
June 1998, the Income Fund discontinued receiving rental income from the
tenant, Long John Silver's, Inc., which filed for bankruptcy and rejected the
leases relating to these restaurant properties. In addition, during the nine
months ended September 30, 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). We are currently
seeking either new tenants or buyers for these restaurant properties. The
Income Fund will not recognize any 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.
The decrease in rental and earned income during the quarter and nine months
ended September 30, 1998 was partially offset by an increase in rental and
earned income of approximately $87,700 as a result of the Income Fund entering
into a new lease with a new tenant for the restaurant property in Tempe,
Arizona, for which rental payments commenced in July 1997.
For the nine months ended September 30, 1998 and 1997, the Income Fund also
earned $19,755 and $36,999, respectively, in contingent rental income, $6,038
and $11,036 of which was earned during the quarters
S-25
<PAGE>
ended September 30, 1998 and 1997, respectively. The decrease in contingent
rental income during the quarter and nine months ended September 30, 1998, as
compared to the quarter and nine months ended September 30, 1997, is primarily
attributable to a decrease in gross sales of certain restaurant properties
whose leases require the payment of contingent rental income.
For the nine months ended September 30, 1997, the Income Fund owned and
leased four restaurant properties, and for the nine months ended September 30,
1998, the Income Fund owned and leased five restaurant properties indirectly
through joint venture arrangements. In connection therewith, during the nine
months ended September 30, 1998 and 1997, the Income Fund earned $85,604 and
$212,586, respectively, attributable to net income earned by these joint
ventures, $63,712 and $71,230 of which was earned during the quarters ended
September 30, 1998 and 1997, respectively. The decrease in net income 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
$21,900 and $87,800 during the quarter and nine months ended September 30,
1998, respectively, in accordance with its collection policy. No such allowance
was established during the quarter and nine months ended September 30, 1997. In
addition, during the nine months ended September 30, 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 September 30, 1998 and the estimated
net realizable value of the restaurant property. Kingsville Real Estate Joint
Venture is currently seeking either a new tenant or purchaser for this
restaurant property.
Operating expenses, including depreciation and amortization expense, were
$658,349 and $428,628 for the nine months ended September 30, 1998 and 1997,
respectively, of which $294,262 and $136,269 were incurred for the quarters
ended September 30, 1998 and 1997, respectively. The increase in operating
expenses during the quarter and nine months ended September 30, 1998 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. We are in the process
of negotiating an arrangement to collect past due amounts and will recognize
any such amounts as income if collected.
In addition, the increase in operating expenses during the quarter and nine
months ended September 30, 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 restaurant properties in June 1998. The increase in operating expenses
during the quarter and nine months ended September 30, 1998, is partially
attributable to an increase in depreciation expense due to the fact that during
the quarter and nine months ended September 30, 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 until new tenants or buyers are
located. The Income Fund is currently seeking either new tenants or buyers for
these restaurant properties.
The Years Ended December 31, 1997, 1996 and 1995
During the years ended December 31, 1996 and 1995, the Income Fund owned and
leased 45 wholly-owned restaurant properties (including one restaurant property
in Houston, Texas, which was sold in April 1996). During 1997, the Income Fund
owned and leased 44 wholly-owned restaurant properties. In addition, during
1995, the Income Fund was a co-venturer in three separate joint ventures that
each owned and leased one restaurant property, and during 1996 and 1997, the
Income Fund was a co-venturer in four separate joint ventures that each owned
and leased one restaurant property. As of December 31, 1997, 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 payments (payable
in monthly installments) ranging from approximately $46,900 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
S-26
<PAGE>
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, 1997, 1996 and 1995, the Income Fund
earned $4,102,842, $4,165,640 and $4,330,100, respectively, in rental income
from operating leases and earned income from direct financing leases from
restaurant properties wholly-owned by the Income Fund. The decrease in rental
and earned income during 1997 and 1996, each as compared to the previous year,
is primarily attributable to a decrease of approximately $51,800 and $136,500
during the years ended December 31, 1997 and 1996, respectively, 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
and $39,800 during 1997 and 1996, each as compared to the previous year, 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 of $38,600 earned from the new tenant during 1997.
During the years ended December 31, 1997, 1996 and 1995, the Income Fund
also earned $54,330, $67,652 and $70,819, respectively, in contingent rental
income. The decrease in contingent rental income during 1997 and 1996, 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, 1997, 1996 and 1995, the
Income Fund earned $277,325, $200,499 and $81,582, 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 1997 and
1996, each as compared to the previous year, is primarily due to the fact that
the Income Fund invested in Middleburg Joint Venture in May 1996, as described
above in "Liquidity and Capital Resources."
During at least one of the years ended December 31, 1997, 1996 and 1995,
three of the Income Fund's lessees (or group of affiliated lessees), Long John
Silver's, Inc., Foodmaker, Inc. and Flagstar Corporation, each contributed more
than 10% of the Income Fund's total rental income (including the Income Fund's
share of rental income from four restaurant properties owned by joint
ventures). As of December 31, 1997, Long John Silver's, Inc. was the lessee
under leases relating to eight restaurants, Foodmaker, Inc. was the lessee
under leases relating to 10 restaurants and Flagstar Corporation was the lessee
under leases relating to 15 restaurants. It is anticipated that based on the
minimum rental payments required by the leases, these three lessees or group of
affiliated lessees each will continue to contribute more than 10% of the Income
Fund's total rental income during 1998 and subsequent years. In addition,
during at least one of the years ended December 31, 1997, 1996 and 1995, 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 four restaurant
properties owned by joint ventures). In subsequent years, it is anticipated
that these four restaurant chains each 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 lessees or
restaurant chains could materially affect the Income Fund's income.
During the years ended December 31, 1997, 1996 and 1995, the Income Fund
also earned $87,719, $119,267 and $88,070, respectively, in interest and other
income. The decrease in interest and other income during 1997, as compared to
1996, and the increase in interest and other income during 1996, as compared to
1995, 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
S-27
<PAGE>
exchange for $25,000. In addition, the decrease in interest and other income
during 1997, as compared to 1996, is offset by an increase attributable to the
Income Fund recognizing approximately $7,900 in other income due to the fact
that the former tenant of the restaurant property in Tempe, Arizona, paid past
due real estate taxes relating to the restaurant property and the Income Fund
reversed such amounts during 1997 that it had previously accrued as payable
during 1996.
Operating expenses, including depreciation and amortization expense, were
$570,002, $594,660 and $556,199 for the years ended December 31, 1997, 1996 and
1995, respectively. The decrease in operating expenses during 1997, as compared
to 1996, and the increase in 1996, as compared to 1995, 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
discussed 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. The decrease in operating expenses during 1997, as compared to
1996, and the increase in 1996, as compared to 1995, 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. The increase in operating expenses
during 1996, as compared to 1995, is primarily attributable to an increase in
accounting and administrative expenses associated with operating the Income
Fund and its restaurant properties and an increase in insurance expense as a
result of our obtaining contingent liability and property coverage for the
Income Fund beginning in May 1995.
The decrease in operating expenses during 1997, was partially offset by an
increase in depreciation expense as a result of the reclassification of the
lease relating to the restaurant property in Tempe, Arizona, from a direct
financing lease to an operating lease, as described above in "Liquidity and
Capital Resources." The increase in operating expenses during 1996, as compared
to 1995, was partially offset by a decrease in depreciation expense during the
year ended December 31, 1996, as a result of the sale of the restaurant
property located in Houston, Texas, in April 1996, as described above in
"Liquidity and Capital Resources."
As a result of the sale of the restaurant property in Houston, Texas, as
described above in "Liquidity and Capital Resources," the Income Fund
recognized a loss of $15,355 for financial reporting purposes for the year
ended December 31, 1996. The loss was primarily due to acquisition fees and
miscellaneous acquisition expenses that the Income Fund had allocated to this
restaurant property. No restaurant properties were sold during 1995 and 1997.
General
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Income Fund's financial position or results of operations.
The Income Fund's leases as of September 30, 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.
The Year 2000 problem is the result of information technology systems and
embedded systems (products which are made with microprocessor (computer) chips
such as HVAC systems, physical security systems and
S-28
<PAGE>
elevators) using a two-digit format, as opposed to four digits, to indicate the
year. Such information technology and embedded systems may be unable to
properly recognize and process date-sensitive information beginning January 1,
2000.
The Income Fund does not have any information technology systems. Affiliates
of us provide all services requiring the use of information technology systems
pursuant to a management agreement with the Income Fund. The maintenance of
embedded systems, if any, at the Income Fund's properties is the responsibility
of the tenants of the properties in accordance with the terms of the Income
Fund's leases. We and our affiliates have established a team dedicated to
reviewing the internal information technology systems used in the operation of
the Income Fund, and the information technology and embedded systems and the
Year 2000 compliance plans of the Income Fund's tenants, significant suppliers,
financial institutions and transfer agent.
The information technology infrastructure of the affiliates of us consists
of a network of personal computers and servers that were obtained from major
suppliers. The affiliates utilize various administrative and financial software
applications on that infrastructure to perform the business functions of the
Income Fund. Our inability and that of our affiliates to identify and timely
correct material Year 2000 deficiencies in the software and/or infrastructure
could result in an interruption in, or failure of, certain of the Income Fund's
business activities or operations. Accordingly, we and our affiliates have
requested and are evaluating documentation from the suppliers of the affiliates
regarding the Year 2000 compliance of their products that are used in the
business activities or operations of the Income Fund. The costs expected to be
incurred by us and our affiliates to become Year 2000 compliant will be
incurred by us and our affiliates; therefore, these costs will have no impact
on the Income Fund's financial position or results of operations.
The Income Fund has material third party relationships with its tenants,
financial institutions and 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. If
any of these third parties are unable to meet their obligations to the Income
Fund because of the Year 2000 deficiencies, such a failure may have a material
impact on the Income Fund. Accordingly, we have requested and are evaluating
documentation from the Income Fund's tenants, financial institutions, and
transfer agent relating to their Year 2000 compliance plans. At this time, we
have not yet received sufficient certifications to be assured that the tenants,
financial institutions, and transfer agent have fully considered and mitigated
any potential material impact of the Year 2000 deficiencies. Therefore, we do
not, at this time, know of the potential costs to the Income Fund of any
adverse impact or effect of any Year 2000 deficiencies by these third parties.
We currently expect that all Year 2000 compliance testing and any necessary
remedial measures on the information technology systems used in the business
activities and operations of the Income Fund will be completed prior to June
30, 1999. Based on the progress we and our affiliates have made in identifying
and addressing the Income Fund's Year 2000 issues and the plan and timeline to
complete the compliance program, we do not foresee significant risks associated
with the Income Fund's Year 2000 compliance at this time. Because we and our
affiliates are still evaluating the status of the systems used in business
activities and operations of the Income Fund and the systems of the third
parties with which the Income Fund conducts its business, we have not yet
developed a comprehensive contingency plan and are unable to identify "the most
reasonably likely worst case scenario" at this time. As we identify significant
risks related to the Income Fund's Year 2000 compliance or if the Income Fund's
Year 2000 compliance program's progress deviates substantially from the
anticipated timeline, we will develop appropriate contingency plans.
S-29
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997.. F-1
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997.............................................. F-2
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997.............. F-3
Condensed Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997.............................................. F-4
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997........................................ F-5
Report of Independent Accountants........................................ F-7
Balance Sheets as of December 31, 1997 and 1996.......................... F-8
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995..................................................................... F-9
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995............................................................ F-10
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995..................................................................... F-11
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and 1995................................................................. F-12
Unaudited Pro Forma Financial Information................................ F-21
Unaudited Pro Forma Balance Sheet as of September 30, 1998............... F-22
Unaudited Pro Forma Income Statement for the Nine Months Ended September
30, 1998................................................................. F-23
Unaudited Pro Forma Income Statement for the Year Ended December 31,
1997..................................................................... F-24
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements............................................................... F-25
</TABLE>
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September December 31,
30, 1998 1997
----------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $1,711,620 and
$1,460,887........................................... $21,589,219 $ 20,820,279
Net investment in direct financing leases............. 12,503,960 13,656,265
Investment in joint ventures.......................... 2,532,807 2,517,421
Cash and cash equivalents............................. 1,785,128 1,706,415
Receivables, less allowance for doubtful accounts
of $225,482 and $7,482............................... 346 202,472
Prepaid expenses...................................... 12,177 7,216
Lease costs, less accumulated amortization
of $2,759 and $1,307................................. 26,794 24,746
Accrued rental income, less allowance for doubtful
accounts
of $5,182 in 1998.................................... 2,475,477 2,496,176
----------- ------------
$40,925,908 $ 41,430,990
=========== ============
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 8,312 $ 10,558
Accrued and escrowed real estate taxes payable........ 50,296 3,244
Distributions payable................................. 956,252 956,252
Due to related parties................................ 6,222 6,887
Rents paid in advance and deposits.................... 34,800 36,737
----------- ------------
Total liabilities................................... 1,055,882 1,013,678
----------- ------------
Partners' capital..................................... 39,870,026 40,417,312
----------- ------------
$40,925,908 $ 41,430,990
=========== ============
</TABLE>
See accompanying notes to financial statements.
F-1
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
------------------- ----------------------
1998 1997 1998 1997
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases........................... $ 592,290 $ 621,234 $1,877,428 $1,829,206
Adjustments to accrued rental
income........................... -- -- (224,867) --
Earned income from direct
financing leases................. 371,635 409,932 1,170,186 1,231,855
Contingent rental income.......... 6,038 11,036 19,755 36,999
Interest and other income......... 7,031 18,420 51,713 59,394
--------- --------- ---------- ----------
976,994 1,060,622 2,894,215 3,157,454
--------- --------- ---------- ----------
Expenses:
General operating and
administrative................... 46,999 38,390 113,005 119,166
Professional services............. 6,630 6,837 19,616 18,999
Bad debt expense.................. 104,323 -- 188,990 --
Management fees to related
parties.......................... 10,320 10,041 31,871 30,005
Real estate taxes................. 33,877 542 35,029 1,952
State and other taxes............. -- -- 17,653 18,496
Depreciation and amortization..... 92,113 80,459 252,185 240,010
--------- --------- ---------- ----------
294,262 136,269 658,349 428,628
--------- --------- ---------- ----------
Income Before Equity in Earnings of
Joint Ventures..................... 682,732 924,353 2,235,866 2,728,826
Equity in Earnings of Joint
Ventures........................... 63,712 71,230 85,604 212,586
--------- --------- ---------- ----------
Net Income.......................... $ 746,444 $ 995,583 $2,321,470 $2,941,412
========= ========= ========== ==========
Allocation of Net Income:
General partners.................. $ 7,465 $ 9,956 $ 23,215 $ 29,414
Limited partners.................. 738,979 985,627 2,298,255 2,911,998
--------- --------- ---------- ----------
$ 746,444 $ 995,583 $2,321,470 $2,941,412
========= ========= ========== ==========
Net Income Per Limited Partner
Unit............................... $ 0.16 $ 0.22 $ 0.51 $ 0.65
========= ========= ========== ==========
Weighted Average Number of Limited
Partner Units Outstanding.......... 4,500,000 4,500,000 4,500,000 4,500,000
========= ========= ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1998 1997
----------------- ------------
<S> <C> <C>
General partners:
Beginning balance............................. $ 192,411 $ 152,889
Net income.................................... 23,215 39,522
----------- -----------
215,626 192,411
----------- -----------
Limited partners:
Beginning balance............................. 40,224,901 40,137,217
Net income.................................... 2,298,255 3,912,692
Distributions ($0.64 and $0.85 per limited
partner
unit, respectively).......................... (2,868,756) (3,825,008)
----------- -----------
39,654,400 40,224,901
----------- -----------
Total partners' capital..................... $39,870,026 $40,417,312
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------
1998 1997
----------- ----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities........... $ 3,066,225 $2,955,295
Cash Flows from Investing Activities:
Additions to land and buildings on operating
leases........................................... -- (55,000)
Investment in joint ventures...................... (115,256) --
Collections on loan to tenant of joint Venture.... -- 4,886
Payment of lease costs............................ (3,500) (24,052)
----------- ----------
Net cash used in investing activities........... (118,756) (74,166)
----------- ----------
Cash Flows from Financing Activities:
Distributions to limited partners................. (2,868,756) (2,868,756)
----------- ----------
Net cash used in financing Activities........... (2,868,456) (2,868,756)
----------- ----------
Net Increase in Cash and Cash Equivalents............. 78,713 12,373
Cash and Cash Equivalents at Beginning of Period...... 1,706,415 1,800,601
----------- ----------
Cash and Cash Equivalents at End of Period............ $ 1,785,128 $1,812,974
----------- ----------
Supplemental Schedule of Non-Cash Investing
and Financing Activities:
Net investment in direct financing leases
reclassified to land and buildings on operating
leases as a result of lease termination............ $ 1,019,673 $ --
----------- ----------
Distributions declared and unpaid at end of Period.. $ 956,252 $ 956,252
=========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine months Ended September 30, 1998 and 1997
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 nine months ended September 30, 1998, may not be
indicative of the results that may be expected for the year ending December 31,
1998. Amounts as of December 31, 1997, 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, 1997.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2. Net Investment in Direct Financing Leases
During the nine months ended September 30, 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 amount. No loss on termination of direct financing leases was
recorded for financial reporting purposes.
3. 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 September 30, 1998, the Partnership had
contributed $115,256, to purchase land and pay construction costs relating to
the joint venture. The Partnership has agreed to contribute approximately
$156,763 in additional construction costs to the joint venture. The Partnership
will 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.
F-5
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Des Moines Real Estate Joint Venture, Williston 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 and family-style restaurants. The following presents the combined,
condensed financial information for the joint ventures at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation and allowance for
loss on land.................................. $2,127,389 $1,768,636
Net investment in direct financing leases, less
allowance on impairment....................... 2,227,673 2,446,688
Cash........................................... 10,846 6,893
Receivables.................................... 21,639 13,843
Accrued rental income.......................... 156,934 157,252
Other assets................................... 284 443
Liabilities.................................... 94,941 7,673
Partners' capital.............................. 4,449,824 4,386,082
Revenues....................................... 287,596 481,085
Net income (loss).............................. (57,592) 446,047
</TABLE>
The Partnership recognized income totaling $85,604 and $212,586 for the nine
months ended September 30, 1998 and 1997, respectively, from these properties,
$63,712 and $71,230 of which was earned for the quarters ended September 30,
1998 and 1997, respectively.
F-6
<PAGE>
Report of Independent Accountants
To the Partners
CNL Income Fund XII, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund XII, Ltd.
(a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. 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 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 Income Fund XII, Ltd.
as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
January 23, 1998
F-7
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation............................. $20,820,279 $21,082,468
Net investment in direct financing leases............. 13,656,265 13,789,036
Investment in joint ventures.......................... 2,517,421 2,496,749
Cash and cash equivalents............................. 1,706,415 1,800,601
Receivables, less allowance for doubtful accounts of
$7,482 and $23,395................................... 202,472 202,908
Prepaid expenses...................................... 7,216 6,786
Organization costs, less accumulated amortization of
$10,000 and $8,465................................... -- 1,535
Lease costs, less accumulated amortization of $1,307
in 1997.............................................. 24,746 --
Accrued rental income................................. 2,496,176 1,963,055
----------- -----------
$41,430,990 $41,343,138
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 10,558 $ 9,303
Accrued and escrowed real estate taxes payable........ 3,244 14,706
Distributions payable................................. 956,252 956,252
Due to related parties................................ 6,887 2,981
Rents paid in advance................................. 36,737 69,790
----------- -----------
Total liabilities................................... 1,013,678 1,053,032
Partners' capital..................................... 40,417,312 40,290,106
----------- -----------
$41,430,990 $41,343,138
=========== ===========
</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,
---------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases....... $2,455,312 $2,473,574 $2,599,899
Earned income from direct financing
leases................................... 1,647,530 1,692,066 1,730,201
Contingent rental income.................. 54,330 67,652 70,819
Interest and other income................. 87,719 119,267 88,070
---------- ---------- ----------
4,244,891 4,352,559 4,488,989
---------- ---------- ----------
Expenses:
General operating and administrative...... 162,593 173,614 141,271
Professional services..................... 28,665 39,121 27,680
Management fees to related parties........ 40,218 40,244 40,774
Real estate taxes......................... -- 7,891 --
State and other taxes..................... 18,496 18,471 18,679
Depreciation and amortization............. 320,030 315,319 327,795
---------- ---------- ----------
570,002 594,660 556,199
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Ventures and Loss on Sale of Land and
Building................................... 3,674,889 3,757,899 3,932,790
Equity in Earnings of Joint Ventures........ 277,325 200,499 81,582
Loss on Sale of Land and Building........... -- (15,3550) --
---------- ---------- ----------
Net Income.................................. $3,952,214 $3,943,043 $4,014,372
========== ========== ==========
Allocation of Net Income:
General partners.......................... $ 39,522 $ 39,533 $ 40,144
Limited partners.......................... 3,912,692 3,903,510 3,974,228
---------- ---------- ----------
$3,952,214 $3,943,043 $4,014,372
========== ========== ==========
Net Income Per Limited Partner Unit......... $ 0.87 $ 0.87 $ 0.88
========== ========== ==========
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, 1997, 1996 and 1995
<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,
1994................... $ 1,000 $ 72,212 $45,000,000 $ (6,820,012) $ 7,149,050 $(5,374,544) $40,027,706
Distributions to limited
partners ($0.86 per
limited partner unit).. -- -- -- (3,870,007) -- -- (3,870,007)
Net income.............. -- 40,144 -- -- 3,974,228 -- 4,014,372
------- -------- ----------- ------------ ----------- ----------- -----------
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
======= ======== =========== ============ =========== =========== ===========
</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,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and
Cash Equivalents:
Cash Flows From Operating Activities:
Cash received from tenants............... $3,736,731 $3,951,047 $3,878,623
Distributions from joint ventures........ 256,653 190,596 80,633
Cash paid for expenses................... (252,145) (278,240) (224,091)
Interest received........................ 65,749 88,286 84,197
---------- ---------- ----------
Net cash provided by Operating
activities.............................. 3,806,988 3,951,689 3,819,362
---------- ---------- ----------
Cash Flows From Investing Activities:
Proceeds from sale of land and building.. -- 1,640,000 --
Additions to land and buildings on
operating leases........................ (55,000) -- --
Investment in joint ventures............. -- (1,645,024) --
Collections on loan to tenant of joint
venture................................. 4,886 7,741 7,008
Payment of lease costs................... (26,052) -- --
---------- ---------- ----------
Net cash provided by (used in) investing
activities.............................. (76,166) 2,717 7,008
---------- ---------- ----------
Cash Flows From Financing Activities:
Distributions to limited partners........ (3,825,008) (3,870,008) (3,825,007)
---------- ---------- ----------
Net cash used in financing activities.... (3,825,008) (3,870,008) (3,825,007)
---------- ---------- ----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................. (94,186) 84,398 1,363
Cash and Cash Equivalents at Beginning of
Year.................................... 1,800,601 1,716,203 1,714,840
---------- ---------- ----------
Cash and Cash Equivalents at End of
Year.................................... $1,706,415 $1,800,601 $1,716,203
========== ========== ==========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................... $3,952,214 $3,943,043 $4,014,372
---------- ---------- ----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation............................. 317,189 313,319 325,795
Amortization............................. 2,841 2,000 2,000
Equity in earnings of joint ventures, net
of distributions........................ (20,672) (9,903) (949)
Loss on sale of land and building........ -- 15,355 --
Decrease (increase) in receivables....... (4,450) 48,671 (24,836)
Decrease in net investment in direct
financing leases........................ 132,771 121,597 111,675
Increase in prepaid expenses............. (430) (4,862) (1,924)
Increase in accrued rental income........ (533,121) (518,502) (519,365)
Increase (decrease) in accounts payable
and accrued expenses.................... (10,207) 8,745 (9,623)
Increase (decrease) in due to related
parties................................. 3,906 (4,269) 7,055
Increase (decrease) in rents paid in
advance................................. (33,053) 36,495 (84,838)
---------- ---------- ----------
Total adjustments........................ (145,226) 8,646 (195,010)
---------- ---------- ----------
Net Cash Provided by Operating
Activities.............................. $3,806,988 $3,951,689 $3,819,362
========== ========== ==========
Supplemental Schedule of Non-Cash
Financing Activities:
Distributions declared and unpaid at
December 31............................. $ 956,252 $ 956,252 $1,001,252
========== ========== ==========
</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, 1997, 1996 and 1995
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.
When the properties are sold, the related cost and accumulated depreciation
for operating leases and the net investment for direct financing leases, plus
any accrued rental income, are removed from the accounts and gains or losses
from sales are reflected in income. The general partners of the Partnership
review properties for impairment whenever events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable through
operations. The general partners determine whether an impairment in value has
occurred by comparing the estimated future undiscounted cash flows, including
the residual value of the property, with the carrying cost of the individual
property. If an impairment is indicated, the assets are adjusted to their fair
values.
When the collection of amounts recorded as rental or other income is
considered to be doubtful, 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 XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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 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.
Organization Costs--Organization costs are amortized over five years using
the straight-line method.
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, 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 XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
3. Land and Buildings on Operating Leases
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Land............................................... $12,837,754 $12,837,754
Buildings.......................................... 9,443,412 9,388,412
----------- -----------
22,281,166 22,226,166
Less accumulated depreciation...................... (1,460,887) (1,143,698)
----------- -----------
$20,820,279 $21,082,468
=========== ===========
</TABLE>
In April 1996, the Partnership sold its property in Houston, Texas, to an
unrelated third party for $1,640,000. As a result of this transaction, the
Partnership recognized a loss of $15,355 for financial reporting purposes
primarily due to acquisition fees and miscellaneous acquisition expenses that
the Partnership had allocated to this property.
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 during the year ended December 31, 1997. The renovations were
completed in May 1997.
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, 1997, 1996 and 1995, the Partnership recognized $533,121, $518,502 and
$519,365, respectively, of such rental income.
F-14
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1997:
<TABLE>
<S> <C>
1998............................................................. $ 2,230,885
1999............................................................. 2,281,192
2000............................................................. 2,283,628
2001............................................................. 2,293,570
2002............................................................. 2,313,592
Thereafter....................................................... 25,464,039
-----------
$36,866,906
===========
</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>
1997 1996
----------- -----------
<S> <C> <C>
Minimum lease payments receivable.................. $28,413,665 $30,188,147
Estimated residual Values.......................... 4,190,941 4,190,941
Less unearned income............................... (18,948,341) (20,590,052)
----------- -----------
Net investment in direct financing leases.......... $13,656,265 $13,789,036
=========== ===========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998............................................................. $ 1,810,632
1999............................................................. 1,818,830
2000............................................................. 1,818,830
2001............................................................. 1,818,830
2002............................................................. 1,818,830
Thereafter....................................................... 19,327,713
-----------
$28,413,665
===========
</TABLE>
F-15
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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, 1996, one of the Partnership's leases was
terminated. As a result of the lease termination, the Partnership reclassified
this lease from a direct financing lease to an operating lease, whereby the
property was recorded at its net carrying value of $742,358. Due to the fact
that the net carrying value was less than the cost of the property, no loss was
recorded for financial reporting purposes.
5. Investment in Joint Ventures
The Partnership has a 59 percent, an 18.61% and a 31.13% interest in the
profits and losses of Williston Real Estate Joint Venture, Des Moines Real
Estate Joint Venture and Kingsville 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 May 1996, the Partnership entered into a joint venture arrangement,
Middleburg Joint Venture, with an affiliate of the Partnership which has the
same general partners to hold one restaurant property. As of December 31, 1996,
the Partnership and its co-venture partner had contributed $1,645,024 and
$234,059, respectively, to the joint venture to acquire the restaurant
property. As of December 31, 1996, the Partnership and its co-venture partner
owned an 87.54% and a 12.46% 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.
Williston Real Estate Joint Venture, Des Moines Real Estate Joint Venture,
Kingsville Real Estate Joint Venture and Middleburg 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>
1997 1996
---------- ----------
<S> <C> <C>
Land and building on operating leases,
less accumulated depreciation........................ $1,768,636 $1,795,026
Net investment in direct financing leases............. 2,446,688 2,466,050
Cash.................................................. 6,893 668
Receivables........................................... 13,843 --
Accrued rental income................................. 157,252 102,435
Other assets.......................................... 443 358
Liabilities........................................... 7,673 673
Partners' capital..................................... 4,386,082 4,363,864
Revenues.............................................. 481,085 405,615
Net income............................................ 446,047 372,158
</TABLE>
F-16
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
The Partnership recognized income totalling $277,325, $200,499 and $81,582
for the years ended December 31, 1997, 1996 and 1995, 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 bears interest at a
rate of ten percent, is payable over 84 months and is collateralized by the
restaurant equipment. Receivables at December 31, 1997 and 1996, include
$188,642 and $186,040, respectively, relating to this loan including accrued
interest of $7,488 at December 31, 1997.
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, 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 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.
During each of the years ended December 31, 1997 and 1996, the Partnership
declared distributions to the limited partners of $3,825,008, and during the
year ended December 31, 1995, the Partnership declared distributions to the
limited partners of $3,870,007, respectively. 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, 1997, 1996 and 1995
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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................... $3,952,214 $3,943,043 $4,014,372
Depreciation for tax reporting purposes
in excess of depreciation for financial
reporting purposes..................... (249,366) (259,752) (264,905)
Direct financing leases recorded as
operating
leases for tax reporting purposes...... 132,771 121,597 111,675
Loss on sale of land and building for
tax reporting
purposes in excess of loss for
financial reporting purposes........... -- (26,151) --
Equity in earnings of joint ventures for
tax reporting
purposes less than equity in earnings
of joint ventures
for financial reporting purposes....... (51,481) (46,345) (15,685)
Allowance for doubtful accounts......... (15,913) (16,396) 20,792
Accrued rental income................... (533,121) (518,502) (519,365)
Rents paid in advance................... (39,303) 36,495 (84,838)
---------- ---------- ----------
Net income for federal income tax
purposes............................... $3,195,801 $3,233,989 $3,262,046
========== ========== ==========
</TABLE>
F-18
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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 parent company of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, served
as president of CNL Fund Advisors, Inc. through October 1997. CNL Income Fund
Advisors, Inc. was a wholly owned subsidiary of CNL Group, Inc. until its
merger, effective January 1, 1996, with CNL Fund Advisors, Inc. During the
years ended December 31, 1997, 1996 and 1995, CNL Income Fund Advisors, Inc.
and CNL Fund Advisors, Inc. (hereinafter referred to collectively as the
"Affiliates") each performed certain services for the Partnership, as described
below.
During the years ended December 31, 1997, 1996 and 1995, certain 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 Affiliates 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 Affiliates. The Partnership incurred management fees of
$40,218, $40,244 and $40,774 for the years ended December 31, 1997, 1996 and
1995, respectively.
Certain Affiliates are 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 Affiliates provide 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, 1997, 1996 and 1995, Affiliates provided
accounting and administrative services to the Partnership on a day-to-day
basis. The Partnership incurred $92,866, $97,722 and $68,337 for the years
ended December 31, 1997, 1996 and 1995, respectively, for such services.
The due to related parties at December 31, 1997 and 1996, totalled $6,887
and $2,981, respectively.
F-19
<PAGE>
CNL INCOME FUND XII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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 at
least one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Flagstar Enter-prises, Inc.,
Denny's, Inc. and Quincy's Restaurants,
Inc....................................... $1,216,908 $1,224,953 $1,234,649
Foodmaker, Inc............................. 1,024,667 1,024,667 1,024,668
Long John Silver's, Inc.................... 647,829 649,992 654,384
</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 at least one of the
years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Jack in the Box............................. $1,024,667 $1,024,667 $1,024,668
Denny's..................................... 807,547 818,672 823,411
Hardee's.................................... 787,260 791,998 798,357
Long John Silver's.......................... 713,522 715,685 720,077
</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 of these lessees or restaurant chains could
significantly impact the results of operations of the Partnership. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
F-20
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to the
Company gives effect to the Acquisition, and is based on estimates and
assumptions set for the 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 the Company, the
historical combined financial information of CNL Income Fund XII, Ltd., (the
"CNL 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 the Company, the
CNL Income Fund, Advisor and CNL Restaurant Financial Services Group. The pro
forma balance sheet assumes that the Acquisition occurred on September 30,
1998; the pro forma consolidated statements of earnings assume that the
Property Acquisitions (as defined on page ) and the Acquisition occurred on
January 1, 1997.
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.
UNAUDITED PRO FORMA BALANCE SHEET
September 30, 1998
<TABLE>
<CAPTION>
Historical
---------------------------------------------------------------------------
CNL CNL
Income Financial CNL
Fund Services, Financial Combined
APF XII, Ltd. Advisor Inc. Corp. Portfolios
------------ ----------- ---------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Land and
buildings on
operating
leases, net $298,967,972 $21,589,219 $ 0 $ 0 $ 0 $ 320,557,191
Net investment
in direct
financing
leases......... 117,028,760 12,503,960 0 0 0 129,532,720
Mortgages and
notes
receivable..... 33,523,506 0 0 0 173,776,981 207,300,487
Other
Investments.... 16,200,316 0 200,000 0 6,561,628 22,961,944
Investment in
joint
ventures....... 631,374 2,532,807 0 0 0 3,164,181
Cash and cash
equivalents.... 90,674,289 1,785,128 283,300 599,997 5,098,033 98,440,747
Receivables..... 575,104 346 7,544,985 6,824,632 517,471 15,462,538
Accrued rental
income......... 3,071,451 2,475,477 0 0 0 5,546,928
Other assets.... 5,711,195 38,971 401,524 295,570 3,854,477 10,310,737
------------ ----------- ---------- ---------- ------------- -------------
Total assets.... $566,383,967 $40,925,908 $8,429,809 $7,720,199 $ 189,808,590 $ 813,268,473
============ =========== ========== ========== ============= =============
LIABILITIES &
EQUITY:
Accounts payable
and accrued
liabilities.... $ 379,496 $ 58,608 $ 449,751 $ 193,949 $ 1,236,138 $ 2,317,942
Land and
buildings on
operating
leases, net.... 3,045,304 0 0 0 0 3,045,304
Distributions
payable........ 0 956,252 2,220,000 0 0 3,176,252
Due to related
parties........ 2,552,411 6,222 0 1,452,512 6,556,920 10,568,065
Income tax
payable........ 0 0 1,989,003 0 1,001,861 2,990,864
Line of credit.. 6,765,575 0 0 0 0 6,765,575
Notes payable... 0 0 390,398 28,462 175,528,203 175,947,063
Deferred
income......... 1,015,758 0 0 0 0 1,015,758
Rents paid in
advance........ 437,497 34,800 0 0 0 472,297
Minority
interest....... 282,544 0 0 0 0 282,544
Common Stock.... 621,187 0 9,800 2,000 200 633,187
Additional paid
in capital..... 556,830,578 0 482,964 5,231,827 3,887,496 566,432,865
Accumulated
distributions
in excess of
net earnings... (5,546,383) 0 2,887,893 811,449 1,597,772 (249,269)
Partners
capital........ 0 39,870,026 0 0 0 39,870,026
------------ ----------- ---------- ---------- ------------- -------------
Total
liabilities and
equity......... $566,383,967 $40,925,908 $8,429,809 $7,720,199 $ 189,808,590 $ 813,268,473
============ =========== ========== ========== ============= =============
<CAPTION>
Pro Forma
-----------------------------------------------
Adjustments Pro Forma
---------------- --------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Land and
buildings on
operating
leases, net $ 7,681,844 (1)
26,052,741 (2) $ 354,291,776
Net investment
in direct
financing
leases......... 4,308,172 (1) 133,840,892
Mortgages and
notes
receivable..... 849,195 (2) 208,149,682
Other
Investments.... -- 22,961,944
Investment in
joint
ventures....... 835,018 (1) 3,999,199
Cash and cash
equivalents.... (532,871)(1)
(8,933,000)(1)
(26,901,936)(2) 62,072,940
Receivables..... (7,855,601)(3) 7,606,937
Accrued rental
income......... (2,475,477)(1) 3,071,451
Other assets.... 41,583,890 (1)
(3,693,804)(1) 48,191,823
---------------- --------------
Total assets.... $ 30,918,171 $ 844,186,644
================ ==============
LIABILITIES &
EQUITY:
Accounts payable
and accrued
liabilities.... -- $ 2,317,942
Land and
buildings on
operating
leases, net.... -- 3,045,304
Distributions
payable........ -- 3,176,252
Due to related
parties........ (7,855,601)(3) 2,712,464
Income tax
payable........ (2,990,864)(4) 0
Line of credit.. -- 6,765,575
Notes payable... -- 175,947,063
Deferred
income......... -- 1,015,758
Rents paid in
advance........ -- 472,297
Minority
interest....... -- 282,544
Common Stock.... 158,152 (1) 791,339
Additional paid
in capital..... 160,379,653 (1) 726,812,518
Accumulated
distributions
in excess of
net earnings... (81,894,007)(1)
2,990,864 (4) (79,152,412)
Partners
capital........ (39,870,026)(1) 0
---------------- --------------
Total
liabilities and
equity......... $ 30,918,171 $ 844,186,644
================ ==============
</TABLE>
F-22
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA INCOME STATEMENT
September 30, 1998
<TABLE>
<CAPTION>
Historical Pro Forma
------------------------------------------------------------------------ ---------------------------
CNL CNL
Income Financial CNL
Fund Services, Financial Combined Pro
APF XII, Ltd. Advisor Inc. Corp. Portfolios Adjustments Forma
----------- ---------- ----------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and earned
income........... $22,947,199 $2,842,502 $ 0 $ 0 $ 0 $25,789,701 $ 9,635,208 (a)
84,471 (b) $35,509,380
Fees.............. 0 0 21,405,127 5,115,549 6,817 26,527,493 (21,046,727)(c)
(2,875,906)(d) 2,604,860
Interest and other
income........... 6,117,911 51,713 751 432,506 18,031,141 24,634,022 1,526,547 (e) 26,160,569
----------- ---------- ----------- ---------- ----------- ----------- ----------- -----------
Total revenue..... 29,065,110 2,894,215 21,405,878 5,548,055 18,037,958 76,951,216 (12,676,407) 64,274,809
Expenses:
General and
administrative... 1,539,004 356,640 6,701,115 4,107,311 2,597,171 15,301,241 (1,311,079)(f)
(1,415,100)(g)
(36,361)(h) 12,538,701
Advisory fees..... 1,248,393 31,871 0 0 1,026,231 2,306,495 (2,306,495)(l) 0
Fees to Restaurant
Financial
Services Group... 0 0 256,456 1,569,202 0 1,825,658 (1,825,658)(n) 0
Interest.......... 0 0 105,668 3,534 14,230,999 14,340,201 (68,670)(m) 14,271,531
State taxes....... 397,569 17,653 15,226 18,564 201,616 650,628 65,410 (j) 716,038
Depreciation--
other............ 0 0 75,607 55,056 0 130,663 0 130,663
Depreciation--
property......... 2,684,924 250,733 0 0 0 2,935,657 1,518,380 (k) 4,454,037
Amortization...... 8,096 1,452 55,932 138 945,299 1,010,917 1,559,396 (l) 2,570,313
----------- ---------- ----------- ---------- ----------- ----------- ----------- -----------
Total operating
expenses......... 5,877,986 658,349 7,210,004 5,753,805 19,001,316 38,501,460 (3,820,177) 34,681,283
----------- ---------- ----------- ---------- ----------- ----------- ----------- -----------
Operating earnings
(losses)......... 23,187,124 2,235,866 14,195,874 (205,750) (963,358) 38,449,756 (8,856,230) 29,593,526
Equity in earnings
of joint
ventures/minority
interest......... (23,271) 85,604 0 12,452 0 74,785 0 74,785
Gain on
securitization... 0 0 0 0 3,018,268 3,018,268 0 3,018,268
----------- ---------- ----------- ---------- ----------- ----------- ----------- -----------
Net earnings
(losses) before
income taxes..... 23,163,853 2,321,470 14,195,874 (193,298) 2,054,910 41,542,809 (8,856,230) 32,686,579
Provision (credit)
for federal
income taxes..... 0 0 5,607,415 (81,229) 789,895 6,316,081 (6,316,081)(o) 0
----------- ---------- ----------- ---------- ----------- ----------- ----------- -----------
Net income........ $23,163,853 $2,321,470 $ 8,588,459 $ (112,069) $ 1,265,015 $35,226,728 $(2,540,149) $32,686,579
=========== ========== =========== ========== =========== =========== =========== ===========
Earnings per
share............ $ 0.49 $ 0.44
=========== ===========
Shares
outstanding:
Weighted average.. 47,633,909 74,458,279 (p)
=========== ===========
End of period..... 62,118,679 79,133,888
=========== ===========
</TABLE>
F-23
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA INCOME STATEMENT
For the year ended December 31, 1997
<TABLE>
<CAPTION>
Historical Pro Form
-------------------------------------------------------------------------- ---------------------------
CNL
CNL Financial CNL
Income Services, Financial Combined Pro
APF Fund XII, Ltd. Advisor Inc. Corp. Portfolios Adjustments Forma
----------- -------------- ---------- ---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and earned
income.......... $15,490,615 $4,157,172 $ 0 $ 0 $ 0 $19,647,787 $24,048,982 (a)
106,648 (b) $43,803,417
Fees............. 0 0 8,310,836 5,965,110 73,704 14,349,650 (9,120,206)(c)
(2,662,141)(d) 2,567,303
Interest and
other income.... 3,967,318 87,719 165,569 0 10,932,843 15,153,449 249,395 (e) 15,402,844
----------- ---------- ---------- ---------- ---------- ----------- ----------- -----------
Total Revenue.... 19,457,933 4,244,891 8,476,405 5,965,110 11,006,547 49,150,886 12,622,678 61,773,564
Expenses:
General and
administrative.. 1,010,725 191,258 4,266,169 1,889,904 828,848 8,186,904 (745,223)(f)
(1,619,238)(g)
(46,111)(h) 5,776,332
Advisory fees.... 804,879 40,218 0 0 1,802,532 2,647,629 (2,647,629)(i) 0
Fees to
Restaurant
Financial
Services Group.. 0 0 151,041 594,041 0 745,082 (745,082)(n) 0
Interest......... 0 0 162,153 183,315 8,320,000 8,665,468 (81,594)(m) 8,583,874
State taxes...... 251,358 18,496 12,084 1,294 1,600 284,832 25,957 (j) 310,789
Depreciation--
other........... 0 0 48,490 14,637 0 63,127 -- 63,127
Depreciation--
property........ 1,784,269 317,189 0 0 0 2,101,458 3,172,919 (k) 5,274,377
Amortization..... 10,793 2,841 18,093 61,324 916,577 1,009,628 2,079,194 (l) 3,088,822
----------- ---------- ---------- ---------- ---------- ----------- ----------- -----------
Total operating
expenses....... 3,862,024 570,002 4,658,030 2,744,515 11,869,557 23,704,128 (606,807) 23,097,321
----------- ---------- ---------- ---------- ---------- ----------- ----------- -----------
Operating earnings
(losses)......... 15,595,909 3,674,889 3,818,375 3,220,595 (863,010) 25,446,758 13,229,485 38,676,243
Equity in
earnings of
joint
ventures/minority
interest........ (31,453) 277,325 0 (126,627) 0 119,245 -- 119,245
----------- ---------- ---------- ---------- ---------- ----------- ----------- -----------
Net earnings
before income
taxes:........... 15,564,456 3,952,214 3,818,375 3,093,968 (863,010) 25,566,003 $13,229,483 $38,795,488
Provision
(credit) for
federal income
taxes........... 0 0 1,508,258 1,272,133 (317,785) 2,462,606 (2,462,606) 0
----------- ---------- ---------- ---------- ---------- ----------- ----------- -----------
Net earnings
(losses):........ $15,564,456 $3,952,214 $2,310,117 $1,821,835 $ (545,225) $23,103,397 $15,692,091 $38,795,488
=========== ========== ========== ========== ========== =========== =========== ===========
Earnings per
share............ $ 0.67 $ 0.52
=========== ===========
Shares
outstanding:
Weighted
average......... 23,423,868 75,132,469 (p)
=========== ===========
End of period.... 36,192,971 75,132,469
=========== ===========
</TABLE>
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of September 30, 1998 reflects the
transactions of the acquisition of the CNL Income Fund, Advisor and CNL
Restaurant Financial Services Group (the "Acquisition Proposal") as set forth
in this Proxy Statement. The Pro Forma Statements of Earnings for the nine
months ended September 30, 1998, and for the year ended December 31, 1997, have
been prepared to reflect a) the issuance of additional shares and the property
acquisitions completed from January 1, 1997 through November 30, 1998
("Offering and Property Transactions") and b) the transactions of the
Acquisition Proposal as set forth in this Proxy Statement. This unaudited pro
forma financial information has been prepared utilizing the historical
financial statements of the Company and the historical combined financial
information of the CNL Income Fund, Advisor and CNL Restaurant Financial
Services Group and should be read in conjunction with the selected historical
financial data and accompanying notes of the Company, the CNL Income Fund,
Advisor and the CNL Restaurant Financial Services Group. The Pro Forma Balance
Sheet was prepared as if the Offering and Property Transactions and the
Acquisition Proposal occurred on September 30, 1998. The Pro Forma Statements
of Earnings were prepared as if the Property Acquisitions and the Acquisition
Proposal occurred as of January 1, 1997. The pro forma information is unaudited
and is not necessarily indicative of the consolidated operating results which
would have occurred if the Offering and Acquisition Transaction and the
Acquisition Proposal 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 Acquisition
Proposal have been made. Capitalized terms have the meanings as defined in the
Proxy Statement.
2. Method of Accounting
The acquisition of the CNL Income Fund and the CNL Restaurant Financial
Services Group will be accounted for under the purchase accounting method. The
Company 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, the Company 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 operating expense on the Company's consolidated statements of
earnings, but the Company will not deduct this expense for purposes of
calculating funds from operations due to the non-recurring and non-cash nature
of the expense.
All significant intercompany balances and transactions between the Company,
CNL Income Fund, Advisor and CNL Restaurant Financial Services Group have been
eliminated in the pro forma financial statements.
3. Adjustments to Pro Forma Balance Sheet
The following describes the pro forma adjustments to the Pro Forma Balance
Sheet as of September 30, 1998, as if the Acquisition was consummated on such
date. For purposes of the pro forma financial statements, it is assumed that at
an annual meeting of stockholders, the stockholders of the Company approved an
amendment to increase the number of authorized shares to an amount necessary to
enable the Company to issue the shares for the Acquisition.
(1) Represents the payment of $532,871 in cash and the issuance of
17,015,209 common shares in consideration for the purchase of the CNL
Income Fund, Advisor and CNL Restaurant Financial Services Group at
September 30, 1998 at a share price of $10 plus estimated transaction
costs. The acquisition of the CNL Income Fund and the CNL Restaurant
Financial Services Group has been accounted for under the purchase
accounting method and goodwill was recognized to the extent that the
consideration paid exceeded the fair value of the net tangible assets
acquired. As for the
F-25
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
acquisition of the Advisor from a related party, the consideration paid
in excess of the fair value of the net tangible assets received has been
accounted for as costs incurred in acquiring the Advisor from a related
party because the Advisor has not been deemed to qualify as a "business"
for purposes of applying APB Opinion No. 16 "Business Combinations."
Upon consummation of the Acquisition, this expense will be recorded as
an operating expense on the Company's statement of earnings. The Company
will not deduct this expense for purposes of calculating funds from
operations due to the nonrecurring and non-cash nature of the expense.
As of September 30, 1998, $249,403 of transaction costs had been
incurred by the Company.
<TABLE>
<S> <C>
CNL Income Fund......................................... $ 47,684,963
Advisor................................................. 76,000,000
CNL Restaurant Financial Services Group................. 47,000,000
------------
Total Purchase Price (cash and shares).................. 170,684,963
Less cash paid to CNL Income Fund....................... (532,871)
------------
Share consideration..................................... 170,152,092
Transaction costs of the Company........................ 8,933,000
------------
Total costs incurred.................................... $179,085,092
============
</TABLE>
In addition, the Company i) used $8,933,000 in cash to pay the
transaction costs related to the Acquisition, ii) made an upward
adjustment to the CNL Income Fund carrying value of land and building on
operating leases by $7,681,844, net investment in direct financing
leases by $4,308,172, investment in joint venture by $835,018, made
downward adjustments to the carrying value of accrued rental income of
$2,475,477, made downward adjustments to other assets of $3,693,804 to
adjust historical values to fair value, iii) recorded goodwill of
$41,583,890 for the acquisition of the CNL Restaurant Financial Services
Group, iv) reduced retained earnings by $76,596,893 for the excess
consideration paid over the net assets of the Advisor and removed the
historical common stock balance of $12,000, additional paid in capital
balance of $9,602,287, retained earnings balance of $5,297,114 and
partners capital balance of $39,870,026 of the CNL Income Fund, Advisor
and CNL Restaurant Financial Services Group.
(2) Represents the use of $26,901,936 in cash and cash equivalents at
September 30, 1998 to acquire $26,052,741 in properties and issue
$849,195 in mortgage notes which occurred from October 1, 1998 through
November 30, 1998.
(3) Represents the elimination by the CNL Income Fund of $6,222 in related
party payables recorded as receivables by the Advisor, the elimination
by the CNL Restaurant Financial Services Group of $6,641,379 in related
party payables recorded as receivables by CNL Restaurant Financial
Services Group and the elimination by the Company of $1,208,000 in
related party payables recorded as receivables by the Advisor.
(4) Represents the elimination of income taxes payable of $2,990,864 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.
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
4. Adjustments to Pro Forma Income Statements
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the nine months ended September 30, 1998, as if
the Acquisition was consummated as of January 1, 1997.
(a) Represents rental and earned income as if 1) properties that had been
previously constructed and acquired from January 1, 1998 through
November 30, 1998 had been acquired and leased on January 1, 1997 and
2) properties that were developed by the Company from January 1, 1998
through November 30, 1998 had been placed in service on May 1, 1997
(assumes a four month development period.)
<TABLE>
<S> <C>
Rental and earned income on Property Transactions
by the Company...................................... $9,635,208
</TABLE>
(b) Represents $84,471 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms
for the leases acquired from the CNL Income Fund as if the leases had
been acquired on January 1, 1997.
(c) Represents the elimination of intercompany fees between the Company,
the CNL Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Origination fees...................................... $ (1,569,202)
Secured equipment lease fee........................... (44,426)
Advisory fees......................................... (1,754,254)
Reimbursement of administrative costs................. (296,962)
Acquisition fees...................................... (15,392,193)
Underwriting fees..................................... (254,9450
Administrative fees................................... (148,491)
Executive fee......................................... (310,000)
Guarantee fees........................................ (93,750)
Servicing fee......................................... (1,014,117)
Development fees...................................... (166,876)
Consulting fee........................................ (1,511)
------------
Total.............................................. $(21,046,727)
============
</TABLE>
(d) Represents the deferral of $2,875,906 in origination fees collected by
CNL Restaurant Financial Services Group that should be amortized over
the term of the loans originated (20 years) in accordance with the
Statement of Financial Accounting Standards #91 "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring
Loans and Initial Direct Costs of Leases."
(e) Represents interest income of $1,318,870 earned from Other Investments
acquired and mortgage notes issued from January 1, 1998 through
November 30, 1998 as if this had occurred on January 1, 1997 and the
amortization of $207,677 of deferred origination fees collected during
the year ended December 31, 1997 and during the nine months ended
September 30, 1998, which were capitalized and deferred in (d) above as
if they had been collected on January 1, 1997. These deferred fees are
being amortized and recorded as interest income.
F-27
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(f) Represents the elimination of intercompany expenses paid between the
Company, the CNL Income Fund, the Advisor and the CNL Restaurant
Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs................... $ (296,962)
Servicing fee........................................... (1,014,117)
-----------
$(1,311,079)
===========
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by the Company
were subject to capitalization during the entire period and 2) costs
relating to properties not developed by the Company were subject to
capitalization up through the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs......................... $(1,415,100)
</TABLE>
(h) Represents savings of $36,361 in professional services and
administrative expenses resulting from reporting on one combined
Company versus 22 separate entities.
(i) Represents the elimination of advisory fees between the Company, the
CNL Income Fund, the Advisor and the CNL Restaurant Financial Services
Group:
<TABLE>
<S> <C>
Advisory fees........................................... $(1,754,254)
Administrative fees..................................... (148,491)
Executive fee........................................... (310,000)
Guarantee fees.......................................... (93,750)
-----------
$(2,306,495)
===========
</TABLE>
(j) Represents additional income taxes of $65,410 resulting from assuming
that acquisitions from January 1, 1998 through November 30, 1998 had
been acquired on January 1, 1997 and assuming that the CNL Income Fund
had operated under a REIT structure.
(k) Represents an increase in depreciation of the building portion of the
properties acquired from January 1, 1998 through November 30, 1998 as
if they had been acquired on January 1, 1997 and the step up in basis
referred to in footnote (2) from acquiring the CNL Income Fund
portfolio using the straight-line method over the estimated useful
lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense....................................... $1,518,380
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of the
CNL Restaurant Financial Services Group referred to in footnote (2)
<TABLE>
<S> <C>
Amortization of goodwill................................... $1,559,396
</TABLE>
(m) Represents elimination of interest expense recorded for the
amortization of $350,000 in arrangement fees collected during the year
ended December 31, 1997 which were eliminated in II (d ) below.
<TABLE>
<S> <C>
Interest expense...................................... $ (68,670)
</TABLE>
F-28
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(n) Represents the elimination of fees paid to affiliates for fees incurred
between the Company, the CNL Income Fund, the Advisor and the CNL
Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees.................................. $ (1,569,202)
Underwriting fees................................. (254,945)
Consulting fee.................................... (1,511)
------------
$(1,825,658)
============
</TABLE>
(o) Represents the elimination of $6,316,081 in the provision for income
taxes as a result of the Acquisition. The Company expects to continue
to qualify as a REIT and does not expect to incur federal income taxes.
(p) Common shares issued during the period required to fund acquisitions as
if they had been acquired on January 1, 1997 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 the proposal to increase the number of authorized common
shares of the Company.
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the year ended December 31, 1997, as if the
Acquisition was consummated as of January 1, 1997.
(a) Represents rental and earned income as if 1) properties that had been
previously constructed and acquired from January 1, 1998 through
November 30, 1998 had been acquired and leased on January 1, 1997 and
2) properties that were developed by the Company from January 1, 1997
through November 30, 1998 had been placed in service on May 1, 1997
(assumes a four month development period.)
<TABLE>
<S> <C>
Rental and earned income on Property Transactions
by the Company................................... $24,048,982
</TABLE>
(b) Represents $106,648 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms
for the leases acquired from the CNL Income Fund as if the leases had
been acquired on January 1, 1997.
(c) Represents the elimination of intercompany fees between the Company,
the CNL Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Origination fees........................................ $ (594,041)
Secured equipment lease fee............................. (375,219)
Advisory fees........................................... (1,815,898)
Reimbursement of administrative costs................... (146,235)
Acquisition fees........................................ (3,887,483)
Underwriting fees....................................... (151,041)
Administrative fees..................................... (269,231)
Executive fee........................................... (250,000)
Guarantee fees.......................................... (312,500)
Arrangement fees........................................ (350,000)
Servicing fee........................................... (598,988)
Development fees........................................ (369,570)
-----------
Total................................................ $(9,120,206)
===========
</TABLE>
F-29
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(d) Represents the deferral of $2,662,141 in origination fees collected by
CNL Restaurant Financial Services Group that should be amortized over
the term of the loans originated (20 years) in accordance with the
Statement of Financial Accounting Standards #91 "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring
Loans and Initial Direct Costs of Leases."
(e) Represents the elimination of interest income of $1,931,331 earned
during the year ended December 31, 1997 assuming all monies raised
during 1997 and all cash held on January 1, 1997 was used to effect the
Acquisition on January 1, 1997, represents interest income of
$2,047,619 earned from Other Investments acquired and mortgage notes
issued from January 1, 1998 through November 30, 1998 as if this had
occurred on January 1, 1997 and the recognition of $133,107 of
origination fees collected during the year ended December 31, 1997
which were deferred in (d) and are being amortized and recorded as
interest income.
(f) Represents the elimination of intercompany expenses paid between the
Company, the CNL Income Fund, the Advisor and the CNL Restaurant
Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs.................... $ (146,235)
Servicing fee............................................ (598,988)
----------
$ (745,223)
==========
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by the Company
were subject to capitalization during the entire period and 2) costs
relating to properties not developed by the Company were subject to
capitalization up through the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs......................... $(1,619,238)
</TABLE>
(h) Represents savings of $46,111 in professional services and
administrative expenses resulting from reporting on one combined
Company versus 22 separate entities.
(i) Represents the elimination of advisory fees between the Company, the
CNL Income Fund, the Advisor and the CNL Restaurant Financial Services
Group:
<TABLE>
<S> <C>
Advisory fees.......................................... $ (1,815,898)
Administrative fees.................................... (269,231)
Executive fee.......................................... (250,000)
Guarantee fees......................................... (312,500)
------------
$(2,647,629)
============
</TABLE>
(j) Represents additional income taxes of $25,957 resulting from assuming
that acquisitions from January 1, 1997 through November 30, 1998 had
been acquired on January 1, 1997 and assuming that the CNL Income Fund
had operated under a REIT structure.
(k) Represents increase in depreciation of the building portion of the
properties acquired from January 1, 1997 through November 30, 1998 as
if they had been acquired on January 1, 1997 and the step up in basis
referred to in footnote (2) from acquiring the CNL Income Fund
portfolio using the straight-line method over the estimated useful
lives of generally 30 years.
F-30
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
<TABLE>
<S> <C>
Depreciation expense....................................... $3,172,919
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of the
CNL Restaurant Financial Services Group referred to in footnote (2)
<TABLE>
<S> <C>
Amortization of goodwill................................... $2,079,194
</TABLE>
(m) Represents elimination of yearly amortization of arrangement fees of
$350,000 capitalized as deferred costs and amortized as interest
expense and the capitalization of interest expense during the period
that properties were under development.
<TABLE>
<S> <C>
Amortization of arrangement fees............................... $ (24,144)
Capitalization of interest during development period........... (57,450)
---------
$ (81,594)
=========
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees incurred
between the Company, the CNL Income Fund, the Advisor and the CNL
Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees..................................... $(594,041)
Underwriting fees.................................... (151,041)
---------
(745,082)
=========
</TABLE>
(o) Represents the elimination of $2,462,606 in the provision for income
taxes as a result of the Acquisition. The Company expects to continue
to qualify as a REIT and does not expect to incur federal income taxes.
(p) Common shares issued during the period were assumed to have been issued
and outstanding as of January 1, 1997. For purposes of the proforma
financial statement, it is assumed that the stockholders approved the
proposal to increase the number of authorized common shares of the
Company.
F-31
<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 eighteen 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
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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"OP Certificate of Merger" has the meaning set forth in Section 2.2 below.
"OP General Partner" has the meaning set forth in the Preface above.
"OP Limited Partner" means CNL APF LP Corp., a Delaware corporation and
wholly owned subsidiary of APF.
"Operating Partnership" has the meaning set forth in the preface above.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity
and frequency).
"Party" or "Parties" has the meaning set forth in the preface above.
"Partner" means any holder of Fund Interests.
"Person" means an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, a limited liability company,
an unincorporated organization, a governmental entity (or any department,
agency, or political subdivision thereof) or other entity.
"Proposed Acquisitions" has the meaning set forth in the second paragraph of
the Recitals above.
"Registration Statement" means the registration statement on Form S-4 to be
filed by APF to register the APF Common Shares to be issued as Share
Consideration in the Merger.
"Representative" has the meaning set forth in Section 12.3 below.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance, charge,
or other security interest, other than (a) mechanic's, materialmen's, and
similar liens, (b) liens for Taxes not yet due and payable or for Taxes that
the taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money and (e) any minor
imperfection of title or similar lien which individually or in the aggregate
could not reasonably be expected to have a Material Adverse Effect on such
Party.
"Share Consideration" has the meaning set forth in Section 4.1(a) below.
"Special Committee" has the meaning set forth in the third paragraph to the
Recitals above.
"Subsidiary" means any corporation, partnership, joint venture, limited
liability company or other entity with respect to which a specified Person (or
a Subsidiary thereof) owns a majority of the common stock or other voting
interests or has the power to vote or direct the voting of sufficient
securities or interests to elect a majority of the directors or otherwise
control the management.
"Surviving Partnership" has the meaning set forth in Section 2.1 below.
"Takeover Statute" has the meaning set forth in Section 8.9 below.
"Tax" means any federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Code
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(S)59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-
on minimum, estimated, or other tax of any kind whatsoever, including any
interest, penalty, or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Third-Party Claim" has the meaning set forth in Section 12.4 below.
ARTICLE II
Merger; Effective Time; Closing
2.1 Merger. Subject to the terms and conditions of this Agreement, the
Delaware RULPA and the Florida RULPA, at the Effective Time, the Operating
Partnership and the Fund shall consummate the Merger in which (i) the Fund
shall be merged with and into the Operating Partnership and the separate
limited partnership existence of the Fund shall thereupon cease, (ii) the
Operating Partnership shall be the successor or surviving limited partnership
in the Merger and shall continue to be governed by the laws of the State of
Delaware and (iii) the separate limited partnership existence of the Operating
Partnership with all its rights, privileges, immunities, powers and franchises
shall continue unaffected by the Merger. The limited partnership surviving the
Merger is sometimes hereinafter referred to as the "Surviving Partnership." The
Merger shall have the effects set forth in the Delaware RULPA and the Florida
RULPA. As a result of the Merger, the outstanding Fund Interests shall be
converted or cancelled in the manner provided in Article IV.
2.2 Effective Time. On the Closing Date, subject to the terms and conditions
of this Agreement, the Operating Partnership and the Fund shall (i) execute or
cause to be executed (A) a Certificate of Merger in the form required by the
Delaware RULPA (the "OP Certificate of Merger") and (B) Articles of Merger in
the form required by the Florida RULPA (the "Fund Articles of Merger"), and
(ii) cause the OP Certificate of Merger to be filed with the Delaware Secretary
of State as provided in the Delaware RULPA and the Fund Articles of Merger to
be filed with the Florida Department of State as provided in the Florida RULPA,
in each case, on the Closing Date or as soon as practicable thereafter. The
Merger shall become effective at (i) such time as the OP Certificate of Merger
has been duly filed with the Delaware of Secretary of State and the Fund
Articles of Merger has been duly filed with the Florida Department of State or
(ii) such other time as is agreed upon by APF, the OP General Partner and the
General Partners and specified in the OP Certificate of Merger and the Fund
Articles of Merger. Such time is hereinafter referred to as the "Effective
Time."
2.3 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Shaw Pittman Potts
& Trowbridge, 2300 N Street, N.W., Washington, D.C. 20037, commencing at 9:00
a.m. local time on such date as within five (5) business days following the
fulfillment or waiver of the conditions set forth in Article X (other than
conditions which by their nature are intended to be fulfilled at the Closing)
or such other place or time or on such other date as APF, the OP General
Partner and the General Partners may agree or as may be necessary to permit the
fulfillment or waiver of the conditions set forth in Article X (the "Closing
Date"). In no event shall the Closing Date be a date subsequent to December 31,
1999. At the Closing, there shall be delivered to APF, the Operating
Partnership, the OP General Partner, the General Partners and the Fund the
certificates and other documents and instruments required to be delivered under
Article X.
2.4 Further Assurances. Each Party hereto will execute such further
documents and instruments and take such further actions as may be reasonably
requested by one or more of the other Parties to consummate the Merger, to vest
the Surviving Partnership with full title to all assets, properties, rights,
approvals, immunities and franchises of either the Fund or the Operating
Partnership or to effect the other purposes of this Agreement.
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ARTICLE III
Certificate of Limited Partnership; Limited Partnership Agreement;and General
Partner of Surviving Partnership
3.1 Certificate of Limited Partnership. At the Effective Time, the
certificate of limited partnership of the Operating Partnership, as in effect
immediately prior to the Effective Time, shall be the certificate of limited
partnership of the Surviving Partnership until thereafter amended as provided
therein.
3.2 Limited Partnership Agreement. At the Effective Time, the limited
partnership agreement of the Operating Partnership, as in effect immediately
prior to the Effective Time, shall be the limited partnership agreement of the
Surviving Partnership.
3.3 General Partner. The general partner of the Operating Partnership
immediately prior to the Effective Time shall be the general partner of the
Surviving Partnership from and after the Effective Time until it is replaced or
it resigns in accordance with the limited partnership agreement of the
Surviving Partnership.
ARTICLE IV
Share Consideration; Payment of Share Consideration
4.1 Share Consideration; Conversion or Cancellation of Fund Interests in
Merger.
(a) At the Effective Time, by virtue of the Merger and without any action by
the Parties, all of the outstanding Fund Interests (i) shall be converted into
the right to receive up to 4,768,496 fully paid and nonassessable APF Common
Shares (2,384,248 APF Common Shares if the Reverse Split [defined below] occurs
before the Closing) (the "Share Consideration") pursuant to the terms of
Section 4.2 below, (ii) shall cease to be outstanding, and (iii) shall be
canceled and retired and shall cease to exist, and each Partner, as the holder
of such Fund Interests shall cease to have any rights with respect thereto,
except the right to receive either (A) APF Common Shares therefor in accordance
with this Section 4.1 and Section 4.3 or (B) the cash and Notes in accordance
with Section 4.4 below. Subject to the approval of the APF's shareholders of an
amendment to its article of incorporation, APF anticipates that prior to the
Closing it will effect a one for two reverse stock split (the "Reverse Split")
pursuant to which each two shares of APF Common Shares outstanding will be
exchanged for one share of APF Common Shares.
(b) Except for the Reverse Stock Split described in Section 4.1(a), prior to
the Effective Time, APF shall not split or combine the APF Common Shares, or
pay a stock dividend or other stock distribution in APF Common Shares, or in
rights or securities exchangeable for, convertible into or exercisable for APF
Common Shares, or otherwise change APF Common Shares into, or exchange APF
Common Shares for, any other securities (whether pursuant to or as part of a
merger, consolidation, acquisition of property or stock, separation,
reorganization, or liquidation of APF as a result of which APF stockholders
receive cash, stock, or other property in exchange for, or in connection with,
their APF Common Shares (a "Business Combination") or otherwise), or make any
other dividend or distribution on or of APF Common Shares (other than regular
quarterly cash dividends paid on APF Common Shares or any distribution pursuant
to APF's dividend reinvestment plan), without the parties hereto having first
entered into an amendment to this Agreement pursuant to which the Share
Consideration will be adjusted to reflect such split, combination, dividend,
distribution, Business Combination, or change.
(c) At the Effective Time, by virtue of the Merger and without any action by
holders thereof, all of the APF Common Shares issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding.
4.2 Payment of Share Consideration. At the Closing, subject to Section 4.4
below, the Partners shall receive the Share Consideration (less expenses paid
by APF on behalf of the Fund), distributed in accordance
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with the provisions of the Fund's limited partnership agreement as of the
Closing Date. For the purposes of this Agreement, the Share Consideration will
be reduced (i) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund and (ii) as provided
in Section 4.4 below.
4.3 Fractional APF Common Shares. No certificates representing fractional
APF Common Shares shall be issued upon conversion of any Fund Interests. Each
Partner of the Fund who would otherwise be entitled to fractional APF Common
Shares will receive one APF Common Share for a fractional interest representing
50% or more of one APF Common Share. No APF Common Shares will be issued for a
fractional interest representing less than 50% of one APF Common Share.
4.4 Cash/Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote against the
Merger and affirmatively elect the cash/note option (the "Cash/Note Option"),
such Dissenting Partners shall be entitled to receive, in lieu of the Share
Consideration, consideration based on such Dissenting Partners' percentage
interest (as determined by the Fund's partnership agreement) in the Fund's
asset liquidation value of $42,752,014, based on Valuation Associates'
appraisal. Such consideration shall be payable 10% in cash and 90% in Callable
Notes due in 2006 (the "Notes"). The Notes will bear interest at a fixed rate
equal to 120% of the applicable federal rate as of the date the consent
solicitation on Form S-4 is mailed to the limited partners. The Share
Consideration shall be reduced on a one-for-one basis for all APF Shares
otherwise distributable to Dissenting Partners had such Dissenting Partners not
elected the Cash/Note Option.
ARTICLE V
Representations and Warranties of The General Partners
Each General Partner severally represents and warrants to APF and the
Operating Partnership that the statements contained in this Article V are
correct and complete as of the date hereof and on the Closing Date:
5.1 Authorization of Transaction. The General Partner has full power and
authority (including, as applicable, full corporate power and authority) to
execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement constitutes the valid and legally binding obligation of the
General Partner, enforceable in accordance with its terms and conditions. The
General Partner does not need to give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or
governmental agency in order to consummate the transactions contemplated by
this Agreement, except in connection with federal securities laws and any
applicable "Blue Sky" or state securities laws.
5.2 Noncontravention. Except as set forth in Section 5.2 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, will violate any
constitution, statute, regulation, rule, injunction, judgment, order, decree,
ruling, charge, or other restriction of any government, governmental agency, or
court to which the General Partner is subject or, as applicable, any provision
of the General Partner's articles of incorporation, bylaws or other
organizational documents.
ARTICLE VI
Representations and Warranties of APF, The OPGeneral Partner and The Operating
Partnership
APF, the OP General Partner and the Operating Partnership jointly and
severally represent and warrant to the General Partners and the Fund that the
statements contained in this Article VI are correct and complete as of the date
hereof and the Closing Date:
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6.1 Organization. APF is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Maryland. APF is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where the failure to
so qualify or obtain authorization would not have a Material Adverse Effect on
APF. APF has full corporate power and authority and all licenses, permits, and
authorizations necessary to carry on the businesses in which it is engaged and
to own and use the properties owned and used by it. The OP General Partner is a
corporation duly organized, validly existing, and in good standing under the
laws of the state of Delaware. The Operating Partnership is a limited
partnership duly organized, validly existing, and in good standing under the
laws of the State of Delaware. The Operating Partnership is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction
where such qualification is required, except where the failure to so qualify or
obtain authorization would not have a Material Adverse Effect on the Operating
Partnership. The Operating Partnership has full limited partnership power and
authority and all licenses, permits, and authorizations necessary to carry on
the businesses in which it is engaged and to own and use the properties owned
and used by it. APF and the OP General Partner have delivered to the General
Partners and the Fund correct and complete copies of the certificate of
incorporation of APF and the OP General Partner and the certificate of limited
partnership and the limited partnership agreement of the Operating Partnership
(each as amended to date). The minute books (containing the records of meetings
of the stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of APF and
the OP General Partner and any organizational records of the Operating
Partnership have been made available to the General Partners and the Fund and
are correct and complete. APF is not in default under or in violation of any
provision of its certificate of incorporation, and the Operating Partnership is
not in default under or in violation of any provision of its certificate of
limited partnership or limited partnership agreement.
6.2 Capital Stock. The authorized capital stock of APF consists of
125,000,000 shares of common stock, $.01 par value (the "APF Common Shares"),
of which 74,696,927 shares are outstanding as of January 31, 1999. Since
January 31, 1999, APF has not issued any shares of capital stock. All
outstanding APF Common Shares are, and all APF Common Shares issuable under any
stock option plans of APF, will be when issued in accordance with the terms
thereof, duly authorized, validly issued, fully paid and nonassessable. Except
for the 56,231,504 APF Common Shares which may be issued in connection with
APF's acquisition of the other 17 CNL Income Funds in the Proposed Acquisitions
and the 12,300,000 APF Shares which may be issued in connection with APF's
acquisition of CNL Fund Advisors, Inc., CNL Financial Services, Inc. and CNL
Financial Corp., there are outstanding on the date hereof no options, warrants,
calls, rights, commitments or any other agreements of any character to which
APF is a party or by which it may be bound, requiring it to issue, transfer,
sell, purchase, register, redeem, or acquire any shares of capital stock or any
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for or acquire any shares of its capital stock. All of the
outstanding general partner interests of the Operating Partnership are owned by
the OP General Partner, and all of the outstanding limited partner interests of
the Operating Partnership are owned by the OP Limited Partnership, and there
are outstanding on the date hereof no options, warrants, rights, commitments or
any other agreements of any character to which the Operating Partnership or any
partner thereof is a party or which it may be bound requiring it to issue,
transfer, sell, purchase, register, redeem or acquire any interest in the
Operating Partnership.
6.3 Authorization for Common Stock. The Share Consideration will, when
issued, be duly authorized, validly issued, fully paid and nonassessable, and
no stockholder of APF will have any preemptive right or similar rights of
subscription or purchase in respect thereof. The Share Consideration will be
registered under the Securities Act and will be registered or exempt from
registration under all applicable state securities laws. The Share
Consideration will, when issued, be approved for listing on the NYSE, subject
to official notice of issuance.
6.4 Authorization of Transaction. APF, the OP General Partner and the
Operating Partnership have full power and authority (including full corporate
and limited partnership, as applicable, power and authority) to
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execute and deliver this Agreement and to perform their obligations hereunder.
The execution, delivery and performance by APF, the OP General Partner and the
Operating Partnership of this Agreement have been duly and validly authorized
by the boards of directors of APF and the OP General Partner. This Agreement
constitutes the valid and legally binding obligation of APF, the OP General
Partner and the Operating Partnership, enforceable in accordance with its terms
and conditions. None of APF, the OP General Partner or the Operating
Partnership needs to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
6.5 Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which, APF, the OP General Partner or the
Operating Partnership is subject or any provision of APF's or the OP General
Partner's articles of incorporation or by-laws or the Operating Partnership's
certificate of limited partnership or limited partnership agreement or (ii)
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice or consent under any agreement, contract, lease, license,
instrument, or other arrangement to which APF, the OP General Partner or the
Operating Partnership is a party or by which it is bound or to which any of its
assets is subject or (iii) result in the imposition of a Security Interest upon
any of its assets.
6.6 Title to Assets. APF has good title to, or a valid leasehold interest
in, the properties and assets used by it, located on its premises, or set forth
in its most recent quarterly report on Form 10-Q filed with the SEC or acquired
after the date thereof, free and clear of all Security Interests, except for
properties and assets disposed of in the Ordinary Course of Business since the
date of its most recent quarterly report on Form 10-Q.
6.7 Reports and Financial Statements. APF has filed all required reports,
schedules, forms, statements and other documents with the SEC since January 1,
1996 (along with any such documents filed subsequent to the date hereof, the
"APF SEC Documents"). All of the APF SEC Documents (other than preliminary
material), as of their respective filing dates, complied in all material
respects with all applicable requirements of the Securities Act and the
Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such APF SEC Documents. None of the APF SEC Documents
at the time of filing contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading, except to the extent such statements have
been modified or superseded by later filed APF SEC Documents. There is no
unresolved violation, criticism or exception by any governmental entity of
which APF has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to APF could have a Material Adverse
Effect on APF. The financial statements of APF included in the APF SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP (except, the case
of interim financial statements, as permitted by Forms 10-Q and 8-K of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly presented, in accordance with the
applicable requirements of GAAP, the financial position of APF as of the dates
thereof and the results of operations and cash flows of APF for the periods
then ended (subject, in the case of interim financial statements, to normal
year-end adjustments).
6.8 Events Subsequent to September 30, 1998. Since September 30, 1998,
nothing has occurred which has had or would reasonably be expected to have a
Material Adverse Effect on APF.
6.9 Litigation. Except as publicly disclosed by APF in its APF SEC Documents
or on Schedule 1, there is no suit, claim, action, proceeding or investigation
pending or, to the Knowledge of APF, threatened against APF or any of its
Subsidiaries or any of their respective properties or assets which (a) if
adversely determined, could reasonably be expected to have a Material Adverse
Effect on APF or (b) as of the date hereof, questions
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the validity of this Agreement or any action to be taken by APF in connection
with the consummation of the transactions contemplated hereby or could
otherwise prevent or delay the consummation of the transactions contemplated by
this Agreement. Except as publicly disclosed by APF in any APF SEC Document,
none of APF or its Subsidiaries is subject to any outstanding order, writ,
injunction or decree which, insofar as can be reasonably foreseen in the
future, could reasonably be expected to have a Material Adverse Effect on APF
or would prevent or delay the consummation of the transactions contemplated
hereby.
6.10 Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by APF for inclusion or incorporation by reference
in (i) the Registration Statement to be filed by APF with the SEC in connection
with the Merger will, at the time the Registration Statement becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading and (ii) the proxy statement sent by APF to its
shareholders pertaining to the Merger will, at the date mailed to shareholders
and at the times of the meeting of shareholders to be held in connection with
the Merger, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event with
respect to APF, its officers and directors or any of its Subsidiaries should
occur which is required to be described in an amendment of, or a supplement to,
the Registration Statement or the proxy statement, APF shall promptly so advise
the General Partners and such event shall be so described, and such amendment
or supplement (which the General Partners shall have a reasonable opportunity
to review) shall be promptly filed with the SEC. The Registration Statement
will comply as to form in all material respects with the provisions of the
Securities Act and the rules and regulations thereunder.
6.11 No Undisclosed Liabilities; Absence of Changes. Except as and to the
extent publicly disclosed by APF in its APF SEC Documents or disclosed in
Schedule 1, as of December 31, 1998, to APF's Knowledge, none of APF or its
Subsidiaries had any liabilities or obligations of any nature, whether or not
accrued, contingent or otherwise, and whether due or to become due or asserted
or unasserted, which are not fully reflected in, reserved against or otherwise
described in the consolidated balance sheet of APF and its consolidated
Subsidiaries (including the notes thereto) as of such date or which could
reasonably be expected to have a Material Adverse Effect on APF. Except as
publicly disclosed by APF in any reports filed by it with the APF SEC
Documents, since December 31, 1998, the business of APF and its Subsidiaries
has been carried on only in the ordinary and usual course, to APF's Knowledge,
none of APF or its Subsidiaries has incurred any liabilities of any nature,
whether or not accrued, contingent or otherwise, and whether due or to become
due or asserted or unasserted, which could reasonably be expected to have, and
there have been no events, changes or effects with respect to APF or its
Subsidiaries Known to APF having or which could reasonably be expected to have,
a Material Adverse Effect on APF.
6.12 Brokers' Fees. Except for the fees and expenses paid to Merrill Lynch &
Co. with respect to the delivery of the Fairness Opinion to the Special
Committee and in connection with the financial services provided by Salomon
Smith Barney, none of APF, the OP General Partner or the Operating Partnership
has any Liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this
Agreement.
6.13 Qualification as a REIT. APF is a "real estate investment trust" for
federal income tax purposes. The consummation of the transactions contemplated
by this Agreement will not cause APF to cease to qualify as a "real estate
investment trust" for federal income tax purposes.
6.14 Compliance with Applicable Law. Except as publicly disclosed by APF in
its APF SEC Documents, to APF's Knowledge, it and its Subsidiaries hold all
permits, licenses, variances, exemptions, order and approvals of all
governmental entities necessary for the lawful conduct of their respective
businesses, except for failures to hold such permits, licenses, variances,
exemptions, orders and approvals which could not reasonably be expected to have
a Material Adverse Effect on APF. Except as publicly disclosed by APF in its
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APF SEC Documents, to APF's Knowledge, APF and its Subsidiaries are in
compliance with the material terms of its permits, except where the failure so
to comply could not reasonably be expected to have a Material Adverse Effect on
APF. Except as publicly disclosed by APF, the businesses of APF and its
Subsidiaries are not, to APF's Knowledge, being conducted in violation of any
law, ordinance or regulation of any governmental entity except that no
representation or warranty is made in this Section 6.14 with respect to
environmental laws and except for violations or possible violations which do
not, and, insofar as reasonably can be foreseen, in the future will not, have a
Material Adverse Effect on APF. Except as publicly disclosed by APF in its APF
SEC Documents, no investigation or review by any governmental entity with
respect to APF or its Subsidiaries is pending or, to the Knowledge of APF,
threatened, nor, to the Knowledge of APF, has any government entity indicated
an intention to conduct the same, other than, in each case, those which APF
reasonably believes will not have a Material Adverse Effect on APF.
6.15 Intellectual Property.
(a) APF owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of APF as presently conducted. Each item of Intellectual Property
owned or used by APF immediately prior to the Closing hereunder will be owned
or available for use by APF on identical terms and conditions immediately
subsequent to the Closing hereunder. APF has taken all necessary action to
maintain and protect each item of Intellectual Property that it owns or uses.
(b) APF has not interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of third
parties, and none of APF's directors or officers (or employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that APF must
license or refrain from using any Intellectual Property rights of any third
party). No third party has interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of APF which
are material to the operation of APF's business.
(c) APF has no patent or registration which has been issued to APF with
respect to any of its Intellectual Property.
(d) Nothing will interfere with, infringe upon, misappropriate, or otherwise
come into conflict with, any Intellectual Property rights of third parties as a
result of the continued operation of APF's business as presently conducted.
6.16 Insurance. With respect to each current insurance policy to which APF
is a party, a named insured or is otherwise the beneficiary of coverage, to the
knowledge of APF: (i) the policy is legal, valid, binding, enforceable, and in
full force and effect; (ii) the policy will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the consummation of the transactions contemplated hereby; (iii) neither APF nor
any other party to the policy is in breach or default (including with respect
to the payment of premiums or the giving of notices), and no event has occurred
which, with notice or the lapse of time, would constitute such a breach or
default, or permit termination, modification, or acceleration, under the
policy; and (iv) no party to the policy has repudiated any provision thereof.
6.17 Tenants. To the Knowledge of APF and except as set forth on Schedule
1, no current tenant of a property owned by APF, which as of the date of APF's
most recent quarterly report on Form 10-Q represented more than 5% of APF's
total revenues, presently intends to materially change its relationship with
the owner of the property, either due to the transactions contemplated hereby
or otherwise.
6.18 Disclosure. APF is in compliance in all material respects with its
obligation under the Securities Exchange Act to publicly disclose material
information in a timely fashion.
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ARTICLE VII
Representations and Warranties Concerning the Fund
The General Partners and the Fund jointly and severally represent and
warrant to APF and the Operating Partnership that the statements contained in
this Article VII are correct and complete as of the date hereof, except as set
forth in the disclosure schedule delivered by the General Partners and the Fund
to APF and the Operating Partnership in accordance with the provisions of
Section 8.14 (the "Disclosure Schedule"). Nothing in the Disclosure Schedule
shall be deemed adequate to disclose an exception to a representation or
warranty made herein, however, unless the Disclosure Schedule identifies the
exception with particularity and describes the relevant facts in reasonable
detail. Without limiting the generality of the foregoing, the mere listing (or
inclusion of a copy) of a document or other item shall not be deemed adequate
to disclose an exception to a representation or warranty made herein (unless
the representation or warranty has to do with the existence of the document or
other item itself). The Disclosure Schedule will be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in this Article
VII.
7.1 Organization, Qualification, and Corporate Power. The Fund is a limited
partnership duly organized, validly existing, and in good standing under the
laws of Florida. The Fund is duly authorized to conduct business and is in good
standing under the laws of each jurisdiction where such qualification is
required, except where the failure to so qualify or obtain authorization would
not have a Material Adverse Effect on the Fund. Except as set forth in Section
7.1(a) of the Disclosure Schedule, the Fund has full limited partnership power
and authority and all licenses, permits, and authorizations necessary to carry
on the businesses in which it is engaged and to own and use the properties
owned and used by it, except where the failure to so qualify or obtain
authorization would not have a Material Adverse Effect on the Fund. Section
7.1(b) of the Disclosure Schedule lists the directors and officers of the
corporate General Partner. The General Partners have been made available to APF
and the Operating Partnership correct and complete copies of the certificate of
limited partnership and the limited partnership agreement of the Fund (as
amended to date). The minute books (containing the records of meetings of the
stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of the
corporate General Partner and any organizational records of the Fund have been
made available to APF and the Operating Partnership and are correct and
complete in all material respects. The Fund is not in default under or in
violation of any provision of its certificate of limited partnership or limited
partnership agreement.
7.2 Capitalization. All of the outstanding ownership interests in the Fund
(the "Fund Interests") consist of (i) one percent in general partnership
interests and (ii) 4,500,000 units of limited partnership interests. All of the
outstanding Fund Interests have been duly authorized, are validly issued, fully
paid, and nonassessable. There are no outstanding or authorized options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights, or other contracts or commitments that could require the Fund to issue,
sell, or otherwise cause to become outstanding any additional ownership
interests. There are no outstanding or authorized stock appreciation, phantom
stock, profit participation, or similar rights with respect to the Fund.
7.3 Authorization of Transaction. The Fund has full power and authority
(including full limited partnership power and authority) to execute and deliver
this Agreement and, upon the affirmative vote of a majority of the outstanding
limited partnership Fund Interests, will have full power and authority
(including limited partnership power and authority) to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of the Fund, enforceable in accordance with its terms and conditions, subject
to bankruptcy, insolvency, moratorium and rights of creditors generally. The
Fund is not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
7.4 Noncontravention. Except as set forth in Section 7.4 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby,
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will (i) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which the Fund is subject or any
provision of the certificate of limited partnership or limited partnership
agreement of the Fund or (ii) result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice or consent
under any agreement, contract, lease, license, instrument, or other arrangement
to which the Fund is a party or by which it is bound or to which any of its
assets is subject (or result in the imposition of any Security Interest upon
any of its assets).
7.5 Title to Assets. The Fund has good title to, or a valid leasehold
interest in, the properties and assets used by it, located on its premises, or
set forth in its most recent quarterly report on Form 10-Q filed with the SEC
(the "Most Recent 10-Q") or acquired after the date thereof, free and clear of
all Security Interests, except for properties and assets disposed of in the
Ordinary Course of Business since the date of the Most Recent 10-Q.
7.6 Subsidiaries. The Fund does not have any Subsidiaries, operating or
otherwise.
7.7 Reports and Financial Statements. The Fund has filed all required
reports, schedules, forms, statements and other documents with the SEC since
January 1, 1996 (along with any such documents filed subsequent to the date
hereof, the "Fund SEC Documents"). All of the Fund SEC Documents (other than
preliminary material), as of their respective filing dates, complied in all
material respects with all applicable requirements of the Securities Act and
the Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such Fund SEC Documents. None of the Fund SEC
Documents at the time of filing contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the extent
such statements have been modified or superseded by later filed Fund SEC
Documents. There is no unresolved violation by any governmental entity of which
the Fund has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to the Fund could have a Material
Adverse Effect on the Fund. The financial statements of the Fund included in
the Fund SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with GAAP
(except, the case of interim financial statements, as permitted by Forms 10-Q
and 8-K of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly presented, in
accordance with the applicable requirements of GAAP, the financial position of
the Fund as of the dates thereof and the results of operations and cash flows
of the Fund for the periods then ended (subject, in the case of interim
financial statements, to normal year-end adjustments).
7.8 Events Subsequent to the Most Recent 10-Q. Since the date of the Most
Recent 10-Q nothing has had a Material Adverse Effect on the Fund. Without
limiting the generality of the foregoing, since that date, except as set forth
in the appropriately lettered paragraph of Section 7.8 of the Disclosure
Schedule:
(a) the Fund has not sold, leased, transferred, or assigned any of its
assets, tangible or intangible, other than for a fair consideration (as
reasonably determined by the General Partners) in the Ordinary Course of
Business;
(b) the Fund has not entered into any agreement, contract, lease, or license
(or series of related agreements, contracts, leases, and licenses) involving
more than $50,000 except in the Ordinary Course of Business;
(c) no party (including the Fund) has accelerated, terminated, modified, or
canceled any agreement, contract, lease, or license (or series of related
agreements, contracts, leases, and licenses) to which the Fund is a party or by
which it is bound except in the Ordinary Course of Business;
(d) the Fund has not imposed any Security Interest upon any of its assets,
tangible or intangible except in the Ordinary Course of Business;
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(e) the Fund has not made any capital expenditure (or series of related
capital expenditures) involving more than $50,000 except in the Ordinary Course
of Business;
(f) the Fund has not made any capital investment in, any loan to, or any
acquisition of the securities or assets of any other Person (or series of
related capital investments, loans, and acquisitions) outside the Ordinary
Course of Business;
(g) the Fund has not issued any note, bond, or other debt security or
created, incurred, assumed, or guaranteed any indebtedness for borrowed money
or capitalized lease obligation outside the Ordinary Course of Business;
(h) the Fund has not delayed or postponed the payment of accounts payable
and other Liabilities outside the Ordinary Course of Business;
(i) the Fund has not canceled, compromised, waived, or released any right or
claim (or series of related rights and claims) outside the Ordinary Course of
Business;
(j) the Fund has not granted any license or sublicense of any rights under
or with respect to any Intellectual Property;
(k) there has been no change made or authorized in the certificate of
limited partnership or limited partnership agreement of the Fund;
(l) the Fund has not issued, sold, or otherwise disposed of any ownership
interests, or granted any options, warrants, or other rights to purchase or
obtain (including upon conversion, exchange, or exercise) any ownership
interests in the Fund;
(m) the Fund has not declared, set aside, or paid any dividend or made any
distribution with respect to its ownership interests (whether in cash or in
kind) or redeemed, purchased, or otherwise acquired any of its ownership
interests other than distributions consistent with past practices;
(n) the Fund has not experienced any material damage, destruction, or loss
(whether or not covered by insurance) to its property;
(o) the Fund has not made any loan to, or entered into any other transaction
with, any of the General Partners or the directors, officers, or employees of
the corporate General Partner outside the Ordinary Course of Business;
(p) the Fund has not entered into any employment contract or collective
bargaining agreement, written or oral, or modified the terms of any existing
such contract or agreement;
(q) the Fund has not made or pledged to make any charitable or other capital
contribution outside the Ordinary Course of Business;
(r) to the Knowledge of the General Partners, there has not been any other
material occurrence, event, incident, action, failure to act, or transaction
outside the Ordinary Course of Business involving the Fund; and
(s) the Fund is not under any legal obligation, whether written or oral, to
do any of the foregoing.
7.9 Undisclosed Liabilities. The Fund does not have any Liability (and, to
the Knowledge of the General Partners, there is no Basis for any present or
future action, suit, proceeding, hearing, investigation, charge, complaint,
claim, or demand against it giving rise to any Liability), except for (i)
Liabilities set forth on the face of the Most Recent Balance Sheet (rather than
in any notes thereto) and (ii) Liabilities which have arisen after the date of
the Most Recent Balance Sheet in the Ordinary Course of Business (none of which
results
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from, arises out of, relates to, is in the nature of, or was caused by any
breach of contract, breach of warranty, tort, infringement, or violation of
law) or which are not in the aggregate material.
7.10 Legal Compliance. Except as disclosed in the Fund SEC Documents, the
Fund has complied in all material respects with all applicable laws (including
rules, regulations, codes, plans, injunctions, judgments, orders, decrees,
rulings, and charges thereunder), the violation of which could cause a Material
Adverse Effect to the Fund, of federal, state, local, and foreign governments
(and all agencies thereof), and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has been filed or
commenced against it alleging any failure so to comply.
7.11 Tax Matters.
(a) The Fund has filed all material Tax Returns that it was required to
file, including, without limitation, any material Tax Returns required to be
filed with any state. All such Tax Returns were correct and complete in all
material respects. All Taxes owed by the Fund (as shown on any filed Tax
Return) have been paid. The Fund currently is not the beneficiary of any
extension of time within which to file any Tax Return. No claim has ever been
made by an authority in a jurisdiction where the Fund does not file Tax Returns
that it is or may be subject to taxation by that jurisdiction. There are no
Security Interests on any of the assets of the Fund that arose in connection
with any failure (or alleged failure) to pay any Tax.
(b) The Fund has withheld and, if due, paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any independent
contractor, creditor, Partner, or other third party.
(c) The General Partners do not expect any authority to assess any
additional Taxes for any period for which Tax Returns have been filed. There is
no dispute or claim concerning any Tax Liability of the Fund either (A) claimed
or raised by any authority in writing or (B) as to which any of the General
Partners has Knowledge. Section 7.11(c) of the Disclosure Schedule lists all
federal, state, local, and foreign income Tax Returns filed with respect to the
Fund for taxable periods ended on or after December 31, 1996, indicates those
Tax Returns that have been audited, and indicates those Tax Returns that
currently are the subject of audit. The General Partners have made available to
APF and the Operating Partnership correct and complete copies of all federal
income Tax Returns, examination reports, and statements of deficiencies
assessed against or agreed to by the Fund since December 31, 1996.
(d) The Fund has not waived any statute of limitations in respect of Taxes
or agreed to any extension of time with respect to a Tax assessment or
deficiency.
(e) The Fund has not filed a consent under Code (S)341(f) concerning
collapsible corporations. The Fund has not made any payments, is not obligated
to make any payments, and is not a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be
deductible under Code (S)280G. The Fund has disclosed on its federal income Tax
Returns all positions taken therein that could give rise to a substantial
understatement of federal income Tax within the meaning of Code (S)6662. The
Fund is not a party to any Tax allocation or sharing agreement. The Fund (A)
has not been a member of an Affiliated Group filing a consolidated federal
income Tax Return (other than a group the common parent of which was the Fund)
or (B) has any Liability for the Taxes of any Person (other than the Fund)
under Treas. Reg. (S)1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract, or otherwise.
7.12 Real Property.
Section 7.12(a) of the Disclosure Schedule lists and describes briefly all
real property owned, leased or subleased by the Fund. Section 7.12(b) of the
Disclosure Schedule lists all leases and subleases to which the Fund is a
party, and the General Partners have made available to APF correct and complete
copies of all such
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leases and subleases (as amended to date). With respect to each lease and
sublease listed in Section 7.12(b) of the Disclosure Schedule:
(a) the lease or, to the Knowledge of the General Partners, the sublease is
legal, valid, binding, enforceable, and in full force and effect, except as may
be affected by bankruptcy, insolvency, moratorium and the rights of creditors
generally;
(b) no consent is required with respect to the lease or sublease as a result
of this Agreement, and the actions contemplated by this Agreement will not
result in the change of any terms of the lease or sublease or otherwise affect
the ongoing validity of the lease or sublease;
(c) no party to the lease or sublease is in breach or default, and no event
has occurred which, with notice or lapse of time, would constitute a breach or
default or permit termination, modification, or acceleration thereunder;
(d) no party to the lease or, to knowledge of the General Partners, sublease
has repudiated any provision thereof;
(e) there are no disputes, oral agreements, or forbearance programs in
effect as to the lease or, to the Knowledge of the General Partners, sublease;
(f) the Fund has not assigned, transferred, conveyed, mortgaged, deeded in
trust, or encumbered any interest in the leasehold or subleasehold;
(g) all facilities leased or subleased thereunder have received all
approvals of governmental authorities (including licenses and permits) required
by the Fund in connection with the operation thereof and, to the Knowledge of
the General Partners, have been operated and maintained in all material
respects in accordance with applicable laws, rules, and regulations; and
(h) all facilities leased or subleased thereunder are supplied with
utilities and other services necessary for the operation of said facilities.
7.13 Intellectual Property.
(a) The Fund owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of the Fund as presently conducted. Each item of Intellectual
Property owned or used by the Fund immediately prior to the Closing hereunder
will be owned or available for use by the Fund on identical terms and
conditions immediately subsequent to the Closing hereunder. The Fund has taken
all necessary action to maintain and protect each item of Intellectual Property
that it owns or uses.
(b) The Fund has not Knowingly interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual Property
rights of third parties, and neither the General Partners nor any of the
corporate General Partner's directors and officers (and employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that the Fund
must license or refrain from using any Intellectual Property rights of any
third party). To the Knowledge of the General Partners, no third party has
interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Intellectual Property rights of the Fund which are material
to the operation of the Fund's business.
(c) The Fund has no patent or registration which has been issued to the Fund
with respect to any of its Intellectual Property.
(d) Section 7.13(d) of the Disclosure Schedule identifies each item of
Intellectual Property that any third party owns and that the Fund uses pursuant
to license, sublicense, agreement, or permission. The General
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Partners have made available to APF and the Operating Partnership correct and
complete copies of all such licenses, sublicenses, agreements, and permissions
(as amended to date).
(e) To the Knowledge of the General Partners, nothing will interfere with,
infringe upon, misappropriate, or otherwise come into conflict with, any
Intellectual Property rights of third parties as a result of the continued
operation of the Fund's business as presently conducted.
7.14 Tangible Assets. The Fund owns or leases all buildings, machinery,
equipment, and other tangible assets used in the conduct of its business as
presently conducted. Each such tangible asset is free from all material
defects, has been maintained in accordance with normal industry practice, is in
good operating condition and repair (subject to normal wear and tear), and is
suitable for the purposes for which it presently is used. The Most Recent
Balance Sheet sets forth all of the assets, in the opinion of the General
Partners, necessary to conduct the Fund's business as it is currently being
conducted.
7.15 Contracts. Section 7.15 of the Disclosure Schedule lists all of the
following types of contracts and other agreements to which the Fund is a party:
(a) any agreement (or group of related agreements) for the lease of personal
property to or from any Person providing for lease payments in excess of
$25,000 per annum;
(b) any agreement concerning a partnership or joint venture;
(c) any agreement (or group of related agreements) under which it has
created, incurred, assumed, or guaranteed any indebtedness for borrowed money,
or any capitalized lease obligation or under which it has imposed a Security
Interest on any of its assets, tangible or intangible;
(d) any agreement concerning confidentiality or noncompetition;
(e) any agreement with any General Partner or any of their Affiliates (other
than the Fund);
(f) any agreement under which it has advanced or loaned any amount to any of
the General Partners or the corporate General Partner's directors, officers,
and employees outside the Ordinary Course of Business; or
(g) any agreement under which the consequences of a default or termination
could have a Material Adverse Effect.
The General Partners have made available to APF and the Operating
Partnership a correct and complete copy of each written agreement listed in
Section 7.15 of the Disclosure Schedule (as amended to date) which is not
included as an exhibit to a Fund SEC Document and a written summary setting
forth the terms and conditions of each oral agreement referred to in Section
7.15 of the Disclosure Schedule. With respect to each agreement set forth in
Section 7.15 of the Disclosure Schedule or filed as an exhibit to a Fund SEC
Document: (A) the agreement is legal, valid, binding, enforceable, and in full
force and effect (except as may be affected by bankruptcy, insolvency,
moratorium or the rights of creditors generally); (B) the agreement will
continue to be legal, valid, binding, enforceable, and in full force and effect
on identical terms following the consummation of the transactions contemplated
hereby (except as may be affected by bankruptcy, insolvency, moratorium or the
rights of creditors generally); (C) no party is in breach or default, and no
event has occurred which with notice or lapse of time would constitute a breach
or default, or permit termination, modification, or acceleration, under the
agreement; and (D) no party has repudiated any provision of the agreement.
7.16 Notes and Accounts Receivable. All notes and accounts receivable of the
Fund are reflected properly on its books and records, are valid receivables
subject to no setoffs or counterclaims, and are current and collectible in
accordance with their terms at their recorded amounts, subject only to the
reserve for bad debts set forth on the face of the Most Recent Balance Sheet
(rather than in any notes thereto) as adjusted for the passage of time through
the Closing Date in accordance with the past custom and practice of the Fund.
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7.17 Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of the Fund.
7.18 Insurance. Section 7.18 of the Disclosure Schedule sets forth the
following information with respect to each insurance policy (including
policies providing property, casualty, liability, and workers' compensation
coverage and bond and surety arrangements) to which the Fund has been a party,
a named insured, or otherwise the beneficiary of coverage at any time within
the past five years (or such lesser periods as the Fund has actively engaged
in business or owned any material assets): (i) the name, address, and
telephone number of the agent; (ii) the name of the insurer, the name of the
policyholder, and the name of each covered insured; and (iii) the policy
number and the period of coverage. With respect to each current insurance
policy, to the Knowledge of the General Partners and the Fund: (A) the policy
is legal, valid, binding, enforceable, and in full force and effect; (B) the
policy will continue to be legal, valid, binding, enforceable, and in full
force and effect on identical terms following the consummation of the
transactions contemplated hereby; (C) neither the Fund nor any other party to
the policy is in breach or default (including with respect to the payment of
premiums or the giving of notices), and no event has occurred which, with
notice or the lapse of time, would constitute such a breach or default, or
permit termination, modification, or acceleration, under the policy; and (D)
no party to the policy has repudiated any provision thereof. The Fund has been
covered during the past five years (or such lesser periods as the Fund has
actively engaged in business or owned any material assets) by insurance in
scope and amount customary and reasonable for the businesses in which it has
engaged during the aforementioned period. Section 7.18 of the Disclosure
Schedule describes any self-insurance arrangements affecting the Fund.
7.19 Litigation. Section 7.19 of the Disclosure Schedule sets forth each
instance, not already disclosed in the Fund SEC Documents, in which the Fund
(i) is subject to any outstanding injunction, judgment, order, decree, ruling,
or charge or (ii) is a party to or, to its Knowledge, is threatened to be made
a party to any action, suit, proceeding, hearing, or investigation of, in, or
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator. None of the
actions, suits, proceedings, hearings, and investigations set forth in Section
7.19 of the Disclosure Schedule or the Fund SEC Documents could result in any
Material Adverse Effect on the Fund. None of the General Partners has any
reason to believe that any additional such action, suit, proceeding, hearing,
or investigation may be brought or threatened against the Fund.
7.20 Tenants. To the Knowledge of any of the General Partners, no current
tenant of a property owned by the Fund presently intends to materially change
its relationship with the owner of the property, either due to the
transactions contemplated hereby or otherwise.
7.21 Employees. The Fund does not have and has never had any employees,
officers or directors. The Fund is not and has never been a party to or had
any liability with respect to any Employee Benefit Plan.
7.22 Guaranties. The Fund is not a guarantor of and is not otherwise liable
for any liability or obligation (including indebtedness) of any other Person.
7.23 Registration Statement. The information furnished by the Fund for
inclusion in the Registration Statement will not, as of the effective date of
the Registration Statement, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
7.24 Environmental Matters. The Fund is currently in compliance with all
material environmental laws, ordinances, regulations and orders applicable to
its business or properties, and, to the Knowledge of the General Partners, the
tenants' present uses of the Fund's properties, whether leased or owned, do
not materially violate any such laws, ordinances, regulations or orders. The
Fund is not subject to any Liability or claim in connection with any
environmental law or any use, treatment, storage or disposal of any hazardous
substance or material or pollutant or any spill, leakage, discharge or release
of any hazardous substance or material or pollutant as a result of having
owned or operated any business prior to the Effective Time, which if a
violation existed would have a Material Adverse Effect on the Fund.
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7.25 Vote Required. The affirmative vote of at least a majority of the
outstanding Fund Interests is the only vote of any security holder in the Fund
(under applicable law or otherwise) required to approve the Merger, this
Agreement and the other transactions contemplated hereby.
7.26 Disclosure. The representations and warranties contained in this
Article VII do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Article VII not misleading.
ARTICLE VIII
Pre-Closing Covenants
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing.
8.1 General. Each of the Parties will use its reasonable best efforts to
take all action and to do all things necessary, proper, or advisable in order
to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions
set forth in Article X below).
8.2 Notices and Consents. The General Partners shall give any notices to
third parties and obtain any third party consents referred to in Sections 5.1,
5.2, 7.3 and 7.4 above and the related sections of the Disclosure Schedule.
APF, the OP General Partner and the Operating Partnership shall give any
notices to third parties and obtain any third party consents referred to in
Sections 6.4 and 6.5 above. Each of the Parties shall give any notices to, make
any filings with, and use its reasonable best efforts to obtain any
authorizations, consents, and approvals of governments and governmental
agencies in connection with the matters referred to in Sections 5.1, 6.4 and
7.3 above.
8.3 Maintenance of Business; Prohibited Acts. During the period from the
date of this Agreement to the Effective Time, the General Partners will not,
and will not cause the Fund to, take any action that adversely affects the
ability of the Fund (i) to pursue its business in the ordinary course, (ii) to
seek to preserve intact its current business organizations, and (iii) to
preserve its relationships with its tenants; and the General Partners will not
allow the Fund to, without the OP General Partner's prior written consent,
which consent shall not be unreasonably withheld:
(a) issue, deliver, sell, dispose of, pledge or otherwise encumber, or
authorize or propose the issuance, delivery, sale, disposition or pledge or
other encumbrance of (i) any additional ownership interests (including the Fund
Interests), or any securities or rights convertible into, exchangeable for or
evidencing the right to subscribe for any of its ownership interests, or any
rights, warrants, options, calls, commitments or any other agreements of any
character to purchase or acquire any of its ownership interests or any other
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for any of its ownership interests, or (ii) any other securities
in respect of, in lieu of or in substitution for the Fund Interests outstanding
on the date hereof;
(b) redeem, purchase or otherwise acquire, or propose to redeem, purchase or
otherwise acquire, any of its outstanding securities (including the Fund
Interests);
(c) split, combine, subdivide or reclassify any of its ownership interests
or otherwise make any payments to the Partners; provided, however, that nothing
shall prohibit: (i) the payment of any ordinary distribution in respect of its
ownership interests at such times and in such manner and amount as may be
consistent with the Fund's past practice (which in any event shall include any
and all compensation paid or payable or expenses reimbursed or reimbursable for
the period from December 31, 1998 through the Effective Time, to the extent not
otherwise paid or distributed to the Partners), or (ii) any distribution of
property necessary for the representation and warranty set forth in Section
7.11 to be true and correct;
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(d) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization (other
than the Merger);
(e) make any acquisition, by means of merger, consolidation or otherwise, of
any direct or indirect ownership interest in or assets comprising any business
enterprise or operation outside the Ordinary Course of Business;
(f) other than as may be necessary to consummate the Merger, adopt any
amendments to its certificate of limited partnership or limited partnership
agreement;
(g) incur any indebtedness for borrowed money or guarantee such indebtedness
or agree to become contingently liable, by guaranty or otherwise, for the
obligations or indebtedness of any other person or make any loans, advances or
capital contributions to, or investments in, any other corporation, any
partnership or other legal entity or to any other persons, outside the Ordinary
Course of Business;
(h) engage in the conduct of any business the nature of which is materially
different from the business in which the Fund is currently engaged;
(i) enter into any agreement providing for acceleration of payment or
performance or other consequence as a result of a change of control of the
Fund;
(j) forgive any indebtedness owed to the Fund or convert or contribute by
way of capital contribution any such indebtedness owed;
(k) authorize or enter into any agreement providing for management services
to be provided by the Fund to any third party or an increase in management fees
paid by any third party under existing management agreements;
(l) mortgage, pledge, encumber, sell, lease or transfer any material assets
of the Fund except as contemplated by this Agreement;
(m) authorize or announce an intention to do any of the foregoing, or enter
into any contract, agreement, commitment or arrangement to do any of the
foregoing; or
(n) perform any act or omit to take any action that would make any of the
representations made above inaccurate or materially misleading as of the
Effective Time.
8.4 Full Access. The General Partners shall permit representatives of APF
and the OP General Partner to have full access at all reasonable times, and in
a manner so as not to interfere with the normal business operations of the Fund
to all premises, properties, personnel, books, records (including Tax records),
contracts, and documents of or pertaining to the Fund. APF, the OP General
Partner and the Operating Partnership shall permit representatives of the
General Partners and the Fund to have full access at all reasonable times, and
in a manner so as not to interfere with the normal business operations of APF
and the Operating Partnership to all premises, properties, personnel, books,
records (including Tax records), contracts, and documents of or pertaining to
APF, the OP General Partner and the Operating Partnership. The Parties agree
that any information obtained in connection with the exercise of their rights
pursuant to this Section 8.4 shall be Confidential Information for purposes of
this Agreement.
8.5 Notice of Developments. Each Party will give prompt written notice to
the others of any material adverse development causing a breach of any of its
own representations and warranties in Articles V, VI or VII above, as
applicable. No disclosure by any Party pursuant to this Section 8.5, however,
shall be deemed to amend or supplement the Disclosure Schedule or to prevent or
cure any misrepresentation, breach of warranty, or breach of covenant.
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8.6 Reorganization. From and after the date hereof and prior to the
Effective Time, except for the transactions contemplated or permitted herein,
each of APF, the Operating Partnership, the General Partners and the Fund shall
use reasonable efforts to conduct its business and file Tax Returns in a manner
that would not jeopardize the qualification of APF after the Effective Time as
a real estate investment trust as defined within Section 856 of the Code.
8.7 Fund Partner Approval. The General Partners hereby agree to vote the
Fund Interests owned by them in favor of this Agreement and the transactions
contemplated hereby and agree, subject to the satisfaction of their fiduciary
duties as general partners under Florida law, as reasonably determined by the
General Partners, to recommend that the limited Partners of the Fund vote their
Fund Interests in favor of this Agreement and the transactions contemplated
hereby.
8.8 Delivery of Certain Financial Statements.
(a) In addition to disclosure in Fund SEC Documents required to be filed by
the Fund, promptly after they are available, and in any event not later than
the tenth business day prior to the Closing Date, the Fund shall provide to APF
and the OP General Partner with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by the Fund and each of the
General Partners that such balance sheets (including the related notes, if any)
present fairly, in all material respects, the financial position of the Fund as
of their respective dates, and the other related statements (including the
related notes, if any) included therein present fairly, in all material
respects, the results of its operations and cash flows for the respective
periods or as of the respective dates set forth therein, all in conformity with
GAAP consistently applied during the periods involved, except as otherwise
stated in the notes thereto, subject to normal year-end audit adjustments.
(b) In addition to disclosure in APF SEC Documents required to be filed by
APF, promptly after they are available, and in any event not later than the
tenth business day prior to the Closing Date, APF shall provide to the Fund and
the General Partners with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by APF that such balance
sheets (including the related notes, if any) present fairly, in all material
respects, the financial position of APF as of their respective dates, and the
other related statements (including the related notes, if any) included therein
present fairly, in all material respects, the results of its operations and
cash flows for the respective periods or as of the respective dates set forth
therein, all in conformity with GAAP consistently applied during the periods
involved, except as otherwise stated in the notes thereto, subject to normal
year-end audit adjustments.
8.9 State Takeover Statutes. APF, the APF Board of Directors, the Operating
Partnership, the Fund and the General Partners shall (i) take all action
necessary so that no "fair price," "business combination," "moratorium,"
"control share acquisition" or any other anti-takeover statute or similar
statute enacted under state or federal laws of the United States or similar
statute or regulation, including without limitation, the control share
acquisition provisions of Section 3-701 et seq. of the Maryland GCL and the
business combination provisions of Section 3-601 et seq of the Maryland GCL
(each, a "Takeover Statute"), is or becomes applicable to the Merger, this
Agreement or any of the other transactions contemplated by this Agreement, and
(ii) if any Takeover Statute becomes applicable to the Merger, this Agreement
or any other transaction contemplated by this Agreement, take all action
necessary to minimize the effect of such Takeover Statute on the Merger and the
other transactions contemplated by this Agreement.
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8.10 Exclusivity. None of the General Partners shall solicit, initiate, or
encourage the submission of any proposal or offer from any Person relating to
the acquisition of any capital stock or other voting securities or any
substantial portion of the assets of the Fund (including any acquisition
structured as a merger, consolidation, or share exchange). The General Partners
shall notify APF and the Operating Partnership immediately if any Person makes
any proposal, offer, inquiry, or contact with respect to any of the foregoing.
8.11 Listing. APF shall effect, at or before the issuance of any APF Common
Shares issued as Share Consideration pursuant to Article IV, authorization for
listing or quotation of such APF Common Shares on the NYSE, subject to official
notice of issuance.
8.12 Maintenance of APF's Business. During the period from the date of this
Agreement to the Effective Time, APF will not take any action that adversely
affects the ability of APF (i) to pursue its business in the ordinary course,
(ii) to seek to preserve intact its current business organizations (iii) to
preserve its relationships with its tenants and (iv) will not take any action
to affect it status as a REIT for federal income tax purposes.
8.13 Registration of Share Consideration. APF shall cause the Registration
Statement to become effective prior to the Closing Date.
8.14 Delivery and Approval of Disclosure Schedule and Schedule 1. Within
fifteen (15) business days after the date of this Agreement the General
Partners shall deliver to APF the Disclosure Schedule and APF shall deliver to
the General Partners Schedule 1. Within fifteen (15) business days after APF
receives the Disclosure Schedule it shall give the General Partners notice
either that the disclosures in the Disclosure Schedule are, as to substance,
satisfactory to APF, in its sole and absolute discretion, or that they are not
satisfactory and that APF terminate this Merger Agreement pursuant to Section
11.2. Likewise, within fifteen (15) business days after the General Partners
receive Schedule 1, the General Partners shall give APF notice either that the
disclosures in Schedule 1 are, as to substance, satisfactory to them, in their
sole and absolute discretion, or that they are not satisfactory and that such
General Partners terminate the Agreement pursuant to Section 11.2. In the case
of both APF and the General Partners, the failure of either to give the notice
specified above within the applicable fifteen (15) business day period shall
constitute approval of the Disclosure Schedule or Schedule 1, as applicable.
8.15 Certain Acquisitions. APF or its Subsidiaries shall acquire CNL Fund
Advisors, Inc., CNL Financial Corp. and CNL Financial Services, Inc.
(collective, the "CNL Restaurant Services Group") substantially in accordance
with the terms and conditions set forth in their respective merger agreements
dated on or about the date hereof or such other terms that are mutually agreed
to by the parties.
ARTICLE IX
Post-Closing Covenants
The Parties agree as follows with respect to the period following the
Closing:
9.1 General. In the event that at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of the Parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request, all at the sole cost and expense of the requesting
Party (unless the requesting Party is entitled to indemnification therefor
under Article XII below). The General Partners acknowledge and agree that from
and after the Closing, the Surviving Partnership will be entitled to possession
of all documents, books, records (including Tax records), agreements, and
financial data of any sort relating to the Fund.
9.2 Litigation Support. In the event and for so long as any Party actively
is contesting or defending against any action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand in connection
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with (i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Fund, each of the other Parties will
cooperate with it and its counsel in the contest or defense, make available
their personnel, and provide such testimony and access to their books and
records as shall be necessary in connection with the contest or defense, all at
the sole cost and expense of the contesting or defending Party (unless the
contesting or defending Party is entitled to indemnification therefor under
Article XII below).
9.3 Transition. The General Partners will not take any action that is
designed or intended to have the effect of discouraging any tenant, lessor,
licensor, customer, supplier, or other business associate of the Fund from
maintaining the same business relationships with the Surviving Partnership
after the Closing as it maintained with the Fund prior to the Closing.
9.4 Confidentiality.
(a) The General Partners and the Fund will treat and hold as such all of the
Confidential Information, refrain from using any of the Confidential
Information except in connection with this Agreement, and deliver promptly to
APF or the OP General Partner, as applicable, or destroy, at the request and
option of APF or the OP General Partner, as applicable, all tangible
embodiments (and all copies) of the Confidential Information which are in its
possession. In the event that any of the General Partners or the Fund is
requested or required (by oral question or request for information or documents
in any legal proceeding, interrogatory, subpoena, civil investigative demand,
or similar process) to disclose any Confidential Information, such General
Partner or the Fund, as applicable, will notify APF or the OP General Partner,
as applicable, promptly of the request or requirement so that such Party may
seek an appropriate protective order or waive compliance with the provisions of
this Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, such General Partner or the Fund is, on the advice of
counsel, compelled to disclose any Confidential Information to any tribunal or
else stand liable for contempt, then such General Partner or the Fund, as
applicable, may disclose the Confidential Information to such tribunal;
provided, however, that such General Partner or the Fund, as applicable, shall
use its best efforts to obtain, at the request of APF or the OP General
Partner, as applicable, an order or other assurance that confidential treatment
will be accorded to such portion of the Confidential Information required to be
disclosed as APF or the OP General Partner, as applicable, shall designate.
(b) APF, the OP General Partner and the Operating Partnership will treat and
hold as such all of the Confidential Information, refrain from using any of the
Confidential Information except in connection with this Agreement, and, if the
Closing does not occur, deliver promptly to the Fund General Partners, as
applicable, or destroy, at the request and option of the Fund or the General
Partners, as applicable, all tangible embodiments (and all copies) of the
Confidential Information which are in its possession. Prior to the Closing and
if the Closing does not occur, in the event that any of APF, the OP General
Partner or the Operating Partnership is requested or required (by oral question
or request for information or documents in any legal proceeding, interrogatory,
subpoena, civil investigative demand, or similar process) to disclose any
Confidential Information, APF, the OP General Partner or the Operating
Partnership, as applicable, will notify the Fund or the General Partners, as
applicable, promptly of the request or requirement so that such Party may seek
an appropriate protective order or waive compliance with the provisions of this
Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, APF, the OP General Partner or the Operating Partnership is,
on the advice of counsel, compelled to disclose any Confidential Information to
any tribunal or else stand liable for contempt, then APF, the OP General
Partner or the Operating Partnership, as applicable, may disclose the
Confidential Information to such tribunal; provided, however, that APF, the OP
General Partner or the Operating Partnership, as applicable, shall use its best
efforts to obtain, at the request of the Fund or the General Partners, as
applicable, an order or other assurance that confidential treatment will be
accorded to such portion of the Confidential Information required to be
disclosed as the Fund or the General Partners, as applicable, shall designate.
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9.5 Covenant Not to Compete. Unless employed by the Surviving Partnership or
APF after the Closing, for a period of three years from and after the Closing
Date, none of the General Partners will engage directly or indirectly in any
business serving the restaurant industry that the Surviving Partnership or APF
conducts as of the Closing Date, except existing restaurant businesses and
properties currently owned or advised by affiliates of CNL Group, Inc.,
including CNL Advisory Services, Inc. In addition, and not in lieu of the
foregoing, for a period of three years from and after the Closing Date, James
M. Seneff, Jr. hereby covenants and agrees not to engage or participate,
directly or indirectly, as principal, agent, executive, employee, employer,
consultant, stockholder, partner or in any other individual capacity
whatsoever, in the conduct or management of, or own any stock or any other
equity investment in or debt of, any business that relates to the ownership,
acquisition or development of "restaurant operations"; provided, however, for
the purposes of this Agreement, "restaurant operations" shall not include the
ownership, acquisition or development of hotel and health care properties that
contain restaurant operations and those entities set forth on Schedule 9.5, and
provided further, the noncompetition covenant shall not operate to preclude Mr.
Seneff's ownership of APF Common Shares and of up to 5% of the equity
securities of companies whose common stock is publicly traded that are engaged
in owning, operating, franchising or making are engaged in owning, operating,
franchising or making loans to restaurants and restaurant companies. If the
final judgment of a court of competent jurisdiction declares that any term or
provision of this Section 9.5 is invalid or unenforceable, the Parties agree
that the court making the determination of invalidity or unenforceability shall
have the power to reduce the scope, duration, or area of the term or provision,
to delete specific words or phrases, or to replace any invalid or unenforceable
term or provision with a term or provision that is valid and enforceable and
that comes closest to expressing the intention of the invalid or unenforceable
term or provision, and this Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment may be appealed.
9.6 Tax Matters.
(a) If there is an adjustment to any item reported on a pre-closing Tax
Return that results in an increase in the Taxes payable by the Fund or any of
the General Partners, and such adjustment results in a corresponding adjustment
to items reported on a post-closing Tax Return with the result that the Taxes
payable either by APF, any of its Subsidiaries, or by any consolidated group of
companies of which APF or any Subsidiary are then members are reduced, or a
refund of Taxes is increased, then any APF Indemnity Claim that the General
Partners or Fund owes APF or the Operating Partnership pursuant to Article XII
below shall be reduced by the amount by which such Taxes are reduced or such
refunds are increased.
(b) Any refund or credit of Taxes (including any statutory interest thereon)
received by APF or any of its Subsidiaries attributable to periods ending on or
prior to or including the Closing Date that were paid by the Fund pursuant to
this Agreement shall reduce any APF Indemnity Claim that the General Partners
or the Fund owes APF pursuant to Article XII below by an amount equal to the
amount of such refund or credit.
(c) In the event that APF or any of its Subsidiaries receives notice,
whether orally or in writing, of any pending or threatened federal, state,
local or foreign tax examinations, claims settlements, proposed adjustments or
related matters with respect to Taxes that could affect the Fund or the General
Partners, or if the Fund or any of the General Partners receives notice of such
matters that could affect APF or any of its Subsidiaries, the party receiving
such notice shall notify in writing the potentially affected party within ten
(10) days thereof. The failure of either party to give the notice required by
this Section shall not impair such party's rights under this Agreement except
to the extent that the other party demonstrates that it has been damaged
thereby.
(d) The General Partners shall have the responsibility for, and shall be
entitled, at their expense, to contest, control, compromise, reasonably settle
or appeal all proceedings with respect to pre-closing Taxes.
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ARTICLE X
Conditions to Obligation to Close
10.1 Conditions to Each Party's Obligation. The respective obligations of
APF, the OP General Partner, the Operating Partnership, the Fund and the
General Partners to consummate the transactions contemplated by this Agreement
are subject to the fulfillment at or prior to the Closing Date of each of the
following conditions, which conditions may be waived upon the written consent
of APF and the General Partners:
(a) Governmental Approvals and Consents. The Parties shall have received all
other authorizations, consents, and approvals of governments and governmental
agencies referred to in Sections 5.1, 6.4, and 7.3 above.
(b) No Injunction or Proceedings. There shall not be any action, suit, or
proceeding pending or threatened before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction or
before any arbitrator wherein an unfavorable injunction, judgment, order,
decree, ruling, or charge would, in the reasonable judgment of APF or the
General Partners, (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions contemplated
by this Agreement to be rescinded following consummation, or (C) materially
adversely affect the right of the Surviving Partnership to own its assets and
to operate its businesses (and no such injunction, judgment, order, decree,
ruling, or charge shall be in effect).
(c) No Suspension of Trading, Etc. At the Effective Time, there shall be no
declaration of a banking moratorium by federal or state authorities or any
suspension of payments by banks in the United States (whether mandatory or not)
or of the extension of credit by lending institutions in the United States, or
commencement of war or other international, armed hostility or national
calamity directly or indirectly involving the United States, which war,
hostility or calamity (or any material acceleration or worsening thereof), in
the sole judgment of APF, would have a Material Adverse Effect on the Fund or,
in the sole judgment of any of the General Partners, would have a Material
Adverse Effect on APF.
(d) Shareholder/Partner Approvals. The stockholders of APF shall have
approved APF's Amended and Restated Articles of Incorporation in the form
attached hereto as Exhibit A, and the Partners of the Fund shall have approved
the Merger Proposal, amendments to the partnership agreement, if any.
(e) Registration of Share Consideration. The Registration Statement shall
have become effective under the Securities Act and shall not be the subject of
any stop order or proceedings by the SEC seeking a stop order.
10.2 Conditions to Obligation of APF, the OP General Partner and the
Operating Partnership. The obligations of APF, the OP General Partner and the
Operating Partnership to consummate the transactions to be performed by them in
connection with the Closing are subject to satisfaction on or prior to December
31, 1999 of the following conditions:
(a) the General Partners and the Fund shall have delivered to APF and the OP
General Partner a certificate to the effect that:
(i) the representations and warranties set forth in Article V and
Article VII above are true and correct in all material respects at and as
of the Closing Date;
(ii) the General Partners and the Fund have performed and complied with
all of their covenants hereunder in all material respects at and as of the
Closing Date;
(iii) the General Partners and the Fund have procured all of the
material third-party consents specified in, respectively, Section 5.2 and
Section 7.4 above and the related sections of the Disclosure Schedule; and
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(iv) no action, suit, or proceeding is pending or, to their Knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation, or
(C) affect adversely the right of the Surviving Partnership to own its
assets and to operate its businesses (and no such injunction, judgment,
order, decree, ruling, or charge is in effect);
Notwithstanding the foregoing, APF's obligation to close as a result of a
breach of the representations and warranties contained in Section 7.24 shall
be governed solely by Section 10.2(e) below.
(b) since December 31, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of the Fund, such determination to be made in the
reasonable discretion of APF;
(c) APF and the Operating Partnership shall have received an opinion dated
as of the Closing Date from Baker and Hostetler LLP, counsel to the General
Partners and the Fund, taken as a whole, in form and substance reasonably
satisfactory to APF and the Operating Partnership;
(d) APF shall have received the Disclosure Schedule and approved it in
accordance with Section 8.14;
(e) There shall not exist an unlawful environmental condition on one or
more properties owned by the Fund, which in the opinion of a mutually
acceptable environmental engineer or consultant, would require APF to expend
in excess of $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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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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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 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-33
<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 Prospectus/Consent Solicitation Statement.
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.
OVERVIEW
Pursuant to the Prospectus/Consent Solicitation Statement and this
Supplement, you are being asked to approve the Acquisition of your Income Fund
by APF. Your Income Fund is one of 18 limited partnerships (which we refer to
collectively as the Funds) that APF is seeking to acquire. Supplements have
also been prepared for each of the other Funds, copies of which may be obtained
without charge to 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 (or a REIT), formed in
1994, whose primary business, like that of the Funds, is the ownership of
restaurant properties leased to operators of national and regional restaurant
chains on a triple-net lease basis. As a full-service REIT, 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 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 shares of common stock (or APF Shares) will I receive if my Income
Fund is acquired by APF?
Your Income Fund will receive 3,886,185 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 $10.00 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
approximately 75 million APF Shares through three public offerings at offering
prices
S-1
<PAGE>
per APF share equal to the Exchange Value. At December 31, 1998, of the
approximately $750 million raised by APF, APF has used approximately $550
million to acquire restaurant properties and to make mortgage loans and had
approximately $120 million in uninvested proceeds which it expects to invest
during the first quarter of 1999. The remaining proceeds were used to pay fees
and other offering expenses.
What is the required vote necessary to approve the Acquisition?
Pursuant to the terms of your Income Fund's partnership agreement, APF's
acquisition of your Income Fund may not be consummated without the approval of
greater than 50% of the outstanding 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
Fund?
Yes. Legg Mason Wood Walker, Incorporated 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 Funds, and (c) the method of allocating the APF
Shares among the Funds.
Do you, as the general partners of my Income Fund, recommend that I vote in
favor 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 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 how you want to vote, and sign
and mail it in the enclosed postage-paid return envelope as soon as possible,
so that at the Special Meeting of Limited Partners, your Units may be voted
"For" or "Against" APF's acquisition of your Income Fund. If you sign and send
in your consent form and do not indicate how you want to vote, your consent
form will be counted as a vote "For" the Acquisition. If you do not vote or you
abstain from voting, it will count as a vote "Against" the Acquisition.
In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to certain limitations. If you vote "Against" the Acquisition,
but your Income Fund is nevertheless acquired by APF, you may elect to receive
a payment (which we call the Cash/Notes Option) that is 10% in cash and 90% in
% Callable Notes due , 2006 (or Notes) based on the liquidation value
of your Income Fund, as determined by Valuation Associates, the appraisal firm
that we engaged in connection with the Acquisition. Such liquidation value will
be lower than the aggregate Exchange Value of the APF Shares offered to your
Income Fund in the Acquisition. The Notes will bear interest at a rate equal to
%, which was determined based on 120% of the applicable federal rate as of
, 1999. Please note that you may only receive the Cash/Notes Option if
you have voted "Against" the Acquisition and you elect to receive the
Cash/Notes Option on your consent form. You will receive APF Shares if your
Income Fund elects to be acquired in the Acquisition and you voted "For" the
Acquisition, or you voted "Against" the Acquisition and did not affirmatively
select the Cash/Notes Option. 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 (for example, 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 be based on the difference between the
value of the APF Shares or the tax basis of your Units. If you elect the
Cash/Notes Option, 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
S-2
<PAGE>
of the APF Shares and cash received by your Income Fund over the tax basis of
your Fund's net assets. Some of the gain may be subject to the 25% rate of tax
applicable to certain 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 $752. To review
the tax consequences to the Limited Partners of the Funds in greater detail,
see pages through of the Prospectus/Consent Solicitation Statement 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 Funds acquired by APF.
Although the majority of APF's assets and the assets of the other Funds
acquired by APF are substantially similar to those of your Income Fund, the
restaurant properties owned by APF and the other 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 Funds' restaurant properties,
see "APF's Business and The Restaurant Properties--Business Objectives and
Strategies" and "--The Restaurant Properties--General" and "Business of the
Funds--Description of Restaurant Properties" in the Prospectus/Consent
Solicitation Statement.
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 Prospectus/Consent Solicitation Statement.
Investment Risks
. Uncertainty Regarding the Exchange Value and Trading Price of APF Shares
Following Listing. Your Income Fund will be receiving 3,886,185 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 is 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 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.
. Decrease in Distributions. In each of the years ended December 31, 1995, 1996
and 1997, your Income Fund made $843, $850 and $850, respectively, in
distributions, per $10,000 investment to you. Based on APF's pro forma
financial information, and assuming APF acquires only your Income Fund and
that each Limited Partner of your Income receives only APF Shares, you would
have received, for the year ended December 31, 1997, $558 in distributions
per $10,000 of original investment, which is 34.4% less than the $850
distributed to you as Limited Partner during the same period. 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
S-3
<PAGE>
stockholders for the year ended December 31, 1997 and for the nine months
ended September 30, 1998 is not necessarily indicative of the distributions
you will receive as a stockholder of APF after the Acquisition. See "Cash
Distributions to Limited Partners of Your Fund."
. Conflicts of Interest in the Acquisition; Substantial Benefits to Related
Parties. There are certain conflicts of interest inherent in the structure of
the Acquisition of your Income Fund. 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 that may or
may not be aligned with your interests 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 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.
. Fundamental Change in Nature of 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 September 30, 1998), 404 restaurant
properties. The risks inherent in investing in an operating company such as
APF include APF's ability to invest in new restaurant properties that are not
as profitable as APF anticipated, the incurrence of substantial indebtedness
to make future acquisitions of restaurant properties which it may be unable
to repay and making mortgage loans to prospective operators of national and
regional restaurant chains which may not have the ability to repay.
As an APF stockholder, you will receive the benefits of your investment
through (i) dividend distributions on, and (ii) increases in the value of,
your APF Shares. In addition, 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 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
Cash/Notes Option). An investment in APF may not outperform your investment in
the Income Fund.
. Original Investment Timeframe. 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 2000 and 2005. We currently have no plans to dispose of
your Income Fund's restaurant properties if the Limited Partners do not
approve the Acquisition.
Real Estate/Business Risks
. Risk of Default on Mortgage Loans and Market Risks associated with
Securitizations. 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.
S-4
<PAGE>
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,) and 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 may 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.
. Risks Associated with Leverage. 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. At the time of the consummation of the Acquisition, as a general
policy, APF's Board of Directors will 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 funds from operations and its ability to make distributions to its
stockholders.
. Acquisition and Development Risks. APF plans to pursue its growth strategy
through the acquisition and development of additional restaurant properties.
To the extent that APF does pursue this growth strategy, we do not know that
it 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.
Tax Risks
. Failure of APF to Qualify as a REIT for Tax Purposes. 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.
S-5
<PAGE>
. Risks Associated with Distribution Requirements. 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 Tax Law. 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 Prospectus/Consent
Solicitation Statement.
CONSIDERATION PAID TO INCOME FUND
The following table sets forth, for your Income Fund (i) the aggregate
amount of original Limited Partner investments in each Fund less any
distributions of net sales proceeds paid to the Limited Partners of that Fund,
(ii) the original amount of Limited Partner investments in each Fund less any
distributions of net sales proceeds per average $10,000 investment, (iii) the
number of APF Shares to be paid to your Income Fund, (iv) the estimated value
of the APF Shares paid to your Income Fund, (v) the estimated Acquisition
expenses allocated to your Income Fund, (vi) the estimated value, based on the
Exchange Value, of APF Shares paid to your Income Fund after deducting
Acquisition expenses, and (vii) the estimated value, based on the Exchange
Value, of APF Shares you will receive for each $10,000 of your original
investment:
<TABLE>
<CAPTION>
Original
Limited
Partner Estimated
Original Investments Value of APF
Limited Less Any Shares per
Partner Distributions Number of Estimated Average
Investments of Net Sales APF Estimated Value of $10,000
Less Any Proceeds per Shares Value of APF Shares Original
Distributions $10,000 Offered APF Shares Estimated after Limited
of Net Sales Original to Payable to Acquisition Acquisition Partner
Proceeds Investment(1) Fund(2) Fund(3) Expenses Expenses(3) Investment(3)
- ------------- ------------- --------- ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
$40,000,000 $10,000 3,886,185 $38,861,850 $486,515 $38,375,335 $9,594
</TABLE>
- --------
(1) Income Fund has had no distributions of net sales proceeds.
(2) The APF Shares payable to each Fund as set forth in this chart will not
change if APF acquires fewer than all of the Funds in the Acquisition. This
number assumes that none of the Limited Partners of the Fund has elected
the Cash/Notes Option.
(3) 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.
Upon completion of the Acquisition of your Income Fund, the operations and
existence of your Income Fund will cease. For more detailed information, see
"The Acquisition" in the Prospectus/Consent Solicitation Statement. If your
Income Fund does not approve the Acquisition, we do not contemplate that your
Income Fund would be liquidated in the near future. The Acquisition, however,
does not result in an all-cash payment to you in the liquidation of your
investment. For example, if you are eligible for and choose the Cash/Notes
Option, you become a Noteholder of APF. You will have exchanged your Units for
unsecured debt obligations
S-6
<PAGE>
of APF which may not be retired in full until , 2006, a date
approximately seven years after the date the Acquisition of your Income Fund
occurs. On the other hand, if you exchange your Units for APF Shares, you will
receive an equity interest in APF whose marketability will depend upon the
market that may develop with respect to the APF Shares, which will be listed on
the NYSE.
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...................................................... $ 19,416
Appraisals and Valuation........................................ 7,766
Fairness Opinions............................................... 34,948
Registration, Listing and Filing Fees........................... --
Soliciting Dealer Fee........................................... 81,425
Financial Consulting Fees....................................... --
Environmental Fees.............................................. 48,539
Accounting and Other Fees....................................... 58,569
--------
Subtotal.................................................... 250,663
Closing Transaction Costs
Transfer Fees and Taxes......................................... 107,460
Legal Fees...................................................... 63,323
Recording Costs................................................. --
Other........................................................... 65,069
--------
Subtotal.................................................... 235,852
--------
Total........................................................... $486,515
========
</TABLE>
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 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
S-7
<PAGE>
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.
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 as, in our opinion, market
conditions permit), as contemplated by the terms of the partnership agreement.
Special Meeting to Discuss the Acquisition
We have scheduled a special meeting of the Limited Partners of your Income
Fund to discuss the solicitation materials, which include the
Prospectus/Consent Solicitation Statement, 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 (as defined below) and to explain in person our reasons
for recommending that you vote "For" the Acquisition.
VOTING PROCEDURE
The Prospectus/Consent Solicitation Statement, 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.
S-8
<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 Prospectus/Consent Solicitation
Statement. A copy of the Agreement and Plan of Merger dated March 11, 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 December 31, 1999. 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.
The consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and certain 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
(including the Acquisition), 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. The partnership agreement also provide 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
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-9
<PAGE>
During the years ended December 31, 1995, 1996 and 1997 and the nine months
ended September 30, 1998, the aggregate amounts accrued or paid by your Income
Fund 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 years presented, are shown below under "Pro Forma":
<TABLE>
<CAPTION>
Nine
Months
Year Ended December 31, Ended
----------------------- September
1995 1996 1997 30, 1998
------- ------- ------- ---------
<S> <C> <C> <C> <C>
Historical:
General Partner Distributions............... -- -- -- --
Broker/Dealer Commissions(1)................
Property Management Fees.................... $36,031 $35,675 $34,321 $26,246
Due Diligence and Marketing Support Fees.... -- -- -- --
Acquisition Fees............................ -- -- -- --
Asset Management Fees(2).................... -- -- -- --
Real Estate Disposition Fees................ -- -- -- --
------- ------- ------- -------
Total historical.......................... $36,031 $35,675 $34,321 $26,246
Pro Forma:
Cash Distributions on APF Shares............ -- -- -- --
Salary Compensation......................... -- -- -- --
------- ------- ------- -------
Total pro forma........................... -- -- -- --
======= ======= ======= =======
</TABLE>
- --------
(1) A majority of the fees paid as broker-dealer commissions and due diligence
and marketing and support fees were reallowed to other broker-dealers
participating in the offering of the Income Fund's Units.
(2) 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 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 the Acquisition--Prices for 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>
Nine Months Ended
Sept. 30, 1998
--------------------
Pro
1993 1994 1995 1996 1997 Historical Forma
---- ---- ---- ---- ---- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income........ $316 $756 $821 $800 $751 $489 $ 421
Distributions from Sales of
Properties...................... -- -- -- -- -- --
Distributions from Return of
Capital(1)...................... 66 -- 23 50 99 149 19
---- ---- ---- ---- ---- -------- --------
Total........................ $382 $756 $844 $850 $850 $ 638 $ 441
==== ==== ==== ==== ==== ======== ========
</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-10
<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 nine months ended September 30,
1998 is not necessarily indicative of the distributions you will receive as a
stockholder of APF after the Acquisition.
Assuming APF maintains its current level of debt for acquiring future
restaurant properties, the expected distribution rate per APF Share will be
8.8% (assuming a $10.00 per APF Share price based on the Exchange Value, the
annualized dividend per year is expected to be $0.88 per APF Share). Based on
the number of APF Shares that you would receive in the Acquisition per your
average $10,000 original investment and this distribution rate, you would
receive an annual distribution of approximately $844.
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 certain alternatives
to the Acquisition and a review of the financial condition and performance of
APF and your Income Fund and the terms of critical agreements, such as your
Income Fund's partnership agreement.
We also believe that the Acquisition is procedurally fair for several
reasons. First, the Acquisition is required to be approved by Limited Partners
holding greater than 50% of outstanding Units of your Income Fund and is
subject to certain 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 Cash/Note Option.
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, our relief 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 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 Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the Cash/Notes Option, constitutes fair value. In addition, we
compared the values of the consideration which
S-11
<PAGE>
would have been received by you and the other Limited Partners in alternative
transactions and concluded that the Acquisition is fair and is the best way to
maximize the return on your investment in light of the values of such
consideration.
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 of Valuation Associates and
Legg Mason received fees for its services and notwithstanding that Legg Mason
has previously provided investment banking services to the Funds and to
Commercial Net Lease Realty, Inc., a former affiliate of ours. See "Reports,
Opinions and Appraisals" in the Prospectus/Consent Solicitation Statement.
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 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 cash and promissory 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 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 Cash/Notes Option.
3. Valuation of Alternatives. Based on the appraisal of the Income Fund's
restaurant properties, we estimated the value of your Income Fund as an ongoing
concern and if liquidated. 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 Fund to Fund. In addition to the receipt
of cash available for distribution, you and the
S-12
<PAGE>
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
September 30, 1998 per $10,000 original investment. Since the calculation of
the book value was done on a GAAP basis, it is not indicative of the true fair
market value of your Income Fund. This figure was compared to the (i) value of
the Fund if it commenced an orderly liquidation of its investment portfolio on
December 31, 1998, (ii) value of the Fund if it continued to operate in
accordance with its existing partnership agreement and business plans, and
(iii) estimated value of the APF Shares, based on the Exchange Value, paid to
each Fund per average $10,000 invested.
Summary of Valuations
(per $10,000 original investment)
<TABLE>
<CAPTION>
Estimated
Value of APF
Shares
per Average
GAAP Going $10,000 Original
Book Liquidation Concern Limited Partner
Value Value(1) Value(1) Investment(2)
------ ----------- ---------- ----------------
<S> <C> <C> <C> <C>
CNL Income Fund XIII, Ltd........ $8,520 $8,672 $9,571 $9,594
</TABLE>
- --------
(1) 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.
(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.
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have an independent
obligation 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 Funds). James M. Seneff, Jr. and
Robert A. Bourne act as the individual general partners of all of the 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.
Benefits to General Partners
As a result of the Acquisition (assuming only your Income Fund is acquired),
we are expected to receive certain benefits, including that we will be relieved
from certain ongoing liabilities with respect to the Funds that are acquired by
APF.
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 Funds if the Acquisition does not occur.
S-13
<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 the Cash/Notes Option, in which case you will
receive cash and 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 Prospectus/Consent Solicitation Statement.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, the
assets (and any liabilities) of your Income Fund (if your Income Fund is
acquired by APF) will be transferred to APF in return for APF Shares and/or
cash and 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
S-14
<PAGE>
$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. ..................................... $752
</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 Code, no gain or loss is recognized if (i)
property is transferred to a corporation by one more individuals or entities in
exchange for the stock of that corporation, and (ii) 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 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 the
Cash/Notes Option, 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 (1) 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 (2) 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 Cash/Notes Option, your Income Fund will receive APF
Shares, cash and Notes in exchange for your Income Fund's assets. Because the
principal portion of the Notes will not be due until , 2006, 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 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 (without reduction for
any selling expenses) 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 are assumed or taken subject to by the
S-15
<PAGE>
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, cash 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" (i.e., real property and
depreciable assets used in a trade or business and held for more than one
year). Your share of gains or losses from the sale of section 1231 assets of
your Income Fund would be combined with any other section 1231 gains and losses
that you recognize in that year. If the result is a net loss, such loss is
characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property will be taxed as ordinary income to the extent of all
prior depreciation deductions taken by your Income Fund prior to sale. In
general, you may only use up to $3,000 of capital losses in excess of capital
gains to offset ordinary income in any taxable year. Any excess loss is carried
forward to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your Income Fund recognizes will be allocated to you and the other
Limited Partners in accordance with the terms of your Income Fund's partnership
agreement. Each Limited Partner will be allocated and must report his, her or
its allocable share of such gain, if any, pursuant to these terms, regardless
of the Limited Partner's decision to receive 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 Cash/Notes Option may
recognize gain in the year of the Acquisition despite the fact that they will
receive only a small amount of cash and no publicly-traded instruments 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 the Cash/Notes Option. See "--Tax Consequences of
Liquidation and Termination of Your Fund" below.
Tax Consequences of the Liquidation and Termination of Your Fund. If your
Fund is acquired by APF, your Fund will be deemed to have liquidated and
distributed APF Shares and/or cash and 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 cash and 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 pro rata 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 (determined on the closing date of the Acquisition) and your
adjusted tax basis in your Units (adjusted by your distributive share of
income, gain, loss, deduction and credit for the final taxable year of your
Income Fund (including any such items recognized by your Income Fund as a
result of the Acquisition) as well as any distributions you receive in such
final taxable year (other than the distribution of the APF Shares)). 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.
S-16
<PAGE>
If you receive cash and Notes in the Acquisition, you will recognize gain to
the extent that the amount of cash you receive in the Acquisition exceeds your
adjusted basis in your Units (adjusted by your distributive share of income,
gain, loss, deduction and credit for the final taxable year of your Income Fund
(including any such items recognized by your Income Fund as a result of the
Acquisition) as well as any distributions you receive in such final taxable
year (other than the distributions of the cash and Notes)). Your basis in the
Notes distributed to you will equal your adjusted basis in your Units, reduced
(but not below zero) by the amount of any cash distributed to you 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 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.
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 cash and 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 Prospectus/Consent Solicitation
Statement.
S-17
<PAGE>
SUMMARY SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
APF, FUNDS, ADVISOR AND CNL RESTAURANT FINANCIAL SERVICES GROUP
Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
Historical Pro Forma
-------------------------------------------------- ---------------------------------------------
CNL
Restaurant
CNL Income Financial
Fund XIII, Services Combined Pro Forma Combined Pro
APF Ltd. Advisor Group Historical Adjustments Forma
------------ ----------- ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data Revenues:
Rental and earned
income................. $ 22,947,199 $ 2,310,870 $ -- $ -- $ 25,258,069 $ 9,635,208 (a)
35,302 (b) $ 34,928,579
Management fees......... -- -- 21,405,127 5,122,366 26,527,493 (21,037,903)(c)
(2,875,906)(d) 2,613,684
Interest and other
income................. 6,117,911 41,267 751 18,463,647 24,623,576 1,526,547 (e) 26,150,123
------------ ----------- ----------- ------------ ------------ ------------ ------------
Total revenue........ 29,065,110 2,352,137 21,405,878 23,586,013 76,409,138 (12,716,752) 63, 692,386
Expenses:
General and
administrative......... 1,539,004 204,903 6,701,115 6,704,482 15,149,504 (1,307,880)(f)
(1,415,100)(g)
(33,343)(h) 12,393,181
Advisory fees........... 1,248,393 26,246 -- 1,026,231 2,300,870 (2,300,870)(i) --
State taxes............. 397,569 16,184 15,226 220,180 649,159 53,806 (j) 702,965
Depreciation and
amortization........... 2,693,020 312,173 131,539 1,000,493 4,137,225 3,071,973 (k)(l) 7,209,198
Interest expense........ -- -- 105,668 14,234,533 14,340,201 (68,670)(m) 14,271,531
Paid to affiliates...... -- -- 256,456 1,569,202 1,825,658 (1,825,658) (n) --
------------ ----------- ----------- ------------ ------------ ------------ ------------
Total expenses....... 5,877,986 559,506 7,210,004 24,755,121 38,402,617 (3,825,742) 34,576, 875
------------ ----------- ----------- ------------ ------------ ------------ ------------
Net earnings (loss)
before equity in
earnings of joint
ventures/minority
interests, gain (loss)
on sale of properties,
gain on securitization,
and provision (credit)
for federal income
taxes.................. 23,187,124 1,792,631 14,195,874 (1,169,108) 38,006,521 (8,891,010) 29,115,511
------------ ----------- ----------- ------------ ------------ ------------ ------------
Equity in earnings of
joint ventures/minority
interests.............. (23,271) 182,346 -- 12,452 171,527 -- 171,527
Gain (loss) on sales of
properties............. -- -- -- -- -- -- --
Gain on securitization.. -- -- -- 3,018,268 3,018,268 -- 3,018,268
Provision (credit) for
federal income taxes... -- -- 5,607,415 708,666 6,316,081 (6,316,081)(o) --
------------ ----------- ----------- ------------ ------------ ------------ ------------
Net earnings............ $ 23,163,853 $ 1,974,977 $ 8,588,459 $ 1,152,946 $ 34,880,235 $ (2,574,929) $ 32,305,306
============ =========== =========== ============ ============ ============ ============
Other Data:
Weighted average number
of shares of common
stock outstanding
during period.......... 47,633,909 N/A N/A N/A N/A -- 73,576,119(p)
Total properties owned
at end of period....... 357 47 N/A N/A N/A -- 404
Funds from operations... $ 26,408,569 $ 2,399,866 N/A N/A N/A -- $ 37,113,647
Total cash distributions
declared............... $ 26,460,446 $ 2,550,006 N/A N/A N/A -- $ 37,113,647
Cash distributions
declared per $10,000
investment............. $ 572 $ 638 N/A N/A N/A -- $ 504
<CAPTION>
Combined Pro Forma
Historical September 30, 1998 Historical September 30, 1998
-------------------------------------------------- ------------ --------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Real estate assets, net. $407,663,180 $30,324,953 $ -- $ -- $437,988,133 $ 7,723,514 (q)
26,052,741 (r) $471,764,388
Mortgages/notes
receivable............. 33,523,506 -- -- 173,776,981 207,300,487 849,195 (r) 208,149,682
Accounts receivable,
net.................... 575,104 19,822 7,544,985 7,342,103 15,482,014 (7,854,862)(s) 7,627,152
Investment in/due from
joint ventures......... 631,374 2,453,391 -- -- 3,084,765 580,961 (q) 3,665,726
Total assets............ 566,383,967 34,992,294 8,429,809 197,528,789 807,334,859 27,716,832 835,051,691
Total
liabilities/minority
interest............... 14,478,585 913,767 5,049,152 185,998,045 206,439,549 (10,845,726)(s)(t) 195,593,823
Total equity............ 551,905,382 34,078,527 3,380,657 11,530,744 600,895,310 38,562,558 (q)(t) 639,457,868
</TABLE>
- -------
S-18
<PAGE>
(a) Represents rental and earned income as if 1) properties that had been
previously constructed and acquired from January 1, 1998 through November
30, 1998 had been acquired and leased on January 1, 1997 and 2) properties
that were developed by APF from January 1, 1998 through November 30, 1998
had been placed in service on May 1, 1997 (assumes a four month development
period.)
<TABLE>
<S> <C>
Rental and earned income on Property Transactions by APF... $9,635,208
</TABLE>
(b) Represents $35,302 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, 1997.
(c) Represents the elimination of intercompany fees between APF, the Income
Fund, the Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees........................................... $ (1,569,202)
Secured equipment lease fee................................ (44,426)
Advisory fees.............................................. (1,748,629)
Reimbursement of administrative costs...................... (293,763)
Acquisition fees........................................... (15,392,193)
Underwriting fees.......................................... (254,945)
Administrative fees........................................ (148,491)
Executive fee.............................................. (310,000)
Guarantee fees............................................. (93,750)
Servicing fee.............................................. (1,014,117)
Development fees........................................... (166,876)
Consulting fee............................................. (1,511)
------------
Total................................................... $(21,037,903)
============
</TABLE>
(d) Represents the deferral of $2,875,906 in origination fees collected by CNL
Restaurant Financial Services Group that should be amortized over the term
of the loans originated (20 years) in accordance with the Statement of
Financial Accounting Standards #91 "Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases."
(e) Represents interest income of $1,318,870 earned from Other Investments
acquired and mortgage notes issued from January 1, 1998 through November
30, 1998 as if this had occurred on January 1, 1997 and the amortization of
$207,677 of deferred origination fees collected during the year ended
December 31, 1997 and during the nine months ended September 30, 1998,
which were capitalized and deferred in (d) above as if they had been
collected on January 1, 1997. These deferred fees are being amortized and
recorded as interest income.
(f) Represents the elimination of intercompany expenses paid between APF, the
Income Fund, the Advisor and the CNL Restaurant Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs....................... $ (293,763)
Servicing fee............................................... (1,014,117)
-----------
$(1,307,880)
===========
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by APF were subject
to capitalization during the entire period and 2) costs relating to
properties not developed by APF were subject to capitalization up through
the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs.......................... $(1,415,100)
</TABLE>
(h) Represents savings of $33,343 in professional services and administrative
expenses resulting from reporting on one combined Company versus 22
separate entities.
(i) Represents the elimination of fees between APF, the Income Fund, the
Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Advisory fees................................................ $(1,748,629)
Administrative fees.......................................... (148,491)
Executive fee................................................ (310,000)
Guarantee fees............................................... (93,750)
-----------
$(2,300,870)
===========
</TABLE>
(j) Represents additional state taxes of $53,806 resulting from assuming that
acquisitions from January 1, 1998 through November 30, 1998 had been
acquired on January 1, 1997 and assuming that the Income Fund had operated
under a REIT structure.
S-19
<PAGE>
(k) Represents an increase in depreciation of the building portion of the
properties acquired from January 1, 1998 through November 30, 1998 as if
they had been acquired on January 1, 1997 and the step up in basis
referred to in footnote (q) from acquiring the Income Fund portfolio using
the straight-line method over the estimated useful lives of generally 30
years.
<TABLE>
<S> <C>
Depreciation expense........................................... $1,507,549
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of the CNL
Restaurant Financial Services Group referred to in footnote (q).
<TABLE>
<S> <C>
Amortization of goodwill...................................... $1,564,424
</TABLE>
(m) Represents elimination of interest expense recorded for the amortization
of $350,000 in arrangement fees collected during the year ended December
31, 1997 which were eliminated in footnote (4), II (d) in the Notes to the
Pro Forma Financial Statements attached to this Supplement.
<TABLE>
<S> <C>
Interest expense................................................ $(68,670)
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees incurred
between APF, the Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Origination fees............................................. $(1,569,202)
Underwriting fees............................................ (254,945)
Consulting fee............................................... (1,511)
-----------
$(1,825,658)
===========
</TABLE>
(o) Represents the elimination of $6,316,081 in the provision for income taxes
as a result of the acquisition. APF expects to continue to qualify as a
REIT and does not expect to incur federal income taxes.
(p) APF Shares issued during the period required to fund acquisitions as if
they had been acquired on January 1, 1997 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 the
proposal to amend and restate APF's articles of incorporation to increase
the number of authorized APF Shares.
(q) Represents the payment of $486,515 in cash and the issuance of 16,137,533
APF Shares in consideration for the purchase of the Income Fund, Advisor
and CNL Restaurant Financial Services Group at September 30, 1998 at a
share price of $10 per APF Share plus estimated transaction costs. The
acquisitions of the Income Fund and the CNL Restaurant Financial Services
Group have been accounted for under the purchase accounting method and
goodwill was recognized to the extent that the consideration paid exceeded
the fair value of the net tangible assets acquired. As for the acquisition
of the Advisor from a related party, the consideration paid in excess of
the fair value of the net tangible assets received has been accounted for
as costs incurred in acquiring the Advisor from a related party because
the Advisor has not been deemed to qualify as a "business" for purposes of
applying APB Opinion No. 16 "Business Combinations." Upon consummation of
the Acquisition, this expense will be recorded as an operating expense on
APF's statement of earnings. APF will not deduct this expense for purposes
of calculating funds from operations due to the nonrecurring and non-cash
nature of the expense. As of September 30, 1998, $249,403 of transaction
costs had been incurred by APF.
<TABLE>
<S> <C>
Income Fund................................................. $ 38,861,847
Advisor..................................................... 76,000,000
CNL Restaurant Financial Services Group..................... 47,000,000
------------
Total Purchase Price (cash and shares).................. 161,861,847
Less cash paid to Income Fund............................... (486,515)
------------
Share consideration..................................... 161,375,332
Transaction costs of APF.................................... 8,933,000
------------
Total costs incurred.................................... $170,308,332
============
</TABLE>
In addition, APF i) used $8,933,000 in cash to pay the transaction costs
related to the Acquisition, ii) made an upward adjustment to the Income
Fund carrying value of land and building on operating leases by $6,150,650,
net investment in direct financing leases by $1,572,864, investment in
joint venture by $580,961, made downward adjustments to the carrying value
of accrued rental income of $1,364,156, and made downward adjustments to
other assets of $3,667,084 to adjust historical values to fair value, iii)
recorded goodwill of $41,717,974 for the acquisition of the CNL Restaurant
Financial Services Group, iv) reduced retained earnings by $76,813,710 for
the excess consideration paid over the net assets of the Advisor and
removed the historical common stock balance of $12,000, additional paid in
capital balance of $9,602,287, retained earnings balance of $5,297,114 and
partners capital balance of $34,078,527 of the CNL Income Fund, Advisor and
CNL Restaurant Financial Services Group.
(r) Represents the use of $26,901,936 in cash and cash equivalents at
September 30, 1998 to acquire $26,052,741 in properties and issue $849,195
in mortgage notes which occurred from October 1, 1998 through November 30,
1998.
S-20
<PAGE>
(s) Represents the elimination by the CNL Income Fund of $5,483 in related
party payables recorded as receivables by the Advisor, the elimination by
the CNL Restaurant Financial Services Group of $6,641,379 in related party
payables recorded as receivables by CNL Restaurant Financial Services Group
and the elimination by the Company of $1,208,000 in related party payables
recorded as receivables by the Advisor.
(t) Represents the elimination of income taxes payable of $2,990,864 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.
S-21
<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>
Nine Months Ended
September 30, Year Ended December 31,
----------------------- -----------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues (1)............ $ 2,534,483 $ 2,856,294 $ 3,832,470 $ 3,795,754 $ 3,956,874
Net income (2).......... 1,974,977 2,211,712 3,035,627 3,231,815 3,319,174
Cash distributions
declared............... 2,550,006 2,550,006 3,400,008 3,400,008 3,375,011
Net income per Unit (2). 0.49 0.55 0.75 0.80 0.82
Cash distributions
declared per Unit...... 0.64 0.64 0.85 0.85 0.84
Weighted average number
of Limited Partner
Units outstanding...... 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000
<CAPTION>
September 30, December 31,
----------------------- -----------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total assets............ $34,992,294 $35,641,797 $35,523,590 $35,945,070 $36,054,757
Total partners' capital. 34,078,527 34,679,643 34,653,556 35,017,937 35,186,130
</TABLE>
- --------
(1) Revenues include equity in earnings of joint ventures.
(2) Net income for the nine months ended September 30, 1997 includes $48,538
from provision for loss on land and net investment in direct financing
leases. 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 and net
income for the year ended December 31, 1995, includes a loss on sale of
land of $29,560.
S-22
<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 September 30, 1998, 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
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
The Income Fund's primary source of capital for the nine months ended
September 30, 1998 and 1997, 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
$2,459,747 and $2,511,698 for the nine months ended September 30, 1998 and
1997, respectively. The decrease in cash from operations for the nine months
ended September 30, 1998, as compared to the nine months ended September 30,
1997, 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.
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 September 30, 1998, the
Income Fund had $817,721 invested in such short-term investments, as compared
to $907,980 at December 31, 1997. The funds remaining at September 30, 1998,
will be used towards the payment of distributions and other liabilities.
Total liabilities of the Income Fund, including distributions payable,
increased to $913,767 at September 30, 1998, from $870,034 at December 31,
1997, primarily as a result of the Income Fund accruing real estate taxes in
connection with certain Long John Silver's restaurant properties, as described
below in "Results of Operations." Total liabilities at September 30, 1998, to
the extent that they exceed cash and cash equivalents at September 30, 1998,
will be paid from future cash from operations.
Based on current and future anticipated cash from operations, the Income
Fund declared distributions to the Limited Partners of $2,550,006 for each of
the nine months ended September 30, 1998 and 1997 ($850,002 for each of the
quarters ended September 30, 1998 and 1997). This represents distributions of
$0.64 per Unit for each applicable nine months ($0.21 per Unit for each
applicable quarter). No distributions were made to us for the quarters and nine
months ended September 30, 1998 and 1997. No amounts distributed to the Limited
Partners for the nine months ended September 30, 1998 and 1997 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 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.
S-23
<PAGE>
The Years Ended December 31, 1997, 1996 and 1995
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
$3,204,420, $3,367,581 and $3,379,378 for the years ended December 31, 1997,
1996 and 1995, respectively. The decrease in cash from operations during 1997
and 1996, 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.
In January 1995, the Income Fund received notice from the tenant of its
restaurant property in Houston, Texas, of its intent to exercise its option in
accordance with its lease agreement, to substitute another restaurant property
for the Houston, Texas restaurant property. In April 1995, the Income Fund sold
its restaurant property in Houston, Texas, to the tenant for its original
purchase price, excluding acquisition fees and miscellaneous acquisition
expenses. As a result of this transaction, the Income Fund recognized a loss
for financial reporting purposes of approximately $29,560 primarily due to
acquisition fees and miscellaneous acquisition expenses the Income Fund had
allocated to the Houston, Texas, restaurant property and due to the accrued
rental income relating to future scheduled rent increases that the Income Fund
had recorded and reversed at the time of sale. The Income Fund used the net
sales proceeds, along with approximately $39,800 of cash reserves, to acquire a
Checkers restaurant property in Lakeland, Florida, from the tenant.
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. As of
December 31, 1996, the sales proceeds of $550,000, plus accrued interest of
$770, 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 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-venturer will share in the profits and losses of
the restaurant property in proportion to its applicable percentage interest. As
of December 31, 1997, the Income Fund owned a 63.03% interest in this
restaurant property. The sale of the restaurant property in Richmond, Virginia,
and the reinvestment of the net sales proceeds in a restaurant property in
Akron, Ohio, were structured to qualify as a like-kind exchange transaction in
accordance with Section 1031 of the Internal Revenue Code. As a result, no gain
was recognized for federal income tax purposes. Therefore, the Income Fund was
not required to distribute any of the net sales proceeds from the sale of this
restaurant property to Limited Partners for the purpose of paying federal and
state income taxes.
In October 1997, the Income Fund sold its restaurant property in Orlando,
Florida, to a third party, for $953,371 and received net sales proceeds of
$932,849, resulting in a loss of $48,538 for financial reporting purposes. In
December 1997, the Income Fund reinvested the net sales proceeds in a
restaurant property located in Miami, Florida, with certain of our affiliates
as tenants-in-common. In connection therewith, the Income Fund and its
affiliates entered into an agreement whereby each co-venturer will share in the
profits and losses of the restaurant property in proportion to its applicable
percentage interest. As of December 31, 1997, 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. The
Income Fund collected $127,843 of the amounts advanced and wrote off the
balance of $69,137.
Other sources and uses of capital included the following items during the
years ended December 31, 1997, 1996 and 1995.
S-24
<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.
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.
Currently, cash reserves and rental income from the Income Fund restaurant
properties are invested in money market accounts or other short-term highly
liquid investments pending the Income Fund's use of such funds to pay Income
Fund expenses or to make distributions to partners. At December 31, 1997, the
Income Fund had $907,980 invested in such short-term investments as compared to
$1,103,568 at December 31, 1996. The decrease in cash and cash equivalents
during the year ended December 31, 1997, is partially the result of the Income
Fund advancing and not recovering $69,137 from the former tenant of the Denny's
restaurant property in Orlando, Florida, as described above. In addition, the
decrease was also partially attributable to a decrease in rents paid in advance
at December 31, 1997.
During 1997, 1996 and 1995, certain of our affiliates incurred on behalf of
the Income Fund $87,870, $97,819 and $94,875, respectively, for certain
operating expenses. As of December 31, 1997 and 1996, the Income Fund owed
$6,791 and $2,594, respectively, to related parties for such amounts,
accounting and administrative services and management fees. As of February 28,
1998, the Income Fund had reimbursed the affiliates all such amounts. Other
liabilities, including distributions payable, decreased to $863,243 at December
31, 1997, from $924,539 at December 31, 1996, partially as the result of a
decrease in rents paid in advance and a decrease in accrued and escrowed real
estate taxes payable at December 31, 1997.
Based primarily 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, 1997 and 1996 and $3,375,011 for the year
ended December 31, 1995. This represents distributions of $0.85 per Unit for
each of the years ended December 31, 1997 and 1996 and $0.84 per Unit for the
year ended December 31, 1995. No amounts distributed or to be distributed to
the Limited Partners for the years ended December 31, 1997, 1996 and 1995, 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 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 minimized the Fund's operating expenses. The
general partners 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.
S-25
<PAGE>
Results of Operations
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 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 the nine months
ended September 30, 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 nine months ended September 30,
1998 and 1997, the Income Fund earned $2,097,553 and $2,512,212, respectively,
in rental income from operating leases (net of adjustments to accrued rental
income) and earned income from direct financing leases for these restaurant
properties, $761,025 and $824,586 of which was earned during the quarters ended
September 30, 1998 and 1997, respectively. Rental and earned income decreased
by approximately $100,100 and $101,400, respectively, during the quarter and
nine months ended September 30, 1998, as compared to the quarter and nine
months ended September 30, 1997, primarily due to the fact that in June 1998,
Long John Silver's, Inc., the tenant of three restaurant properties, filed for
bankruptcy and rejected the leases relating to these restaurant properties. As
a result, during the nine months ended September 30, 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). In October 1998, the Income Fund re-leased one of these restaurant
properties to a new tenant for which rent will commence in December 1998. We
are currently seeking either new tenants or purchasers for the two remaining
restaurant properties. The Income Fund will not recognize any rental and earned
income from the two remaining 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.
During the nine months ended September 30, 1997, the Income Fund also owned
and leased two restaurant properties indirectly through joint venture
arrangements and two restaurant properties with certain of our affiliates as
tenants-in-common. During the nine months ended September 30, 1998, the Income
Fund owned and leased three restaurant properties as tenants-in-common with
certain of our affiliates and two restaurant properties indirectly through
joint venture arrangements. In connection therewith, during the nine months
ended September 30, 1998 and 1997, the Income Fund earned $182,346 and
$109,720, respectively, attributable to the net income earned by these joint
ventures, $60,864 and $39,217 of which was earned during the quarters ended
September 30, 1998 and 1997, respectively. The increase in net income earned by
these joint ventures during the quarter and nine months ended September 30,
1998, as compared to the quarter and nine months ended September 30, 1997, is
primarily attributable to the fact that in December 1997, the Income Fund
reinvested the net sales proceeds it received from the sale, in October 1997,
of the restaurant property in Orlando, Florida, in a restaurant property
located in Miami, Florida, with certain of our affiliates as tenants-in-common.
Operating expenses, including depreciation and amortization expense, were
$559,506 and $596,044 for the nine months ended September 30, 1998 and 1997,
respectively, of which $241,028 and $270,186 were incurred for the quarters
ended September 30, 1998 and 1997, respectively. The decrease in operating
expenses during the quarter and nine months ended September 30, 1998, as
compared to the quarter and nine months ended September 30, 1997, is partially
attributable to the fact that during the quarter and nine months ended
September 30, 1997, the Income Fund recorded bad debt expense of approximately
$54,800 for rental and other amounts, relating to the Denny's restaurant
property in Orlando, Florida, due to financial difficulties the tenant was
experiencing. The restaurant property was sold in October 1997, and in
anticipation of the October sale, the Income Fund wrote off as bad debt expense
approximately $69,100 of amounts previously advanced during the nine months
ended September 30, 1997.
The decrease in operating expenses during the quarter and nine months ended
September 30, 1998, as compared to the quarter and nine months ended September
30, 1997, is partially offset by the fact that the Income Fund accrued
insurance and real estate taxes as a result of Long John Silver's, Inc. filing
for
S-26
<PAGE>
bankruptcy and rejecting the leases relating to three restaurant properties, in
June 1998. The Income Fund will continue to incur certain expenses, such as
real estate taxes, insurance, and maintenance relating to these 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 decrease in operating expenses during the quarter
and nine months ended September 30, 1998, is partially offset by an increase in
depreciation expense due to the fact that during the quarter and nine months
ended September 30, 1998, the Income Fund reclassified the assets from direct
financing leases to operating leases, in accordance with Statement of Financial
Accounting Standards #13, "Accounting for Leases," which requires the Income
Fund to record the reclassified leases at the lower of original cost, present
fair value or present carrying value.
During the quarter and nine months ended September 30, 1997, the Income Fund
established an allowance for loss on land and net investment in the direct
financing lease in the amount of $7,336 and $48,538, respectively, for
financial reporting purposes for the restaurant property in Orlando, Florida.
The total allowance for the restaurant property represented the difference
between (i) the sum of the restaurant property's land carrying value and the
carrying value of the net investment in the direct financing lease at September
30, 1997 and (ii) the net realizable value of $932,849 received as net sales
proceeds received in conjunction with the sale of the restaurant property in
October 1997.
The Years Ended December 31, 1997, 1996 and 1995
During 1995, the Income Fund owned and leased 45 wholly-owned restaurant
properties (including one restaurant property in Houston, Texas, which was sold
in April 1995), 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) and 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). During 1997, 1996 and
1995, the Income Fund was a co-venturer in two separate joint ventures that
each owned and leased one restaurant property. In addition, during 1995 and
1996, the Income Fund owned and leased one restaurant property, and during
1997, owned and leased three restaurant properties, with certain of our
affiliates as tenants-in-common. As of December 31, 1997, the Income Fund
owned, either directly, as tenants-in-common with affiliates or through joint
venture arrangements, 47 restaurant properties which are subject to long-term,
triple-net leases. The leases of the restaurant properties provide for minimum
base annual rental amounts (payable in monthly installments) ranging from
approximately $27,400 to $191,900. A majority of the leases provide for
percentage rent based on sales in excess of a specified amount. In addition,
the majority of the leases provide that, commencing in specified lease years,
the annual base rent required under the terms of the lease will increase.
During the years ended December 31, 1997, 1996 and 1995, the Income Fund
earned $3,347,609, $3,376,286 and $3,509,773, respectively, in rental income
from operating leases and earned income from direct financing leases from
restaurant properties wholly-owned by the Income Fund. 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 Income Fund discontinued charging rent to the former tenant
of the Denny's restaurant property in Orlando, Florida, 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, and
the decrease during 1996, as compared to 1995, was partially attributable to
the fact that the Income Fund established an allowance for doubtful accounts of
approximately $15,300, $85,400 and $38,000 during 1997, 1996 and 1995,
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, and the decrease during 1996, as compared to 1995, was also attributable to
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 increases are
recognized on a straight-line basis over the term of the lease in accordance
with generally accepted accounting principles). The Income Fund sold this
restaurant property in October 1997, and
S-27
<PAGE>
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 for the years ended
1997 and 1996, each as compared to the previous year, is partially attributable
to a decrease of approximately $46,200 and $5,600, respectively, 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, 1997, 1996 and 1995, the Income Fund also
earned $287,751, $299,495 and $293,749, respectively, in 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. The increase in contingent rental income during 1996
as compared to 1995, is primarily the result of increases in gross sales
relating to certain restaurant properties during 1996.
In addition, for the years ended December 31, 1997, 1996 and 1995, the
Income Fund earned $150,417, $60,654 and $98,520, 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 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." The increase was also attributable to the fact that in December
1997, the Income Fund reinvested the net sales proceeds from the sale of the
restaurant property in Orlando, Florida, in a restaurant property in Miami,
Florida, with certain of our affiliates, as tenants-in-common as described
above in "Liquidity and Capital Resources." The decrease in net income earned
by joint ventures during 1996, as compared to 1995, is primarily a result of
the former tenant defaulting under the terms of the lease agreement of the
Kenny Rogers' Roasters restaurant property owned with an affiliate as tenants-
in-common during 1996. The Income Fund entered into a new lease for this
restaurant property with a new tenant to operate the restaurant property as an
Arby's restaurant. Rent commenced in December 1996, upon completion of the
renovations.
During at least one of the years ended December 31, 1997, 1996 and 1995,
five of the Income Fund's lessees (or group of affiliated lessees), Flagstar
Corporation, Long John Silver's, Inc., Golden Corral Corporation, Foodmaker,
Inc. and Checkers Drive-In Restaurants, 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, 1997, Flagstar Corporation was the lessee under leases relating to
12 restaurants, Long John Silver's, Inc. was the lessee under leases relating
to eight restaurants, Golden Corral Corporation was the lessee under leases
relating to three restaurants, Foodmaker, Inc. was the lessee under leases
relating to five restaurants and Checkers was the lessee under leases relating
to eight restaurants. It is anticipated that based on the minimum rental
payments required by the leases, Flagstar Corporation, Long John Silver's,
Inc., Golden Corral Corporation and Foodmaker, Inc. each will continue to
contribute more than 10% of the Income Fund's total rental income during 1998
and subsequent years. In addition, during at least one of the years ended
December 31, 1997, 1996 and 1995, 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 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). In subsequent years, it is anticipated that these five 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.
S-28
<PAGE>
Operating expenses, including depreciation and amortization expense, were
$748,305, $646,794 and $608,140 for the years ended December 31, 1997, 1996 and
1995, respectively. The increase in operating expenses during 1997, as compared
to 1996, is primarily the result of the fact that the Income Fund recorded bad
debt 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 Income Fund ceasing collection efforts on rental amounts not collected from
the tenant as of the time of the sale of the restaurant property in October
1997, as described above in "Liquidity and Capital Resources." Operating
expenses also increased as a result of the fact that 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 increase in operating expenses during 1997 is partially
offset by, and the increase during 1996 is partially attributable to, the fact
that during 1996, the Income Fund recorded real estate tax expense relating to
this restaurant property of approximately $10,700. No such real estate tax
expense was recorded by the Income Fund during 1995 or 1997, due to the fact
that real estate taxes amounts were paid by the tenant and the purchaser of the
restaurant property, respectively, for each of these years.
The increase in operating expenses during 1996, as compared to 1995, is also
partially the result of an increase in accounting and administrative expenses
associated with operating the Income Fund and its restaurant properties and an
increase in insurance expense as a result of our obtaining contingent liability
and property coverage for the Income Fund beginning in May 1995.
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. In addition, as a
result of the sale of the restaurant property in Houston, Texas, as described
above in "Liquidity and Capital Resources," the Income Fund recognized a loss
for financial reporting purposes of $29,560 for the year ended December 31,
1995. The loss was primarily due to acquisition fees and miscellaneous
acquisition expenses the Income Fund had allocated to this restaurant property
and due to accrued rental income relating to future scheduled rent increases
that the Income Fund had recorded and reversed at the time of sale.
General
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Period." Adoption of this consensus did not have a material effect on the
Income Fund's financial position or results of operations.
The Income Fund's leases as of September 30, 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 based 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.
The Year 2000 problem is the result of information technology systems and
embedded systems (products which are made with microprocessor (computer) chips
such as HVAC systems, physical security systems and elevators) using a two-
digit format, as opposed to four digits, to indicate the year. Such information
technology and embedded systems may be unable to properly recognize and process
date-sensitive information beginning January 1, 2000.
S-29
<PAGE>
The Income Fund does not have any information technology systems. Certain of
our affiliates provide all services requiring the use of information technology
systems pursuant to a management agreement with the Income Fund. The
maintenance of embedded systems, if any, at the Income Fund's properties is the
responsibility of the tenants of the properties in accordance with the terms of
the Income Fund's leases. We and our affiliates have established a team
dedicated to reviewing the internal information technology systems used in the
operation of the Income Fund, and the information technology and embedded
systems and the Year 2000 compliance plans of the Income Fund's tenants,
significant suppliers, financial institutions and transfer agent.
The information technology infrastructure of the certain of our affiliates
consists of a network of personal computers and servers that were obtained from
major suppliers. The affiliates utilize various administrative and financial
software applications on that infrastructure to perform the business functions
of the Income Fund. Our inability and that of our affiliates to identify and
timely correct material Year 2000 deficiencies in the software and/or
infrastructure could result in an interruption in, or failure of, certain of
the Income Fund's business activities or operations. Accordingly, we and our
affiliates have requested and are evaluating documentation from the suppliers
of the affiliates regarding the Year 2000 compliance of their products that are
used in the business activities or operations of the Income Fund. The costs
expected to be incurred by us and our affiliates to become Year 2000 compliant
will be incurred by us and our affiliates; therefore, these costs will have no
impact on the Income Fund's financial position or results of operations.
The Income Fund has material third party relationships with its tenants,
financial institutions and 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. If
any of these third parties are unable to meet their obligations to the Income
Fund because of the Year 2000 deficiencies, such a failure may have a material
impact on the Income Fund. Accordingly, we have requested and are evaluating
documentation from the Income Fund's tenants, financial institutions, and
transfer agent relating to their Year 2000 compliance plans. At this time, we
have not yet received sufficient certifications to be assured that the tenants,
financial institutions, and transfer agent have fully considered and mitigated
any potential material impact of the Year 2000 deficiencies. Therefore, we do
not, at this time, know of the potential costs to the Income Fund of any
adverse impact or effect of any Year 2000 deficiencies by these third parties.
We currently expect that all Year 2000 compliance testing and any necessary
remedial measures on the information technology systems used in the business
activities and operations of the Income Fund will be completed prior to June
30, 1999. Based on the progress we and our affiliates have made in identifying
and addressing the Income Fund's Year 2000 issues and the plan and timeline to
complete the compliance program, we do not foresee significant risks associated
with the Income Fund's Year 2000 compliance at this time. Because we and our
affiliates are still evaluating the status of the systems used in business
activities and operations of the Income Fund and the systems of the third
parties with which the Income Fund conducts its business, we have not yet
developed a comprehensive contingency plan and are unable to identify "the most
reasonably likely worst case scenario" at this time. As we identify significant
risks related to the Income Fund's Year 2000 compliance or if the Income Fund's
Year 2000 compliance program's progress deviates substantially from the
anticipated timeline, we will develop appropriate contingency plans.
S-30
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997... F-1
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997.............................................. F-2
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997.............. F-3
Condensed Statements of Cash Flows for the Nine Months Ended September 30,
1998 and 1997............................................................ F-4
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997........................................ F-5
Report of Independent Accountants......................................... F-6
Balance Sheets as of December 31, 1997 and 1996........................... F-7
Statements of Income for the Years Ended December 31, 1997, 1996 and 1995. F-8
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995............................................................ F-9
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995..................................................................... F-10
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and 1995................................................................. F-11
Unaudited Pro Forma Financial Information................................. F-19
Unaudited Pro Forma Balance Sheet as of September 30, 1998................ F-20
Unaudited Pro Forma Income Statement for the Nine Months Ended September
30, 1998................................................................. F-21
Unaudited Pro Forma Income Statement for the Year Ended December 31, 1997. F-22
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements............................................................... F-23
</TABLE>
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September December
30, 1998 31, 1997
ASSETS ----------- -----------
<S> <C> <C>
Land and buildings on operating leases, less accumulated
depreciation of $2,008,739 and $1,697,320.............. $23,965,359 $22,788,618
Net investment in direct financing leases............... 6,359,594 7,910,470
Investment in joint ventures............................ 2,453,391 2,457,810
Cash and cash equivalents............................... 817,721 907,980
Receivables, less allowance for doubtful accounts of
$25,192 in 1998........................................ 19,822 23,946
Prepaid expenses........................................ 12,251 10,368
Organization costs, less accumulated amortization of
$10,000 and $9,422..................................... -- 578
Accrued rental income................................... 1,364,156 1,423,820
----------- -----------
$34,992,294 $35,523,590
=========== ===========
<CAPTION>
LIABILITIES AND PARTNERS' CAPITAL
<S> <C> <C>
Accounts payable........................................ $ 7,516 $ 7,671
Accrued real estate taxes payable....................... 45,195 --
Distributions payable................................... 850,002 850,002
Due to related parties.................................. 5,483 6,791
Rents paid in advance................................... 5,571 5,570
----------- -----------
Total liabilities................................... 913,767 870,034
Partners' capital....................................... 34,078,527 34,653,556
----------- -----------
$34,992,294 $35,523,590
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-1
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
------------------- ----------------------
1998 1997 1998 1997
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases........................ $ 583,183 $ 645,571 $1,815,609 $1,855,547
Adjustments to accrued rental
income........................ 3,713 -- (307,405) --
Earned income from direct
financing leases.............. 174,129 179,015 589,349 656,665
Contingent rental income....... 72,309 89,378 213,317 195,164
Interest and other income...... 8,081 17,913 41,267 39,198
--------- --------- ---------- ----------
841,415 931,877 2,352,137 2,746,574
--------- --------- ---------- ----------
Expenses:
General operating and
Administrative................ 44,235 35,046 114,819 116,069
Professional services.......... 5,089 4,520 19,724 16,533
Bad debt expense............... -- 123,862 -- 123,862
Management fees to related
parties....................... 8,472 8,340 26,246 25,596
Real estate taxes.............. 67,472 -- 70,360 --
State and other taxes.......... -- -- 16,184 18,301
Depreciation and amortization.. 115,760 98,418 312,173 295,683
--------- --------- ---------- ----------
241,028 270,186 559,506 596,044
--------- --------- ---------- ----------
Income Before Equity in Earnings
of Joint Ventures and Provision
for Loss on Land and Net
Investment in Direct Financing
Lease........................... 600,387 661,691 1,792,631 2,150,530
Equity in Earnings of Joint
Ventures........................ 60,864 39,217 182,346 109,720
Provision for Loss on Land and
Net Investment in Direct
Financing Lease................. -- (7,336) -- (48,538)
--------- --------- ---------- ----------
Net Income....................... $ 661,251 $ 693,572 $1,974,977 $2,211,712
========= ========= ========== ==========
Allocation of Net Income:
General partners............... $ 6,613 $ 6,977 $ 19,750 $ 22,443
Limited partners............... 654,638 686,595 1,955,227 2,189,269
--------- --------- ---------- ----------
$ 661,251 $ 693,572 $1,974,977 $2,211,712
========= ========= ========== ==========
Net Income Per Limited Partner
Unit............................ $ 0.16 $ 0.17 $ 0 .49 $ 0.55
========= ========= ========== ==========
Weighted Average Number of
Limited Partner Units
Outstanding..................... 4,000,000 4,000,000 4,000,000 4,000,000
========= ========= ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
September December
30, 1998 31, 1997
----------- -----------
<S> <C> <C>
General partners:
Beginning balance.................................. $ 137,207 $ 106,517
Net income......................................... 19,750 30,690
----------- -----------
156,957 137,207
----------- -----------
Limited partners:
Beginning balance.................................. 34,516,349 34,911,420
Net income......................................... 1,955,227 3,004,937
Distributions ($0.64 and $0.85 per limited partner
unit, respectively)............................... (2,550,006) (3,400,008)
----------- -----------
33,921,570 34,516,349
----------- -----------
Total partners' capital.............................. $34,078,527 $34,653,556
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities........... $2,459,747 $2,511,698
---------- ----------
Cash Flows from Investing Activities:
Investment in joint ventures...................... -- (550,000)
Decrease in restricted cash....................... -- 550,000
Loan to tenant.................................... -- (196,980)
---------- ----------
Net cash used in investing activities........... -- (196,980)
---------- ----------
Cash Flows from Financing Activities:
Distributions to limited partners................. (2,550,006) (2,550,006)
---------- ----------
Net cash used in financing
activities..................................... (2,550,006) (2,550,006)
---------- ----------
Net Decrease in Cash and Cash Equivalents............. (90,259) (235,288)
Cash and Cash Equivalents at Beginning of Period...... 907,980 1,103,568
---------- ----------
Cash and Cash Equivalents at End of
Period............................................... $ 817,721 $ 868,280
========== ==========
Supplemental Schedule of Non-Cash Investing and
Financing Activities
Net investment in direct financing leases
reclassified to land and buildings on
operating leases as a result of lease
termination........................................ $1,488,160 $ --
========== ==========
Distributions declared and unpaid at end of
period............................................. $ 850,002 $ 850,002
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, 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, 1997.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2. Net Investment in Direct Financing Leases
During the nine months ended September 30, 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-5
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners
CNL Income Fund XIII, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund XIII,
Ltd. (a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. 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 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 Income Fund XIII, Ltd.
as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
January 21, 1998
F-6
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation.............................. $22,788,618 $23,612,639
Net investment in direct financing leases.............. 7,910,470 8,543,916
Investment in joint ventures........................... 2,457,810 976,531
Cash and cash equivalents.............................. 907,980 1,103,568
Restricted cash........................................ -- 550,770
Receivables, less allowance for doubtful accounts of
$150,734 in 1996...................................... 23,946 100,955
Prepaid expenses....................................... 10,368 9,143
Organization costs, less accumulated amortization of
$9,422 and $7,422..................................... 578 2,578
Accrued rental income, less allowance for doubtful
accounts of $72,734 in 1996........................... 1,423,820 1,044,970
----------- -----------
$35,523,590 $35,945,070
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable....................................... $ 7,671 $ 6,340
Accrued and escrowed real estate taxes payable......... -- 14,092
Distributions payable.................................. 850,002 850,002
Due to related parties................................. 6,791 2,594
Rents paid in advance.................................. 5,570 54,105
----------- -----------
Total liabilities...................................... 870,034 927,133
Partners' capital...................................... 34,653,556 35,017,937
----------- -----------
$35,523,590 $35,945,070
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases....... $2,371,062 $2,477,156 $2,566,579
Earned income from direct financing
leases................................... 976,547 899,130 943,194
Contingent rental income.................. 287,751 299,495 293,749
Interest and other income................. 46,693 59,319 54,832
---------- ---------- ----------
3,682,053 3,735,100 3,858,354
---------- ---------- ----------
Expenses:
General operating and administrative...... 152,918 156,466 130,501
Bad debt expense.......................... 123,071 -- --
Professional services..................... 25,595 33,746 27,703
Management fees to related parties........ 34,321 35,675 36,031
Real estate taxes......................... -- 10,680 --
State and other taxes..................... 18,301 16,793 20,470
Depreciation and amortization............. 394,099 393,434 393,435
---------- ---------- ----------
748,305 646,794 608,140
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Ventures, Gain (Loss) on Sale of Land...... 2,933,748 3,088,306 3,250,214
Equity in Earnings of Joint Ventures........ 150,417 60,654 98,520
Gain (Loss) on Sale of Land and Building.... (48,538) 82,855 (29,560)
---------- ---------- ----------
Net Income.................................. $3,035,627 $3,231,815 $3,319,174
========== ========== ==========
Allocation of Net Income:
General partners.......................... $ 30,690 $ 31,490 $ 33,432
Limited partners.......................... 3,004,937 3,200,325 3,285,742
---------- ---------- ----------
$3,035,627 $3,231,815 $3,319,174
========== ========== ==========
Net Income Per Limited Partner Unit......... $ 0.75 $ 0.80 $ 0.82
========== ========== ==========
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-8
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
General Partners Limited Partners
---------------- --------------------------------------------------
Accumu- Accumu-
Contri- lated Contri- lated Syndication
butions Earnings butions Distributions Earnings Costs Total
------- -------- ----------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994................... $1,000 $ 40,595 $40,000,000 $ (4,153,373) $ 4,018,914 $(4,665,169) $35,241,967
Distribution to
limited partners
($0.84 per limited
partner unit)........ -- -- -- (3,375,011) -- -- (3,375,011)
Net income............ -- 33,432 -- -- 3,285,742 -- 3,319,174
------ -------- ----------- ------------ ----------- ----------- -----------
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
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows From Operating Activities:
Cash received from tenants............ $ 3,329,633 $ 3,476,985 $ 3,453,186
Distributions from joint ventures..... 151,322 93,700 88,793
Cash paid for expenses................ (236,793) (251,454) (214,011)
Interest received..................... 29,395 48,350 51,410
----------- ----------- -----------
Net cash provided by operating
activities......................... 3,273,557 3,367,581 3,379,378
----------- ----------- -----------
Cash Flows From Investing Activities:
Additions to land and buildings on
operating leases..................... -- -- (336,116)
Proceeds from sale of land and
building............................. 932,849 550,000 286,411
Advances to tenant.................... (196,980) -- --
Repayment of advances................. 127,843 -- --
Investment in joint ventures.......... (1,482,849) -- (140,052)
Decrease (increase) in restricted
cash................................. 550,000 (550,000) --
Other................................. -- -- 954
----------- ----------- -----------
Net cash used in investing
activities......................... (69,137) -- (188,803)
----------- ----------- -----------
Cash Flows From Financing Activities:
Reimbursement of acquisition costs
paid by related parties on behalf of
the Partnership...................... -- -- (3,074)
Distributions to limited partners..... (3,400,008) (3,400,008) (3,350,014)
----------- ----------- -----------
Net cash used in financing
activities......................... (3,400,008) (3,400,008) (3,353,088)
----------- ----------- -----------
Net Decrease in Cash and Cash
Equivalents............................ (195,588) (32,427) (162,513)
Cash and Cash Equivalents at Beginning
of Year................................ 1,103,568 1,135,995 1,298,508
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year................................... $ 907,980 $ 1,103,568 $ 1,135,995
=========== =========== ===========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................ $ 3,035,627 $ 3,231,815 $ 3,319,174
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation........................ 391,434 391,434 391,435
Amortization........................ 2,665 2,000 2,000
Equity in earnings of joint
ventures, net of distributions..... 905 33,046 (9,727)
Loss (gain) on sale of land and
building........................... 48,538 (82,855) 29,560
Decrease (increase) in receivables.. 77,779 (28,034) (3,833)
Decrease in net investment in direct
financing leases................... 84,646 80,214 71,410
Increase in prepaid expenses........ (1,225) (5,005) (4,138)
Increase in accrued rental income... (378,850) (313,540) (371,167)
Increase (decrease) in accounts
payable and accrued expenses....... (12,761) 12,137 922
Increase (decrease) in due to
related parties.................... 4,197 (4,773) 6,213
Increase (decrease) in rents paid in
advance............................ (48,535) 51,142 (52,471)
----------- ----------- -----------
Total adjustments................. 168,793 135,766 60,204
----------- ----------- -----------
Net Cash Provided by Operating
Activities............................. $ 3,204,420 $ 3,367,581 $ 3,379,378
=========== =========== ===========
Supplemental Schedule of Non-Cash
Financing Activities:
Distributions declared and unpaid at
December 31.......................... $ 850,002 $ 850,002 $ 850,002
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
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.
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 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.
F-11
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 are 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 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 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.
F-12
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. Land and Buildings on Operating Leases
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Land............................................ $12,742,897 $13,175,484
Buildings....................................... 11,743,041 11,743,041
----------- -----------
24,485,938 24,918,525
Less accumulated depreciation................... (1,697,320) (1,305,886)
----------- -----------
$22,788,618 $23,612,639
=========== ===========
</TABLE>
In November 1996, the Partnership sold its 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 property was originally acquired
by the Partnership in March 1994, and had a cost of approximately $415,400,
excluding acquisition fees and miscellaneous acquisition expenses; therefore,
the Partnership sold the property for approximately $134,600 in excess of its
original purchase price. In January 1997, the Partnership reinvested the net
sales proceeds in a property in Akron, Ohio, as tenants-in-common, with
affiliates of the general partners (see Note 5).
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).
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, 1997, 1996 and 1995, the Partnership recognized $378,850,
$313,541 and $371,167, 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, 1997:
<TABLE>
<S> <C>
1998.......................................................... $ 2,136,766
1999.......................................................... 2,274,706
2000.......................................................... 2,265,811
2001.......................................................... 2,277,006
2002.......................................................... 2,307,013
Thereafter.................................................... 24,312,111
-----------
$35,573,413
===========
</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 XIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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>
1997 1996
------------ ------------
<S> <C> <C>
Minimum lease payments receivable............. $ 15,747,868 $ 18,116,667
Estimated residual values..................... 2,582,058 2,723,067
Less unearned income.......................... (10,419,456) (12,295,818)
------------ ------------
Net investment in direct financing leases..... $ 7,910,470 $ 8,543,916
============ ============
</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).
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998.......................................................... $ 958,686
1999.......................................................... 964,106
2000.......................................................... 964,106
2001.......................................................... 976,846
2002.......................................................... 994,681
Thereafter.................................................... 10,889,443
-----------
$15,747,868
===========
</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, 1997, 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, 1997, the Partnership owned a 63.03% 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
F-14
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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, 1997, the Partnership owned a 47.83% interest in
this property.
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>
1997 1996
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation......................... $4,256,861 $1,482,503
Net investment in direct financing leases......... 364,479 367,661
Cash.............................................. 18,729 21,173
Receivables....................................... -- 6,412
Prepaid expenses.................................. 380 255
Accrued rental income............................. 106,653 51,745
Liabilities....................................... 15,653 28,121
Partners' capital................................. 4,731,449 1,901,628
Revenues.......................................... 347,971 216,960
Net income........................................ 285,922 145,851
</TABLE>
The Partnership recognized income totalling $150,417, $60,654 and $98,520
for the years ended December 31, 1997, 1996 and 1995, respectively, from these
joint ventures and the properties held as tenants-in-common with affiliates.
6. Restricted Cash
In 1996, the sales proceeds of $550,000 from the sale of the property in
Richmond, Virginia, plus accrued interest of $770, 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 1997, the funds were
released from escrow and the Partnership acquired a 63.03% interest in a Burger
King property in Akron, Ohio, as tenants-in-common with an affiliate of the
general partners (Note 5).
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, 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
F-15
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
five percent to the general partners. Any gain from the sale of a property 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.
During each of the years ended December 31, 1997 and 1996, the Partnership
declared distributions to the limited partners of $3,400,008 and during the
year ended December 31, 1995, the Partnership declared distributions to the
limited partners of $3,375,011. 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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................... $3,035,627 $3,231,815 $3,319,174
Depreciation for tax reporting purposes
in excess of depreciation for financial
reporting purposes..................... (100,696) (103,634) (103,634)
Direct financing leases recorded as
operating leases for tax reporting
purposes............................... 84,646 80,214 71,410
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............................... (19,727) 6,819 (17,195)
Loss (gain) on sale of property deferred
for tax reporting purposes............. -- (82,855) 29,560
Loss on sale of property for financial
reporting purposes in excess of loss
for tax reporting purposes............. 38,823 -- --
Allowance for doubtful accounts......... (150,734) 102,198 45,182
Accrued rental income................... (378,850) (313,540) (371,167)
Rents paid in advance................... (48,535) 51,142 (52,471)
---------- ---------- ----------
Net income for federal income tax
purposes............................... $2,460,554 $2,972,159 $2,920,859
========== ========== ==========
</TABLE>
9. Related Party Transactions
One of the individual partners, James M. Seneff, Jr., is one of the
principal shareholders of CNL Group, Inc., the parent company of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, served
as president of CNL Fund Advisors, Inc. through October 1997. CNL Income Fund
Advisors, Inc. was a wholly owned subsidiary of CNL Group, Inc. until its
merger, effective January 1, 1996, with CNL Fund Advisors, Inc. During the
years ended December 31, 1997, 1996 and 1995, CNL Income Fund Advisors, Inc.
and CNL Fund Advisors, Inc. (hereinafter referred to collectively as the
"Affiliates") each performed certain services for the Partnership, as described
below.
During the years ended December 31, 1997, 1996 and 1995, certain 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 Affiliates 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-16
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 Affiliates. 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 $34,321, $35,675 and $36,031 for the years ended
December 31, 1997, 1996 and 1995, respectively.
Certain Affiliates are 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 Affiliates provide 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, 1997, 1996 and 1995, Affiliates provided
accounting and administrative services to the Partnership on a day-to-day
basis. For the years ended December 31, 1997, 1996 and 1995, the expenses
incurred for these services were $87,322, $91,272 and $67,052, respectively.
The due to related parties at December 31, 1997 and 1996, totalled $6,791
and $2,594, 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.
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 joint ventures and the properties held
as tenants-in-common with affiliates) for at least one of the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Long John Silver's, Inc....................... $759,064 $764,565 $774,281
Flagstar Enterprises, Inc. and Quincy's
Restaurants, Inc............................. 744,199 765,109 785,570
Golden Corral Corporation..................... 536,886 539,568 533,668
Foodmaker, Inc................................ 450,816 450,393 450,724
Checkers Drive-In Restaurants, Inc............ 366,187 412,422 416,746
</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-17
<PAGE>
CNL INCOME FUND XIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Concluded)
the Partnership's share of total rental and earned income from joint ventures
and the properties held as tenants-in-common with affiliates) for at least one
of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Long John Silver's............................. $759,064 $764,565 $774,281
Hardee's....................................... 649,762 670,249 690,324
Golden Corral Family Steakhouse Restaurants.... 536,886 539,568 533,668
Burger King.................................... 484,111 431,280 419,740
Jack in the Box................................ 450,816 450,393 450,724
Checkers Drive-In Restaurants.................. 366,187 412,422 416,746
</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. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
F-18
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to the
Company gives effect to the Acquisition, and is based on estimates and
assumptions set for the 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 the Company, the
historical combined financial information of CNL Income Fund XIII, Ltd., (the
"CNL 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 the Company, the
CNL Income Fund, Advisor and CNL Restaurant Financial Services Group. The pro
forma balance sheet assumes that the Acquisition occurred on September 30,
1998; the pro forma consolidated statements of earnings assume that the
Property Acquisitions (as defined on page ) and the Acquisition occurred on
January 1, 1997.
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.
UNAUDITED PRO FORMA BALANCE SHEET
September 30, 1998
<TABLE>
<CAPTION>
Historical
--------------------------------------------------------------------------------
CNL Income
Fund XIII, CNL Financial CNL Combined
APF Ltd. Advisor Services, Inc. Financial Corp. Portfolios
------------ ----------- ---------- -------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS:
Land and
buildings on
operating
leases, net..... $298,967,972 $23,965,359 $ 0 $ 0 $ 0 $322,933,331
Net investment in
direct financing
leases.......... 117,028,760 6,359,594 0 0 0 123,388,354
Mortgages and
notes
receivable...... 33,523,506 0 0 0 173,776,981 207,300,487
Other
Investments..... 16,200,316 0 200,000 0 6,561,628 22,961,944
Investment in
joint ventures.. 631,374 2,453,391 0 0 0 3,084,765
Cash and cash
equivalents..... 90,674,289 817,721 283,300 599,997 5,098,033 97,473,340
Receivables...... 575,104 19,822 7,544,985 6,824,632 517,471 15,482,014
Accrued rental
income.......... 3,071,451 1,364,156 0 0 0 4,435,607
Other assets..... 5,711,195 12,251 401,524 295,570 3,854,477 10,275,017
------------ ----------- ---------- ---------- ------------ ------------
Total assets.... $566,383,967 $34,992,294 $8,429,809 $7,720,199 $189,808,590 $807,334,859
============ =========== ========== ========== ============ ============
LIABILITIES & EQUITY:
Accounts payable
and accrued
liabilities..... $ 379,496 $ 52,711 $ 449,751 $ 193,949 $ 1,236,138 $ 2,312,045
Accrued
construction
costs payable... 3,045,304 0 0 0 0 3,045,304
Distributions
payable......... 0 850,002 2,220,000 0 0 3,070,002
Due to related
parties......... 2,552,411 5,483 0 1,452,512 6,556,920 10,567,326
Income tax
payable......... 0 0 1,989,003 0 1,001,861 2,990,864
Line of credit... 6,765,575 0 0 0 0 6,765,575
Notes payable.... 0 0 390,398 28,462 175,528,203 175,947,063
Deferred income.. 1,015,758 0 0 0 0 1,015,758
Rents paid in
advance......... 437,497 5,571 0 0 0 443,068
Minority
interest........ 282,544 0 0 0 0 282,544
Common Stock..... 621,187 0 9,800 2,000 200 633,187
Additional paid
in capital...... 556,830,578 0 482,964 5,231,827 3,887,496 566,432,865
Accumulated
distributions in
excess of net
earnings........ (5,546,383) 0 2,887,893 811,449 1,597,772 (249,269)
Partners
capital......... 0 34,078,527 0 0 0 34,078,527
------------ ----------- ---------- ---------- ------------ ------------
Total
liabilities and
equity......... $566,383,967 $34,992,294 $8,429,809 $7,720,199 $189,808,590 $807,334,859
============ =========== ========== ========== ============ ============
<CAPTION>
Pro Forma
-----------------------------
Adjustments Pro Forma
--------------- -------------
<S> <C> <C>
ASSETS:
Land and
buildings on
operating
leases, net..... $ 6,150,650 (1)
26,052,741 (2) $355,136,722
Net investment in
direct financing
leases.......... 1,572,864 (1) 124,961,218
Mortgages and
notes
receivable...... 849,195 (2) 208,149,682
Other
Investments..... -- 22,961,944
Investment in
joint ventures.. 580,961 (1) 3,665,726
Cash and cash
equivalents..... (486,515)(1)
(8,933,000)(1)
(26,901,936)(2) 61,151,889
Receivables...... (7,854,862)(3) 7,627,152
Accrued rental
income.......... (1,364,156)(1) 3,071,451
Other assets..... 41,717,974 (1)
(3,667,084)(1) 48,325,907
--------------- -------------
Total assets.... $27,716,832 $835,051,691
=============== =============
LIABILITIES & EQUITY:
Accounts payable
and accrued
liabilities..... $ -- $ 2,312,045
Accrued
construction
costs payable... -- 3,045,304
Distributions
payable......... -- 3,070,002
Due to related
parties......... (7,854,862)(3) 2,712,464
Income tax
payable......... (2,990,864)(4) 0
Line of credit... -- 6,765,575
Notes payable.... -- 175,947,063
Deferred income.. -- 1,015,758
Rents paid in
advance......... -- 443,068
Minority
interest........ -- 282,544
Common Stock..... 149,375 (1) 782,562
Additional paid
in capital...... 151,611,670 (1) 718,044,535
Accumulated
distributions in
excess of net
earnings........ (82,110,824)(1)
2,990,864 (4) (79,369,229)
Partners
capital......... (34,078,527)(1) 0
--------------- -------------
Total
liabilities and
equity......... $27,716,832 $835,051,691
=============== =============
</TABLE>
F-20
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA INCOME STATEMENT
September 30, 1998
<TABLE>
<CAPTION>
Historical Pro Forma
------------------------------------------------------------------------ ----------------------------
CNL
CNL Income Financial CNL
Fund XIII, Services, Financial Combined
APF Ltd. Advisor Inc. Corp. Portfolios Adjustments Pro Forma
----------- ---------- ----------- ---------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and earned
income............ $22,947,199 $2,310,870 $ 0 $ 0 $ 0 $25,258,069 $ 9,635,208 (a)
35,302 (b) $34,928,579
Fees.............. 0 0 21,405,127 5,115,549 6,817 26,527,493 (21,037,903)(c)
(2,875,906)(d) 2,613,684
Interest and other
income............ 6,117,911 41,267 751 432,506 18,031,141 24,623,576 1,526,547 (e) 26,150,123
----------- ---------- ----------- ---------- ----------- ----------- ------------ -----------
Total revenue..... 29,065,110 2,352,137 21,405,878 5,548,055 18,037,958 76,409,138 (12,716,752) 63,692,386
Expenses:
General and
administrative.... 1,539,004 204,903 6,701,115 4,107,311 2,597,171 15,149,504 (1,307,880)(f)
(1,415,100)(g)
(33,343)(h) 12,393,181
Advisory fees..... 1,248,393 26,246 0 0 1,026,231 2,300,870 (2,300,870)(i) 0
Fees to Restaurant
Financial Services
Group............. 0 0 256,456 1,569,202 0 1,825,658 (1,825,658)(n) 0
Interest.......... 0 0 105,668 3,534 14,230,999 14,340,201 (68,670)(m) 14,271,531
State taxes....... 397,569 16,184 15,226 18,564 201,616 649,159 53,806 (j) 702,965
Depreciation--
other............. 0 0 75,607 55,056 0 130,663 -- 130,663
Depreciation--
property.......... 2,684,924 311,419 0 0 0 2,996,343 1,507,549 (k) 4,503,892
Amortization...... 8,096 754 55,932 138 945,299 1,010,219 1,564,424 (l) 2,574,643
----------- ---------- ----------- ---------- ----------- ----------- ------------ -----------
Total operating
expenses.......... 5,877,986 559,506 7,210,004 5,753,805 19,001,316 38,402,617 (3,825,742) 34,576,875
----------- ---------- ----------- ---------- ----------- ----------- ------------ -----------
Operating earnings
(losses).......... 23,187,124 1,792,631 14,195,874 (205,750) (963,358) 38,006,521 (8,891,010) 29,115,511
Equity in earnings
of joint
ventures/minority
interest.......... (23,271) 182,346 0 12,452 0 171,527 0 171,527
Gain on
securitization.... 0 0 0 0 3,018,268 3,018,268 0 3,018,268
----------- ---------- ----------- ---------- ----------- ----------- ------------ -----------
Net earnings
(losses) before
income taxes...... 23,163,853 1,974,977 14,195,874 (193,298) 2,054,910 41,196,316 (8,891,010) 32,305,306
Provision (credit)
for federal income
taxes............. 0 0 5,607,415 (81,229) 789,895 6,316,081 (6,316,081)(o) 0
----------- ---------- ----------- ---------- ----------- ----------- ------------ -----------
Net income......... $23,163,853 $1,974,977 $ 8,588,459 $ (112,069) $ 1,265,015 $34,880,235 $ (2,574,929) $32,305,306
=========== ========== =========== ========== =========== =========== ============ ===========
Earnings per share. $ 0.49 $ 0.44
=========== ===========
Shares outstanding:
Weighted average.. 47,633,909 73,576,119(p)
=========== ===========
End of period..... 62,118,679 78,256,212
=========== ===========
</TABLE>
F-21
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA INCOME STATEMENT
For the year ended December 31, 1997
<TABLE>
<CAPTION>
Historical Pro Forma
------------------------------------------------------------------------ ---------------------------
CNL
CNL Income Financial CNL
Fund XIII, Services, Financial Combined
APF Ltd. Advisor Inc. Corp. Portfolios Adjustments Pro Forma
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and earned
income.............. $15,490,615 $3,635,360 $ 0 $ 0 $ 0 $19,125,975 $24,048,982 (a)
47,068 (b) $43,222,025
Fees................ 0 0 8,310,836 5,965,110 73,704 14,349,650 (9,111,771)(c)
(2,662,141)(d) 2,575,738
Interest and other
income.............. 3,967,318 46,693 165,569 0 10,932,843 15,112,423 249,395 (e) 15,361,818
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Total revenue....... 19,457,933 3,682,053 8,476,405 5,965,110 11,006,547 48,588,048 12,571,533 61,159,581
Expenses:
General and
administrative...... 1,010,725 301,584 4,266,169 1,889,904 828,848 8,297,230 (742,685)(f)
(1,619,238)(g)
(45,770)(h) 5,889,537
Advisory fees....... 804,879 34,321 0 0 1,802,532 2,641,732 (2,641,732)(i) 0
Fees to Restaurant
Financial Services
Group............... 0 0 151,041 594,041 0 745,082 (745,082)(n) 0
Interest............ 0 0 162,153 183,315 8,320,000 8,665,468 (81,594)(m) 8,583,874
State taxes......... 251,358 18,301 12,084 1,294 1,600 284,637 21,080 (j) 305,717
Depreciation--other. 0 0 48,490 14,637 0 63,127 -- 63,127
Depreciation--
property............ 1,784,269 391,434 0 0 0 2,175,703 3,158,478 (k) 5,334,181
Amortization........ 10,793 2,665 18,093 61,324 916,577 1,009,452 2,085,899 (l) 3,095,351
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Total operating
expenses............ 3,862,024 748,305 4,658,030 2,744,515 11,869,557 23,882,431 (610,644) 23,271,787
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Operating earnings
(losses)............ 15,595,909 2,933,748 3,818,375 3,220,595 (863,010) 24,705,617 13,182,177 37,887,794
Equity in earnings
of joint
ventures/minority
interest............ (31,453) 150,417 0 (126,627) 0 (7,663) -- (7,663)
Provision for loss
on properties....... 0 (48,538) 0 0 0 (48,538) -- (48,538)
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Net earnings before
income taxes........ 15,564,456 3,035,627 3,818,375 3,093,968 (863,010) 24,649,416 13,182,177 37,831,593
Provision (credit)
for federal income
taxes............... 0 0 1,508,258 1,272,133 (317,785) 2,462,606 (2,462,606)(o) 0
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Net earnings
(losses)............ $15,564,456 $3,035,627 $2,310,117 $1,821,835 $ (545,225) $22,186,810 $15,664,783 $37,831,593
=========== ========== ========== ========== =========== =========== =========== ===========
Earnings per share... $ 0.66 $ 0.51
=========== ===========
Shares outstanding:
Weighted average.... 23,423,868 74,294,585(p)
=========== ===========
End of period....... 36,192,971 74,249,585
=========== ===========
</TABLE>
F-22
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of September 30, 1998 reflects the
transactions of the acquisition of the CNL Income Fund, Advisor and CNL
Restaurant Financial Services Group (the "Acquisition Proposal") as set forth
in this Proxy Statement. The Pro Forma Statements of Earnings for the nine
months ended September 30, 1998, and for the year ended December 31, 1997, have
been prepared to reflect a) the issuance of additional shares and the property
acquisitions completed from January 1, 1997 through November 30, 1998
("Offering and Property Transactions") and b) the transactions of the
Acquisition Proposal as set forth in this Proxy Statement. This unaudited pro
forma financial information has been prepared utilizing the historical
financial statements of the Company and the historical combined financial
information of the CNL Income Fund, Advisor and CNL Restaurant Financial
Services Group and should be read in conjunction with the selected historical
financial data and accompanying notes of the Company, the CNL Income Fund,
Advisor and the CNL Restaurant Financial Services Group. The Pro Forma Balance
Sheet was prepared as if the Offering and Property Transactions and the
Acquisition Proposal occurred on September 30, 1998. The Pro Forma Statements
of Earnings were prepared as if the Property Acquisitions and the Acquisition
Proposal occurred as of January 1, 1997. The pro forma information is unaudited
and is not necessarily indicative of the consolidated operating results which
would have occurred if the Offering and Acquisition Transaction and the
Acquisition Proposal 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 Acquisition
Proposal have been made. Capitalized terms have the meanings as defined in the
Proxy Statement.
2. Method of Accounting
The acquisition of the CNL Income Fund and the CNL Restaurant Financial
Services Group will be accounted for under the purchase accounting method. The
Company 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, the Company 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 operating expense on the Company's consolidated statements of
earnings, but the Company will not deduct this expense for purposes of
calculating funds from operations due to the non-recurring and non-cash nature
of the expense.
All significant intercompany balances and transactions between the Company,
CNL Income Fund, Advisor and CNL Restaurant Financial Services Group have been
eliminated in the pro forma financial statements.
3. Adjustments to Pro Forma Balance Sheet
The following describes the pro forma adjustments to the Pro Forma Balance
Sheet as of September 30, 1998, as if the Acquisition was consummated on such
date. For purposes of the pro forma financial statements, it is assumed that at
an annual meeting of stockholders, the stockholders of the Company approved an
amendment to increase the number of authorized shares to an amount necessary to
enable the Company to issue the shares for the Acquisition.
(1) Represents the payment of $486,515 in cash and the issuance of
16,137,533 common shares in consideration for the purchase of the CNL
Income Fund, Advisor and CNL Restaurant Financial Services Group at
September 30, 1998 at a share price of $10 plus estimated transaction
costs. The acquisition of the CNL Income Fund and the CNL Restaurant
Financial Services Group has been accounted for under the purchase
accounting method and goodwill was recognized to the extent that the
consideration paid
F-23
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
exceeded the fair value of the net tangible assets acquired. As for the
acquisition of the Advisor from a related party, the consideration paid in
excess of the fair value of the net tangible assets received has been
accounted for as costs incurred in acquiring the Advisor from a related
party because the Advisor has not been deemed to qualify as a "business"
for purposes of applying APB Opinion No. 16 "Business Combinations." Upon
consummation of the Acquisition, this expense will be recorded as an
operating expense on the Company's statement of earnings. The Company will
not deduct this expense for purposes of calculating funds from operations
due to the nonrecurring and non-cash nature of the expense. As of September
30, 1998, $249,403 of transaction costs had been incurred by the Company.
<TABLE>
<S> <C>
CNL Income Fund............................................. $ 38,861,847
Advisor..................................................... 76,000,000
CNL Restaurant Financial Services Group..................... 47,000,000
------------
Total Purchase Price (cash and shares).................... 161,861,847
Less cash paid to CNL Income Fund........................... (486,515)
------------
Share consideration......................................... 161,375,332
Transaction costs of the Company............................ 8,933,000
------------
Total costs incurred...................................... $170,308,332
============
</TABLE>
In addition, the Company i) used $8,933,000 in cash to pay the transaction
costs related to the Acquisition, ii) made an upward adjustment to the CNL
Income Fund carrying value of land and building on operating leases by
$6,150,650, net investment in direct financing leases by $1,572,864, investment
in joint venture by $580,961, made downward adjustments to the carrying value
of accrued rental income of $1,364,156, made downward adjustments to other
assets of $3,667,084 to adjust historical values to fair value, iii) recorded
goodwill of $41,717,974 for the acquisition of the CNL Restaurant Financial
Services Group, iv) reduced retained earnings by $76,813,710 for the excess
consideration paid over the net assets of the Advisor and removed the
historical common stock balance of $12,000, additional paid in capital balance
of $9,602,287, retained earnings balance of $5,297,114 and partners capital
balance of $34,078,527 of the CNL Income Fund, Advisor and CNL Restaurant
Financial Services Group.
(2) Represents the use of $26,901,936 in cash and cash equivalents at
September 30, 1998 to acquire $26,052,741 in properties and issue $849,195
in mortgage notes which occurred from October 1, 1998 through November 30,
1998.
(3) Represents the elimination by the CNL Income Fund of $5,483 in
related party payables recorded as receivables by the Advisor, the
elimination by the CNL Restaurant Financial Services Group of $6,641,379 in
related party payables recorded as receivables by CNL Restaurant Financial
Services Group and the elimination by the Company of $1,208,000 in related
party payables recorded as receivables by the Advisor.
(4) Represents the elimination of income taxes payable of $2,990,864
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.
4. Adjustments to Pro Forma Income Statements
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the nine months ended September 30, 1998, as
if the Acquisition was consummated as of January 1, 1997.
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(a) Represents rental and earned income as if 1) properties that had been
previously constructed and acquired from January 1, 1998 through
November 30, 1998 had been acquired and leased on January 1, 1997 and
2) properties that were developed by the Company from January 1, 1998
through November 30, 1998 had been placed in service on May 1, 1997
(assumes a four month development period.)
<TABLE>
<S> <C>
Rental and earned income on Property Transactions by the
Company.................................................... $9,635,208
</TABLE>
(b) Represents $35,302 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms
for the leases acquired from the CNL Income Fund as if the leases had
been acquired on January 1, 1997.
(c) Represents the elimination of intercompany fees between the Company,
the CNL Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Origination fees.......................................... $ (1,569,202)
Secured equipment lease fee............................... (44,426)
Advisory fees............................................. (1,748,629)
Reimbursement of administrative costs..................... (293,763)
Acquisition fees.......................................... (15,392,193)
Underwriting fees......................................... (254,945)
Administrative fees....................................... (148,491)
Executive fee............................................. (310,000)
Guarantee fees............................................ (93,750)
Servicing fee............................................. (1,014,117)
Development fees.......................................... (166,876)
Consulting fee............................................ (1,511)
------------
Total................................................. $(21,037,903)
============
</TABLE>
(d) Represents the deferral of $2,875,906 in origination fees collected by
CNL Restaurant Financial Services Group that should be amortized over
the term of the loans originated (20 years) in accordance with the
Statement of Financial Accounting Standards #91 "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring
Loans and Initial Direct Costs of Leases."
(e) Represents interest income of $1,318,870 earned from Other Investments
acquired and mortgage notes issued from January 1, 1998 through
November 30, 1998 as if this had occurred on January 1, 1997 and the
amortization of $207,677 of deferred origination fees collected during
the year ended December 31, 1997 and during the nine months ended
September 30, 1998, which were capitalized and deferred in (d) above as
if they had been collected on January 1, 1997. These deferred fees are
being amortized and recorded as interest income.
(f) Represents the elimination of intercompany expenses paid between the
Company, the CNL Income Fund, the Advisor and the CNL Restaurant
Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs...................... $ (293,763)
Servicing fee.............................................. (1,014,117)
-----------
$(1,307,880)
===========
</TABLE>
F-25
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by the Company
were subject to capitalization during the entire period and 2) costs
relating to properties not developed by the Company were subject to
capitalization up through the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs.......................... $(1,415,100)
</TABLE>
(h) Represents savings of $33,343 in professional services and
administrative expenses resulting from reporting on one combined
Company versus 22 separate entities.
(i) Represents the elimination of advisory fees between the Company, the
CNL Income Fund, the Advisor and the CNL Restaurant Financial Services
Group:
<TABLE>
<S> <C>
Advisory fees............................................... $(1,748,629)
Administrative fees......................................... (148,491)
Executive fee............................................... (310,000)
Guarantee fees.............................................. (93,750)
-----------
$(2,300,870)
===========
</TABLE>
(j) Represents additional income taxes of $53,806 resulting from assuming
that acquisitions from January 1, 1998 through November 30, 1998 had
been acquired on January 1, 1997 and assuming that the CNL Income Fund
had operated under a REIT structure.
(k) Represents an increase in depreciation of the building portion of the
properties acquired from January 1, 1998 through November 30, 1998 as
if they had been acquired on January 1, 1997 and the step up in basis
referred to in footnote (2) from acquiring the CNL Income Fund
portfolio using the straight-line method over the estimated useful
lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense........................................ $1,507,549
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of the
CNL Restaurant Financial Services Group referred to in footnote (2).
<TABLE>
<S> <C>
Amortization of goodwill.................................... $1,564,424
</TABLE>
(m) Represents elimination of interest expense recorded for the
amortization of $350,000 in arrangement fees collected during the year
ended December 31, 1997 which were eliminated in II (d) below.
<TABLE>
<S> <C>
Interest expense............................................ $ (68,670)
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees incurred
between the Company, the CNL Income Fund, the Advisor and the CNL
Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees............................................ $(1,569,202)
Underwriting fees........................................... (254,945)
Consulting fee.............................................. (1,511)
-----------
$(1,825,658)
===========
</TABLE>
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(o) Represents the elimination of $6,316,081 in the provision for income
taxes as a result of the Acquisition. The Company expects to continue
to qualify as a REIT and does not expect to incur federal income taxes.
(p) Common shares issued during the period required to fund acquisitions as
if they had been acquired on January 1, 1997 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 the proposal to increase the number of authorized common
shares of the Company.
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the year ended December 31, 1997, as if the
Acquisition was consummated as of January 1, 1997.
(a) Represents rental and earned income as if 1) properties that had been
previously constructed and acquired from January 1, 1998 through
November 30, 1998 had been acquired and leased on January 1, 1997 and
2) properties that were developed by the Company from January 1, 1997
through November 30, 1998 had been placed in service on May 1, 1997
(assumes a four month development period).
<TABLE>
<S> <C>
Rental and earned income on Property Transactions
by the Company........................................ $24,048,982
</TABLE>
(b) Represents $47,068 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms
for the leases acquired from the CNL Income Fund as if the leases had
been acquired on January 1, 1997.
(c) Represents the elimination of intercompany fees between the Company,
the CNL Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Origination fees........................................... $ (594,041)
Secured equipment lease fee................................ (375,219)
Advisory fees.............................................. (1,810,001)
Reimbursement of administrative costs...................... (143,697)
Acquisition fees........................................... (3,887,483)
Underwriting fees.......................................... (151,041)
Administrative fees........................................ (269,231)
Executive fee.............................................. (250,000)
Guarantee fees............................................. (312,500)
Arrangement fees........................................... (350,000)
Servicing fee.............................................. (598,988)
Development fees........................................... (369,570)
-----------
Total.................................................. $(9,111,771)
===========
</TABLE>
(d) Represents the deferral of $2,662,141 in origination fees collected by
CNL Restaurant Financial Services Group that should be amortized over
the term of the loans originated (20 years) in accordance with the
Statement of Financial Accounting Standards #91 "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring
Loans and Initial Direct Costs of Leases."
F-27
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(e) Represents the elimination of interest income of $1,931,331 earned
during the year ended December 31, 1997 assuming all monies raised
during 1997 and all cash held on January 1, 1997 was used to effect the
Acquisition on January 1, 1997, represents interest income of
$2,047,619 earned from Other Investments acquired and mortgage notes
issued from January 1, 1998 through November 30, 1998 as if this had
occurred on January 1, 1997 and the recognition of $133,107 of
origination fees collected during the year ended December 31, 1997
which were deferred in (d) and are being amortized and recorded as
interest income.
(f) Represents the elimination of intercompany expenses paid between the
Company, the CNL Income Fund, the Advisor and the CNL Restaurant
Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs........................ $(143,697)
Servicing fee................................................ (598,988)
---------
$(742,685)
=========
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by the Company
were subject to capitalization during the entire period and 2) costs
relating to properties not developed by the Company were subject to
capitalization up through the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs......................... $(1,619,238)
</TABLE>
(h) Represents savings of $45,770 in professional services and
administrative expenses resulting from reporting on one combined
Company versus 22 separate entities.
(i) Represents the elimination of advisory fees between the Company, the
CNL Income Fund, the Advisor and the CNL Restaurant Financial Services
Group:
<TABLE>
<S> <C>
Advisory fees............................................... $(1,810,001)
Administrative fees......................................... (269,231)
Executive fee............................................... (250,000)
Guarantee fees.............................................. (312,500)
-----------
$(2,641,732)
===========
</TABLE>
(j) Represents additional income taxes of $21,080 resulting from assuming
that acquisitions from January 1, 1997 through November 30, 1998 had
been acquired on January 1, 1997 and assuming that the CNL Income Fund
had operated under a REIT structure.
(k) Represents increase in depreciation of the building portion of the
properties acquired from January 1, 1997 through November 30, 1998 as
if they had been acquired on January 1, 1997 and the step up in basis
referred to in footnote (2) from acquiring the CNL Income Fund
portfolio using the straight-line method over the estimated useful
lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense........................................ $3,158,478
</TABLE>
F-28
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Concluded)
(l) Represents the amortization of the goodwill on the acquisition of the
CNL Restaurant Financial Services Group referred to in footnote (2).
<TABLE>
<S> <C>
Amortization of goodwill.................................... $2,085,899
</TABLE>
(m) Represents elimination of yearly amortization of arrangement fees of
$350,000 capitalized as deferred costs and amortized as interest
expense and the capitalization of interest expense during the period
that properties were under development.
<TABLE>
<S> <C>
Amortization of arrangement fees.............................. $(24,144)
Capitalization of interest during development period.......... (57,450)
--------
$(81,594)
========
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees incurred
between the Company, the CNL Income Fund, the Advisor and the CNL
Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees.............................................. $(594,041)
Underwriting fees............................................. (151,041)
---------
$(745,082)
=========
</TABLE>
(o) Represents the elimination of $2,462,606 in the provision for income
taxes as a result of the Acquisition. The Company expects to continue
to qualify as a REIT and does not expect to incur federal income taxes.
(p) Common shares issued during the period were assumed to have been issued
and outstanding as of January 1, 1997. For purposes of the pro forma
financial statement, it is assumed that the stockholders approved the
proposal to increase the number of authorized common shares of the
Company.
F-29
<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 eighteen 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
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger is entered into as of this 11th day of
March, 1999, by and among CNL American Properties Fund, Inc., a Maryland
corporation ("APF"), CNL APF Partners, L.P., a Delaware limited partnership
(the "Operating Partnership"), CNL APF GP Corp., a Delaware corporation (the
"OP General Partner"), CNL Income Fund XIII, Ltd., a Florida limited
partnership (the "Fund"), and Robert A. Bourne, James M. Seneff, Jr., and CNL
Realty Corporation, a Florida corporation (together with Messrs. Bourne and
Seneff, the "General Partners"). APF, the Operating Partnership, the OP General
Partner, the Fund and the General Partners are referred to collectively herein
as the "Parties" and individually as a "Party."
RECITALS:
WHEREAS, the Parties hereto desire to consummate a merger (the "Merger")
whereby the Fund will be merged with and into the Operating Partnership, and
the Operating Partnership will be the surviving limited partnership in the
Merger, upon the terms and subject to the conditions of this Agreement and in
accordance with the Delaware Revised Uniform Limited Partnership Act (the
"Delaware RULPA") and the Florida Revised Uniform Limited Partnership Act (the
"Florida RULPA");
WHEREAS, the Fund is one of 18 CNL Income Funds (collectively with the Fund,
the "CNL Income Funds") that APF is proposing to acquire (the "Proposed
Acquisitions");
WHEREAS, the Special Committee (the "Special Committee") of the independent
members of the Board of Directors of APF has received a fairness opinion (the
"Fairness Opinion") from Merrill Lynch & Co. as to the fairness to APF, from a
financial point of view, of the consideration to be paid in connection with the
Proposed Acquisitions;
WHEREAS, the Special Committee has recommended the Merger to the Board of
Directors of APF and the Board has approved the proposal to consummate the
Merger (the "Merger Proposal") and the related transactions;
WHEREAS, Legg Mason Wood Walker Incorporated has delivered a fairness
opinion (the "Fund Fairness Opinion") to the General Partners as to the
fairness to the Fund and its limited partners from a financial point of view,
of the APF Common Share consideration offered to the Fund and its limited
partners; and
WHEREAS, the Board of Directors of the OP General Partner has unanimously
approved the Merger Proposal;
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the receipt and sufficiency of which are
acknowledged, the Parties agree as follows:
ARTICLE I
Definitions
1.1 Terms Defined in this Agreement. As used in this Agreement, the
following terms shall have the respective meanings set forth below:
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
B-1
<PAGE>
"Affiliated Group" means any affiliated group within the meaning of Code
(S)1504, or any similar group defined under a similar provision of state, local
or foreign law.
"Agreement" means this Agreement, as amended from time to time.
"APF" has the meaning set forth in the preface above.
"APF Common Shares" shall mean the shares of common stock, par value $0.01,
of APF.
"APF Indemnity Claim" has the meaning set forth in Section 12.1 below.
"APF SEC Documents" has the meaning set forth in Section 6.7 below.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms the basis for any specified
consequence.
"Business Combination" has the meaning set forth in Section 4.1(b) below.
"Cash/Note Option" has the meaning set forth in Section 4.4 below.
"Closing" has the meaning set forth in Section 2.3 below.
"CNL Income Funds" has the meaning set forth in the second paragraph of the
Recitals above.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the businesses
and affairs of the Fund, the Operating Partnership or APF, if any, that is not
already generally available to the public.
"Delaware RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Disclosure Schedule" has the meaning set forth in the first paragraph of
Article VII below.
"Dissenting Partners" has the meaning set forth in Section 4.4 below.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
tax-qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) tax-qualified defined benefit retirement
plan or arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Fairness Opinion" has the meaning set forth in the third paragraph of the
Recitals above.
"Florida RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Fund" has the meaning set forth in the preface above.
"Fund Articles of Merger" has the meaning set forth in Section 2.2 below.
"Fund Fairness Opinion" has the meaning set forth in the fifth paragraph of
the recitals above.
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"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 3,886,185 fully paid and nonassessable APF Common
Shares (1,943,093 APF Common Shares if the Reverse Split [defined below] occurs
before the Closing) (the "Share Consideration") pursuant to the terms of
Section 4.2 below, (ii) shall cease to be outstanding, and (iii) shall be
canceled and retired and shall cease to exist, and each Partner, as the holder
of such Fund Interests shall cease to have any rights with respect thereto,
except the right to receive either (A) APF Common Shares therefor in accordance
with this Section 4.1 and Section 4.3 or (B) the cash and Notes in accordance
with Section 4.4 below. Subject to the approval of the APF's shareholders of an
amendment to its article of incorporation, APF anticipates that prior to the
Closing it will effect a one for two reverse stock split (the "Reverse Split")
pursuant to which each two shares of APF Common Shares outstanding will be
exchanged for one share of APF Common Shares.
(b) Except for the Reverse Stock Split described in Section 4.1(a), prior to
the Effective Time, APF shall not split or combine the APF Common Shares, or
pay a stock dividend or other stock distribution in APF Common Shares, or in
rights or securities exchangeable for, convertible into or exercisable for APF
Common Shares, or otherwise change APF Common Shares into, or exchange APF
Common Shares for, any other securities (whether pursuant to or as part of a
merger, consolidation, acquisition of property or stock, separation,
reorganization, or liquidation of APF as a result of which APF stockholders
receive cash, stock, or other property in exchange for, or in connection with,
their APF Common Shares (a "Business Combination") or otherwise), or make any
other dividend or distribution on or of APF Common Shares (other than regular
quarterly cash dividends paid on APF Common Shares or any distribution pursuant
to APF's dividend reinvestment plan), without the parties hereto having first
entered into an amendment to this Agreement pursuant to which the Share
Consideration will be adjusted to reflect such split, combination, dividend,
distribution, Business Combination, or change.
(c) At the Effective Time, by virtue of the Merger and without any action by
holders thereof, all of the APF Common Shares issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding.
4.2 Payment of Share Consideration. At the Closing, subject to Section 4.4
below, the Partners shall receive the Share Consideration (less expenses paid
by APF on behalf of the Fund), distributed in accordance
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with the provisions of the Fund's limited partnership agreement as of the
Closing Date. For the purposes of this Agreement, the Share Consideration will
be reduced (i) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund and (ii) as provided
in Section 4.4 below.
4.3 Fractional APF Common Shares. No certificates representing fractional
APF Common Shares shall be issued upon conversion of any Fund Interests. Each
Partner of the Fund who would otherwise be entitled to fractional APF Common
Shares will receive one APF Common Share for a fractional interest representing
50% or more of one APF Common Share. No APF Common Shares will be issued for a
fractional interest representing less than 50% of one APF Common Share.
4.4 Cash/Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote against the
Merger and affirmatively elect the cash/note option (the "Cash/Note Option"),
such Dissenting Partners shall be entitled to receive, in lieu of the Share
Consideration, consideration based on such Dissenting Partners' percentage
interest (as determined by the Fund's partnership agreement) in the Fund's
asset liquidation value of $34,688,461, based on Valuation Associates'
appraisal. Such consideration shall be payable 10% in cash and 90% in Callable
Notes due in 2006 (the "Notes"). The Notes will bear interest at a fixed rate
equal to 120% of the applicable federal rate as of the date the consent
solicitation on Form S-4 is mailed to the limited partners. The Share
Consideration shall be reduced on a one-for-one basis for all APF Shares
otherwise distributable to Dissenting Partners had such Dissenting Partners not
elected the Cash/Note Option.
ARTICLE V
Representations and Warranties of The General Partners
Each General Partner severally represents and warrants to APF and the
Operating Partnership that the statements contained in this Article V are
correct and complete as of the date hereof and on the Closing Date:
5.1 Authorization of Transaction. The General Partner has full power and
authority (including, as applicable, full corporate power and authority) to
execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement constitutes the valid and legally binding obligation of the
General Partner, enforceable in accordance with its terms and conditions. The
General Partner does not need to give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or
governmental agency in order to consummate the transactions contemplated by
this Agreement, except in connection with federal securities laws and any
applicable "Blue Sky" or state securities laws.
5.2 Noncontravention. Except as set forth in Section 5.2 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, will violate any
constitution, statute, regulation, rule, injunction, judgment, order, decree,
ruling, charge, or other restriction of any government, governmental agency, or
court to which the General Partner is subject or, as applicable, any provision
of the General Partner's articles of incorporation, bylaws or other
organizational documents.
ARTICLE VI
Representations and Warranties of APF, The OPGeneral Partner and The Operating
Partnership
APF, the OP General Partner and the Operating Partnership jointly and
severally represent and warrant to the General Partners and the Fund that the
statements contained in this Article VI are correct and complete as of the date
hereof and the Closing Date:
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6.1 Organization. APF is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Maryland. APF is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where the failure to
so qualify or obtain authorization would not have a Material Adverse Effect on
APF. APF has full corporate power and authority and all licenses, permits, and
authorizations necessary to carry on the businesses in which it is engaged and
to own and use the properties owned and used by it. The OP General Partner is a
corporation duly organized, validly existing, and in good standing under the
laws of the state of Delaware. The Operating Partnership is a limited
partnership duly organized, validly existing, and in good standing under the
laws of the State of Delaware. The Operating Partnership is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction
where such qualification is required, except where the failure to so qualify or
obtain authorization would not have a Material Adverse Effect on the Operating
Partnership. The Operating Partnership has full limited partnership power and
authority and all licenses, permits, and authorizations necessary to carry on
the businesses in which it is engaged and to own and use the properties owned
and used by it. APF and the OP General Partner have delivered to the General
Partners and the Fund correct and complete copies of the certificate of
incorporation of APF and the OP General Partner and the certificate of limited
partnership and the limited partnership agreement of the Operating Partnership
(each as amended to date). The minute books (containing the records of meetings
of the stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of APF and
the OP General Partner and any organizational records of the Operating
Partnership have been made available to the General Partners and the Fund and
are correct and complete. APF is not in default under or in violation of any
provision of its certificate of incorporation, and the Operating Partnership is
not in default under or in violation of any provision of its certificate of
limited partnership or limited partnership agreement.
6.2 Capital Stock. The authorized capital stock of APF consists of
125,000,000 shares of common stock, $.01 par value (the "APF Common Shares"),
of which 74,696,927 shares are outstanding as of January 31, 1999. Since
January 31, 1999, APF has not issued any shares of capital stock. All
outstanding APF Common Shares are, and all APF Common Shares issuable under any
stock option plans of APF, will be when issued in accordance with the terms
thereof, duly authorized, validly issued, fully paid and nonassessable. Except
for the 57,113,815 APF Common Shares which may be issued in connection with
APF's acquisition of the other 17 CNL Income Funds in the Proposed Acquisitions
and the 12,300,000 APF Shares which may be issued in connection with APF's
acquisition of CNL Fund Advisors, Inc., CNL Financial Services, Inc. and CNL
Financial Corp., there are outstanding on the date hereof no options, warrants,
calls, rights, commitments or any other agreements of any character to which
APF is a party or by which it may be bound, requiring it to issue, transfer,
sell, purchase, register, redeem, or acquire any shares of capital stock or any
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for or acquire any shares of its capital stock. All of the
outstanding general partner interests of the Operating Partnership are owned by
the OP General Partner, and all of the outstanding limited partner interests of
the Operating Partnership are owned by the OP Limited Partnership, and there
are outstanding on the date hereof no options, warrants, rights, commitments or
any other agreements of any character to which the Operating Partnership or any
partner thereof is a party or which it may be bound requiring it to issue,
transfer, sell, purchase, register, redeem or acquire any interest in the
Operating Partnership.
6.3 Authorization for Common Stock. The Share Consideration will, when
issued, be duly authorized, validly issued, fully paid and nonassessable, and
no stockholder of APF will have any preemptive right or similar rights of
subscription or purchase in respect thereof. The Share Consideration will be
registered under the Securities Act and will be registered or exempt from
registration under all applicable state securities laws. The Share
Consideration will, when issued, be approved for listing on the NYSE, subject
to official notice of issuance.
6.4 Authorization of Transaction. APF, the OP General Partner and the
Operating Partnership have full power and authority (including full corporate
and limited partnership, as applicable, power and authority) to
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execute and deliver this Agreement and to perform their obligations hereunder.
The execution, delivery and performance by APF, the OP General Partner and the
Operating Partnership of this Agreement have been duly and validly authorized
by the boards of directors of APF and the OP General Partner. This Agreement
constitutes the valid and legally binding obligation of APF, the OP General
Partner and the Operating Partnership, enforceable in accordance with its terms
and conditions. None of APF, the OP General Partner or the Operating
Partnership needs to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
6.5 Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which, APF, the OP General Partner or the
Operating Partnership is subject or any provision of APF's or the OP General
Partner's articles of incorporation or by-laws or the Operating Partnership's
certificate of limited partnership or limited partnership agreement or (ii)
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice or consent under any agreement, contract, lease, license,
instrument, or other arrangement to which APF, the OP General Partner or the
Operating Partnership is a party or by which it is bound or to which any of its
assets is subject or (iii) result in the imposition of a Security Interest upon
any of its assets.
6.6 Title to Assets. APF has good title to, or a valid leasehold interest
in, the properties and assets used by it, located on its premises, or set forth
in its most recent quarterly report on Form 10-Q filed with the SEC or acquired
after the date thereof, free and clear of all Security Interests, except for
properties and assets disposed of in the Ordinary Course of Business since the
date of its most recent quarterly report on Form 10-Q.
6.7 Reports and Financial Statements. APF has filed all required reports,
schedules, forms, statements and other documents with the SEC since January 1,
1996 (along with any such documents filed subsequent to the date hereof, the
"APF SEC Documents"). All of the APF SEC Documents (other than preliminary
material), as of their respective filing dates, complied in all material
respects with all applicable requirements of the Securities Act and the
Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such APF SEC Documents. None of the APF SEC Documents
at the time of filing contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading, except to the extent such statements have
been modified or superseded by later filed APF SEC Documents. There is no
unresolved violation, criticism or exception by any governmental entity of
which APF has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to APF could have a Material Adverse
Effect on APF. The financial statements of APF included in the APF SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP (except, the case
of interim financial statements, as permitted by Forms 10-Q and 8-K of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly presented, in accordance with the
applicable requirements of GAAP, the financial position of APF as of the dates
thereof and the results of operations and cash flows of APF for the periods
then ended (subject, in the case of interim financial statements, to normal
year-end adjustments).
6.8 Events Subsequent to September 30, 1998. Since September 30, 1998,
nothing has occurred which has had or would reasonably be expected to have a
Material Adverse Effect on APF.
6.9 Litigation. Except as publicly disclosed by APF in its APF SEC Documents
or on Schedule 1, there is no suit, claim, action, proceeding or investigation
pending or, to the Knowledge of APF, threatened against APF or any of its
Subsidiaries or any of their respective properties or assets which (a) if
adversely determined, could reasonably be expected to have a Material Adverse
Effect on APF or (b) as of the date hereof, questions
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the validity of this Agreement or any action to be taken by APF in connection
with the consummation of the transactions contemplated hereby or could
otherwise prevent or delay the consummation of the transactions contemplated by
this Agreement. Except as publicly disclosed by APF in any APF SEC Document,
none of APF or its Subsidiaries is subject to any outstanding order, writ,
injunction or decree which, insofar as can be reasonably foreseen in the
future, could reasonably be expected to have a Material Adverse Effect on APF
or would prevent or delay the consummation of the transactions contemplated
hereby.
6.10 Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by APF for inclusion or incorporation by reference
in (i) the Registration Statement to be filed by APF with the SEC in connection
with the Merger will, at the time the Registration Statement becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading and (ii) the proxy statement sent by APF to its
shareholders pertaining to the Merger will, at the date mailed to shareholders
and at the times of the meeting of shareholders to be held in connection with
the Merger, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event with
respect to APF, its officers and directors or any of its Subsidiaries should
occur which is required to be described in an amendment of, or a supplement to,
the Registration Statement or the proxy statement, APF shall promptly so advise
the General Partners and such event shall be so described, and such amendment
or supplement (which the General Partners shall have a reasonable opportunity
to review) shall be promptly filed with the SEC. The Registration Statement
will comply as to form in all material respects with the provisions of the
Securities Act and the rules and regulations thereunder.
6.11 No Undisclosed Liabilities; Absence of Changes. Except as and to the
extent publicly disclosed by APF in its APF SEC Documents or disclosed in
Schedule 1, as of December 31, 1998, to APF's Knowledge, none of APF or its
Subsidiaries had any liabilities or obligations of any nature, whether or not
accrued, contingent or otherwise, and whether due or to become due or asserted
or unasserted, which are not fully reflected in, reserved against or otherwise
described in the consolidated balance sheet of APF and its consolidated
Subsidiaries (including the notes thereto) as of such date or which could
reasonably be expected to have a Material Adverse Effect on APF. Except as
publicly disclosed by APF in any reports filed by it with the APF SEC
Documents, since December 31, 1998, the business of APF and its Subsidiaries
has been carried on only in the ordinary and usual course, to APF's Knowledge,
none of APF or its Subsidiaries has incurred any liabilities of any nature,
whether or not accrued, contingent or otherwise, and whether due or to become
due or asserted or unasserted, which could reasonably be expected to have, and
there have been no events, changes or effects with respect to APF or its
Subsidiaries Known to APF having or which could reasonably be expected to have,
a Material Adverse Effect on APF.
6.12 Brokers' Fees. Except for the fees and expenses paid to Merrill Lynch &
Co. with respect to the delivery of the Fairness Opinion to the Special
Committee and in connection with the financial services provided by Salomon
Smith Barney, none of APF, the OP General Partner or the Operating Partnership
has any Liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this
Agreement.
6.13 Qualification as a REIT. APF is a "real estate investment trust" for
federal income tax purposes. The consummation of the transactions contemplated
by this Agreement will not cause APF to cease to qualify as a "real estate
investment trust" for federal income tax purposes.
6.14 Compliance with Applicable Law. Except as publicly disclosed by APF in
its APF SEC Documents, to APF's Knowledge, it and its Subsidiaries hold all
permits, licenses, variances, exemptions, order and approvals of all
governmental entities necessary for the lawful conduct of their respective
businesses, except for failures to hold such permits, licenses, variances,
exemptions, orders and approvals which could not reasonably be expected to have
a Material Adverse Effect on APF. Except as publicly disclosed by APF in its
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APF SEC Documents, to APF's Knowledge, APF and its Subsidiaries are in
compliance with the material terms of its permits, except where the failure so
to comply could not reasonably be expected to have a Material Adverse Effect on
APF. Except as publicly disclosed by APF, the businesses of APF and its
Subsidiaries are not, to APF's Knowledge, being conducted in violation of any
law, ordinance or regulation of any governmental entity except that no
representation or warranty is made in this Section 6.14 with respect to
environmental laws and except for violations or possible violations which do
not, and, insofar as reasonably can be foreseen, in the future will not, have a
Material Adverse Effect on APF. Except as publicly disclosed by APF in its APF
SEC Documents, no investigation or review by any governmental entity with
respect to APF or its Subsidiaries is pending or, to the Knowledge of APF,
threatened, nor, to the Knowledge of APF, has any government entity indicated
an intention to conduct the same, other than, in each case, those which APF
reasonably believes will not have a Material Adverse Effect on APF.
6.15 Intellectual Property.
(a) APF owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of APF as presently conducted. Each item of Intellectual Property
owned or used by APF immediately prior to the Closing hereunder will be owned
or available for use by APF on identical terms and conditions immediately
subsequent to the Closing hereunder. APF has taken all necessary action to
maintain and protect each item of Intellectual Property that it owns or uses.
(b) APF has not interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of third
parties, and none of APF's directors or officers (or employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that APF must
license or refrain from using any Intellectual Property rights of any third
party). No third party has interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of APF which
are material to the operation of APF's business.
(c) APF has no patent or registration which has been issued to APF with
respect to any of its Intellectual Property.
(d) Nothing will interfere with, infringe upon, misappropriate, or otherwise
come into conflict with, any Intellectual Property rights of third parties as a
result of the continued operation of APF's business as presently conducted.
6.16 Insurance. With respect to each current insurance policy to which APF
is a party, a named insured or is otherwise the beneficiary of coverage, to the
knowledge of APF: (i) the policy is legal, valid, binding, enforceable, and in
full force and effect; (ii) the policy will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the consummation of the transactions contemplated hereby; (iii) neither APF nor
any other party to the policy is in breach or default (including with respect
to the payment of premiums or the giving of notices), and no event has occurred
which, with notice or the lapse of time, would constitute such a breach or
default, or permit termination, modification, or acceleration, under the
policy; and (iv) no party to the policy has repudiated any provision thereof.
6.17 Tenants. To the Knowledge of APF and except as set forth on Schedule
1, no current tenant of a property owned by APF, which as of the date of APF's
most recent quarterly report on Form 10-Q represented more than 5% of APF's
total revenues, presently intends to materially change its relationship with
the owner of the property, either due to the transactions contemplated hereby
or otherwise.
6.18 Disclosure. APF is in compliance in all material respects with its
obligation under the Securities Exchange Act to publicly disclose material
information in a timely fashion.
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ARTICLE VII
Representations and Warranties Concerning the Fund
The General Partners and the Fund jointly and severally represent and
warrant to APF and the Operating Partnership that the statements contained in
this Article VII are correct and complete as of the date hereof, except as set
forth in the disclosure schedule delivered by the General Partners and the Fund
to APF and the Operating Partnership in accordance with the provisions of
Section 8.14 (the "Disclosure Schedule"). Nothing in the Disclosure Schedule
shall be deemed adequate to disclose an exception to a representation or
warranty made herein, however, unless the Disclosure Schedule identifies the
exception with particularity and describes the relevant facts in reasonable
detail. Without limiting the generality of the foregoing, the mere listing (or
inclusion of a copy) of a document or other item shall not be deemed adequate
to disclose an exception to a representation or warranty made herein (unless
the representation or warranty has to do with the existence of the document or
other item itself). The Disclosure Schedule will be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in this Article
VII.
7.1 Organization, Qualification, and Corporate Power. The Fund is a limited
partnership duly organized, validly existing, and in good standing under the
laws of Florida. The Fund is duly authorized to conduct business and is in good
standing under the laws of each jurisdiction where such qualification is
required, except where the failure to so qualify or obtain authorization would
not have a Material Adverse Effect on the Fund. Except as set forth in Section
7.1(a) of the Disclosure Schedule, the Fund has full limited partnership power
and authority and all licenses, permits, and authorizations necessary to carry
on the businesses in which it is engaged and to own and use the properties
owned and used by it, except where the failure to so qualify or obtain
authorization would not have a Material Adverse Effect on the Fund. Section
7.1(b) of the Disclosure Schedule lists the directors and officers of the
corporate General Partner. The General Partners have been made available to APF
and the Operating Partnership correct and complete copies of the certificate of
limited partnership and the limited partnership agreement of the Fund (as
amended to date). The minute books (containing the records of meetings of the
stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of the
corporate General Partner and any organizational records of the Fund have been
made available to APF and the Operating Partnership and are correct and
complete in all material respects. The Fund is not in default under or in
violation of any provision of its certificate of limited partnership or limited
partnership agreement.
7.2 Capitalization. All of the outstanding ownership interests in the Fund
(the "Fund Interests") consist of (i) one percent in general partnership
interests and (ii) 4,000,000 units of limited partnership interests. All of the
outstanding Fund Interests have been duly authorized, are validly issued, fully
paid, and nonassessable. There are no outstanding or authorized options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights, or other contracts or commitments that could require the Fund to issue,
sell, or otherwise cause to become outstanding any additional ownership
interests. There are no outstanding or authorized stock appreciation, phantom
stock, profit participation, or similar rights with respect to the Fund.
7.3 Authorization of Transaction. The Fund has full power and authority
(including full limited partnership power and authority) to execute and deliver
this Agreement and, upon the affirmative vote of a majority of the outstanding
limited partnership Fund Interests, will have full power and authority
(including limited partnership power and authority) to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of the Fund, enforceable in accordance with its terms and conditions, subject
to bankruptcy, insolvency, moratorium and rights of creditors generally. The
Fund is not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
7.4 Noncontravention. Except as set forth in Section 7.4 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby,
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will (i) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which the Fund is subject or any
provision of the certificate of limited partnership or limited partnership
agreement of the Fund or (ii) result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice or consent
under any agreement, contract, lease, license, instrument, or other arrangement
to which the Fund is a party or by which it is bound or to which any of its
assets is subject (or result in the imposition of any Security Interest upon
any of its assets).
7.5 Title to Assets. The Fund has good title to, or a valid leasehold
interest in, the properties and assets used by it, located on its premises, or
set forth in its most recent quarterly report on Form 10-Q filed with the SEC
(the "Most Recent 10-Q") or acquired after the date thereof, free and clear of
all Security Interests, except for properties and assets disposed of in the
Ordinary Course of Business since the date of the Most Recent 10-Q.
7.6 Subsidiaries. The Fund does not have any Subsidiaries, operating or
otherwise.
7.7 Reports and Financial Statements. The Fund has filed all required
reports, schedules, forms, statements and other documents with the SEC since
January 1, 1996 (along with any such documents filed subsequent to the date
hereof, the "Fund SEC Documents"). All of the Fund SEC Documents (other than
preliminary material), as of their respective filing dates, complied in all
material respects with all applicable requirements of the Securities Act and
the Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such Fund SEC Documents. None of the Fund SEC
Documents at the time of filing contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the extent
such statements have been modified or superseded by later filed Fund SEC
Documents. There is no unresolved violation by any governmental entity of which
the Fund has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to the Fund could have a Material
Adverse Effect on the Fund. The financial statements of the Fund included in
the Fund SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with GAAP
(except, the case of interim financial statements, as permitted by Forms 10-Q
and 8-K of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly presented, in
accordance with the applicable requirements of GAAP, the financial position of
the Fund as of the dates thereof and the results of operations and cash flows
of the Fund for the periods then ended (subject, in the case of interim
financial statements, to normal year-end adjustments).
7.8 Events Subsequent to the Most Recent 10-Q. Since the date of the Most
Recent 10-Q nothing has had a Material Adverse Effect on the Fund. Without
limiting the generality of the foregoing, since that date, except as set forth
in the appropriately lettered paragraph of Section 7.8 of the Disclosure
Schedule:
(a) the Fund has not sold, leased, transferred, or assigned any of its
assets, tangible or intangible, other than for a fair consideration (as
reasonably determined by the General Partners) in the Ordinary Course of
Business;
(b) the Fund has not entered into any agreement, contract, lease, or license
(or series of related agreements, contracts, leases, and licenses) involving
more than $50,000 except in the Ordinary Course of Business;
(c) no party (including the Fund) has accelerated, terminated, modified, or
canceled any agreement, contract, lease, or license (or series of related
agreements, contracts, leases, and licenses) to which the Fund is a party or by
which it is bound except in the Ordinary Course of Business;
(d) the Fund has not imposed any Security Interest upon any of its assets,
tangible or intangible except in the Ordinary Course of Business;
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<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.
B-27
<PAGE>
ARTICLE XII
Indemnification
12.1 Indemnity Obligations of the General Partners and the Fund. Subject to
Sections 12.5 and 12.6 hereof, each of the General Partners severally, in
accordance with its percentage interest in the Share Consideration and limited
in amount to the value of the APF Common Shares received by it, based upon the
average per share closing price of the APF Common Shares for the first twenty
trading days after the APF Common Shares are listed on NYSE (the "20 Day
Average Price"), agree to indemnify and hold APF, the OP General Partner and
the Surviving Partnership harmless from, and to reimburse APF, the OP General
Partner and the Surviving Partnership for, any APF Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "APF Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, obligation, suit, action, fee, cost, or expense
of any nature whatsoever resulting from (i) any breach of any representation
and warranty of any of the General Partners or the Fund which is contained in
this Agreement or any Schedule, Exhibit, or certificate delivered pursuant
hereto; (ii) any breach or non-fulfillment of, or any failure to perform, any
of the covenants, agreements, or undertakings of any of the General Partners or
the Fund which are contained in or made pursuant to this Agreement; and (iii)
all interest, penalties, costs, and expenses (including, without limitation,
all reasonable fees and disbursements of counsel) arising out of or related to
any indemnification made under this Section 12.1.
12.2 Indemnity Obligations of APF, the OP General Partner and the Operating
Partnership. Subject to Sections 12.5 and 12.6 hereof, APF, the OP General
Partner and the Operating Partnership (including in its capacity as the
Surviving Partnership) hereby jointly and severally agree to indemnify and hold
each of the General Partners and the Fund harmless from, and to reimburse each
of the General Partners and the Fund for, any Fund Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "Fund Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, suit, action, fee, cost, or expense of any nature
whatsoever incurred by any of the General Partners or the Fund resulting from
(i) any breach of any representation and warranty of APF, the OP General
Partner or the Operating Partnership which is contained in this Agreement or
any Schedule, Exhibit, or certificate delivered pursuant hereto; (ii) any
breach or non-fulfillment of, or failure to perform, any of the covenants,
agreements, or undertakings of APF, the OP General Partner and the Operating
Partnership which are contained in or made pursuant to the terms and conditions
of this Agreement; and (iii) all interest, penalties, costs, and expenses
(including, without limitation, all reasonable fees and disbursements of
counsel) arising out of or related to any indemnification made under this
Section 12.2.
12.3 Appointment of Representative. James M. Seneff, Jr. is hereby appointed
as the exclusive agent of the General Partners and the Fund to act on their
behalf with respect to any and all Fund Indemnity Claims and any and all APF
Indemnity Claims arising under this Agreement or such other representative as
may be hereafter appointed by the General Partners. Such agent is herein
referred to as the "Representative." The Representative shall take, and the
General Partners agree that the Representative shall take, any and all actions
which the Representative believes are necessary or appropriate under this
Agreement for and on behalf of the General Partners and the Fund, as fully as
if such parties were acting on their own behalf, including, without limitation,
asserting Fund Indemnity Claims against APF, the OP General Partner and the
Operating Partnership, defending all APF Indemnity Claims, consenting to,
compromising, or settling all Fund Indemnity Claims and APF Indemnity Claims,
conducting negotiations with APF, the OP General Partner and the Operating
Partnership and their representatives regarding such claims, taking any and all
other actions specified in or contemplated by this Agreement and engaging
counsel, accountants, or other representatives in connection with the foregoing
matters. APF, the OP General Partner and the Operating Partnership shall have
the right to rely upon all actions taken or omitted to be taken by the
Representative pursuant to this Agreement, all of which actions or omissions
shall be legally binding upon each of the General Partners and the Fund. The
Representative, acting pursuant to this Section 12.3, shall not be liable to
any of the General Partners or the Fund for any act or omission, except in
connection with any act or omission that was the result of the Representative's
bad faith or gross negligence.
B-28
<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-29
<PAGE>
ARTICLE XIII
Limitation of Liability
13.1 Threshold. Notwithstanding anything to the contrary stated in this
Agreement, in no event (i) shall the General Partners or any of them have any
liability to APF and/or the OP General Partner and the Surviving Partnership on
account of any APF Indemnity Claim or for any claim for breach of warranty or
for misrepresentation, or any other claim whatsoever arising under this
Agreement or in connection with the transaction contemplated herein
(individually a "Claim" and collectively, "Claims") or for any loss, damage,
deficiency, liability, obligation, suit, action, judgment, fee, cost or expense
of any nature whatsoever directly resulting from Claims (collectively,
"Losses") unless, until and only to the extent that the accumulated amount of
all Losses exceeds the amount of $388,619 in the aggregate (the "Threshold")
nor (ii) shall the individual or aggregate liability of the General Partners on
account of Claims and Losses exceed the value of APF Common Shares actually
issued to the General Partners in the Merger valued at the 20 Day Average
Price. To the extent that any Claim is asserted against more than one General
Partner, each General Partner shall be liable only for such General Partner's
proportionate share of the Claim based on the percentage that the APF Common
Shares received by such General Partner in the Merger is of the total APF
Commons Shares comprising the Share Consideration. Any Claim against a General
Partner, including an APF Indemnity Claim, may be satisfied by such General
Partner, in its sole discretion, by surrendering to the claimant(s) APF Common
Shares at a value equal to the closing price per share of such shares on the
NYSE on the last trading day preceding the date such APF Common Shares are
surrendered.
13.2 Special Indemnification. APF agrees to indemnify, defend and hold
harmless the General Partners against any loss, damage, deficiency, liability,
obligation, suit, action, judgment, fee, cost or expense of any nature
whatsoever, including reasonable attorneys' fees, arising after the Effective
Time that would have arisen in their capacity as General Partners of the Fund
had the Merger not been consummated and that are the result of APF's alleged
actions or inactions. The Threshold described in Section 13.1 above shall not
apply to APF obligations to indemnify the General Partners pursuant to this
Section 13.2.
ARTICLE XIV
Miscellaneous
14.1 Press Releases and Public Announcements. No Party shall issue any press
release or make any public announcement relating to the subject matter of this
Agreement prior to the Closing without the prior written approval of APF and
the General Partners; provided, however, that any Party may make any public
disclosure it believes in good faith is required by applicable law or any
listing or trading agreement concerning its publicly-traded securities (in
which case the disclosing Party will use its best efforts to advise the other
Parties prior to making the disclosure).
14.2 No Third-Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any Person other than the Parties and their respective
successors and permitted assigns.
14.3 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, to the extent they related in any way to the subject matter
hereof.
14.4 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective
successors and permitted assigns. No Party may assign either this Agreement or
any of its rights, interests, or obligations hereunder without the prior
written approval of APF and the General Partners.
14.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
B-30
<PAGE>
14.6 Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.7 Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given, as of the
date two business days after mailing, if it is sent by registered or certified
mail, return receipt requested, postage prepaid, and addressed to the intended
recipient as set forth below:
If to the Fund or the General Partners:
c/o James M. Seneff, Jr.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 423-2894
With copy to:
Baker & Hostetler LLP
Sun Trust Center, Suite 2300
200 South Orange Avenue
Orlando, Florida 32801
Attn: Kenneth C. Wright, Esq.
Telecopy: (407) 841-0168
If to APF or the Operating Partnership:
Curtis B. McWilliams
Executive Vice President
CNL American Properties, Inc.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 650-1000
With copy to:
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Attn: John M. McDonald, Esq.
Telecopy: (202) 663-8007
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth
above using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving the other Parties notice in the manner herein set forth.
14.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of Florida
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
B-31
<PAGE>
14.9 Amendments and Waivers. No amendment of any provision of this Agreement
shall be valid unless the same shall be in writing and signed by APF, the OP
General Partner and the General Partners. No waiver by any Party of any
default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or
subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
14.10 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
14.11 Expenses. If the Closing occurs, APF will bear all costs and expenses
of the Parties incurred in connection with this Agreement and the transactions
contemplated hereby to the extent not already paid by the Fund or the General
Partners. If the Closing does not occur, APF, the OP General Partner and the
Operating Partnership will bear their own costs and expenses (including legal
fees and expenses) incurred in connection with this Agreement and the
transactions contemplated hereby, and the General Partners and the Fund will
divide their costs and expenses (including legal fees and expenses) as follows:
(i) the Fund shall bear that percentage of the costs and expenses equal to the
percentage obtained by dividing the number of Fund votes in favor of the Merger
by the sum of the total number of votes cast and the total number of
abstentions and (ii) the General Partners shall bear the remainder of the costs
and expenses.
14.12 Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.
14.13 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
14.14 Specific Performance. Each of the Parties acknowledges and agrees that
the other Parties would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Parties shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter (subject to the provisions set
forth in Section 13.15 below), in addition to any other remedy to which they
may be entitled, at law or in equity.
14.15 Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in and for Orange County,
Florida, in any action or proceeding arising out of or relating to this
Agreement and agrees that all claims in respect of the action or proceeding may
be heard and determined in any such court.
B-32
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
By: /s/ James M. Seneff, Jr.
Its: Chief Executive Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
By: /s/ Robert A. Bourne
Its: President
CNL APF GP Corp.
By: /s/ Robert A. Bourne
Its: President
CNL INCOME FUND 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
B-33
<PAGE>
Appendix C
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF LIMITED PARTNERSHIP
OF
CNL Income Fund XIII, Ltd.
- --------------------------------------------------------------------------------
(Insert name currently on file with Florida Dept. of State)
Pursuant to the provisions of section 620.109, Florida Statues, this Florida
limited partnership, whose certificate was filed with the Florida Department of
State on September 25, 1992, adopts the following certificate of amendment to
its certificate of limited partnership:
FIRST: Amendment(s): (indicate article number(s) being amended, added, or
deleted)
Article XX, Section 21.5 is deleted in its entirety, and all cross
references to such section are deleted in their entirety.
SECOND: This certificate of amendment shall be effective at the time of its
filing with the Florida Department of State.
THIRD: Signature(s)
Signature of current general partner(s):
-------------------------------------
James M. Seneff, Jr.
-------------------------------------
Robert A. Bourne
CNL REALTY CORPORATION
By:
-------------------------------------
Name:
Signature(s) of new general partner(s), if applicable: N/A
C-1
<PAGE>
Appendix D
[FORM OF OPINION]
, 1999
James M. Seneff, Jr.
Robert A. Bourne
400 East South Street
Orlando, Florida 32801
Gentlemen:
We have acted as counsel to CNL Income Fund XIII, Ltd., a Florida limited
partnership (the "Partnership") of which you are the general partners (the
"General Partners"), in connection with the proposed amendment (the "Proposed
Amendment") to the Amended and Restated Agreement of Limited Partnership of CNL
Income Fund XIII, Ltd. (the "Partnership Agreement"). The Partnership Agreement
requires that in connection with any proposed amendment to the Partnership
Agreement (other than ministerial amendments and those amendments dealing with
the transfer of a limited partner's partnership interest or the admission of
substituted or additional limited partners), the General Partners must obtain
an opinion of counsel concerning whether such proposed amendment would result
in changing the Partnership to a general partnership. The Proposed Amendment
would delete the provision in the Partnership Agreement that prohibits the
Partnership from participating in any transaction involving (i) the
acquisition, merger, conversion, or consolidation, either directly or
indirectly, of the Partnership, and (ii) the issuance of securities of any
other partnership, real estate investment trust, corporation trust or other
entity that would be created or would survive after the successful completion
of such transaction.
This opinion is furnished pursuant to the Partnership Agreement. In
rendering our opinion, we have examined and relied on the Partnership
Agreement, the Proposed Amendment, and the Certificate of Limited Partnership
of the Partnership. We have, in addition, made such other inquiries of fact and
examinations of law as we have deemed necessary for purposes of rendering this
opinion.
We are members of the Bar of the State of Florida and do not hold ourselves
out as being conversant with the laws of any jurisdiction other than those of
the State of Florida and are expressing no opinion as to the laws of any
jurisdiction other than those of the State of Florida and our opinion is so
limited.
In rendering the opinion set forth below, we have assumed: the genuineness
of all signatures on records, certificates, instruments, agreements and other
documents submitted to us for examination; the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified, photostatic, facsimile, reproduced, or
conformed copies and the authenticity of the originals of such latter
documents; the accuracy and completeness of all factual representations made in
the above-referenced documents; and the legal capacity of all natural persons.
Based upon the foregoing and subject to the limitations and qualifications
hereinafter set forth, we are of the opinion that the Proposed Amendment to the
Partnership Agreement would not result in changing the Partnership to a general
partnership.
This opinion letter is based upon and limited to laws of the State of
Florida as in effect on the date of this letter and to our current knowledge of
facts in existence as of the date of this letter and material to the opinions
expressed in this letter. This opinion letter is rendered as of the date
hereof, and does not purport to analyze, evaluate or consider the legal effect
of any event, legal or factual, occurring after such date that may alter the
validity, effect or contents of this opinion, and we assume no obligation to
update the opinion set forth herein.
<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 Prospectus/Consent Solicitation Statement.
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.
OVERVIEW
Pursuant to the Prospectus/Consent Solicitation Statement and this
Supplement, you are being asked to approve the Acquisition of your Income Fund
by APF. Your Income Fund is one of 18 limited partnerships (which we refer to
collectively as the Funds) that APF is seeking to acquire. Supplements have
also been prepared for each of the other Funds, copies of which may be obtained
without charge to 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 (or a REIT), formed in
1994, whose primary business, like that of the Funds, is the ownership of
restaurant properties leased to operators of national and regional restaurant
chains on a triple-net lease basis. As a full-service REIT, 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 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 shares of common stock (or APF Shares) will I receive if my Income
Fund is acquired by APF?
Your Income Fund will receive 4,313,041 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 $10.00 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
approximately 75 million APF Shares through three public offerings at offering
prices
S-1
<PAGE>
per APF share equal to the Exchange Value. At December 31, 1998, of the
approximately $750 million raised by APF, APF has used approximately $550
million to acquire restaurant properties and to make mortgage loans and had
approximately $120 million in uninvested proceeds which it expects to invest
during the first quarter of 1999. The remaining proceeds were used to pay fees
and other offering expenses.
What is the required vote necessary to approve the Acquisition?
Pursuant to the terms of your Income Fund's partnership agreement, APF's
acquisition of your Income Fund may not be consummated without the approval of
greater than 50% of the outstanding 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
Fund?
Yes. Legg Mason Wood Walker, Incorporated 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 Funds, and (c) the method of allocating the APF
Shares among the Funds.
Do you, as the general partners of my Income Fund, recommend that I vote in
favor 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 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 how you want to vote, and sign
and mail it in the enclosed postage-paid return envelope as soon as possible,
so that at the Special Meeting of Limited Partners, your Units may be voted
"For" or "Against" APF's acquisition of your Income Fund. If you sign and send
in your consent form and do not indicate how you want to vote, your consent
form will be counted as a vote "For" the Acquisition. If you do not vote or you
abstain from voting, it will count as a vote "Against" the Acquisition.
In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to certain limitations. If you vote "Against" the Acquisition,
but your Income Fund is nevertheless acquired by APF, you may elect to receive
a payment (which we call the Cash/Notes Option) that is 10% in cash and 90% in
% Callable Notes due , 2006 (or Notes) based on the liquidation value
of your Income Fund, as determined by Valuation Associates, the appraisal firm
that we engaged in connection with the Acquisition. Such liquidation value will
be lower than the aggregate Exchange Value of the APF Shares offered to your
Income Fund in the Acquisition. The Notes will bear interest at a rate equal to
%, which was determined based on 120% of the applicable federal rate as of
, 1999. Please note that you may only receive the Cash/Notes Option if
you have voted "Against" the Acquisition and you elect to receive the
Cash/Notes Option on your consent form. You will receive APF Shares if your
Income Fund elects to be acquired in the Acquisition and you voted "For" the
Acquisition, or you voted "Against" the Acquisition and did not affirmatively
select the Cash/Notes Option. 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 (for example, 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 be based on the difference between the
value of the APF Shares or the tax basis of your Units. If you elect the
Cash/Notes Option, 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
S-2
<PAGE>
of the APF Shares and cash received by your Income Fund over the tax basis of
your Fund's net assets. Some of the gain may be subject to the 25% rate of tax
applicable to certain 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 $348. To review
the tax consequences to the Limited Partners of the Funds in greater detail,
see pages through of the Prospectus/Consent Solicitation Statement 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 Funds acquired by APF.
Although the majority of APF's assets and the assets of the other Funds
acquired by APF are substantially similar to those of your Income Fund, the
restaurant properties owned by APF and the other 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 Funds' restaurant properties,
see "APF's Business and The Restaurant Properties -- Business Objectives and
Strategies" and "-- The Restaurant Properties -- General" and "Business of the
Funds-- Description of Restaurant Properties" in the Prospectus/Consent
Solicitation Statement.
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 Prospectus/Consent Solicitation Statement.
Investment Risks
. Uncertainty Regarding the Exchange Value and Trading Price of APF Shares
Following Listing. Your Income Fund will be receiving 4,313,041 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 is 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 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.
. Decrease in Distributions. In each of the years ended December 31, 1995,
1996 and 1997, your Income Fund made $806, $825 and $825, respectively, in
distributions per $10,000 investment to you. Based on APF's pro forma
financial information, and assuming APF acquires only your Income Fund and
that each Limited Partner of your Income receives only APF Shares, you would
have received, for the year ended December 31, 1997, $555 in distributions
per $10,000 of original investment, which is 32.7% less than the $825
distributed to you as Limited Partner during the same period. 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 year ended December 31, 1997 and for the nine
months ended September 30, 1998 is not necessarily indicative of the
distributions you will receive as a stockholder of APF after the
Acquisition. See "Cash Distribution to Limited Partners of Your Fund."
S-3
<PAGE>
. Conflicts of Interest in the Acquisition; Substantial Benefits to Related
Parties. There are certain conflicts of interest inherent in the structure
of the Acquisition of your Income Fund. 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
that may or may not be aligned with your interests 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.
. Fundamental Change in Nature of 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 September
30, 1998), 413 restaurant properties. The risks inherent in investing in an
operating company such as APF include APF's ability to invest in new
restaurant properties that are not as profitable as APF anticipated, the
incurrence of substantial indebtedness to make future acquisitions of
restaurant properties which it may be unable to repay and making mortgage
loans to prospective operators of national and regional restaurant chains
which may not have the ability to repay.
As an APF stockholder, you will receive the benefits of your investment
through (i) dividend distributions on, and (ii) increases in the value of,
your APF Shares. In addition, 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, 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 Cash/Notes Option). An investment in APF may not
outperform your investment in the Income Fund.
. Original Investment Timeframe. 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. We currently have no current plans to dispose of your Income Fund's
restaurant properties if the Limited Partners do not approve the
Acquisition.
Real Estate/Business Risks
. Risk of Default on Mortgage Loans and Market Risks associated with
Securitizations. 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.
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
S-4
<PAGE>
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,) and 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 may 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.
. Risks Associated with Leverage. 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. At the time of the consummation of the Acquisition, as a
general policy, APF's Board of Directors will 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 funds from operations and its ability to make
distributions to its stockholders.
. Acquisition and Development Risks. APF plans to pursue its growth strategy
through the acquisition and development of additional restaurant properties.
To the extent that APF does pursue this growth strategy, we do not know that
it 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.
Tax Risks
. Failure of APF to Qualify as a REIT for Tax Purposes. 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.
S-5
<PAGE>
. Risks Associated with Distribution Requirements. 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 Tax Law. 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 Prospectus/Consent Solicitation Statement.
CONSIDERATION PAID TO INCOME FUND
The following table sets forth, for your Income Fund (i) the aggregate
amount of original Limited Partner investments in each Fund less any
distributions of net sales proceeds paid to the Limited Partners of that Fund,
(ii) the original amount of Limited Partner investments in each Fund less any
distributions of net sales proceeds per average $10,000 investment, (iii) the
number of APF Shares to be paid to your Income Fund, (iv) the estimated value
of the APF Shares paid to your Income Fund, (v) the estimated Acquisition
expenses allocated to your Income Fund, (vi) the estimated value, based on the
Exchange Value, of APF Shares paid to your Income Fund after deducting
Acquisition expenses, and (vii) the estimated value, based on the Exchange
Value, of APF Shares you will receive for each $10,000 of your original
investment:
<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) Fund(2) Fund(3) Expenses Expenses(3) Investment(3)
- ------------------- ---------------------- ------------- --------------- ----------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$45,000,000 $10,000 4,313,041 $43,130,410 $524,930 $42,605,480 $9,468
</TABLE>
- --------
(1) Income Fund has had no distributions of net sales proceeds.
(2) The APF Shares payable to each Fund as set forth in this chart will not
change if APF acquires fewer than all of the Funds in the Acquisition. This
number assumes that none of the Limited Partners of the Fund has elected
the Cash/Notes Option.
(3) 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.
Upon completion of the Acquisition of your Income Fund, the operations and
existence of your Income Fund will cease. For more detailed information, see
"The Acquisition" in the Prospectus/Consent Solicitation Statement. If your
Income Fund does not approve the Acquisition, we do not contemplate that your
Income Fund would be liquidated in the near future. The Acquisition, however,
does not result in an all-cash payment to you in the liquidation of your
investment. For example, if you are eligible for and choose the Cash/Notes
Option, you become a Noteholder of APF. You will have exchanged your Units for
unsecured debt obligations of APF which may not be retired in full until
, 2006, a date approximately seven years after the date the Acquisition
of your Income Fund occurs. On the other hand, if you exchange your Units for
APF Shares, you will receive an equity interest in APF whose marketability will
depend upon the market that may develop with respect to the APF Shares, which
will be listed on the NYSE.
S-6
<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:
<TABLE>
<CAPTION>
Pre-closing Transaction Costs
<S> <C>
Legal Fees......................................... $ 22,748
Appraisals and Valuation........................... 9,099
Fairness Opinions.................................. 40,947
Registration, Listing and Filing Fees.............. --
Soliciting Dealer Fee.............................. 92,341
Financial Consulting Fees.......................... --
Environmental Fees................................. 56,870
Accounting and Other Fees.......................... 67,905
--------
Subtotal....................................... 289,910
<CAPTION>
Closing Transaction Costs
<S> <C>
Transfer Fees and Taxes............................ 79,272
Legal Fees......................................... 79,540
Recording Costs.................................... --
Other.............................................. 76,208
--------
Subtotal....................................... 235,020
--------
Total.............................................. $524,930
========
</TABLE>
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 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.
S-7
<PAGE>
Required Amendment to the Partnership Agreement
Your Income Fund's partnership agreement includes one provision that may
prevent the successful completion of APF's Acquisition of your Income Fund.
This provision must be amended in order to successfully complete the
Acquisition. Therefore, if you vote "For" the Acquisition, you will also be
asked to vote in favor of this amendment. The proposed amendment is summarized
below:
. Amendment to Roll-Up Prohibition. Article 21 of the partnership agreement
currently provides that your Income Fund may not participate in any
transaction involving (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 as, in our opinion, market
conditions permit), as contemplated by the terms of the partnership agreement.
Special Meeting to Discuss the Acquisition
We have scheduled a special meeting of the Limited Partners of your Income
Fund to discuss the solicitation materials, which include the
Prospectus/Consent Solicitation Statement, 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 (as defined below) and to explain in person our reasons
for recommending that you vote "For" the Acquisition.
VOTING PROCEDURE
The Prospectus/Consent Solicitation Statement, 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.
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
S-8
<PAGE>
merger with the Operating Partnership, in the manner described in the
Prospectus/Consent Solicitation Statement. A copy of the Agreement and Plan of
Merger dated March 11, 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 December 31, 1999. 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.
The consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and certain 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
(including the Acquisition), 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. The partnership agreement also provide 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
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, 1995, 1996 and 1997 and the nine months
ended September 30, 1998, the aggregate amounts accrued or paid by your Income
Fund to us are shown below under "Historical"
S-9
<PAGE>
and the estimated amounts of compensation that would have been paid had the
Acquisition been in effect for the years presented, are shown below under "Pro
Forma":
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------- Nine Months Ended
1995 1996 1997 September 30, 1998
------- ------- ------- ------------------
<S> <C> <C> <C> <C>
Historical:
General Partner Distributions..... -- -- -- --
Property Management Fees.......... $38,832 $38,785 $38,626 $27,628
Broker/Dealer Commissions(1)......
Due Diligence and Marketing
Support Fees..................... -- -- -- --
Acquisition Fees.................. -- -- -- --
Asset Management Fees............. -- -- -- --
Real Estate Disposition Fees(2)... -- -- -- --
------- ------- ------- -------
Total historical................ $38,832 $38,785 $38,626 $27,628
Pro Forma:
Cash Distributions on APF Shares.. -- -- -- --
Salary Compensation............... -- -- -- --
------- ------- ------- -------
Total pro forma................. -- -- -- --
</TABLE>
- --------
(1) A majority of the fees paid as broker-dealer commissions and due diligence
and marketing support fees were reallowed to other broker-dealers
participating in the offering of the Income Fund's Units.
(2) 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 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 the Acquisition -- Prices for 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>
Nine Months
Ended Sept. 30, 1998
--------------------
1993 1994 1995 1996 1997 Historical Pro Forma
---- ---- ---- ---- ---- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income....... $146 $650 $806 $825 $807 $518 $419
Distributions from Return of
Capital........................ -- -- -- -- 18 101 17
---- ---- ---- ---- ---- ---- ----
Total......................... $146 $650 $806 $825 $825 $619 $436
==== ==== ==== ==== ==== ==== ====
</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 nine months ended September 30,
1998 is not necessarily indicative of the distributions you will receive as a
stockholder of APF after the Acquisition.
S-10
<PAGE>
Assuming APF maintains its current level of debt for acquiring future
restaurant properties, the expected distribution rate per APF Share will be
8.8% (assuming a $10.00 per APF Share price based on the Exchange Value, the
annualized dividend per year is expected to be $0.88 per APF Share). Based on
the number of APF Shares that you would receive in the Acquisition per your
average $10,000 original investment and this distribution rate, you would
receive an annual distribution of approximately $833.
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 certain 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 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 Cash/Note Option.
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 our relief 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 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 Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the Cash/Notes Option, constitutes 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 and is the best way to maximize the return on your
investment in light of the values of such consideration.
S-11
<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 each of Valuation Associates and
Legg Mason received fees for its services and notwithstanding that Legg Mason
has previously provided investment banking services to the Funds and to
Commercial Net Lease Realty, Inc., a former affiliate of ours. See "Reports,
Opinions and Appraisals" in the Prospectus/Consent Solicitation Statement.
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 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 cash and promissory 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 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 Cash/Notes Option.
3. Valuation of Alternatives. Based on the appraisal of the Income Fund's
restaurant properties, we estimated the value of your Income Fund as an ongoing
concern and if liquidated. 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 Fund to Fund. In addition to the receipt
of cash available for distribution, you and the other Limited Partners will be
able to benefit from the potential growth of APF as an operating company and
will also receive investment liquidity through the public market in APF Shares.
S-12
<PAGE>
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
September 30, 1998 per $10,000 original investment. Since the calculation of
the book value was done on a GAAP basis, it is not indicative of the true fair
market value of your Income Fund. This figure was compared to the (i) value of
the Fund if it commenced an orderly liquidation of its investment portfolio on
December 31, 1998, (ii) value of the Fund if it continued to operate in
accordance with its existing partnership agreement and business plans, and
(iii) estimated value of the APF Shares, based on the Exchange Value, paid to
each Fund per average $10,000 invested.
Summary of Valuations
(per $10,000 original investment)
<TABLE>
<CAPTION>
Estimated Value
of APF Shares
per Average
$10,000
Going Original Limited
GAAP Liquidation Concern Partnership
Book Value Value(1) Value(1) Investment(2)
---------- ----------- -------- ----------------
<S> <C> <C> <C> <C>
CNL Income Fund XIV, Ltd. .... $8,791 $8,513 $9,430 $9,468
</TABLE>
- --------
(1) 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.
(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.
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have an independent
obligation 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 Funds). James M. Seneff, Jr. and
Robert A. Bourne act as the individual general partners of all of the 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.
Benefits to General Partners
As a result of the Acquisition (assuming only your Income Fund is acquired),
we are expected to receive certain benefits, including that we will be relieved
from certain ongoing liabilities with respect to the Funds that are acquired by
APF.
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 Funds if the Acquisition does not occur.
S-13
<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 the Cash/Notes Option, in which case you will
receive cash and 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 Prospectus/Consent Solicitation Statement.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, the
assets (and any liabilities) of your Income Fund (if your Income Fund is
acquired by APF) will be transferred to APF in return for APF Shares and/or
cash and 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
S-14
<PAGE>
$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 XIV, Ltd. ................................ $348
</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 Code, no gain or loss is recognized if (i)
property is transferred to a corporation by one more individuals or entities in
exchange for the stock of that corporation, and (ii) 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 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 the
Cash/Notes Option, 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 (1) 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 (2) 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 Cash/Notes Option, your Income Fund will receive APF
Shares, cash and Notes in exchange for your Income Fund's assets. Because the
principal portion of the Notes will not be due until , 2006, 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 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 (without reduction for
any selling expenses) 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 are 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, cash and Notes.
S-15
<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" (i.e., real property and
depreciable assets used in a trade or business and held for more than one
year). Your share of gains or losses from the sale of section 1231 assets of
your Income Fund would be combined with any other section 1231 gains and losses
that you recognize in that year. If the result is a net loss, such loss is
characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property will be taxed as ordinary income to the extent of all
prior depreciation deductions taken by your Income Fund prior to sale. In
general, you may only use up to $3,000 of capital losses in excess of capital
gains to offset ordinary income in any taxable year. Any excess loss is carried
forward to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your Income Fund recognizes will be allocated to you and the other
Limited Partners in accordance with the terms of your Income Fund's partnership
agreement. Each Limited Partner will be allocated and must report his, her or
its allocable share of such gain, if any, pursuant to these terms, regardless
of the Limited Partner's decision to receive 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 Cash/Notes Option may
recognize gain in the year of the Acquisition despite the fact that they will
receive only a small amount of cash and no publicly-traded instruments 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 the Cash/Notes Option. See "-- Tax Consequences of
Liquidation and Termination of Your Fund" below.
Tax Consequences of the Liquidation and Termination of Your Fund. If your
Fund is acquired by APF, your Fund will be deemed to have liquidated and
distributed APF Shares and/or cash and 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 cash and 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 pro rata 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 (determined on the closing date of the Acquisition) and your
adjusted tax basis in your Units (adjusted by your distributive share of
income, gain, loss, deduction and credit for the final taxable year of your
Income Fund (including any such items recognized by your Income Fund as a
result of the Acquisition) as well as any distributions you receive in such
final taxable year (other than the distribution of the APF Shares)). 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 cash and Notes in the Acquisition, you will recognize gain to
the extent that the amount of cash you receive in the Acquisition exceeds your
adjusted basis in your Units (adjusted by your distributive share of income,
gain, loss, deduction and credit for the final taxable year of your Income Fund
(including any such items recognized by your Income Fund as a result of the
Acquisition) as well as any distributions you
S-16
<PAGE>
receive in such final taxable year (other than the distributions of the cash
and Notes)). Your basis in the Notes distributed to you will equal your
adjusted basis in your Units, reduced (but not below zero) by the amount of any
cash distributed to you 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 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.
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 cash and 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 Prospectus/Consent Solicitation
Statement.
S-17
<PAGE>
SUMMARY SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
APF, FUNDS, ADVISOR AND CNL RESTAURANT FINANCIAL SERVICES GROUP
Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
Historical Pro Forma
------------------------------------------------ ---------------------------------
CNL
Restaurant
CNL Income Financial
Fund XIV, Services Combined Pro Forma Combined Pro
APF Ltd. Advisor Group Historical Adjustments Forma
------------ ----------- ---------- ----------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data Revenues:
Rental and earned
income................ $ 22,947,199 $ 2,474,536 $ -- $ -- $ 25,421,735 $ 9,635,208 (a)
47,778 (b) $ 35,104,721
Management fees........ -- -- 21,405,127 5,122,366 26,527,493 (21,043,762) (c)
(2,875,906) (d) 2,607,825
Interest and other
income................ 6,117,911 73,074 751 18,463,647 24,655,356 1,526,547 (e) 26,181,903
------------ ----------- ---------- ----------- ------------ ----------- -------------
Total revenue.......... 29,065,110 2,547,583 21,405,878 23,586,013 76,604,584 (12,710,135) 63,894,449
Expenses:
General and
administrative........ 1,539,004 221,045 6,701,115 6,704,482 15,165,646 (1,312,357) (f)
(1,415,100) (g)
(38,146) (h) 12,400,043
Advisory fees.......... 1,248,393 27,628 -- 1,026,231 2,302,252 (2,302,252) (i) --
State taxes............ 397,569 22,498 15,226 220,180 655,473 59,807 (j) 715,280
Depreciation and
amortization.......... 2,693,020 277,598 131,539 1,000,493 4,102,650 3,048,676 (k)(l) 7,151,326
Interest expense....... -- -- 105,668 14,234,533 14,340,201 (68,670) (m) 14,271,531
Paid to affiliates..... -- -- 256,456 1,569,202 1,825,658 (1,825,658) (n) --
------------ ----------- ---------- ----------- ------------ ----------- -------------
Total expenses......... 5,877,986 548,769 7,210,004 24,755,121 38,391,880 (3,853,700) 34,538,180
------------ ----------- ---------- ----------- ------------ ----------- -------------
Net earnings (loss)
before equity in
earnings of joint
ventures/minority
interests, gain (loss)
on sale of properties,
gain on securitization,
and provision (credit)
for federal income
taxes.................. 23,187,124 1,998,814 14,195,874 (1,169,108) 38,212,704 (8,856,435) 29,356,269
------------ ----------- ---------- ----------- ------------ ----------- -------------
Equity in earnings of
joint ventures/minority
interests.............. (23,271) 241,570 -- 12,452 230,751 -- 230,751
Gain (loss) on sales of
properties............. -- 112,206 -- -- 112,206 -- 112,206
Gain on securitization.. -- -- -- 3,018,268 3,018,268 -- 3,018,268
Provision (credit) for
federal income taxes... -- -- 5,607,415 708,666 6,316,081 (6,316,081)(o) --
------------ ----------- ---------- ----------- ------------ ----------- -------------
Net earnings............ $ 23,163,853 $ 2,352,590 $8,588,459 $ 1,152,946 35,257,848 $(2,540,354) $ 32,717,494
============ =========== ========== =========== ============ =========== =============
Other Data:
Weighted average number
of shares of common
stock outstanding
during period.......... 47,633,909 N/A N/A N/A N/A -- 74,002,850(p)
Total properties owned
at end of period....... 357 56 N/A N/A N/A -- 413
Funds from operations... $ 26,408,569 $ 2,581,659 N/A N/A N/A -- $ 37,356,718
Total cash distributions
declared............... $ 26,460,446 $ 2,784,390 N/A N/A N/A -- $ 37,356,718
Cash distributions
declared per $10,000
investment............. $ 572 $ 619 N/A N/A N/A -- $ 505
<CAPTION>
Historical Combined Pro Forma
September 30, 1998 Historical September 30, 1998
------------------------------------------------ ------------ ---------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data
Real estate assets,
net.................... $407,663,180 $32,435,783 $ -- $ -- $440,098,963 $ 6,963,413 (q)
26,052,741 (r) $ 473,115,117
Mortgages/notes
receivable............. 33,523,506 -- -- 173,776,981 207,300,487 849,195 (r) 208,149,682
Accounts receivable,
net.................... 575,104 -- 7,544,985 7,342,103 15,462,192 (7,855,308)(s) 7,606,884
Investment in/due from
joint ventures......... 631,374 3,633,822 -- -- 4,265,196 738,434 (q) 5,003,630
Total assets............ 566,383,967 40,570,962 8,429,809 197,528,789 812,913,527 26,575,470 839,488,997
Total
liabilities/minority
interest............... 14,478,585 1,013,605 5,049,152 185,998,045 206,539,387 (10,846,172)(s)(t) 195,693,215
Total equity............ 551,905,382 39,557,357 3,380,657 11,530,744 606,374,140 37,421,642 (q)(t) 643,795,783
</TABLE>
- -------
S-18
<PAGE>
(a) Represents rental and earned income as if 1) properties that had been
previously constructed and acquired from January 1, 1998 through November
30, 1998 had been acquired and leased on January 1, 1997 and 2) properties
that were developed by APF from January 1, 1998 through November 30, 1998
had been placed in service on May 1, 1997 (assumes a four month development
period.)
Rental and
earned
income on
Property
Transactions
by APF...... $9,635,208
(b) Represents $47,778 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, 1997.
(c) Represents the elimination of intercompany fees between APF, the Income
Fund, the Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<CAPTION>
<S> <C>
Origination fees............................................. $ (1,569,202)
Secured equipment lease fee.................................. (44,426)
Advisory fees................................................ (1,750,011)
Reimbursement of administrative costs........................ (298,240)
Acquisition fees............................................. (15,392,193)
Underwriting fees............................................ (254,945)
Administrative fees.......................................... (148,491)
Executive fee................................................ (310,000)
Guarantee fees............................................... (93,750)
Servicing fee................................................ (1,014,117)
Development fees............................................. (166,876)
Consulting fee............................................... (1,511)
------------
Total...................................................... $(21,043,762)
============
</TABLE>
(d) Represents the deferral of $2,875,906 in origination fees collected by CNL
Restaurant Financial Services Group that should be amortized over the term
of the loans originated (20 years) in accordance with the Statement of
Financial Accounting Standards #91 "Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases."
(e) Represents interest income of $1,318,870 earned from Other Investments
acquired and mortgage notes issued from January 1, 1998 through November
30, 1998 as if this had occurred on January 1, 1997 and the amortization of
$207,677 of deferred origination fees collected during the year ended
December 31, 1997 and during the nine months ended September 30, 1998,
which were capitalized and deferred in (d) above as if they had been
collected on January 1, 1997. These deferred fees are being amortized and
recorded as interest income.
(f) Represents the elimination of intercompany expenses paid between APF, the
Income Fund, the Advisor and the CNL Restaurant Financial Services Group.
<TABLE>
<CAPTION>
<S> <C>
Reimbursement of administrative costs....................... $ (298,240)
Servicing fee............................................... (1,014,117)
-----------
$(1,312,357)
===========
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by APF were subject
to capitalization during the entire period and 2) costs relating to
properties not developed by APF were subject to capitalization up through
the time that EITF 97-11 became effective.
General and
administrative
costs......... $(1,415,100)
(h) Represents savings of $38,146 in professional services and administrative
expenses resulting from reporting on one combined company versus 22
separate entities.
(i) Represents the elimination of fees between APF, the Income Fund, the
Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Advisory fees.............................................. $ (1,750,011)
Administrative fees........................................ (148,491)
Executive fee.............................................. (310,000)
Guarantee fees............................................. (93,750)
------------
$ (2,302,252)
============
</TABLE>
(j) Represents additional state taxes of $59,807 resulting from assuming that
acquisitions from January 1, 1998 through November 30, 1998 had been
acquired on January 1, 1997 and assuming that the Income Fund had operated
under a REIT structure.
S-19
<PAGE>
(k) Represents an increase in depreciation of the building portion of the
properties acquired from January 1, 1998 through November 30, 1998 as if
they had been acquired on January 1, 1997 and the step up in basis referred
to in footnote (q) from acquiring the Income Fund portfolio using the
straight-line method over the estimated useful lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense.......................................... $1,486,751
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of the CNL
Restaurant Financial Services Group referred to in footnote (q).
<TABLE>
<S> <C>
Amortization of goodwill...................................... $1,561,925
</TABLE>
(m) Represents elimination of interest expense recorded for the amortization of
$350,000 in arrangement fees collected during the year ended December 31,
1997 which were eliminated in footnote (4), II (d) in the Notes to the Pro
Forma Financial Statements attached to this Supplement.
<TABLE>
<S> <C>
Interest expense.............................................. $ (68,670)
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees incurred
between APF, the Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Origination fees............................................ $(1,569,202)
Underwriting fees........................................... (254,945)
Consulting fee.............................................. (1,511)
-----------
$(1,825,658)
===========
</TABLE>
(o) Represents the elimination of $6,316,081 in the provision for income taxes
as a result of the acquisition. APF expects to continue to qualify as a
REIT and does not expect to incur federal income taxes.
(p) APF Shares issued during the period required to fund acquisitions as if
they had been acquired on January 1, 1997 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 the
proposal to increase the number of authorized APF Shares.
(q) Represents the payment of $524,929 in cash and the issuance of 16,560,548
APF Shares in consideration for the purchase of the Income Fund, Advisor
and CNL Restaurant Financial Services Group at September 30, 1998 using the
Exchange Value of $10 per APF Share plus estimated transaction costs. The
acquisitions of the Income Fund and the CNL Restaurant Financial Services
Group have been accounted for under the purchase accounting method and
goodwill was recognized to the extent the estimated value of the
consideration paid exceeded the fair value of the net tangible assets
acquired. As for the acquisition of the Advisor from a related party, the
consideration paid in excess of the fair value of the net tangible assets
received has been accounted for as costs incurred in acquiring the Advisor
from a related party because the Advisor has not been deemed to qualify as
a "business" for purposes of applying APB Opinion No. 16 "Business
Combinations." Upon consummation of the Acquisition, this expense will be
recorded as an operating expense on APF's statement of earnings. APF will
not deduct this expense for purposes of calculating funds from operations
due to the nonrecurring and non-cash nature of the expense. As of September
30, 1998, $249,403 of transaction costs had been incurred by APF.
<TABLE>
<S> <C>
Income Fund............................................... $ 43,130,405
Advisor................................................... 76,000,000
CNL Restaurant Financial Services Group................... 47,000,000
Total Purchase Price (cash and shares).................... 166,130,405
Less cash paid to Income Fund............................. (524,929)
Share consideration....................................... 165,605,476
Transaction costs of APF.................................. 8,933,000
------------
Total costs incurred..................................... $174,538,476
============
</TABLE>
In addition, APF i) used $8,933,000 in cash to pay the transaction costs
related to the Acquisition, ii) made an upward adjustment to the Income Fund
carrying value of land and building on operating leases by $5,611,645, net
investment in direct financing leases by $1,351,768, investment in joint
venture by $738,434, made downward adjustments to the carrying value of
accrued rental income of $1,795,945, and made downward adjustments to other
assets of $3,668,522 to adjust historical values to fair value, iii)
recorded goodwill of $41,651,327 for the acquisition of the CNL Restaurant
Financial Services Group, iv) reduced retained earnings by $76,705,940 for
the excess consideration paid over the net assets of the Advisor and removed
the historical common stock balance of $12,000, additional paid in capital
balance of $9,602,287, retained earnings balance of $5,297,114 and partners
capital balance of $39,557,357 of the Income Fund, Advisor and CNL
Restaurant Financial Services Group.
(r) Represents the use of $26,901,936 in cash and cash equivalents at September
30, 1998 to acquire $26,052,741 in properties and issue $849,195 in
mortgage notes which occurred from October 1, 1998 through November 30,
1998.
(s) Represents the elimination by the Income Fund of $5,929 in related party
payables recorded as receivables by the Advisor, the elimination by the
Restaurant Financial Services Group of $6,641,379 in related party payables
recorded as receivables by CNL Restaurant Financial Services Group and the
elimination by APF of $1,208,000 in related party payables recorded as
receivables by the Advisor.
(t) Represents the elimination of income taxes payable of $2,990,864 from
liabilities assumed in the acquisition of the CNL Restaurant Businesses
since the acquisition agreements require that the Advisor and CNL
Restaurant Financial Services Group have no accumulated or current earnings
and profits for federal income tax purposes at the time of the acquisition.
S-20
<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>
Nine Months Ended
September 30, Year Ended December 31,
----------------------- -----------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues (1)............ $ 2,789,153 $ 3,209,495 $ 4,268,693 $ 4,503,039 $ 4,406,707
Net income (2).......... 2,352,590 2,752,076 3,665,940 3,916,329 3,751,237
Cash distributions
declared............... 2,784,390 2,784,390 3,712,520 3,712,522 3,628,130
Net income per Unit
(2).................... 0.52 0.61 0.81 0.86 0.83
Cash distributions
declared per Unit...... 0.62 0.62 0.83 0.83 0.81
Weighted average number
of Limited Partner
Units outstanding...... 4,500,000 4,500,000 4,500,000 4,500,000 4,500,000
<CAPTION>
September 30, December 31,
----------------------- -----------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total assets............ $40,570,962 $41,081,362 $40,984,624 $41,045,849 $40,838,104
Total partners'
capital................ 39,557,357 40,003,423 39,989,157 40,035,737 39,831,930
</TABLE>
- --------
(1) Revenues include equity in earnings of the joint ventures.
(2) Net income for the nine months ended September 30, 1998 includes $112,206
from gain on sale of land and building. Net income for the year ended
December 31, 1995, includes $66,518 from loss on sale of land.
S-21
<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 September 30, 1998, the Income Fund owned 56 restaurant
properties, which included interests in 10 restaurant properties owned by joint
ventures in which the Income Fund is a co-venturer.
Liquidity and Capital Resources
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 1998 and 1997, 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 $2,610,623 and $2,782,288, respectively. The
decrease in cash from operations for the nine months ended September 30, 1998,
as compared to the nine months ended September 30, 1997, 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 items during the
nine months ended September 30, 1998.
During the nine months ended September 30, 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 approximately $213,300 in excess of their original
purchase prices. During the nine months ended September 30, 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 below. The Income Fund will distribute amounts sufficient to enable
the Limited Partners to pay federal and state income taxes, if any (at a level
reasonably assumed by us), resulting from the sale.
In addition, 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 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. Construction of the restaurant was completed in
January 1998. As of September 30, 1998, the Income Fund had contributed
$206,848 to the
S-22
<PAGE>
joint venture and owned a 39.94% interest in the profits and losses of the
joint venture. In addition, 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, Melbourne Joint Venture, with one of our affiliates, to construct
and hold one restaurant property, at a total cost of $1,052,552. As of
September 30, 1998, the Income Fund had contributed $314,011 to purchase land
and pay for construction costs relating to the joint venture. The Income Fund
has agreed to contribute approximately $212,300 in additional construction
costs to the joint venture. The Income Fund will have an approximate 50%
interest in the profits and losses of the joint venture.
As of September 30, 1998, the net sales proceeds from the sale of one of the
restaurant properties in Richmond, Virginia 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 October 1998, the Income Fund
reinvested these net sales proceeds, along with additional funds, in a
restaurant property in Fayetteville, North Carolina, as described below.
In October 1998, the Income Fund reinvested approximately $1,533,100 of the
net sales proceeds it received from the sales of the restaurant properties in
Richmond, Virginia and 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, in a Bennigan's
restaurant property located in Fayetteville, North Carolina. In connection
therewith, the Income Fund entered into a long term, triple-net lease with
terms substantially the same as its other leases. The Income Fund acquired the
Bennigan's 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.
Currently, cash reserves and rental income from the Income Fund's restaurant
properties is invested in money market accounts or other short-term, highly
liquid investments pending the use of such funds to pay Income Fund expenses or
to make distributions to partners. At September 30, 1998, the Income Fund had
$2,293,184 invested in such short-term investments, as compared to $1,285,777
at December 31, 1997. The increase in cash is primarily attributable to the
receipt of net sales proceeds relating to the sales of one of the restaurant
properties in Richmond, Virginia and the restaurant property in Madison,
Alabama, net of the amount reinvested in Melbourne Joint Venture, as described
above. In addition, the increase in cash is partially attributable to the
release of funds held in escrow at December 31, 1997 relating to the right of
way taking of the restaurant property in Riviera Beach, Florida, as described
above. The funds remaining at September 30, 1998, after payment of
distributions and other liabilities, will be used to meet the Income Fund's
working capital and other needs and to acquire additional restaurant
properties.
Total liabilities of the Income Fund, including distributions payable,
increased to $1,013,605 at September 30, 1998, from $995,467 at December 31,
1997. 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, the Income
Fund declared distributions to the Limited Partners of $2,784,390 for each of
the nine months ended September 30, 1998 and 1997 ($928,130 for each of the
quarters ended September 30, 1998 and 1997). This represents distributions for
each applicable nine months of $0.62 per unit ($0.21 per unit for each
applicable quarter). No distributions were made to us for the quarters and nine
months ended September 30, 1998 and 1997. No amounts distributed to the Limited
Partners for the nine months ended September 30, 1998 and 1997, 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 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-23
<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.
The Years Ended December 31, 1997, 1996 and 1995
The Income Fund's primary source of capital for the years ended December 31,
1997, 1996 and 1995, 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 $3,606,190, $3,706,296 and
$3,709,844 for the years ended December 31, 1997, 1996 and 1995, respectively.
The decrease in cash from operations during 1997 and 1996, 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 used of capital included the following items during the
years ended December 31, 1997, 1996 and 1995.
The Income Fund received notice in January 1995, from the tenant of two of
its restaurant properties located in Knoxville, Tennessee, and Dallas, Texas,
of the tenant's intention to exercise its option, in accordance with its lease
agreement, to substitute other properties for these two restaurant properties.
In March 1995, the Income Fund sold its two restaurant properties in Knoxville,
Tennessee and Dallas, Texas, to the tenant for their original purchase prices,
excluding acquisition fees and miscellaneous acquisition expenses, and received
net sales proceeds totaling $696,012. The Income Fund used the net sales
proceeds, along with other uninvested offering proceeds, to acquire two
Checkers restaurant properties in Coral Springs and St. Petersburg, Florida,
from the tenant. As a result of these transactions, the Income Fund recognized
a loss of $66,518 for financial reporting purposes primarily due to acquisition
fees and miscellaneous acquisition expenses that the Income Fund had allocated
to the Knoxville, Tennessee, and Dallas, Texas restaurant properties, and due
to the accrued rental income relating to future scheduled rent increases that
the Income Fund had previously recorded and wrote off at the time of sale.
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.
During 1997, the Fund entered into an agreement with the tenant of the
Checkers #486 Property in Richmond, Virginia, to sell the restaurant property.
The general partners believe that the anticipated sales price exceeds the
Fund's cost attributable to the restaurant property. As of February 28, 1998,
the sale had not occurred.
During 1997, the Income Fund entered into an agreement with a third party to
sell the restaurant property in Marietta, Georgia. We believe that the
anticipated sales price exceeds the Income Fund's cost attributable to the
restaurant property. As of February 28, 1998, the sale had not occurred.
In December 1997, the Port of Palm Bay deposited $660,000 in the registry of
the court on behalf of the Fund and the tenant in exchange for taking
possession of the restaurant property located in Riviera Beach, Florida,
through a total right of way taking. The Fund owned the land and the tenant
owned the building
S-24
<PAGE>
relating to this restaurant property. The general partners and the tenant are
in the process of negotiating the allocation of the $660,000. The general
partners anticipate that the Fund will be entitled to receive at least
$330,000, but the general partners intend to pursue a larger allocation of this
amount. As of December 31, 1997, the Fund had removed the carrying value of the
land in the amount of $318,592 from its accounts due to the fact that the Port
of Palm Bay had taken possession of this restaurant property, and in exchange,
the Fund recorded restricted cash in the amount of $318,592. The general
partners anticipate that the Fund will recognize a gain as a result of the
taking of this restaurant property and will recognize such gain when the final
proceeds are determined. As of February 28, 1998, the final amount of proceeds
to be received had not been determined.
In January 1998, the Fund sold its restaurant property in Madison, Alabama,
to a third party for $740,000 and received net sales proceeds of $700,950. Due
to the fact that the 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 Fund
wrote off $13,314 of such accrued rental income at December 31, 1997. Due to
the fact that the Fund recorded the write off at December 31, 1997, no gain or
loss will be recorded in 1998 for financial reporting purposes relating to the
sale. The Fund intends to reinvest the net sales proceeds in an additional
restaurant property. The general partners believe that the transaction, or a
portion thereof, relating to the sale of this restaurant property and the
reinvestment of the proceeds will be structured to qualify as a like-kind
exchange transaction for federal income tax purposes.
In January 1998, the Fund sold its restaurant property in Richmond, Virginia
(#548), to a third party for $512,462 and received net sales proceeds in that
amount, resulting in a gain of $70,798 for financial reporting purposes. The
Fund intends to reinvest the net sales proceeds in an additional restaurant
property. The general partners believe that the transaction, or a portion
thereof, relating to the sale of this restaurant property and the reinvestment
of the proceeds will be structured to qualify 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.
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.
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 pending the Income Fund's use of such funds to pay Income
Fund expenses or make distributions to partners. At December 31, 1997, the
Income Fund had $1,285,777 invested in such short-term investments as compared
to $1,462,012 at December 31, 1996. The decrease in cash is primarily
attributable to the Income Fund investing in CNL Kingston Joint Venture in
September 1997, as described above. The funds remaining at December 31, 1997,
after the payment of distributions and other liabilities, will be used to meet
the Income Fund's working capital and other needs.
During 1997, 1996 and 1995, the affiliates incurred on behalf of the Income
Fund $87,695, $94,152 and $104,433, respectively, for certain operating
expenses. In addition, during 1995, certain of our affiliates incurred on
behalf of the Income Fund $577 for certain acquisition expenses. At December
31, 1997 and 1996, the Income Fund owed $7,853 and $1,651, respectively, to
affiliates for such amounts and accounting and administrative services and
management fees. As of February 28, 1998, the Income Fund had reimbursed the
affiliates all such amounts. Other liabilities, including distributions
payable, decreased to $987,614 at December 31, 1997, from $1,008,461 at
December 31, 1996, primarily as a result of a decrease in rents paid in advance
at December 31, 1997.
S-25
<PAGE>
Based primarily on current and future cash from operations, the Income Fund
declared distributions to the Limited Partners of $3,712,520, $3,712,522 and
$3,628,130 for the years ended December 31, 1997, 1996 and 1995, respectively.
This represents distributions of $0.83 per Unit for each of the years ended
December 31, 1997 and 1996 and $0.81 per Unit for the year ended December 31,
1995. No amounts distributed or to be distributed to the Limited Partners for
the years ended 1997, 1996 and 1995 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.
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
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 1997, the Income Fund owned and
leased 50 wholly-owned restaurant properties (including one restaurant property
in Riviera Beach, Florida, sold through a right of way taking in December 1997)
and during the nine months ended September 30, 1998, the Income Fund owned and
leased 49 wholly-owned restaurant properties (including two restaurant
properties in Richmond, Virginia, and one restaurant property in Madison,
Alabama, which were sold during 1998) to operators of fast-food and family-
style restaurant chains. In connection therewith, during the nine months ended
September 30, 1998 and 1997, the Income Fund earned $2,474,536 and $2,934,924,
respectively, in rental income from operating leases (net of adjustments to
accrued rental income) and earned income from direct financing leases from
these restaurant properties, $852,352 and $977,641 of which was earned during
the quarters ended September 30, 1998 and 1997, respectively. The decrease in
rental and earned income during the quarter and nine months
ended September 30, 1998, as compared to the quarter and nine months ended
September 30, 1997, is primarily attributable to the fact that in June 1998,
the Income Fund stopped receiving rental income from the tenant, Long John
Silver's Inc., which filed for bankruptcy and rejected the leases relating to
four restaurant properties. In addition, during the nine months ended September
30, 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. We are currently seeking either replacement tenants or purchasers
for these restaurant properties. The Income Fund will not recognize any rental
and earned income from these restaurant properties until replacement 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.
In addition, the decrease in rental and earned income during the quarter and
nine months ended September 30, 1998, is partially attributable to a decrease
in rental and earned income 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 during the quarter and nine months ended September 30,
1998, is also partially due to the fact that the Income Fund wrote off
approximately $12,100 in 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
S-26
<PAGE>
principles) relating to one of the restaurant properties in Richmond, Virginia
to adjust the carrying value of the asset to the net sales proceeds received
from the sale of this restaurant property. In October 1998, the Income Fund
reinvested the majority of the net sales proceeds from these restaurant
properties in a restaurant property in Fayetteville, North Carolina, as
described above in "Liquidity and Capital Resources." Consequently, the Income
Fund expects the decrease in rental and earned income relating to the sales of
these restaurant properties to be partially offset by an increase in rental and
earned income relating to the acquisition of the restaurant property in
Fayetteville, North Carolina, during the remainder of 1998 and in subsequent
years.
In addition, during the nine months ended September 30, 1997, the Income
Fund owned and leased nine restaurant properties and during the nine months
ended September 30, 1998, the Income Fund owned and leased ten restaurant
properties indirectly through joint venture arrangements. In connection
therewith, during the nine months ended September 30, 1998 and 1997, the Income
Fund earned $241,570 and $231,204, respectively, attributable to net income
earned by these joint ventures, $76,939 and $78,381 of which was earned during
the quarters ended September 30, 1998 and 1997, respectively. The increase in
net income earned by joint ventures during nine months ended September 30,
1998, as compared to the nine months ended September 30, 1997, is primarily
attributable to the Income Fund investing in Kingston Joint Venture in
September 1997.
In addition, during the nine months ended September 30, 1998 and 1997, the
Income Fund earned $73,047 and $43,367, respectively in interest and other
income, $26,585 and $12,765 of which was earned during the quarters ended
September 30, 1998 and 1997, respectively. The increase in interest and other
income for the quarter and nine months ended September 30, 1998 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
$548,769 and $457,419 for the nine months ended September 30, 1998 and 1997,
respectively, of which $238,307 and $138,402 were incurred for the quarters
ended September 30, 1998 and 1997, respectively. The increase in operating
expenses during the quarter and nine months ended September 30, 1998, as
compared to the quarter and nine months ended September 30, 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. In
connection with the bankruptcy, 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 #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 quarter
and nine months ended September 30, 1998. No such loss was recorded during the
quarter and nine months ended September 30, 1997. In addition, the increase in
operating expenses during the quarter and nine months ended September 30, 1998,
is partially attributable to an increase in depreciation expense due to the
fact that during the quarter and nine months ended September 30, 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 until new tenants or
purchasers are located. The Income Fund is currently seeking either new tenants
or purchasers for these restaurant properties.
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 nine months ended September 30, 1998. No restaurant properties were
sold during the nine months ended September 30, 1997.
S-27
<PAGE>
The Years Ended December 31, 1997, 1996 and 1995
The Income Fund owned and leased 52 wholly-owned restaurant properties
during 1995 (including one restaurant property in Knoxville, Tennessee, and one
restaurant property in Dallas, Texas, which were sold in March 1995) and 50
wholly-owned restaurant properties during 1996 and 1997 (including one
restaurant property in Riviera Beach, Florida which was condemned through a
total right of way taking in December 1997). In addition, during 1995, the
Income Fund was a co-venturer in three separate joint ventures that owned and
leased a total of four restaurant properties, 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), and during 1997, the Income Fund
was a co-venture in four separate joint ventures that owned and leased a total
of nine restaurant properties. As of December 31, 1997, the Income Fund owned,
either directly or through joint venture arrangements, 58 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 lease
year), the annual base rent required under the terms of the lease will
increase.
During the years ended December 31, 1997, 1996 and 1995, the Income Fund
earned $3,911,527, $3,987,525 and $4,015,564, respectively, in rental income
from operating leases and earned income from direct financing leases from
restaurant properties wholly-owned by the Income Fund. The decrease in rental
and earned income during 1996, as compared to 1995, was primarily attributable
to the fact that during 1994, the Income Fund's former tenant of the restaurant
property in Akron, Ohio, ceased operating the restaurant located on the
restaurant property. The Income Fund subsequently leased this restaurant
property to various temporary operators who assumed the restaurant operations
and paid the Income Fund rent on a month-to-month basis. 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.
In addition, 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.
In addition, for the years ended December 31, 1997, 1996 and 1995, the
Income Fund earned $309,879, $459,137 and $338,717, 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, and the increase during 1996 as compared to 1995, 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."
During at least one of the years ended December 31, 1997, 1996 and 1995,
five lessees (or group of affiliated lessees) of the Income Fund, Flagstar
Corporation, 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 nine restaurant properties owned by joint ventures). As of
December 31, 1997, Flagstar Corporation was the lessee under leases relating to
11 restaurants, Foodmaker, Inc. was the lessee under leases relating to six
restaurants, Long John Silver's, Inc. was the lessee under leases relating to
nine restaurants, Checkers Drive-In Restaurants, Inc. was the lessee under
leases relating to 17 restaurants and Golden Corral Corporation was the lessee
under
S-28
<PAGE>
leases relating to four restaurants. It is anticipated that based on the
minimum rental payments required by the leases, these five lessees (or group of
affiliated lessees) each will continue to contribute more than 10% of the
Income Fund's total rental income in 1998 and subsequent years. In addition,
during at least one of the years ended December 31, 1997, 1996 or 1995, 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 nine restaurant properties owned by joint ventures). In subsequent years,
it is anticipated that these six restaurant chains 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.
Operating expenses, including depreciation and amortization expense, were
$602,753, $586,710 and $588,952 for the years ended December 31, 1997, 1996 and
1995, respectively. 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 subsequently ceased
operating the restaurant property, the Income Fund incurred real estate taxes
during the years ended December 31, 1997, 1996 and 1995. 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 1995 sales of the restaurant properties in Knoxville,
Tennessee, and Dallas, Texas, as described above in "Liquidity and Capital
Resources," the Income Fund recognized a loss for financial reporting purposes
of $66,518 for the year ended December 31, 1995. The loss was primarily due to
acquisition fees and miscellaneous acquisition expenses the Income Fund had
allocated to these restaurant properties and due to accrued rental income
relating to straight lining future scheduled rent increases that the Income
Fund had recorded and wrote off at the time of the sale. No restaurant
properties were sold during 1996 and 1997.
General
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Income Fund's financial position or results of operations.
The Income Fund's leases as of September 30, 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
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.
The Year 2000 problem is the result of information technology systems and
embedded systems (products which are made with microprocessor (computer) chips
such as HVAC systems, physical security systems and elevators) using a two-
digit format, as opposed to four digits, to indicate the year. Such information
technology and embedded systems may be unable to properly recognize and process
date-sensitive information beginning January 1, 2000.
S-29
<PAGE>
The Income Fund does not have any information technology systems. Certain of
our affiliates provide all services requiring the use of information technology
systems pursuant to a management agreement with the Income Fund. The
maintenance of embedded systems, if any, at the Income Fund's properties is the
responsibility of the tenants of the properties in accordance with the terms of
the Income Fund's leases. We and our affiliates have established a team
dedicated to reviewing the internal information technology systems used in the
operation of the Income Fund, and the information technology and embedded
systems and the Year 2000 compliance plans of the Income Fund's tenants,
significant suppliers, financial institutions and transfer agent.
The information technology infrastructure of our affiliates consists of a
network of personal computers and servers that were obtained from major
suppliers. The affiliates utilize various administrative and financial software
applications on that infrastructure to perform the business functions of the
Income Fund. Our inability and that of our affiliates to identify and timely
correct material Year 2000 deficiencies in the software and/or infrastructure
could result in an interruption in, or failure of, certain of the Income Fund's
business activities or operations. Accordingly, we and our affiliates have
requested and are evaluating documentation from the suppliers of the affiliates
regarding the Year 2000 compliance of their products that are used in the
business activities or operations of the Income Fund. The costs expected to be
incurred by us and our affiliates to become Year 2000 compliant will be
incurred by us and our affiliates; therefore, these costs will have no impact
on the Income Fund's financial position or results of operations.
The Income Fund has material third party relationships with its tenants,
financial institutions and 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. If
any of these third parties are unable to meet their obligations to the Income
Fund because of the Year 2000 deficiencies, such a failure may have a material
impact on the Income Fund. Accordingly, we have requested and are evaluating
documentation from the Income Fund's tenants, financial institutions, and
transfer agent relating to their Year 2000 compliance plans. At this time, we
have not yet received sufficient certifications to be assured that the tenants,
financial institutions, and transfer agent have fully considered and mitigated
any potential material impact of the Year 2000 deficiencies. Therefore, we do
not, at this time, know of the potential costs to the Income Fund of any
adverse impact or effect of any Year 2000 deficiencies by these third parties.
We currently expect that all Year 2000 compliance testing and any necessary
remedial measures on the information technology systems used in the business
activities and operations of the Income Fund will be completed prior to June
30, 1999. Based on the progress we and our affiliates have made in identifying
and addressing the Income Fund's Year 2000 issues and the plan and timeline to
complete the compliance program, we do not foresee significant risks associated
with the Income Fund's Year 2000 compliance at this time. Because we and our
affiliates are still evaluating the status of the systems used in business
activities and
operations of the Income Fund and the systems of the third parties with which
the Income Fund conducts its business, we have not yet developed a
comprehensive contingency plan and are unable to identify "the most reasonably
likely worst case scenario" at this time. As we identify significant risks
related to the Income Fund's Year 2000 compliance or if the Income Fund's Year
2000 compliance program's progress deviates substantially from the anticipated
timeline, we will develop appropriate contingency plans.
S-30
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997... F-1
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997.............................................. F-2
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997.............. F-3
Condensed Statements of Cash Flows for the Nine Months Ended September 30,
1998 and 1997............................................................ F-4
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997........................................ F-5
Report of Independent Accountants......................................... F-8
Balance Sheets as of December 31, 1997 and 1996........................... F-9
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995..................................................................... F-10
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995............................................................ F-11
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995..................................................................... F-12
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and 1995................................................................. F-13
Unaudited Pro Forma Financial Information................................. F-21
Unaudited Pro Forma Balance Sheet as of September 30, 1998................ F-22
Unaudited Pro Forma Income Statement for the Nine Months Ended September
30, 1998................................................................. F-23
Unaudited Pro Forma Income Statement for the Year Ended December 31,
1997..................................................................... F-24
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements............................................................... F-25
</TABLE>
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September December
30, 1998 31, 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation
of $1,571,136 and $1,295,713......................... $26,043,665 $25,217,725
Net investment in direct financing leases............. 6,392,118 9,041,485
Investment in joint ventures.......................... 3,633,822 3,271,739
Cash and cash equivalents............................. 2,293,184 1,285,777
Restricted cash....................................... 398,539 318,592
Receivables, less allowance for doubtful accounts of
$5,013 in 1998....................................... -- 19,912
Prepaid expenses...................................... 13,689 7,915
Organization costs, less accumulated amortization of
$10,000 and $8,599................................... -- 1,401
Accrued rental income, less allowance for doubtful
accounts
of $11,040 and $6,295................................ 1,795,945 1,820,078
----------- -----------
$40,570,962 $40,984,624
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 1,234 $ 10,258
Accrued and escrowed real estate taxes payable........ 42,751 19,570
Distributions payable................................. 928,130 928,130
Due to related parties................................ 5,929 7,853
Rents paid in advance................................. 35,561 29,656
----------- -----------
Total liabilities................................... 1,013,605 995,467
Partners' capital..................................... 39,557,357 39,989,157
----------- -----------
$40,570,962 $40,984,624
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-1
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases........................ $ 682,180 $ 723,524 $2,107,058 $2,170,802
Adjustment to accrued rental
income........................ (14,350) -- (277,319) --
Earned income from direct
financing leases.............. 184,522 254,117 644,797 764,122
Interest and other income...... 26,585 12,765 73,047 43,367
---------- ---------- ---------- ----------
878,937 990,406 2,547,583 2,978,291
---------- ---------- ---------- ----------
Expenses:
General operating and
administrative................ 51,444 35,386 130,375 111,792
Professional services.......... 5,632 7,006 22,509 18,590
Bad debt expense............... -- -- -- 14,000
Management fees to related
parties....................... 8,842 9,573 27,628 28,863
Real estate taxes.............. 41,562 1,384 46,288 7,192
State and other taxes.......... 1,462 -- 22,498 21,874
Loss on termination of direct
financing lease............... 21,873 -- 21,873 --
Depreciation and amortization.. 107,492 85,053 277,598 255,108
---------- ---------- ---------- ----------
238,307 138,402 548,769 457,419
---------- ---------- ---------- ----------
Income Before Equity in Earnings
of Joint Ventures
and Gain on Sale of Land and
Building........................ 640,630 852,004 1,998,814 2,520,872
Equity in Earnings of Joint
Ventures........................ 76,939 78,381 241,570 231,204
Gain on Sale of Land and
Building........................ -- -- 112,206 --
---------- ---------- ---------- ----------
Net Income....................... $ 717,569 $ 930,385 $2,352,590 $2,752,076
========== ========== ========== ==========
Allocation of Net Income:
General partners............... $ 7,175 $ 9,304 $ 22,403 $ 27,521
Limited partners............... 710,394 921,081 2,330,187 2,724,555
---------- ---------- ---------- ----------
$ 717,569 $ 930,385 $2,352,590 $2,752,076
========== ========== ========== ==========
Net Income Per Limited Partner
Unit............................ $ 0.16 $ 0.20 $ 0.52 $ 0.61
========== ========== ========== ==========
Weighted Average Number of
Limited
Partner Units Outstanding....... 4,500,000 4,500,000 4,500,000 4,500,000
========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended
1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
General partners:
Beginning balance........................ $ 146,640 $ 109,981
Net income............................... 22,403 36,659
----------- -----------
169,043 146,640
----------- -----------
Limited partners:
Beginning balance........................ 39,842,517 39,925,756
Net income............................... 2,330,187 3,629,281
Distributions ($0.62 and $0.83 per
limited partner unit, respectively)..... (2,784,390) (3,712,520)
----------- -----------
39,388,314 39,842,517
----------- -----------
Total partners' capital................ $39,557,357 $39,989,157
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
----------- ----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities........... $ 2,610,638 $2,782,288
----------- ----------
Cash Flows from Investing Activities:
Proceeds from sale of land and building........... 1,648,110 --
Investment in joint venture....................... (387,573) (77,277)
Return of capital from joint venture.............. -- 51,950
Increase in restricted cash....................... (79,378) --
----------- ----------
Net cash provided by (used in) investing
activities................................... 1,181,159 (25,327)
----------- ----------
Cash Flows from Financing Activities:
Distributions to limited partners................. (2,784,390) (2,784,390)
----------- ----------
Net cash used in financing activities......... (2,784,390) (2,784,390)
----------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents.. 1,007,407 (27,429)
Cash and Cash Equivalents at Beginning of Period...... 1,285,777 1,462,012
----------- ----------
Cash and Cash Equivalents at End of Period............ $ 2,293,184 $1,434,583
=========== ==========
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Net investment in direct financing leases
reclassified to land and buildings on operating
leases as a result of lease termination.......... $ 2,084,141 $ --
=========== ==========
Distributions declared and unpaid at end of
period........................................... $ 928,130 $ 928,130
=========== ==========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters Nine Months Ended September 30, 1998 and 1997
1. Basic 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 fair statement of the results for the interim periods presented.
Operating results for the nine months ended September 30, 1998, may not be
indicative of the results that may be expected for the year ending December 31,
1998. Amounts as of December 31, 1997, included in the financial statements,
have been derived from audited financial statements as of the 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, 1997.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2. Land and Buildings on Operating Leases
During the nine months ended September 30, 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 totaling 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 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 excess of its original purchase
price.
3. Net Investment in Direct Financing Leases
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 2).
During the nine months ended September 30, 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 #13, "Accounting for Leases," the
F-5
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters Nine Months Ended September 30, 1998 and 1997
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.
4. 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, at a total cost of $1,052,552. As
of September 30, 1998, the Partnership had contributed $314,011 to purchase
land and pay for construction costs relating to the joint venture. The
Partnership has agreed to contribute approximately $212,300 in additional
construction costs to the joint venture. The Partnership will 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 September 30, 1998, Attalla Joint Venture, Salem Joint Venture,
Kingston Joint Venture and Melbourne Joint Venture, each owned and leased one
property, and WoodRidge Real Estate Joint Venture owned and leased six
properties, to operators of fast-food or family-style restaurants. The
following presents the combined, condensed financial information for the joint
ventures at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land and buildings on operating leases,
less accumulated depreciation................ $6,673,070 $6,008,240
Net investment in direct financing lease...... 361,764 364,479
Cash.......................................... 2,783 13,842
Receivables................................... 20,884 2,571
Accrued rental income......................... 212,017 150,621
Other assets.................................. 1,153 1,257
Liabilities................................... 195,521 231,061
Partners' capital............................. 7,076,150 6,309,949
Revenues...................................... 582,901 712,004
Net income.................................... 467,698 588,835
</TABLE>
The Partnership recognized income totaling $241,570 and $231,204 for the
nine months ended September 30, 1998 and 1997, respectively, from these joint
ventures, $76,939 and $78,381 of which was earned for the quarters ended
September 30, 1998 and 1997, respectively.
5. Restricted Cash
As of September 30, 1998, $397,970 in net sales proceeds from the sale of
one of the Properties in Richmond, Virginia, plus accrued interest of $569,
were being held in an interest-bearing escrow account pending the release of
funds by an escrow agent to acquire an additional property.
F-6
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters Nine Months Ended September 30, 1998 and 1997
6. Subsequent Event
In October 1998, the Partnership reinvested approximately $1,533,100 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 Bennigan's property located in Fayetteville,
North Carolina. In connection therewith, the Partnership entered into a long
term, triple-net lease with terms substantially the same as its other leases.
The Partnership acquired the Bennigan's property from an affiliate of the
general partners. The affiliate had purchased and temporarily held title to the
property in order to facilitate the acquisition of the property by the
Partnership. The purchase price paid by the Partnership represented the costs
incurred by the affiliate to acquire the property, including closing costs.
F-7
<PAGE>
Report of Independent Accountants
To the Partners
CNL Income Fund XIV, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund XIV, Ltd.
(a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. 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 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 Income Fund XIV, Ltd.
as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
January 20, 1998
F-8
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation............................. $25,217,725 $25,852,484
Net investment in direct financing leases............. 9,041,485 9,125,272
Investment in joint ventures.......................... 3,271,739 3,201,156
Cash and cash equivalents............................. 1,285,777 1,462,012
Restricted cash....................................... 318,592 --
Receivables, less allowance for doubtful accounts of
$22,970 in 1996...................................... 19,912 23,477
Prepaid expenses...................................... 7,915 8,243
Organization costs, less accumulated amortization of
$8,599 and $6,599.................................... 1,401 3,401
Accrued rental income................................. 1,820,078 1,369,804
----------- -----------
$40,984,624 $41,045,849
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 10,258 $ 5,447
Accrued and escrowed real estate taxes payable........ 19,570 12,364
Distributions payable................................. 928,130 928,130
Due to related parties................................ 7,853 1,651
Rents paid in advance................................. 29,656 62,520
----------- -----------
Total liabilities................................... 995,467 1,010,112
Commitments (Note 11)
Partners' capital..................................... 39,989,157 40,035,737
----------- -----------
$40,984,624 $41,045,849
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases........ $2,893,900 $2,960,909 $2,980,928
Earned income from direct financing
leases.................................... 1,017,627 1,026,616 1,034,636
Interest and other income.................. 47,287 56,377 52,426
---------- ---------- ----------
3,958,814 4,043,902 4,067,990
---------- ---------- ----------
Expenses:
General operating and administrative....... 154,654 162,163 143,138
Professional services...................... 29,746 24,138 31,270
Bad debt expense........................... 10,500 -- 12,619
Management fees to related parties......... 38,626 38,785 38,832
Real estate taxes.......................... 7,192 3,426 8,116
State and other taxes...................... 21,874 18,109 14,865
Depreciation and amortization.............. 340,161 340,089 340,112
---------- ---------- ----------
602,753 586,710 588,952
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Ventures and Loss on Sale of Land.......... 3,356,061 3,457,192 3,479,038
Equity in Earnings of Joint Ventures........ 309,879 459,137 338,717
Loss on Sale of Land........................ -- -- (66,518)
---------- ---------- ----------
Net Income.................................. $3,665,940 $3,916,329 $3,751,237
========== ========== ==========
Allocation of Net Income:
General partners........................... $ 36,659 $ 39,163 $ 38,073
Limited partners........................... 3,629,281 3,877,166 3,713,164
---------- ---------- ----------
$3,665,940 $3,916,329 $3,751,237
========== ========== ==========
Net Income Per Limited Partner Unit......... $ 0.81 $ 0.86 $ 0.83
========== ========== ==========
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-10
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
General Partners Limited Partners
------------------------- ----------------------------------------------------
Accumulated Accumulated Syndication
Contributions Earnings Contributions Contributions Earnings Costs Total
------------- ----------- ------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994................... $1,000 $ 31,745 $45,000,000 $ (3,082,753) $ 3,142,776 $(5,383,945) $39,708,823
Distributions to
limited partners
($0.81) per limited
partner unit)......... -- -- -- (3,628,130) -- -- (3,628,130)
Net income............. -- 38,073 -- 3,713,164 -- 3,751,237
------ -------- ----------- ------------ ----------- ----------- -----------
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
partners 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
====== ======== =========== ============ =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-11
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows From Operating Activities:
Cash received from tenants............. $3,501,064 $3,572,793 $3,626,651
Distributions from joint ventures...... 308,220 340,299 270,406
Cash paid for expenses................. (243,326) (250,885) (237,937)
Interest received...................... 40,232 44,089 50,724
---------- ---------- ----------
Net cash provided by operating
activities.......................... 3,606,190 3,706,296 3,709,844
---------- ---------- ----------
Cash Flows From Investing Activities:
Proceeds from sale of land............. -- -- 696,012
Proceeds received from right of way
taking................................ 318,592 -- --
Additions to land and buildings on
operating leases...................... -- -- (964,073)
Investment in direct financing leases.. -- -- (75,352)
Investment in joint ventures........... (121,855) (7,500) (1,087,218)
Return of capital from joint venture... 51,950 -- --
Increase in restricted cash............ (318,592) -- --
Other.................................. -- -- 5,530
---------- ---------- ----------
Net cash used in investing
activities.......................... (69,905) (7,500) (1,425,101)
---------- ---------- ----------
Cash Flows From Financing Activities:
Reimbursement of acquisition costs paid
by related parties on behalf of the
Partnership........................... -- -- (577)
Distributions to limited partners...... (3,712,520) (3,712,522) (3,543,751)
---------- ---------- ----------
Net cash used in financing
activities.......................... (3,712,520) (3,712,522) (3,544,328)
---------- ---------- ----------
Net Decrease in Cash and Cash Equivalents.. (176,235) (13,726) (1,259,585)
Cash and Cash Equivalents at Beginning of
Year...................................... 1,462,012 1,475,738 2,735,323
---------- ---------- ----------
Cash and Cash Equivalents at End of Year... $1,285,777 $1,462,012 $1,475,738
========== ========== ==========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income............................... $3,665,940 $3,916,329 $3,751,237
---------- ---------- ----------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation........................... 337,180 337,181 337,393
Amortization........................... 2,981 2,908 2,719
Equity in earnings of joint ventures,
net of distributions.................. (1,659) (118,889) (68,311)
Loss on sale of land................... -- -- 66,518
Decrease (increase) in receivables..... 3,565 (13,946) 36,872
Decrease (increase) in prepaid
expenses.............................. 328 (4,802) (3,441)
Decrease in net investment in direct
financing leases...................... 83,787 74,798 66,778
Increase in accrued rental income...... (471,287) (491,221) (497,969)
Decrease in other assets............... -- -- 3,315
Increase (decrease) in accounts
payable............................... 12,017 (8,408) 22,223
Increase (decrease) in due to related
parties, excluding reimbursement of
acquisition costs paid on behalf of
the Partnership....................... 6,202 (5,218) 6,869
Increase (decrease) in rents paid in
advance............................... (32,864) 17,564 (14,359)
---------- ---------- ----------
Total adjustments.................... (59,750) (210,033) (41,393)
---------- ----------
Net Cash Provided by Operating Activities.. $3,606,190 $3,706,296 $3,709,844
========== ========== ==========
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-12
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
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. Under the terms of a registration statement filed with
the Securities and Exchange Commission, the Partnership was authorized to sell
a maximum of 4,500,000 units ($45,000,000) of limited partnership interest. A
total of 4,500,000 units ($45,000,000) of limited partnership interest were
sold.
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.
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.
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-13
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
Investment in Joint Ventures--The Partnership accounts for its interests in
Attalla Joint Venture, Wood-Ridge Real Estate Joint Venture, Salem 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 are 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 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.
F-14
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
3. Land and Buildings on Operating Leases
Land and buildings on operating leases consisted of the following at
December 31:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Land............................................ $16,425,914 $16,723,493
Buildings....................................... 10,087,524 10,087,524
----------- -----------
26,513,438 26,811,017
Less accumulated depreciation................... (1,295,713) (958,533)
----------- -----------
$25,217,725 $25,852,484
=========== ===========
</TABLE>
In December, 1997, the Port of Palm Bay deposited $660,000 in the registry
of the court on behalf of the Partnership and the tenant in exchange for taking
possession of the property located in Riviera Beach, Florida through a total
right of way taking. The Partnership owned the land and the tenant owned the
building relating to this property. The general partners of the Partnership and
the tenant are in the process of negotiating the allocation of the $660,000.
The general partners anticipate that the Partnership will be entitled to
receive at least $330,000 but the general partners intend to pursue a larger
allocation of this amount. As of December 31, 1997, the Partnership had removed
the carrying value of the land in the amount of $318,592 from its accounts due
to the fact that the Port of Palm Bay had taken possession of the property, and
in exchange, the Partnership recorded restricted cash in the amount of $318,592
(See Note 6). The general partners anticipate that the Partnership will
recognize a gain as a result of the taking of this property and will recognize
such gain when the final proceeds are determined. As of January 20, 1998, the
final amount of proceeds to be received had not been determined.
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, 1997, 1996 and 1995, the Partnership recognized $471,287,
$491,221 and $497,969, 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, 1997:
<TABLE>
<S> <C>
1998.......................................................... $ 2,398,237
1999.......................................................... 2,560,989
2000.......................................................... 2,630,941
2001.......................................................... 2,650,138
2002.......................................................... 2,707,496
Thereafter.................................................... 31,197,883
-----------
$44,145,684
===========
</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-15
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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>
1997 1996
----------- -----------
<S> <C> <C>
Minimum lease payments receivable............... $18,621,827 $19,723,241
Estimated residual values....................... 2,842,002 2,842,002
Less unearned income............................ (12,422,344) (13,439,971)
----------- -----------
Net investment in direct financing leases....... $ 9,041,485 $ 9,125,272
=========== ===========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998.......................................................... $ 1,104,743
1999.......................................................... 1,122,218
2000.......................................................... 1,129,246
2001.......................................................... 1,132,069
2002.......................................................... 1,140,538
Thereafter.................................................... 12,993,013
-----------
$18,621,827
===========
</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 owns a 50 percent, a 72.2% and a 50% 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 September 1996, Wood-Ridge Real Estate Joint Venture sold its two
properties to the tenant of these properties 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 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 re-invested $4,404,046
of the net sales proceeds in five properties. In January 1997, Wood-Ridge Real
Estate Joint Venture reinvested $502,598 of the remaining net sales proceeds in
a Taco Bell property in Anniston, Alabama. As of 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.
In September 1997, the Partnership entered into a joint venture arrangement,
CNL Kingston Joint Venture, with an affiliate of the Partnership which has the
same general partners, to construct and hold one restaurant property. As of
December 31, 1997, the Partnership and its co-venture partner had contributed
$121,855 and
F-16
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
$183,241, respectively, to CNL Kingston Joint Venture to fund construction
costs relating to the property owned by the joint venture. The Partnership and
its co-venture partner have agreed to contribute approximately $85,600 and
$128,700, respectively, in additional construction costs to the joint venture.
When construction is completed, the Partnership and its co-venture partner
expect to have an approximate 40 and 60 percent interest, respectively, in the
profits and losses of the joint venture. As of December 31, 1997, 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.
As of December 31, 1997, Attalla Joint Venture, Salem Joint Venture and
Kingston 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>
1997 1996
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation........................ $6,008,240 $5,102,901
Net investment in direct financing lease......... 364,479 367,661
Cash............................................. 13,842 818
Restricted cash.................................. -- 595,426
Receivables...................................... 2,571 7,037
Accrued rental income............................ 150,621 62,163
Other assets..................................... 1,257 15,390
Liabilities...................................... 231,061 33,565
Partners' capital................................ 6,309,949 6,117,831
Revenues......................................... 712,004 690,225
Gain on sale of land and buildings............... -- 261,106
Net income....................................... 588,835 887,177
</TABLE>
The Partnership recognized income totaling $309,879, $459,137 and $338,717
for the years ended December 31, 1997, 1996 and 1995, respectively, from these
joint ventures.
6. Restricted Cash
In December 1997, the Port of Palm Bay deposited $660,000 in the registry of
the court on behalf of the Partnership in exchange for taking possession of the
property (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 sale of properties, 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
F-17
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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 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.
During the years ended December 31, 1997, 1996 and 1995, the Partnership
declared distributions to the limited partners of $3,712,520, $3,712,522 and
$3,628,130, 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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................... $3,665,940 $3,916,329 $3,751,237
Depreciation for tax reporting purposes
in excess of depreciation for financial
reporting purposes..................... (130,766) (130,766) (130,551)
Direct financing leases recorded as
operating leases for tax reporting
purposes............................... 83,787 74,798 66,778
Loss on sale of land for financial
reporting purposes in excess of loss
for tax reporting purposes............. -- -- 66,518
Equity in earnings of joint ventures for
financial reporting purposes in excess
of equity in earnings of joint ventures
for tax reporting purposes............. 3,109 (174,253) (80,207)
Accrued rental income................... (471,287) (491,221) (497,969)
Rents paid in advance................... (32,864) 17,564 (14,359)
Other................................... (21,988) 23,878 718
---------- ---------- ----------
Net income for federal income tax
purposes............................... $3,095,931 $3,236,329 $3,162,165
========== ========== ==========
</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 parent company of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, served
as president of CNL Fund Advisors, Inc. through October 1997. CNL Income Fund
Advisors, Inc. was a wholly owned subsidiary of CNL Group, Inc. until its
merger, effective January 1, 1996, with CNL Fund Advisors, Inc. During the
years ended December 31, 1997, 1996 and 1995, CNL Income Fund Advisors, Inc.
and CNL Fund Advisors, Inc. (hereinafter referred to collectively as the
"Affiliates") each performed certain services for the Partnership, as described
below.
During the years ended December 31, 1997, 1996 and 1995, certain 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 Affiliates a management fee of one percent of the sum of gross revenues
from
F-18
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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 Affiliates. 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 $38,626, $38,785 and $38,832 for the years ended
December 31, 1997, 1996 and 1995, respectively.
Certain Affiliates are 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 Affiliates provide 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, 1997, 1996 and 1995, Affiliates provided
accounting and administrative services to the Partnership on a day-to-day
basis. The Partnership incurred $89,910, $96,082 and $75,263 for the years
ended December 31, 1997, 1996 and 1995, respectively, for such services.
The due to related parties at December 31, 1997 and 1996, totaled $7,853 and
$1,651, 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 at least one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Flagstar Enterprises, Inc. and Denny's,
Inc. ...................................... $863,373 $879,594 $882,060
Long John Silver's, Inc. ................... 850,159 853,992 860,391
Checkers Drive-In Restaurants, Inc. ........ 724,612 732,941 732,196
Foodmaker, Inc. ............................ 562,725 556,100 551,800
Golden Corral Corporation................... 520,911 476,350 466,737
</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 at least one
of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Long John Silver's............................ $850,159 $853,992 $860,391
Checkers Drive-in Restaurants................. 724,612 732,941 732,196
Denny's....................................... 618,154 615,021 592,660
Jack in the Box............................... 562,725 556,100 551,800
Golden Corral Family Steakhouse Restaurants... 520,911 476,350 466,737
Hardee's...................................... 483,606 498,655 500,235
</TABLE>
F-19
<PAGE>
CNL INCOME FUND XIV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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. However, the general partners believe that the
risk of such a default is reduced due to the essential or important nature of
these properties for the on-going operations of the lessees.
11. Commitments
During 1997, the Partnership entered into an agreement with the tenant of
the Checkers #486 property in Richmond, Virginia, to sell the property. The
general partners believe that the anticipated sales price exceeds the
Partnership's cost attributable to the property. As of January 20, 1998, the
sale had not occurred.
During 1997, the Partnership entered into an agreement with a third party to
sell the property in Marietta, Georgia. The general partners believe that the
anticipated sales price exceeds the Partnership's cost attributable to the
property. As of January 20, 1998, the sale had not occurred.
12. Subsequent Events
In January 1998, the Partnership sold its property in Madison, Alabama, to a
third party for $740,000 and received net sales proceeds of $700,950. 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 $13,314 of such accrued rental income during 1997. The
Partnership intends to reinvest the net sales proceeds in an additional
property.
During 1997, the Partnership entered into a contract to sell the property in
Richmond, Virginia (#548) to a third party. In January 1998, the Partnership
sold this property for $512,462 and received net sales proceeds in that amount,
resulting in a gain of $70,798 for financial reporting purposes. The
Partnership intends to reinvest the net sales proceeds in an additional
property.
F-20
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to the
Company gives effect to the Acquisition, and is based on estimates and
assumptions set for the 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 the Company, the
historical combined financial information of CNL Income Fund XIV, Ltd., (the
"CNL 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 the Company, the
CNL Income Fund, Advisor and CNL Restaurant Financial Services Group. The pro
forma balance sheet assumes that the Acquisition occurred on September 30,
1998; the pro forma consolidated statements of earnings assume that the
Property Acquisitions (as defined on page ) and the Acquisition occurred on
January 1, 1997.
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.
UNAUDITED PRO FORMA BALANCE SHEET
September 30, 1998
<TABLE>
<CAPTION>
Historical Pro Forma
------------------------------------------------------------------------- -----------------------------
CNL
CNL Income Financial CNL
Fund XIV, Services, Financial Combined
APF Ltd. Advisor Inc. Corp. Portfolios Adjustments Pro Forma
------------ ----------- ---------- ---------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Land and
buildings on
operating
leases, net..... $298,967,972 $26,043,665 $ 0 $ 0 $ 0 $325,011,637 $ 5,611,645 (1)
26,052,741 (2) $356,676,023
Net investment in
direct financing
leases.......... 117,028,760 6,392,118 0 0 0 123,420,878 1,351,768 (1) 124,772,646
Mortgages and
notes
receivable...... 33,523,506 0 0 0 173,776,981 207,300,487 849,195 (2) 208,149,682
Other
Investments..... 16,200,316 0 200,000 0 6,561,628 22,961,944 -- 22,961,944
Investment in
joint ventures.. 631,374 3,633,822 0 0 0 4,265,196 738,434 (1) 5,003,630
Cash and cash
equivalents..... 90,674,289 2,691,723 283,300 599,997 5,098,033 99,347,342 (524,929)(1)
(8,933,000)(1)
(26,901,936)(2) 62,987,477
Receivables...... 575,104 0 7,544,985 6,824,632 517,471 15,462,192 (7,855,308)(3) 7,606,884
Accrued rental
income.......... 3,071,451 1,795,945 0 0 0 4,867,396 (1,795,945)(1) 3,071,451
Other assets..... 5,711,195 13,689 401,524 295,570 3,854,477 10,276,455 41,651,327 (1)
(3,668,522)(1) 48,259,260
------------ ----------- ---------- ---------- ------------ ------------ ------------ ------------
Total assets.... $566,383,967 $40,570,962 $8,429,809 $7,720,199 $189,808,590 $812,913,527 $ 26,575,470 $839,488,997
============ =========== ========== ========== ============ ============ ============ ============
LIABILITIES &
EQUITY:
Accounts payable
and accrued
liabilities..... $ 379,496 $ 43,985 $ 449,751 $ 193,949 $ 1,236,138 $ 2,303,319 $ -- $ 2,303,319
Accrued
construction
costs payable... 3,045,304 0 0 0 0 3,045,304 -- 3,045,304
Distributions
payable......... 0 928,130 2,220,000 0 0 3,148,130 -- 3,148,130
Due to related
parties......... 2,552,411 5,929 0 1,452,512 6,556,920 10,567,772 (7,855,308)(3) 2,712,464
Income tax
payable......... 0 0 1,989,003 0 1,001,861 2,990,864 (2,990,864)(4) 0
Line of credit... 6,765,575 0 0 0 0 6,765,575 -- 6,765,575
Notes payable.... 0 0 390,398 28,462 175,528,203 175,947,063 -- 175,947,063
Deferred income.. 1,015,758 0 0 0 0 1,015,758 -- 1,015,758
Rents paid in
advance......... 437,497 35,561 0 0 0 473,058 -- 473,058
Minority
interest........ 282,544 0 0 0 0 282,544 -- 282,544
Common Stock..... 621,187 0 9,800 2,000 200 633,187 153,605 (1) 786,792
Additional paid
in capital...... 556,830,578 0 482,964 5,231,827 3,887,496 566,432,865 155,837,584 (1) 722,270,449
Accumulated
distributions in
excess of net
earnings ....... (5,546,383) 0 2,887,893 811,449 1,597,772 (249,269) (82,003,054)(1)
2,990,864 (4) (79,261,459)
Partners
capital......... 0 39,557,357 0 0 0 39,557,357 (39,557,357)(1) 0
------------ ----------- ---------- ---------- ------------ ------------ ------------ ------------
Total
liabilities and
equity......... $566,383,967 $40,570,962 $8,429,809 $7,720,199 $189,808,590 $812,913,527 $ 26,575,470 $839,488,997
============ =========== ========== ========== ============ ============ ============ ============
</TABLE>
F-22
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA INCOME STATEMENT
September 30, 1998
<TABLE>
<CAPTION>
Historical Pro Forma
--------------------------------------------------------------------- ---------------------------
CNL
CNL Income Financial CNL
Fund XIV, Services, Financial Combined
APF Ltd. Advisor Inc. Corp. Portfolio Adjustments Pro Forma
----------- ---------- ---------- --------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and earned
income............... $22,947,199 $2,474,536 $ 0 $ 0 $ 0 $25,421,735 $ 9,635,208 (a)
47,778 (b) $35,104,721
Fees.................. 0 0 21,405,127 5,115,549 6,817 26,527,493 (21,043,762)(c)
(2,875,906)(d) 2,607,825
Interest and other
income............... 6,117,911 73,047 751 432,506 18,031,141 24,655,356 (1,526,547)(e) 26,181,903
----------- ---------- ---------- --------- ---------- ----------- ----------- -----------
Total revenue....... 29,065,110 2,547,583 21,405,878 5,548,055 18,037,958 76,604,584 (12,710,135) 63,894,449
Expenses:
General and
administrative....... 1,539,004 221,045 6,701,115 4,107,311 2,597,171 15,165,646 (1,312,357)(f)
(1,415,100)(g)
(38,146)(h) 12,400,043
Advisory fees......... 1,248,393 27,628 0 0 1,026,231 2,302,252 (2,302,252)(i) 0
Fees to Restaurant
Financial Services
Group................ 0 0 256,456 1,569,202 0 1,825,658 (1,852,658)(n) 0
Interest.............. 0 0 105,668 3,534 14,230,999 14,340,201 (68,670)(m) 14,271,531
State taxes........... 397,569 22,498 15,226 18,564 201,616 655,473 59,807 (j) 715,280
Depreciation--other... 0 0 75,607 55,056 0 130,663 0 130,663
Depreciation--
property............. 2,684,924 275,423 0 0 0 2,960,347 1,486,751 (k) 4,447,098
Amortization.......... 8,096 2,175 55,932 138 945,299 1,011,640 1,561,925 (l) 2,573,565
----------- ---------- ---------- --------- ---------- ----------- ----------- -----------
Total operating
expenses........... 5,877,986 548,769 7,210,004 5,753,805 19,001,316 38,391,880 (3,853,700) 34,538,180
----------- ---------- ---------- --------- ---------- ----------- ----------- -----------
Operating earnings
(losses).............. 23,187,124 1,998,814 14,195,874 (205,750) (963,358) 38,212,704 (8,856,435) 29,356,269
Equity in earnings of
joint
ventures/minority
interest (23,271) 241,570 0 12,452 0 230,751 0 230,751
Gain on sale of
properties........... 0 112,206 0 0 0 112,206 0 112,206
Gain on
securitization....... 0 0 0 0 3,018,268 3,018,268 0 3,018,268
----------- ---------- ---------- --------- ---------- ----------- ----------- -----------
Net earnings (losses)
before income taxes... 23,163,853 2,352,590 14,195,874 (193,298) 2,054,910 41,573,929 (8,856,135) 32,717,194
Provision (credit)
for federal income
taxes................ 0 0 5,607,415 (81,229) 789,895 6,316,081 (6,316,081)(o) 0
----------- ---------- ---------- --------- ---------- ----------- ----------- -----------
Net income............. $23,163,853 $2,352,590 $8,588,459 $(112,069) $1,265,015 $35,257,848 $(2,540,354) $32,717,494
=========== ========== ========== ========= ========== =========== =========== ===========
Earnings per share..... $ 0.49 $ 0.44
Shares outstanding:
Weighted average...... 47,633,909 74,002,850(p)
=========== ===========
End of period.......... 62,118,679 78,679,227
=========== ===========
</TABLE>
F-23
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA INCOME STATEMENT
For the year ended December 31, 1997
<TABLE>
<CAPTION>
Historical Pro Forma
------------------------------------------------------------------------------- ---------------------------
CNL Income CNL Financial CNL Financial Combined
APF Fund XIV, Ltd. Advisor Services, Inc. Corp. Portfolios Adjustments Pro Forma
----------- -------------- ---------- -------------- ------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and
earned income.. $15,490,615 $3,911,527 $ 0 $ 0 $ 0 $19,402,142 $24,048,982 (a)
51,579 $43,502,703
Fees............ 0 0 8,310,836 5,965,110 73,704 14,349,650 (9,118,719)(c)
(2,662,141)(d) 2,568,790
Interest and
other income... 3,967,318 47,287 165,569 0 10,932,843 15,113,017 (249,395)(e) 15,362,412
----------- ---------- ---------- ---------- ---------- ----------- ----------- -----------
Total Revenue... 19,457,933 3,958,814 8,476,405 5,965,110 11,006,547 48,864,809 12,569,096 61,433,905
Expenses:
General and
administrative.. 1,010,725 202,092 4,266,169 1,889,904 828,848 8,197,738 (745,328)(f)
(1,619,238)(g)
(46,454)(h) 5,786,718
Advisory fees... 804,879 38,626 0 0 1,802,532 2,646,037 (2,646,037)(i) 0
Fees to
Restaurant
Financial
Services
Group.......... 0 0 151,041 594,041 0 745,082 (745,082)(n) 0
Interest........ 0 0 162,153 183,315 8,320,000 8,665468 (81,594)(m) 8,583,874
State taxes..... 251,358 21,874 12,084 1,294 1,600 288,210 23,555 (j) 311,765
Depreciation--
other.......... 0 0 48,490 14,637 0 63,127 -- 63,127
Depreciation--
property....... 1,784,269 337,180 0 0 0 2,121,449 3,130,748 (k) 5,252,197
Amortization.... 10,793 2,981 18,093 61,324 916,577 1,009,768 2,082,566 (l) 3,092,334
----------- ---------- ---------- ---------- ---------- ----------- ----------- -----------
Total operating
expenses....... 3,862,024 602,753 4,658,030 2,744,515 11,869,557 23,736,879 (646,864) 23,090,015
----------- ---------- ---------- ---------- ---------- ----------- ----------- -----------
Operating
earnings
(losses)........ 15,595,909 3,356,061 3,818,375 3,220,595 (863,010) 25,127,930 13,215,960 38,343,890
Equity in
earnings of
joint
ventures/minority
interest....... (31,453) 309,879 0 (126,627) 0 151,799 -- 151,799
----------- ---------- ---------- ---------- ---------- ----------- ----------- -----------
Net earnings
before income
taxes........... 15,564,456 3,665,940 3,818,375 3,093,968 (863,010) 25,279,729 13,215,960 38,495,689
Provision
(credit) for
federal income
taxes........... 0 0 1,508,258 1,272,133 (317,785) 2,462,606 (2,462,606)(o) 0
----------- ---------- ---------- ---------- ---------- ----------- ----------- -----------
Net earnings
(losses)........ $15,564,456 $3,665,940 $2,310,117 $1,821,835 $ (545,225) $22,817,123 $15,678,566 $38,495,689
=========== ========== ========== ========== ========== =========== =========== ===========
Earnings per
share........... $ 0.66 $ 0.52
=========== ===========
Shares
outstanding:
Weighted
average........ 23,423,868 74,676,916(p)
=========== ===========
End of period... 36,192,971 74,676,916
=========== ===========
</TABLE>
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of September 30, 1998 reflects the
transactions of the acquisition of the CNL Income Fund, Advisor and CNL
Restaurant Financial Services Group (the "Acquisition Proposal") as set forth
in this Proxy Statement. The Pro Forma Statements of Earnings for the nine
months ended September 30, 1998, and for the year ended December 31, 1997, have
been prepared to reflect a) the issuance of additional shares and the property
acquisitions completed from January 1, 1997 through November 30, 1998
("Offering and Property Transactions") and b) the transactions of the
Acquisition Proposal as set forth in this Proxy Statement. This unaudited pro
forma financial information has been prepared utilizing the historical
financial statements of the Company and the historical combined financial
information of the CNL Income Fund, Advisor and CNL Restaurant Financial
Services Group and should be read in conjunction with the selected historical
financial data and accompanying notes of the Company, the CNL Income Fund,
Advisor and the CNL Restaurant Financial Services Group. The Pro Forma Balance
Sheet was prepared as if the Offering and Property Transactions and the
Acquisition Proposal occurred on September 30, 1998. The Pro Forma Statements
of Earnings were prepared as if the Property Acquisitions and the Acquisition
Proposal occurred as of January 1, 1997. The pro forma information is unaudited
and is not necessarily indicative of the consolidated operating results which
would have occurred if the Offering and Acquisition Transaction and the
Acquisition Proposal 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 Acquisition
Proposal have been made. Capitalized terms have the meanings as defined in the
Proxy Statement.
2. Method of Accounting
The acquisition of the CNL Income Fund and the CNL Restaurant Financial
Services Group will be accounted for under the purchase accounting method. The
Company 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, the Company 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 operating expense on the Company's consolidated statements of
earnings, but the Company will not deduct this expense for purposes of
calculating funds from operations due to the non-recurring and non-cash nature
of the expense.
All significant intercompany balances and transactions between the Company,
CNL Income Fund, Advisor and CNL Restaurant Financial Services Group have been
eliminated in the pro forma financial statements.
3. Adjustments to Pro Forma Balance Sheet
The following describes the pro forma adjustments to the Pro Forma Balance
Sheet as of September 30, 1998, as if the Acquisition was consummated on such
date. For purposes of the pro forma financial statements, it is assumed that at
an annual meeting of stockholders, the stockholders of the Company approved an
amendment to increase the number of authorized shares to an amount necessary to
enable the Company to issue the shares for the Acquisition.
(1) Represents the payment of $524,929 in cash and the issuance of
16,560,548 common shares in consideration for the purchase of the CNL
Income Fund, Advisor and CNL Restaurant Financial Services Group at
September 30, 1998 at a share price of $10 plus estimated transaction
costs.
The acquisition of the CNL Income Fund and the CNL Restaurant Financial
Services Group has been accounted for under the purchase accounting method and
goodwill was recognized to the extent that
F-25
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
the consideration paid exceeded the fair value of the net tangible assets
acquired. As for the acquisition of the Advisor from a related party, the
consideration paid in excess of the fair value of the net tangible assets
received has been accounted for as costs incurred in acquiring the Advisor from
a related party because the Advisor has not been deemed to qualify as a
"business" for purposes of applying APB Opinion No. 16 "Business Combinations."
Upon consummation of the Acquisition, this expense will be recorded as an
operating expense on the Company's statement of earnings. The Company will not
deduct this expense for purposes of calculating funds from operations due to
the nonrecurring and non-cash nature of the expense. As of September 30, 1998,
$249,403 of transaction costs had been incurred by the Company.
<TABLE>
<S> <C>
CNL Income Fund............................................. $ 43,130,405
Advisor..................................................... 76,000,000
CNL Restaurant Financial Services Group..................... 47,000,000
------------
Total Purchase Price (cash and shares).................... 166,130,405
Less cash paid to CNL Income Fund........................... (524,929)
------------
Share consideration....................................... 165,605,476
Transaction costs of the Company............................ 8,933,000
------------
Total costs incurred...................................... $174,538,476
============
</TABLE>
In addition, the Company i) used $8,933,000 in cash to pay the transaction
costs related to the Acquisition, ii) made an upward adjustment to the CNL
Income Fund carrying value of land and building on operating leases by
$5,611,645, net investment in direct financing leases by $1,351,768, investment
in joint venture by $738,434, made downward adjustments to the carrying value
of accrued rental income of $1,795,945, made downward adjustments to other
assets of $3,668,522 to adjust historical values to fair value, iii) recorded
goodwill of $41,651,327 for the acquisition of the CNL Restaurant Financial
Services Group, iv) reduced retained earnings by $76,705,940 for the excess
consideration paid over the net assets of the Advisor and removed the
historical common stock balance of $12,000, additional paid in capital balance
of $9,602,287, retained earnings balance of $5,297,114 and partners capital
balance of $39,557,357 of the CNL Income Fund, Advisor and CNL Restaurant
Financial Services Group.
(2) Represents the use of $26,901,936 in cash and cash equivalents at
September 30, 1998 to acquire $26,052,741 in properties and issue
$849,195 in mortgage notes which occurred from October 1, 1998 through
November 30, 1998.
(3) Represents the elimination by the CNL Income Fund of $5,929 in related
party payables recorded as receivables by the Advisor, the elimination
by the CNL Restaurant Financial Services Group of $6,641,379 in related
party payables recorded as receivables by CNL Restaurant Financial
Services Group and the elimination by the Company of $1,208,000 in
related party payables recorded as receivables by the Advisor.
(4) Represents the elimination of income taxes payable of $2,990,864 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.
4. Adjustments to Pro Forma Income Statements
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the nine months ended September 30, 1998, as if the
Acquisition was consummated as of January 1, 1997.
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(a) Represents rental and earned income as if 1) properties that had been
previously constructed and acquired from January 1, 1998 through
November 30, 1998 had been acquired and leased on January 1, 1997 and
2) properties that were developed by the Company from January 1, 1998
through November 30, 1998 had been placed in service on May 1, 1997
(assumes a four month development period.
<TABLE>
<S> <C>
Rental and earned income on Property Transactions by the
Company................................................. $9,635,208
</TABLE>
(b) Represents $47,778 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms
for the leases acquired from the CNL Income Fund as if the leases had
been acquired on January 1, 1997.
(c) Represents the elimination of intercompany fees between the Company,
the CNL Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Origination fees.......................................... $ (1,569,202)
Secured equipment lease fee............................... (44,426)
Advisory fees............................................. (1,750,011)
Reimbursement of administrative costs..................... (298,240)
Acquisition fees.......................................... (15,392,193)
Underwriting fees......................................... (254,945)
Administrative fees....................................... (148,491)
Executive fee............................................. (310,000)
Guarantee fees............................................ (93,750)
Servicing fee............................................. (1,014,117)
Development fees.......................................... (166,876)
Consulting fee............................................ (1,511)
------------
Total................................................... $(21,043,762)
============
</TABLE>
(d) Represents the deferral of $2,875,906 in origination fees collected by
CNL Restaurant Financial Services Group that should be amortized over
the term of the loans originated (20 years) in accordance with the
Statement of Financial Accounting Standards #91 "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring
Loans and Initial Direct Costs of Leases."
(e) Represents interest income of $1,318,870 earned from Other Investments
acquired and mortgage notes issued from January 1, 1998 through
November 30, 1998 as if this had occurred on January 1, 1997 and the
amortization of $207,677 of deferred origination fees collected during
the year ended December 31, 1997 and during the nine months ended
September 30, 1998, which were capitalized and deferred in (d) above as
if they had been collected on January 1, 1997. These deferred fees are
being amortized and recorded as interest income.
(f) Represents the elimination of intercompany expenses paid between the
Company, the CNL Income Fund, the Advisor and the CNL Restaurant
Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs...................... $ (298,240)
Servicing fee.............................................. (1,014,117)
-----------
$(1,312,357)
===========
</TABLE>
F-27
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by the Company
were subject to capitalization during the entire period and 2) costs
relating to properties not developed by the Company were subject to
capitalization up through the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs......................... $(1,415,100)
</TABLE>
(h) Represents savings of $38,146 in professional services and
administrative expenses resulting from reporting on one combined
Company versus 22 separate entities.
(i) Represents the elimination of advisory fees between the Company, the
CNL Income Fund, the Advisor and the CNL Restaurant Financial Services
Group:
<TABLE>
<S> <C>
Advisory fees.............................................. $(1,750,011)
Administrative fees........................................ (148,491)
Executive fee.............................................. (310,000)
Guarantee fees............................................. (93,750)
-----------
$(2,302,252)
===========
</TABLE>
(j) Represents additional income taxes of $59,807 resulting from assuming
that acquisitions from January 1, 1998 through November 30, 1998 had
been acquired on January 1, 1997 and assuming that the CNL Income Fund
had operated under a REIT structure.
(k) Represents an increase in depreciation of the building portion of the
properties acquired from January 1, 1998 through November 30, 1998 as
if they had been acquired on January 1, 1997 and the step up in basis
referred to in footnote (2) from acquiring the CNL Income Fund
portfolio using the straight-line method over the estimated useful
lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense....................................... $1,486,751
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of the
CNL Restaurant Financial Services Group referred to in footnote (2)
<TABLE>
<S> <C>
Amortization of goodwill................................... $1,561,925
</TABLE>
(m) Represents elimination of interest expense recorded for the
amortization of $350,000 in arrangement fees collected during the year
ended December 31, 1997 which were eliminated in II (d ) below.
<TABLE>
<S> <C>
Interest expense........................................... $ (68,670)
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees incurred
between the Company, the CNL Income Fund, the Advisor and the CNL
Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees........................................... $(1,569,202)
Underwriting fees.......................................... (254,945)
Consulting fee............................................. (1,511)
-----------
$(1,825,658)
===========
</TABLE>
F-28
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(o) Represents the elimination of $6,316,081 in the provision for income
taxes as a result of the Acquisition. The Company expects to continue
to qualify as a REIT and does not expect to incur federal income taxes.
(p) Common shares issued during the period required to fund acquisitions as
if they had been acquired on January 1, 1997 were assumed to have been
issued and outstanding as of January 1, 1998. For purposes of the
proforma financial statements, it is assumed that the stockholders
approved the proposal to increase the number of authorized common
shares of the Company.
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the year ended December 31, 1997, as if the
Acquisition was consummated as of January 1, 1997.
(a) Represents rental and earned income as if 1) properties that had been
previously constructed and acquired from January 1, 1998 through
November 30, 1998 had been acquired and leased on January 1, 1997 and
2) properties that were developed by the Company from January 1, 1997
through November 30, 1998 had been placed in service on May 1, 1997
(assumes a four month development period.
<TABLE>
<S> <C>
Rental and earned income on Property Transactions by the
Company................................................ $24,048,982
</TABLE>
(b) Represents $51,579 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms
for the leases acquired from the CNL Income Fund as if the leases had
been acquired on January 1, 1997.
(c) Represents the elimination of intercompany fees between the Company,
the CNL Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Origination fees.......................................... $ (594,041)
Secured equipment lease fee............................... (375,219)
Advisory fees............................................. (1,814,306)
Reimbursement of administrative costs..................... (146,340)
Acquisition fees.......................................... (3,887,483)
Underwriting fees......................................... (151,041)
Administrative fees....................................... (269,231)
Executive fee............................................. (250,000)
Guarantee fees............................................ (312,500)
Arrangement fees.......................................... (350,000)
Servicing fee............................................. (598,988)
Development fees.......................................... (369,570)
-----------
Total..................................................... $(9,118,719)
===========
</TABLE>
(d) Represents the deferral of $2,662,141 in origination fees collected by
CNL Restaurant Financial Services Group that should be amortized over
the term of the loans originated (20 years) in accordance with the
Statement of Financial Accounting Standards #91 "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring
Loans and Initial Direct Costs of Leases."
(e) Represents the elimination of interest income of $1,931,331 earned
during the year ended December 31, 1997 assuming all monies raised
during 1997 and all cash held on January 1, 1997 was used to effect the
Acquisition on January 1, 1997, represents interest income of
$2,047,619 earned
F-29
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
from Other Investments acquired and mortgage notes issued from January
1, 1998 through November 30, 1998 as if this had occurred on January 1,
1997 and the recognition of $133,107 of origination fees collected
during the year ended December 31, 1997 which were deferred in (d) and
are being amortized and recorded as interest income.
(f) Represents the elimination of intercompany expenses paid between the
Company, the CNL Income Fund, the Advisor and the CNL Restaurant
Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs...................... $ (146,340)
Servicing fee.............................................. (598,988)
----------
$ (745,328)
==========
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by the Company
were subject to capitalization during the entire period and 2) costs
relating to properties not developed by the Company were subject to
capitalization up through the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs......................... $(1,619,238)
</TABLE>
(h) Represents savings of $46,454 in professional services and
administrative expenses resulting from reporting on one combined
Company versus 22 separate entities.
(i) Represents the elimination of advisory fees between the Company, the
CNL Income Fund, the Advisor and the CNL Restaurant Financial Services
Group:
<TABLE>
<S> <C>
Advisory fees.............................................. $(1,814,306)
Administrative fees........................................ (269,231)
Executive fee.............................................. (250,000)
Guarantee fees............................................. (312,500)
-----------
$(2,646,037)
===========
</TABLE>
(j) Represents additional income taxes of $23,555 resulting from assuming
that acquisitions from January 1, 1997 through November 30, 1998 had
been acquired on January 1, 1997 and assuming that the CNL Income Fund
had operated under a REIT structure.
(k) Represents increase in depreciation of the building portion of the
properties acquired from January 1, 1997 through November 30, 1998 as
if they had been acquired on January 1, 1997 and the step up in basis
referred to in footnote (2) from acquiring the CNL Income Fund
portfolio using the straight-line method over the estimated useful
lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense....................................... $3,130,748
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of the
CNL Restaurant Financial Services Group referred to in footnote (2)
<TABLE>
<S> <C>
Amortization of goodwill................................... $2,082,566
</TABLE>
F-30
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(m) Represents elimination of yearly amortization of arrangement fees of
$350,000 capitalized as deferred costs and amortized as interest
expense and the capitalization of interest expense during the period
that properties were under development.
<TABLE>
<S> <C>
Amortization of arrangement fees............................ $ (24,144)
Capitalization of interest during development period........ (57,450)
---------
$ (81,594)
=========
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees incurred
between the Company, the CNL Income Fund, the Advisor and the CNL
Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees............................................. $(594,041)
Underwriting fees............................................ (151,041)
---------
(745,082)
=========
</TABLE>
(o) Represents the elimination of $2,462,606 in the provision for income
taxes as a result of the Acquisition. The Company expects to continue
to qualify as a REIT and does not expect to incur federal income taxes.
(p) Common shares issued during the period were assumed to have been issued
and outstanding as of January 1, 1997. For purposes of the pro forma
financial statement, it is assumed that the stockholders approved the
proposal to increase the number of authorized common shares of the
Company.
F-31
<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 eighteen 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
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger is entered into as of this 11th day of
March, 1999, by and among CNL American Properties Fund, Inc., a Maryland
corporation ("APF"), CNL APF Partners, L.P., a Delaware limited partnership
(the "Operating Partnership"), CNL APF GP Corp., a Delaware corporation (the
"OP General Partner"), CNL Income Fund XIV, Ltd., a Florida limited partnership
(the "Fund"), and Robert A. Bourne, James M. Seneff, Jr., and CNL Realty
Corporation, a Florida corporation (together with Messrs. Bourne and Seneff,
the "General Partners"). APF, the Operating Partnership, the OP General
Partner, the Fund and the General Partners are referred to collectively herein
as the "Parties" and individually as a "Party."
RECITALS:
WHEREAS, the Parties hereto desire to consummate a merger (the "Merger")
whereby the Fund will be merged with and into the Operating Partnership, and
the Operating Partnership will be the surviving limited partnership in the
Merger, upon the terms and subject to the conditions of this Agreement and in
accordance with the Delaware Revised Uniform Limited Partnership Act (the
"Delaware RULPA") and the Florida Revised Uniform Limited Partnership Act (the
"Florida RULPA");
WHEREAS, the Fund is one of 18 CNL Income Funds (collectively with the Fund,
the "CNL Income Funds") that APF is proposing to acquire (the "Proposed
Acquisitions");
WHEREAS, the Special Committee (the "Special Committee") of the independent
members of the Board of Directors of APF has received a fairness opinion (the
"Fairness Opinion") from Merrill Lynch & Co. as to the fairness to APF, from a
financial point of view, of the consideration to be paid in connection with the
Proposed Acquisitions;
WHEREAS, the Special Committee has recommended the Merger to the Board of
Directors of APF and the Board has approved the proposal to consummate the
Merger (the "Merger Proposal") and the related transactions;
WHEREAS, Legg Mason Wood Walker Incorporated has delivered a fairness
opinion (the "Fund Fairness Opinion") to the General Partners as to the
fairness to the Fund and its limited partners from a financial point of view,
of the APF Common Share consideration offered to the Fund and its limited
partners; and
WHEREAS, the Board of Directors of the OP General Partner has unanimously
approved the Merger Proposal;
NOW, THEREFORE, in consideration of the premises and the mutual promises
herein made, and in consideration of the representations, warranties, and
covenants herein contained, the receipt and sufficiency of which are
acknowledged, the Parties agree as follows:
ARTICLE I
Definitions
1.1 Terms Defined in this Agreement. As used in this Agreement, the
following terms shall have the respective meanings set forth below:
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
B-1
<PAGE>
"Affiliated Group" means any affiliated group within the meaning of Code
(S)1504, or any similar group defined under a similar provision of state, local
or foreign law.
"Agreement" means this Agreement, as amended from time to time.
"APF" has the meaning set forth in the preface above.
"APF Common Shares" shall mean the shares of common stock, par value $0.01,
of APF.
"APF Indemnity Claim" has the meaning set forth in Section 12.1 below.
"APF SEC Documents" has the meaning set forth in Section 6.7 below.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms the basis for any specified
consequence.
"Business Combination" has the meaning set forth in Section 4.1(b) below.
"Cash/Note Option" has the meaning set forth in Section 4.4 below.
"Closing" has the meaning set forth in Section 2.3 below.
"CNL Income Funds" has the meaning set forth in the second paragraph of the
Recitals above.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the businesses
and affairs of the Fund, the Operating Partnership or APF, if any, that is not
already generally available to the public.
"Delaware RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Disclosure Schedule" has the meaning set forth in the first paragraph of
Article VII below.
"Dissenting Partners" has the meaning set forth in Section 4.4 below.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
tax-qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) tax-qualified defined benefit retirement
plan or arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Fairness Opinion" has the meaning set forth in the third paragraph of the
Recitals above.
"Florida RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Fund" has the meaning set forth in the preface above.
"Fund Articles of Merger" has the meaning set forth in Section 2.2 below.
"Fund Fairness Opinion" has the meaning set forth in the fifth paragraph of
the recitals above.
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"Fund Indemnity Claim" has the meaning set forth in Section 12.2 below.
"Fund Interests" means the general and limited partnership interests in the
Fund.
"Fund SEC Documents" has the meaning set forth in Section 7.7 below.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"General Partners" has the meaning set forth in the preface above.
"Intellectual Property" means (a) all inventions (whether patentable or
unpatentable and whether or not reduced to practice), all improvements
thereto, and all patents, patent applications, and patent disclosures,
together with all reissuances, continuations, continuations-in-part,
revisions, extensions, and reexaminations thereof, (b) all trademarks, service
marks, trade dress, logos, trade names, and corporate names, together with all
translations, adaptations, derivations, and combinations thereof and including
all goodwill associated therewith, and all applications, registrations, and
renewals in connection therewith, (c) all copyrightable works, all copyrights,
and all applications, registrations, and renewals in connection therewith, (d)
all mask works and all applications, registrations, and renewals in connection
therewith, (e) all trade secrets and confidential business information
(including ideas, research and development, know-how, formulas, compositions,
manufacturing and production processes and techniques, technical data,
designs, drawings, specifications, customer and supplier lists, pricing and
cost information, and business and marketing plans and proposals), (f) all
computer software (including data and related documentation but excluding
commercially available shrink wrap software), (g) all other proprietary
rights, and (h) all copies and tangible embodiments thereof (in whatever form
or medium).
"IRS" means the Internal Revenue Service.
"Knowledge" means in the case of the Fund, CNL Realty Corporation, Inc.,
APF and the OP General Partner, the actual knowledge of a director or an
executive officer after reasonable investigation and, in the case of the
individual General Partners, the collective actual Knowledge of all of the
General Partners after reasonable investigation. For the purposes of this
Agreement, the Knowledge of one General Partner shall be attributed to the
other General Partners.
"Known" and "Knowingly" mean that the Fund, any General Partner or APF, as
applicable, had Knowledge of the particular matter or took the action
described with prior Knowledge.
"Liability" means any liability (whether Known or unknown, whether asserted
or unasserted, whether absolute or contingent, whether accrued or unaccrued,
whether liquidated or unliquidated, and whether due or to become due),
including any liability for Taxes.
"Material Adverse Effect" means, as to any Party, a material adverse effect
on the business, properties, operations or condition (financial or otherwise)
which is not related to an industry-wide change in the economy or market or
other conditions affecting all businesses in the industry of the Party to
which the term is applied.
"Merger" has the meaning set forth in the first paragraph of the Recitals
above.
"Merger Proposal" has the meaning set forth in fourth paragraph of the
Recitals above.
"Most Recent 10-Q" has the meaning set forth in Section 7.5 below.
"Most Recent Balance Sheet" means the most recent balance sheet filed in a
Fund SEC Document.
"Notes" has the meaning set forth in Section 4.4 below.
"NYSE" means the New York Stock Exchange.
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"OP Certificate of Merger" has the meaning set forth in Section 2.2 below.
"OP General Partner" has the meaning set forth in the Preface above.
"OP Limited Partner" means CNL APF LP Corp., a Delaware corporation and
wholly owned subsidiary of APF.
"Operating Partnership" has the meaning set forth in the preface above.
"Ordinary Course of Business" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity
and frequency).
"Party" or "Parties" has the meaning set forth in the preface above.
"Partner" means any holder of Fund Interests.
"Person" means an individual, a partnership, a corporation, an association,
a joint stock company, a trust, a joint venture, a limited liability company,
an unincorporated organization, a governmental entity (or any department,
agency, or political subdivision thereof) or other entity.
"Proposed Acquisitions" has the meaning set forth in the second paragraph of
the Recitals above.
"Registration Statement" means the registration statement on Form S-4 to be
filed by APF to register the APF Common Shares to be issued as Share
Consideration in the Merger.
"Representative" has the meaning set forth in Section 12.3 below.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance, charge,
or other security interest, other than (a) mechanic's, materialmen's, and
similar liens, (b) liens for Taxes not yet due and payable or for Taxes that
the taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money and (e) any minor
imperfection of title or similar lien which individually or in the aggregate
could not reasonably be expected to have a Material Adverse Effect on such
Party.
"Share Consideration" has the meaning set forth in Section 4.1(a) below.
"Special Committee" has the meaning set forth in the third paragraph to the
Recitals above.
"Subsidiary" means any corporation, partnership, joint venture, limited
liability company or other entity with respect to which a specified Person (or
a Subsidiary thereof) owns a majority of the common stock or other voting
interests or has the power to vote or direct the voting of sufficient
securities or interests to elect a majority of the directors or otherwise
control the management.
"Surviving Partnership" has the meaning set forth in Section 2.1 below.
"Takeover Statute" has the meaning set forth in Section 8.9 below.
"Tax" means any federal, state, local, or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental (including taxes under Code
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(S)59A), customs duties, capital stock, franchise, profits, withholding, social
security (or similar), unemployment, disability, real property, personal
property, sales, use, transfer, registration, value added, alternative or add-
on minimum, estimated, or other tax of any kind whatsoever, including any
interest, penalty, or addition thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim for refund, or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Third-Party Claim" has the meaning set forth in Section 12.4 below.
ARTICLE II
Merger; Effective Time; Closing
2.1 Merger. Subject to the terms and conditions of this Agreement, the
Delaware RULPA and the Florida RULPA, at the Effective Time, the Operating
Partnership and the Fund shall consummate the Merger in which (i) the Fund
shall be merged with and into the Operating Partnership and the separate
limited partnership existence of the Fund shall thereupon cease, (ii) the
Operating Partnership shall be the successor or surviving limited partnership
in the Merger and shall continue to be governed by the laws of the State of
Delaware and (iii) the separate limited partnership existence of the Operating
Partnership with all its rights, privileges, immunities, powers and franchises
shall continue unaffected by the Merger. The limited partnership surviving the
Merger is sometimes hereinafter referred to as the "Surviving Partnership." The
Merger shall have the effects set forth in the Delaware RULPA and the Florida
RULPA. As a result of the Merger, the outstanding Fund Interests shall be
converted or cancelled in the manner provided in Article IV.
2.2 Effective Time. On the Closing Date, subject to the terms and conditions
of this Agreement, the Operating Partnership and the Fund shall (i) execute or
cause to be executed (A) a Certificate of Merger in the form required by the
Delaware RULPA (the "OP Certificate of Merger") and (B) Articles of Merger in
the form required by the Florida RULPA (the "Fund Articles of Merger"), and
(ii) cause the OP Certificate of Merger to be filed with the Delaware Secretary
of State as provided in the Delaware RULPA and the Fund Articles of Merger to
be filed with the Florida Department of State as provided in the Florida RULPA,
in each case, on the Closing Date or as soon as practicable thereafter. The
Merger shall become effective at (i) such time as the OP Certificate of Merger
has been duly filed with the Delaware of Secretary of State and the Fund
Articles of Merger has been duly filed with the Florida Department of State or
(ii) such other time as is agreed upon by APF, the OP General Partner and the
General Partners and specified in the OP Certificate of Merger and the Fund
Articles of Merger. Such time is hereinafter referred to as the "Effective
Time."
2.3 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Shaw Pittman Potts
& Trowbridge, 2300 N Street, N.W., Washington, D.C. 20037, commencing at 9:00
a.m. local time on such date as within five (5) business days following the
fulfillment or waiver of the conditions set forth in Article X (other than
conditions which by their nature are intended to be fulfilled at the Closing)
or such other place or time or on such other date as APF, the OP General
Partner and the General Partners may agree or as may be necessary to permit the
fulfillment or waiver of the conditions set forth in Article X (the "Closing
Date"). In no event shall the Closing Date be a date subsequent to December 31,
1999. At the Closing, there shall be delivered to APF, the Operating
Partnership, the OP General Partner, the General Partners and the Fund the
certificates and other documents and instruments required to be delivered under
Article X.
2.4 Further Assurances. Each Party hereto will execute such further
documents and instruments and take such further actions as may be reasonably
requested by one or more of the other Parties to consummate the Merger, to vest
the Surviving Partnership with full title to all assets, properties, rights,
approvals, immunities and franchises of either the Fund or the Operating
Partnership or to effect the other purposes of this Agreement.
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ARTICLE III
Certificate of Limited Partnership; Limited Partnership Agreement;and General
Partner of Surviving Partnership
3.1 Certificate of Limited Partnership. At the Effective Time, the
certificate of limited partnership of the Operating Partnership, as in effect
immediately prior to the Effective Time, shall be the certificate of limited
partnership of the Surviving Partnership until thereafter amended as provided
therein.
3.2 Limited Partnership Agreement. At the Effective Time, the limited
partnership agreement of the Operating Partnership, as in effect immediately
prior to the Effective Time, shall be the limited partnership agreement of the
Surviving Partnership.
3.3 General Partner. The general partner of the Operating Partnership
immediately prior to the Effective Time shall be the general partner of the
Surviving Partnership from and after the Effective Time until it is replaced or
it resigns in accordance with the limited partnership agreement of the
Surviving Partnership.
ARTICLE IV
Share Consideration; Payment of Share Consideration
4.1 Share Consideration; Conversion or Cancellation of Fund Interests in
Merger.
(a) At the Effective Time, by virtue of the Merger and without any action by
the Parties, all of the outstanding Fund Interests (i) shall be converted into
the right to receive up to 4,313,041 fully paid and nonassessable APF Common
Shares (2,156,521 APF Common Shares if the Reverse Split [defined below] occurs
before the Closing) (the "Share Consideration") pursuant to the terms of
Section 4.2 below, (ii) shall cease to be outstanding, and (iii) shall be
canceled and retired and shall cease to exist, and each Partner, as the holder
of such Fund Interests shall cease to have any rights with respect thereto,
except the right to receive either (A) APF Common Shares therefor in accordance
with this Section 4.1 and Section 4.3 or (B) the cash and Notes in accordance
with Section 4.4 below. Subject to the approval of the APF's shareholders of an
amendment to its article of incorporation, APF anticipates that prior to the
Closing it will effect a one for two reverse stock split (the "Reverse Split")
pursuant to which each two shares of APF Common Shares outstanding will be
exchanged for one share of APF Common Shares.
(b) Except for the Reverse Stock Split described in Section 4.1(a), prior to
the Effective Time, APF shall not split or combine the APF Common Shares, or
pay a stock dividend or other stock distribution in APF Common Shares, or in
rights or securities exchangeable for, convertible into or exercisable for APF
Common Shares, or otherwise change APF Common Shares into, or exchange APF
Common Shares for, any other securities (whether pursuant to or as part of a
merger, consolidation, acquisition of property or stock, separation,
reorganization, or liquidation of APF as a result of which APF stockholders
receive cash, stock, or other property in exchange for, or in connection with,
their APF Common Shares (a "Business Combination") or otherwise), or make any
other dividend or distribution on or of APF Common Shares (other than regular
quarterly cash dividends paid on APF Common Shares or any distribution pursuant
to APF's dividend reinvestment plan), without the parties hereto having first
entered into an amendment to this Agreement pursuant to which the Share
Consideration will be adjusted to reflect such split, combination, dividend,
distribution, Business Combination, or change.
(c) At the Effective Time, by virtue of the Merger and without any action by
holders thereof, all of the APF Common Shares issued and outstanding
immediately prior to the Effective Time shall remain issued and outstanding.
4.2 Payment of Share Consideration. At the Closing, subject to Section 4.4
below, the Partners shall receive the Share Consideration (less expenses paid
by APF on behalf of the Fund), distributed in accordance
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with the provisions of the Fund's limited partnership agreement as of the
Closing Date. For the purposes of this Agreement, the Share Consideration will
be reduced (i) by one APF Common Share for every $10.00 of expenses incurred by
the Fund but paid or assumed by APF on behalf of the Fund and (ii) as provided
in Section 4.4 below.
4.3 Fractional APF Common Shares. No certificates representing fractional
APF Common Shares shall be issued upon conversion of any Fund Interests. Each
Partner of the Fund who would otherwise be entitled to fractional APF Common
Shares will receive one APF Common Share for a fractional interest representing
50% or more of one APF Common Share. No APF Common Shares will be issued for a
fractional interest representing less than 50% of one APF Common Share.
4.4 Cash/Note Option. In the event that the Merger is consummated and one or
more limited partners (the "Dissenting Partners") of the Fund vote against the
Merger and affirmatively elect the cash/note option (the "Cash/Note Option"),
such Dissenting Partners shall be entitled to receive, in lieu of the Share
Consideration, consideration based on such Dissenting Partners' percentage
interest (as determined by the Fund's partnership agreement) in the Fund's
asset liquidation value of $38,309,732, based on Valuation Associates'
appraisal. Such consideration shall be payable 10% in cash and 90% in Callable
Notes due in 2006 (the "Notes"). The Notes will bear interest at a fixed rate
equal to 120% of the applicable federal rate as of the date the consent
solicitation on Form S-4 is mailed to the limited partners. The Share
Consideration shall be reduced on a one-for-one basis for all APF Shares
otherwise distributable to Dissenting Partners had such Dissenting Partners not
elected the Cash/Note Option.
ARTICLE V
Representations and Warranties of The General Partners
Each General Partner severally represents and warrants to APF and the
Operating Partnership that the statements contained in this Article V are
correct and complete as of the date hereof and on the Closing Date:
5.1 Authorization of Transaction. The General Partner has full power and
authority (including, as applicable, full corporate power and authority) to
execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement constitutes the valid and legally binding obligation of the
General Partner, enforceable in accordance with its terms and conditions. The
General Partner does not need to give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government or
governmental agency in order to consummate the transactions contemplated by
this Agreement, except in connection with federal securities laws and any
applicable "Blue Sky" or state securities laws.
5.2 Noncontravention. Except as set forth in Section 5.2 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, will violate any
constitution, statute, regulation, rule, injunction, judgment, order, decree,
ruling, charge, or other restriction of any government, governmental agency, or
court to which the General Partner is subject or, as applicable, any provision
of the General Partner's articles of incorporation, bylaws or other
organizational documents.
ARTICLE VI
Representations and Warranties of APF, The OPGeneral Partner and The Operating
Partnership
APF, the OP General Partner and the Operating Partnership jointly and
severally represent and warrant to the General Partners and the Fund that the
statements contained in this Article VI are correct and complete as of the date
hereof and the Closing Date:
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6.1 Organization. APF is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Maryland. APF is duly
authorized to conduct business and is in good standing under the laws of each
jurisdiction where such qualification is required, except where the failure to
so qualify or obtain authorization would not have a Material Adverse Effect on
APF. APF has full corporate power and authority and all licenses, permits, and
authorizations necessary to carry on the businesses in which it is engaged and
to own and use the properties owned and used by it. The OP General Partner is a
corporation duly organized, validly existing, and in good standing under the
laws of the state of Delaware. The Operating Partnership is a limited
partnership duly organized, validly existing, and in good standing under the
laws of the State of Delaware. The Operating Partnership is duly authorized to
conduct business and is in good standing under the laws of each jurisdiction
where such qualification is required, except where the failure to so qualify or
obtain authorization would not have a Material Adverse Effect on the Operating
Partnership. The Operating Partnership has full limited partnership power and
authority and all licenses, permits, and authorizations necessary to carry on
the businesses in which it is engaged and to own and use the properties owned
and used by it. APF and the OP General Partner have delivered to the General
Partners and the Fund correct and complete copies of the certificate of
incorporation of APF and the OP General Partner and the certificate of limited
partnership and the limited partnership agreement of the Operating Partnership
(each as amended to date). The minute books (containing the records of meetings
of the stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of APF and
the OP General Partner and any organizational records of the Operating
Partnership have been made available to the General Partners and the Fund and
are correct and complete. APF is not in default under or in violation of any
provision of its certificate of incorporation, and the Operating Partnership is
not in default under or in violation of any provision of its certificate of
limited partnership or limited partnership agreement.
6.2 Capital Stock. The authorized capital stock of APF consists of
125,000,000 shares of common stock, $.01 par value (the "APF Common Shares"),
of which 74,696,927 shares are outstanding as of January 31, 1999. Since
January 31, 1999, APF has not issued any shares of capital stock. All
outstanding APF Common Shares are, and all APF Common Shares issuable under any
stock option plans of APF, will be when issued in accordance with the terms
thereof, duly authorized, validly issued, fully paid and nonassessable. Except
for the 56,686,959 APF Common Shares which may be issued in connection with
APF's acquisition of the other 17 CNL Income Funds in the Proposed Acquisitions
and the 12,300,000 APF Shares which may be issued in connection with APF's
acquisition of CNL Fund Advisors, Inc., CNL Financial Services, Inc. and CNL
Financial Corp., there are outstanding on the date hereof no options, warrants,
calls, rights, commitments or any other agreements of any character to which
APF is a party or by which it may be bound, requiring it to issue, transfer,
sell, purchase, register, redeem, or acquire any shares of capital stock or any
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for or acquire any shares of its capital stock. All of the
outstanding general partner interests of the Operating Partnership are owned by
the OP General Partner, and all of the outstanding limited partner interests of
the Operating Partnership are owned by the OP Limited Partnership, and there
are outstanding on the date hereof no options, warrants, rights, commitments or
any other agreements of any character to which the Operating Partnership or any
partner thereof is a party or which it may be bound requiring it to issue,
transfer, sell, purchase, register, redeem or acquire any interest in the
Operating Partnership.
6.3 Authorization for Common Stock. The Share Consideration will, when
issued, be duly authorized, validly issued, fully paid and nonassessable, and
no stockholder of APF will have any preemptive right or similar rights of
subscription or purchase in respect thereof. The Share Consideration will be
registered under the Securities Act and will be registered or exempt from
registration under all applicable state securities laws. The Share
Consideration will, when issued, be approved for listing on the NYSE, subject
to official notice of issuance.
6.4 Authorization of Transaction. APF, the OP General Partner and the
Operating Partnership have full power and authority (including full corporate
and limited partnership, as applicable, power and authority) to
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execute and deliver this Agreement and to perform their obligations hereunder.
The execution, delivery and performance by APF, the OP General Partner and the
Operating Partnership of this Agreement have been duly and validly authorized
by the boards of directors of APF and the OP General Partner. This Agreement
constitutes the valid and legally binding obligation of APF, the OP General
Partner and the Operating Partnership, enforceable in accordance with its terms
and conditions. None of APF, the OP General Partner or the Operating
Partnership needs to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
6.5 Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which, APF, the OP General Partner or the
Operating Partnership is subject or any provision of APF's or the OP General
Partner's articles of incorporation or by-laws or the Operating Partnership's
certificate of limited partnership or limited partnership agreement or (ii)
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice or consent under any agreement, contract, lease, license,
instrument, or other arrangement to which APF, the OP General Partner or the
Operating Partnership is a party or by which it is bound or to which any of its
assets is subject or (iii) result in the imposition of a Security Interest upon
any of its assets.
6.6 Title to Assets. APF has good title to, or a valid leasehold interest
in, the properties and assets used by it, located on its premises, or set forth
in its most recent quarterly report on Form 10-Q filed with the SEC or acquired
after the date thereof, free and clear of all Security Interests, except for
properties and assets disposed of in the Ordinary Course of Business since the
date of its most recent quarterly report on Form 10-Q.
6.7 Reports and Financial Statements. APF has filed all required reports,
schedules, forms, statements and other documents with the SEC since January 1,
1996 (along with any such documents filed subsequent to the date hereof, the
"APF SEC Documents"). All of the APF SEC Documents (other than preliminary
material), as of their respective filing dates, complied in all material
respects with all applicable requirements of the Securities Act and the
Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such APF SEC Documents. None of the APF SEC Documents
at the time of filing contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading, except to the extent such statements have
been modified or superseded by later filed APF SEC Documents. There is no
unresolved violation, criticism or exception by any governmental entity of
which APF has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to APF could have a Material Adverse
Effect on APF. The financial statements of APF included in the APF SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP (except, the case
of interim financial statements, as permitted by Forms 10-Q and 8-K of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly presented, in accordance with the
applicable requirements of GAAP, the financial position of APF as of the dates
thereof and the results of operations and cash flows of APF for the periods
then ended (subject, in the case of interim financial statements, to normal
year-end adjustments).
6.8 Events Subsequent to September 30, 1998. Since September 30, 1998,
nothing has occurred which has had or would reasonably be expected to have a
Material Adverse Effect on APF.
6.9 Litigation. Except as publicly disclosed by APF in its APF SEC Documents
or on Schedule 1, there is no suit, claim, action, proceeding or investigation
pending or, to the Knowledge of APF, threatened against APF or any of its
Subsidiaries or any of their respective properties or assets which (a) if
adversely determined, could reasonably be expected to have a Material Adverse
Effect on APF or (b) as of the date hereof, questions
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the validity of this Agreement or any action to be taken by APF in connection
with the consummation of the transactions contemplated hereby or could
otherwise prevent or delay the consummation of the transactions contemplated by
this Agreement. Except as publicly disclosed by APF in any APF SEC Document,
none of APF or its Subsidiaries is subject to any outstanding order, writ,
injunction or decree which, insofar as can be reasonably foreseen in the
future, could reasonably be expected to have a Material Adverse Effect on APF
or would prevent or delay the consummation of the transactions contemplated
hereby.
6.10 Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by APF for inclusion or incorporation by reference
in (i) the Registration Statement to be filed by APF with the SEC in connection
with the Merger will, at the time the Registration Statement becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading and (ii) the proxy statement sent by APF to its
shareholders pertaining to the Merger will, at the date mailed to shareholders
and at the times of the meeting of shareholders to be held in connection with
the Merger, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event with
respect to APF, its officers and directors or any of its Subsidiaries should
occur which is required to be described in an amendment of, or a supplement to,
the Registration Statement or the proxy statement, APF shall promptly so advise
the General Partners and such event shall be so described, and such amendment
or supplement (which the General Partners shall have a reasonable opportunity
to review) shall be promptly filed with the SEC. The Registration Statement
will comply as to form in all material respects with the provisions of the
Securities Act and the rules and regulations thereunder.
6.11 No Undisclosed Liabilities; Absence of Changes. Except as and to the
extent publicly disclosed by APF in its APF SEC Documents or disclosed in
Schedule 1, as of December 31, 1998, to APF's Knowledge, none of APF or its
Subsidiaries had any liabilities or obligations of any nature, whether or not
accrued, contingent or otherwise, and whether due or to become due or asserted
or unasserted, which are not fully reflected in, reserved against or otherwise
described in the consolidated balance sheet of APF and its consolidated
Subsidiaries (including the notes thereto) as of such date or which could
reasonably be expected to have a Material Adverse Effect on APF. Except as
publicly disclosed by APF in any reports filed by it with the APF SEC
Documents, since December 31, 1998, the business of APF and its Subsidiaries
has been carried on only in the ordinary and usual course, to APF's Knowledge,
none of APF or its Subsidiaries has incurred any liabilities of any nature,
whether or not accrued, contingent or otherwise, and whether due or to become
due or asserted or unasserted, which could reasonably be expected to have, and
there have been no events, changes or effects with respect to APF or its
Subsidiaries Known to APF having or which could reasonably be expected to have,
a Material Adverse Effect on APF.
6.12 Brokers' Fees. Except for the fees and expenses paid to Merrill Lynch &
Co. with respect to the delivery of the Fairness Opinion to the Special
Committee and in connection with the financial services provided by Salomon
Smith Barney, none of APF, the OP General Partner or the Operating Partnership
has any Liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this
Agreement.
6.13 Qualification as a REIT. APF is a "real estate investment trust" for
federal income tax purposes. The consummation of the transactions contemplated
by this Agreement will not cause APF to cease to qualify as a "real estate
investment trust" for federal income tax purposes.
6.14 Compliance with Applicable Law. Except as publicly disclosed by APF in
its APF SEC Documents, to APF's Knowledge, it and its Subsidiaries hold all
permits, licenses, variances, exemptions, order and approvals of all
governmental entities necessary for the lawful conduct of their respective
businesses, except for failures to hold such permits, licenses, variances,
exemptions, orders and approvals which could not reasonably be expected to have
a Material Adverse Effect on APF. Except as publicly disclosed by APF in its
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APF SEC Documents, to APF's Knowledge, APF and its Subsidiaries are in
compliance with the material terms of its permits, except where the failure so
to comply could not reasonably be expected to have a Material Adverse Effect on
APF. Except as publicly disclosed by APF, the businesses of APF and its
Subsidiaries are not, to APF's Knowledge, being conducted in violation of any
law, ordinance or regulation of any governmental entity except that no
representation or warranty is made in this Section 6.14 with respect to
environmental laws and except for violations or possible violations which do
not, and, insofar as reasonably can be foreseen, in the future will not, have a
Material Adverse Effect on APF. Except as publicly disclosed by APF in its APF
SEC Documents, no investigation or review by any governmental entity with
respect to APF or its Subsidiaries is pending or, to the Knowledge of APF,
threatened, nor, to the Knowledge of APF, has any government entity indicated
an intention to conduct the same, other than, in each case, those which APF
reasonably believes will not have a Material Adverse Effect on APF.
6.15 Intellectual Property.
(a) APF owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of APF as presently conducted. Each item of Intellectual Property
owned or used by APF immediately prior to the Closing hereunder will be owned
or available for use by APF on identical terms and conditions immediately
subsequent to the Closing hereunder. APF has taken all necessary action to
maintain and protect each item of Intellectual Property that it owns or uses.
(b) APF has not interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of third
parties, and none of APF's directors or officers (or employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that APF must
license or refrain from using any Intellectual Property rights of any third
party). No third party has interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of APF which
are material to the operation of APF's business.
(c) APF has no patent or registration which has been issued to APF with
respect to any of its Intellectual Property.
(d) Nothing will interfere with, infringe upon, misappropriate, or otherwise
come into conflict with, any Intellectual Property rights of third parties as a
result of the continued operation of APF's business as presently conducted.
6.16 Insurance. With respect to each current insurance policy to which APF
is a party, a named insured or is otherwise the beneficiary of coverage, to the
knowledge of APF: (i) the policy is legal, valid, binding, enforceable, and in
full force and effect; (ii) the policy will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the consummation of the transactions contemplated hereby; (iii) neither APF nor
any other party to the policy is in breach or default (including with respect
to the payment of premiums or the giving of notices), and no event has occurred
which, with notice or the lapse of time, would constitute such a breach or
default, or permit termination, modification, or acceleration, under the
policy; and (iv) no party to the policy has repudiated any provision thereof.
6.17 Tenants. To the Knowledge of APF and except as set forth on Schedule
1, no current tenant of a property owned by APF, which as of the date of APF's
most recent quarterly report on Form 10-Q represented more than 5% of APF's
total revenues, presently intends to materially change its relationship with
the owner of the property, either due to the transactions contemplated hereby
or otherwise.
6.18 Disclosure. APF is in compliance in all material respects with its
obligation under the Securities Exchange Act to publicly disclose material
information in a timely fashion.
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ARTICLE VII
Representations and Warranties Concerning the Fund
The General Partners and the Fund jointly and severally represent and
warrant to APF and the Operating Partnership that the statements contained in
this Article VII are correct and complete as of the date hereof, except as set
forth in the disclosure schedule delivered by the General Partners and the Fund
to APF and the Operating Partnership in accordance with the provisions of
Section 8.14 (the "Disclosure Schedule"). Nothing in the Disclosure Schedule
shall be deemed adequate to disclose an exception to a representation or
warranty made herein, however, unless the Disclosure Schedule identifies the
exception with particularity and describes the relevant facts in reasonable
detail. Without limiting the generality of the foregoing, the mere listing (or
inclusion of a copy) of a document or other item shall not be deemed adequate
to disclose an exception to a representation or warranty made herein (unless
the representation or warranty has to do with the existence of the document or
other item itself). The Disclosure Schedule will be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in this Article
VII.
7.1 Organization, Qualification, and Corporate Power. The Fund is a limited
partnership duly organized, validly existing, and in good standing under the
laws of Florida. The Fund is duly authorized to conduct business and is in good
standing under the laws of each jurisdiction where such qualification is
required, except where the failure to so qualify or obtain authorization would
not have a Material Adverse Effect on the Fund. Except as set forth in Section
7.1(a) of the Disclosure Schedule, the Fund has full limited partnership power
and authority and all licenses, permits, and authorizations necessary to carry
on the businesses in which it is engaged and to own and use the properties
owned and used by it, except where the failure to so qualify or obtain
authorization would not have a Material Adverse Effect on the Fund. Section
7.1(b) of the Disclosure Schedule lists the directors and officers of the
corporate General Partner. The General Partners have been made available to APF
and the Operating Partnership correct and complete copies of the certificate of
limited partnership and the limited partnership agreement of the Fund (as
amended to date). The minute books (containing the records of meetings of the
stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of the
corporate General Partner and any organizational records of the Fund have been
made available to APF and the Operating Partnership and are correct and
complete in all material respects. The Fund is not in default under or in
violation of any provision of its certificate of limited partnership or limited
partnership agreement.
7.2 Capitalization. All of the outstanding ownership interests in the Fund
(the "Fund Interests") consist of (i) one percent in general partnership
interests and (ii) 4,500,000 units of limited partnership interests. All of the
outstanding Fund Interests have been duly authorized, are validly issued, fully
paid, and nonassessable. There are no outstanding or authorized options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights, or other contracts or commitments that could require the Fund to issue,
sell, or otherwise cause to become outstanding any additional ownership
interests. There are no outstanding or authorized stock appreciation, phantom
stock, profit participation, or similar rights with respect to the Fund.
7.3 Authorization of Transaction. The Fund has full power and authority
(including full limited partnership power and authority) to execute and deliver
this Agreement and, upon the affirmative vote of a majority of the outstanding
limited partnership Fund Interests, will have full power and authority
(including limited partnership power and authority) to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of the Fund, enforceable in accordance with its terms and conditions, subject
to bankruptcy, insolvency, moratorium and rights of creditors generally. The
Fund is not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
7.4 Noncontravention. Except as set forth in Section 7.4 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby,
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will (i) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which the Fund is subject or any
provision of the certificate of limited partnership or limited partnership
agreement of the Fund or (ii) result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice or consent
under any agreement, contract, lease, license, instrument, or other arrangement
to which the Fund is a party or by which it is bound or to which any of its
assets is subject (or result in the imposition of any Security Interest upon
any of its assets).
7.5 Title to Assets. The Fund has good title to, or a valid leasehold
interest in, the properties and assets used by it, located on its premises, or
set forth in its most recent quarterly report on Form 10-Q filed with the SEC
(the "Most Recent 10-Q") or acquired after the date thereof, free and clear of
all Security Interests, except for properties and assets disposed of in the
Ordinary Course of Business since the date of the Most Recent 10-Q.
7.6 Subsidiaries. The Fund does not have any Subsidiaries, operating or
otherwise.
7.7 Reports and Financial Statements. The Fund has filed all required
reports, schedules, forms, statements and other documents with the SEC since
January 1, 1996 (along with any such documents filed subsequent to the date
hereof, the "Fund SEC Documents"). All of the Fund SEC Documents (other than
preliminary material), as of their respective filing dates, complied in all
material respects with all applicable requirements of the Securities Act and
the Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such Fund SEC Documents. None of the Fund SEC
Documents at the time of filing contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the extent
such statements have been modified or superseded by later filed Fund SEC
Documents. There is no unresolved violation by any governmental entity of which
the Fund has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to the Fund could have a Material
Adverse Effect on the Fund. The financial statements of the Fund included in
the Fund SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with GAAP
(except, the case of interim financial statements, as permitted by Forms 10-Q
and 8-K of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly presented, in
accordance with the applicable requirements of GAAP, the financial position of
the Fund as of the dates thereof and the results of operations and cash flows
of the Fund for the periods then ended (subject, in the case of interim
financial statements, to normal year-end adjustments).
7.8 Events Subsequent to the Most Recent 10-Q. Since the date of the Most
Recent 10-Q nothing has had a Material Adverse Effect on the Fund. Without
limiting the generality of the foregoing, since that date, except as set forth
in the appropriately lettered paragraph of Section 7.8 of the Disclosure
Schedule:
(a) the Fund has not sold, leased, transferred, or assigned any of its
assets, tangible or intangible, other than for a fair consideration (as
reasonably determined by the General Partners) in the Ordinary Course of
Business;
(b) the Fund has not entered into any agreement, contract, lease, or license
(or series of related agreements, contracts, leases, and licenses) involving
more than $50,000 except in the Ordinary Course of Business;
(c) no party (including the Fund) has accelerated, terminated, modified, or
canceled any agreement, contract, lease, or license (or series of related
agreements, contracts, leases, and licenses) to which the Fund is a party or by
which it is bound except in the Ordinary Course of Business;
(d) the Fund has not imposed any Security Interest upon any of its assets,
tangible or intangible except in the Ordinary Course of Business;
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(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 $4,313,041 in order to remediate such unlawful environmental
condition and cause the subject property or properties to comply with
applicable environmental laws, ordinances, regulations or orders; and
(f) If each of the CNL Income Funds approves its respective Proposed
Acquisition, Merrill Lynch & Co. shall not have withdrawn its Fairness Opinion
issued in connection with the Merger. If a Proposed Acquisition is not
approved by the applicable CNL Income Fund, then the Special Committee of the
Board of Directors of APF shall have received a fairness opinion addressed to
APF and its stockholders from Merrill Lynch & Co. as to the fairness of the
Proposed Acquisitions that were approved by the respective CNL Income Fund,
including the consideration to be paid in connection therewith, to APF and its
stockholders from a financial point of view.
APF, the OP General Partner and the Operating Partnership may waive any
condition specified in this Section 10.2 if they execute a writing so stating
at or prior to the Closing.
10.3 Conditions to Obligation of the General Partners and the Fund. The
obligations of the General Partners and the Fund to consummate the
transactions to be performed by them in connection with the Closing are
subject to satisfaction on or prior to December 31, 1999 of the following
conditions:
(a) APF, the OP General Partner and the Operating Partnership shall have
delivered to the General Partners and the Fund a certificate to the effect
that:
(i) the representations and warranties set forth in Article VI above are
true and correct in all material respects at and as of the Closing Date;
(ii) APF, the OP General Partner and the Operating Partnership have
performed and complied with all of their covenants hereunder in all
material respects through the Closing; and
(iii) no action, suit, or proceeding is pending or, to their knowledge,
threatened before any court or quasi-judicial or administrative agency of
any federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement or (B) cause any of the
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transactions contemplated by this Agreement to be rescinded following
consummation (and no such injunction, judgment, order, decree, ruling, or
charge is in effect);
(b) APF shall have delivered to the Fund for distribution to the Partners
the Share Consideration pursuant to Section 4.2 and, as applicable, the cash
and Notes pursuant to Section 4.4;
(c) since September 30, 1998, there shall not have occurred any material
adverse changes in the business, properties, operations or condition
(financial or otherwise) of APF;
(d) APF shall have acquired the CNL Restaurant Services Group;
(e) the General Partners shall have received Schedule 1 and approved it in
accordance with Section 8.14;
(f) the APF Common Shares shall have been approved for listing on the NYSE
subject to official notice of issuance;
(g) the General Partners shall have received an opinion dated as of the
Closing Date from Shaw Pittman Potts & Trowbridge, counsel to APF and the
Operating Partnership, in form and substance reasonably satisfactory to the
General Partners; and
(h) Legg Mason Wood Walker Incorporated shall not have withdrawn the Fund
Fairness Opinion.
The General Partners and the Fund may waive any condition specified in this
Section 10.3 if they execute a writing so stating at or prior to the Closing.
ARTICLE XI
Termination
11.1 Termination by Mutual Consent. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by the General Partners, the limited partners of the Fund,
the OP General Partner or the stockholders of APF, respectively, either by the
mutual written consent of APF, the OP General Partner and the General Partners
or by mutual action of the General Partners and the Boards of Directors of
each of the corporate General Partner and the OP General Partner and the
Special Committee.
11.2 Termination by Individual Parties. This Agreement may be terminated
and the Merger may be abandoned (a) by action of the Special Committee and the
Board of Directors of the OP General Partner in the event of a failure of a
condition to the obligations of APF and the Operating Partnership set forth in
Section 10.2 of this Agreement; (b) by the General Partners in the event of a
failure of a condition to the obligations of General Partners or the Fund set
forth in Section 10.3 of this Agreement; (c) any Party if the Merger shall not
have occurred by December 31, 1999 or (d) if a United States federal or state
court of competent jurisdiction or United States federal or state governmental
agency shall have issued an order, decree or ruling or taken any other action
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such order, decree, ruling or other action
shall have become final and non-appealable; provided, in the case of a
termination pursuant to clause (a) or (b) above, that the terminating party
shall not have breached in any material respect its obligations under this
Agreement in any manner that shall have proximately contributed to the
occurrence of the failure referred to in said clause.
11.3 Effect of Termination and Abandonment. In the event of termination of
this Agreement and abandonment of the Merger pursuant to this Article XI, no
Party hereto (or any of its directors or officers) shall have any liability or
further obligation to any other Party to this Agreement, except that nothing
herein will relieve any Party from liability for any breach of this Agreement
or the obligations set forth in Sections 9.4 and 13.11.
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<PAGE>
ARTICLE XII
Indemnification
12.1 Indemnity Obligations of the General Partners and the Fund. Subject to
Sections 12.5 and 12.6 hereof, each of the General Partners severally, in
accordance with its percentage interest in the Share Consideration and limited
in amount to the value of the APF Common Shares received by it, based upon the
average per share closing price of the APF Common Shares for the first twenty
trading days after the APF Common Shares are listed on NYSE (the "20 Day
Average Price"), agree to indemnify and hold APF, the OP General Partner and
the Surviving Partnership harmless from, and to reimburse APF, the OP General
Partner and the Surviving Partnership for, any APF Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "APF Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, obligation, suit, action, fee, cost, or expense
of any nature whatsoever resulting from (i) any breach of any representation
and warranty of any of the General Partners or the Fund which is contained in
this Agreement or any Schedule, Exhibit, or certificate delivered pursuant
hereto; (ii) any breach or non-fulfillment of, or any failure to perform, any
of the covenants, agreements, or undertakings of any of the General Partners or
the Fund which are contained in or made pursuant to this Agreement; and (iii)
all interest, penalties, costs, and expenses (including, without limitation,
all reasonable fees and disbursements of counsel) arising out of or related to
any indemnification made under this Section 12.1.
12.2 Indemnity Obligations of APF, the OP General Partner and the Operating
Partnership. Subject to Sections 12.5 and 12.6 hereof, APF, the OP General
Partner and the Operating Partnership (including in its capacity as the
Surviving Partnership) hereby jointly and severally agree to indemnify and hold
each of the General Partners and the Fund harmless from, and to reimburse each
of the General Partners and the Fund for, any Fund Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "Fund Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, suit, action, fee, cost, or expense of any nature
whatsoever incurred by any of the General Partners or the Fund resulting from
(i) any breach of any representation and warranty of APF, the OP General
Partner or the Operating Partnership which is contained in this Agreement or
any Schedule, Exhibit, or certificate delivered pursuant hereto; (ii) any
breach or non-fulfillment of, or failure to perform, any of the covenants,
agreements, or undertakings of APF, the OP General Partner and the Operating
Partnership which are contained in or made pursuant to the terms and conditions
of this Agreement; and (iii) all interest, penalties, costs, and expenses
(including, without limitation, all reasonable fees and disbursements of
counsel) arising out of or related to any indemnification made under this
Section 12.2.
12.3 Appointment of Representative. James M. Seneff, Jr. is hereby appointed
as the exclusive agent of the General Partners and the Fund to act on their
behalf with respect to any and all Fund Indemnity Claims and any and all APF
Indemnity Claims arising under this Agreement or such other representative as
may be hereafter appointed by the General Partners. Such agent is herein
referred to as the "Representative." The Representative shall take, and the
General Partners agree that the Representative shall take, any and all actions
which the Representative believes are necessary or appropriate under this
Agreement for and on behalf of the General Partners and the Fund, as fully as
if such parties were acting on their own behalf, including, without limitation,
asserting Fund Indemnity Claims against APF, the OP General Partner and the
Operating Partnership, defending all APF Indemnity Claims, consenting to,
compromising, or settling all Fund Indemnity Claims and APF Indemnity Claims,
conducting negotiations with APF, the OP General Partner and the Operating
Partnership and their representatives regarding such claims, taking any and all
other actions specified in or contemplated by this Agreement and engaging
counsel, accountants, or other representatives in connection with the foregoing
matters. APF, the OP General Partner and the Operating Partnership shall have
the right to rely upon all actions taken or omitted to be taken by the
Representative pursuant to this Agreement, all of which actions or omissions
shall be legally binding upon each of the General Partners and the Fund. The
Representative, acting pursuant to this Section 12.3, shall not be liable to
any of the General Partners or the Fund for any act or omission, except in
connection with any act or omission that was the result of the Representative's
bad faith or gross negligence.
B-28
<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-29
<PAGE>
ARTICLE XIII
Limitation of Liability
13.1 Threshold. Notwithstanding anything to the contrary stated in this
Agreement, in no event (i) shall the General Partners or any of them have any
liability to APF and/or the OP General Partner and the Surviving Partnership on
account of any APF Indemnity Claim or for any claim for breach of warranty or
for misrepresentation, or any other claim whatsoever arising under this
Agreement or in connection with the transaction contemplated herein
(individually a "Claim" and collectively, "Claims") or for any loss, damage,
deficiency, liability, obligation, suit, action, judgment, fee, cost or expense
of any nature whatsoever directly resulting from Claims (collectively,
"Losses") unless, until and only to the extent that the accumulated amount of
all Losses exceeds the amount of $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-30
<PAGE>
14.6 Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.7 Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given, as of the
date two business days after mailing, if it is sent by registered or certified
mail, return receipt requested, postage prepaid, and addressed to the intended
recipient as set forth below:
If to the Fund or the General Partners:
c/o James M. Seneff, Jr.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 423-2894
With copy to:
Baker & Hostetler LLP
Sun Trust Center, Suite 2300
200 South Orange Avenue
Orlando, Florida 32801
Attn: Kenneth C. Wright, Esq.
Telecopy: (407) 841-0168
If to APF or the Operating Partnership:
Curtis B. McWilliams
Executive Vice President
CNL American Properties, Inc.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 650-1000
With copy to:
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Attn: John M. McDonald, Esq.
Telecopy: (202) 663-8007
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth
above using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving the other Parties notice in the manner herein set forth.
14.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of Florida
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
B-31
<PAGE>
14.9 Amendments and Waivers. No amendment of any provision of this Agreement
shall be valid unless the same shall be in writing and signed by APF, the OP
General Partner and the General Partners. No waiver by any Party of any
default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or
subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
14.10 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
14.11 Expenses. If the Closing occurs, APF will bear all costs and expenses
of the Parties incurred in connection with this Agreement and the transactions
contemplated hereby to the extent not already paid by the Fund or the General
Partners. If the Closing does not occur, APF, the OP General Partner and the
Operating Partnership will bear their own costs and expenses (including legal
fees and expenses) incurred in connection with this Agreement and the
transactions contemplated hereby, and the General Partners and the Fund will
divide their costs and expenses (including legal fees and expenses) as follows:
(i) the Fund shall bear that percentage of the costs and expenses equal to the
percentage obtained by dividing the number of Fund votes in favor of the Merger
by the sum of the total number of votes cast and the total number of
abstentions and (ii) the General Partners shall bear the remainder of the costs
and expenses.
14.12 Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.
14.13 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
14.14 Specific Performance. Each of the Parties acknowledges and agrees that
the other Parties would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Parties shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter (subject to the provisions set
forth in Section 13.15 below), in addition to any other remedy to which they
may be entitled, at law or in equity.
14.15 Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in and for Orange County,
Florida, in any action or proceeding arising out of or relating to this
Agreement and agrees that all claims in respect of the action or proceeding may
be heard and determined in any such court.
B-32
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
By: /s/ James M. Seneff, Jr.
Its: Chief Executive Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
By: /s/ Robert A. Bourne
Its: President
CNL APF GP Corp.
By: /s/ Robert A. Bourne
Its: President
CNL INCOME FUND 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-33
<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 Prospectus/Consent Solicitation Statement.
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.
OVERVIEW
Pursuant to the Prospectus/Consent Solicitation Statement and this
Supplement, you are being asked to approve the Acquisition of your Income Fund
by APF. Your Income Fund is one of 18 limited partnerships (which we refer to
collectively as the Funds) that APF is seeking to acquire. Supplements have
also been prepared for each of the other Funds, copies of which may be obtained
without charge to 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 (or a REIT), formed in
1994, whose primary business, like that of the Funds, is the ownership of
restaurant properties leased to operators of national and regional restaurant
chains on a triple-net lease basis. As a full-service REIT, 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 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 shares of common stock (or APF Shares) will I receive if my Income
Fund is acquired by APF?
Your Income Fund will receive 3,733,901 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 $10.00 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
approximately 75 million APF Shares through three public offerings at offering
prices per APF share equal to the Exchange Value. At December 31, 1998, of the
approximately $750 million raised by APF, APF has used approximately $550
million to acquire restaurant properties and to make mortgage loans and had
approximately $120 million in uninvested proceeds which it expects to invest
during the first quarter of 1999. The remaining proceeds were used to pay fees
and other offering expenses.
S-1
<PAGE>
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
Fund?
Yes. Legg Mason Wood Walker, Incorporated 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 Funds, and (c) the method of allocating the APF
Shares among the Funds.
Do you, as the general partners of my Income Fund, recommend that I vote in
favor 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 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 how you want to vote, and sign
and mail it in the enclosed postage-paid return envelope as soon as possible,
so that at the Special Meeting of Limited Partners, your Units may be voted
"For" or "Against" APF's acquisition of your Income Fund. If you sign and send
in your consent form and do not indicate how you want to vote, your consent
form will be counted as a vote "For" the Acquisition. If you do not vote or you
abstain from voting, it will count as a vote "Against" the Acquisition.
In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to certain limitations. If you vote "Against" the Acquisition,
but your Income Fund is nevertheless acquired by APF, you may elect to receive
a payment (which we call the Cash/Notes Option) that is 10% in cash and 90% in
% Callable Notes due , 2006 (or Notes) based on the liquidation value of
your Income Fund, as determined by Valuation Associates, the appraisal firm
that we engaged in connection with the Acquisition. Such liquidation value will
be lower than the aggregate Exchange Value of the APF Shares offered to your
Income Fund in the Acquisition. The Notes will bear interest at a rate equal to
%, which was determined based on 120% of the applicable federal rate as of
, 1999. Please note that you may only receive the Cash/Notes Option if you
have voted "Against" the Acquisition and you elect to receive the Cash/Notes
Option on your consent form. You will receive APF Shares if your Income Fund
elects to be acquired in the Acquisition and you voted "For" the Acquisition,
or you voted "Against" the Acquisition and did not affirmatively select the
Cash/Notes Option. 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 (for example, 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 be based on the difference between the
value of the APF Shares or the tax basis of your Units. If you elect the
Cash/Notes Option, 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 and cash
received by your Income Fund over the tax basis of your Fund's net assets. Some
of the gain may be subject to the 25% rate of tax applicable to certain 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 $10,000 investment in your Income Fund will be $(47). To review the tax
consequences to the Limited Partners of the Funds in greater detail, see pages
through of the Prospectus/Consent Solicitation Statement and "Federal
Income Tax Considerations" in this Supplement.
S-2
<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 Funds acquired by APF.
Although the majority of APF's assets and the assets of the other Funds
acquired by APF are substantially similar to those of your Income Fund, the
restaurant properties owned by APF and the other 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 Funds' restaurant properties,
see "APF's Business and The Restaurant Properties--Business Objectives and
Strategies" and "--The Restaurant Properties--General" and "Business of the
Funds--Description of Restaurant Properties" in the Prospectus/Consent
Solicitation Statement.
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 Prospectus/Consent Solicitation Statement.
Investment Risks
. Uncertainty Regarding the Exchange Value and Trading Price of APF Shares
Following Listing. Your Income Fund will be receiving 3,733,901 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 is 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 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.
. Decrease in Distributions. In each of the years ended December 31, 1995,
1996 and 1997, your Income Fund made $725, $825 and $850, respectively, in
distributions per $10,000 investment to you. Based on APF's pro forma
financial information, and assuming APF acquires only your Income Fund and
that each Limited Partner of your Income receives only APF Shares, you would
have received, for the year ended December 31, 1997, $540 in distributions
per $10,000 of original investment, which is 36.5% less than the $850
distributed to you as Limited Partner during the same period. 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 year ended December 31, 1997 is not necessarily
indicative of the distributions you will receive as a stockholder of APF
after the Acquisition. See "Cash Distributions to Limited Partners of Your
Fund."
. Conflicts of Interest in the Acquisition; Substantial Benefits to Related
Parties. There are certain conflicts of interest inherent in the structure
of the Acquisition of your Income Fund. 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 that
S-3
<PAGE>
may or may not be aligned with your interests 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 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.
. Fundamental Change in Nature of 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 September
30, 1998), 407 restaurant properties. The risks inherent in investing in an
operating company such as APF include APF's ability to invest in new
restaurant properties that are not as profitable as APF anticipated, the
incurrence of substantial indebtedness to make future acquisitions of
restaurant properties which it may be unable to repay and making mortgage
loans to prospective operators of national and regional restaurant chains
which may not have the ability to repay.
As an APF stockholder, you will receive the benefits of your investment
through (i) dividend distributions on, and (ii) increases in the value of,
your APF Shares. In addition, 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 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 Cash/Notes Option). An investment in APF may not
outperform your investment in the Income Fund.
. Original Investment Timeframe. 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. We have no current plans to
dispose of your Income Fund's restaurant properties if the Limited Partners
do not approve the Acquisition.
Real Estate/Business Risks
. Risk of Default on Mortgage Loans and Market Risks associated with
Securitizations. 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.
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,) and seek a
different source for funding its operations than securitizations.
S-4
<PAGE>
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 may 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.
. Risks Associated with Leverage. 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. At the time of the consummation of the Acquisition, as a
general policy, APF's Board of Directors will 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 funds from operations and its ability to make
distributions to its stockholders.
. Acquisition and Development Risks. APF plans to pursue its growth strategy
through the acquisition and development of additional restaurant
properties. To the extent that APF does pursue this growth strategy, we do
not know that it 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.
Tax Risks
. Failure of APF to Qualify as a REIT for Tax Purposes. 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.
. Risks Associated with Distribution Requirements. 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-5
<PAGE>
. Changes in Tax Law. 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 Prospectus/Consent Solicitation Statement.
CONSIDERATION PAID TO INCOME FUND
The following table sets forth, for your Income Fund (i) the aggregate
amount of original Limited Partner investments in each Fund less any
distributions of net sales proceeds paid to the Limited Partners of that Fund,
(ii) the original amount of Limited Partner investments in each Fund less any
distributions of net sales proceeds per average $10,000 investment, (iii) the
number of APF Shares to be paid to your Income Fund, (iv) the estimated value
of the APF Shares paid to your Income Fund, (v) the estimated Acquisition
expenses allocated to your Income Fund, (vi) the estimated value, based on the
Exchange Value, of APF Shares paid to your Income Fund after deducting
Acquisition expenses, and (vii) the estimated value, based on the Exchange
Value, of APF Shares you will receive for each $10,000 of your original
investment:
<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) Fund(2) to Fund(3) Expenses Expenses(3) Investment(3)
- ----------------- ---------------------- ------------- -------------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
$40,000,000 $10,000 3,733,901 $37,339,010 $450,338 $36,888,672 $9,222
</TABLE>
- --------
(1) Income Fund has had no distributions of net sales proceeds.
(2) The APF Shares payable to each Fund as set forth in this chart will not
change if APF acquires fewer than all of the Funds in the Acquisition. This
number assumes that none of the Limited Partners of the Fund has elected
the Cash/Notes Option.
(3) 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.
Upon completion of the Acquisition of your Income Fund, the operations and
existence of your Income Fund will cease. For more detailed information, see
"The Acquisition" in the Prospectus/Consent Solicitation Statement. If your
Income Fund does not approve the Acquisition, we do not contemplate that your
Income Fund would be liquidated in the near future. The Acquisition, however,
does not result in an all-cash payment to you in the liquidation of your
investment. For example, if you are eligible for and choose the Cash/Notes
Option, you become a Noteholder of APF. You will have exchanged your Units for
unsecured debt obligations of APF which may not be retired in full until ,
2006, a date approximately seven years after the date the Acquisition of your
Income Fund occurs. On the other hand, if you exchange your Units for APF
Shares, you will receive an equity interest in APF whose marketability will
depend upon the market that may develop with respect to the APF Shares, which
will be listed on the NYSE.
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.
S-6
<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......................................................... $ 20,287
Appraisals and Valuation........................................... 8,115
Fairness Opinions.................................................. 36,516
Registration, Listing and Filing Fees.............................. --
Soliciting Dealer Fee.............................................. 82,466
Financial Consulting Fees.......................................... --
Environmental Fees................................................. 50,717
Accounting and Other Fees.......................................... 61,264
--------
Subtotal......................................................... 259,365
Closing Transaction Costs
Transfer Fees and Taxes............................................ 69,525
Legal Fees......................................................... 53,500
Recording Costs.................................................... --
Other.............................................................. 67,948
--------
Subtotal......................................................... 190,973
--------
Total.............................................................. $450,338
========
</TABLE>
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 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.
S-7
<PAGE>
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 as, in our opinion, market
conditions permit), as contemplated by the terms of the partnership agreement.
Special Meeting to Discuss the Acquisition
We have scheduled a special meeting of the Limited Partners of your Income
Fund to discuss the solicitation materials, which include the
Prospectus/Consent Solicitation Statement, 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 (as defined below) and to explain in person our reasons
for recommending that you vote "For" the Acquisition.
VOTING PROCEDURE
The Prospectus/Consent Solicitation Statement, 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.
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 Prospectus/Consent Solicitation
Statement. A copy of the Agreement and Plan of Merger dated March 11, 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 December
31, 1999.
S-8
<PAGE>
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.
The consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and certain 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
(including the Acquisition), 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. The partnership agreement also provide 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
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-9
<PAGE>
During the years ended December 31, 1995, 1996 and 1997 and the nine months
ended September 30, 1998, the aggregate amounts accrued or paid by your Income
Fund 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 years presented, are shown below under "Pro Forma":
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended
----------------------- September 30,
1995 1996 1997 1998
------- ------- ------- -------------
<S> <C> <C> <C> <C>
Historical:
General Partner Distributions.......... -- -- -- --
Broker/Dealer Commissions(1)
Property Management Fees............... $34,213 $35,126 $35,321 $25,475
Due Diligence and Marketing Support
Fees.................................. -- -- -- --
Acquisition Fees....................... -- -- -- --
Asset Management Fees.................. -- -- -- --
Real Estate Disposition Fees(2)........ -- -- -- --
------- ------- ------- -------
Total historical..................... $34,213 $35,126 $35,321 $25,475
Pro Forma:
Cash Distributions on APF Shares....... -- -- -- --
Salary Compensation.................... -- -- -- --
------- ------- ------- -------
Total pro forma...................... -- -- -- --
======= ======= ======= =======
</TABLE>
- --------
(1) A majority of the fees paid as broker-dealer commissions and due diligence
and marketing support fees were reallowed to other broker-dealers
participating in the offering of the Income Fund's Units.
(2) 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 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 the Acquisition -- Prices for 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>
Nine Months
Ended Sept. 30,
1998
----------------
Pro
1993 1994 1995 1996 1997 Historical Forma
---- ---- ---- ---- ---- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income........... -- $406 $725 $820 $850 $530 $409
Distributions from Return of
Capital............................ -- 3 -- -- -- 70 17
--- ---- ---- ---- ---- ---- ----
Total............................... -- $409 $725 $820 $850 $600 $426
=== ==== ==== ==== ==== ==== ====
</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.
S-10
<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 nine months ended September 30,
1998 is not necessarily indicative of the distributions you will receive as a
stockholder of APF after the Acquisition.
Assuming APF maintains its current level of debt for acquiring future
restaurant properties, the expected distribution rate per APF Share will be
8.8% (assuming a $10.00 per APF Share price based on the Exchange Value, the
annualized dividend per year is expected to be $0.88 per APF Share). Based on
the number of APF Shares that you would receive in the Acquisition per your
average $10,000 original investment and this distribution rate, you would
receive an annual distribution of approximately $812.
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 certain 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 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 Cash/Note Option.
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, our relief 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 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 Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the
S-11
<PAGE>
Cash/Notes Option, constitutes 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 and is the best way to maximize the return on your investment in light
of the values of such consideration.
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 of Valuation Associates and
Legg Mason received fees for its services and notwithstanding that Legg Mason
has previously provided investment banking services to the Funds and to
Commercial Net Lease Realty, Inc., a former affiliate of ours. See "Reports,
Opinions and Appraisals" in the Prospectus/Consent Solicitation Statement.
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 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 cash and promissory 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 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 Cash/Notes Option.
3. Valuation of Alternatives. Based on the appraisal of the Income Fund's
restaurant properties, we estimated the value of your Income Fund as a ongoing
concern and if liquidated. 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-12
<PAGE>
vary, however, from Fund to 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
September 30, 1998 per $10,000 original investment. Since the calculation of
the book value was done on a GAAP basis, it is not indicative of the true fair
market value of your Income Fund. This figure was compared to the (i) value of
the Fund if it commenced an orderly liquidation of its investment portfolio on
December 31, 1998, (ii) value of the Fund if it continued to operate in
accordance with its existing partnership agreement and business plans, and
(iii) estimated value of the APF Shares, based on the Exchange Value, paid to
each Fund per average $10,000 invested.
Summary of Valuations
(per $10,000 original investment)
<TABLE>
<CAPTION>
Estimated Value of APF
Shares per Average
$10,000 Original
GAAP Book Liquidation Going Concern Limited Partner
Value Value(1) Value(1) Investment(2)
--------- ----------- ------------- ----------------------
<S> <C> <C> <C> <C>
CNL Income Fund XV,
Ltd. .................. $8,941 $8,290 $9,182 $9,222
</TABLE>
- --------
(1) 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.
(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.
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have an independent
obligation 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 Funds). James M. Seneff, Jr. and
Robert A. Bourne act as the individual general partners of all of the 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.
Benefits to General Partners
As a result of the Acquisition (assuming only your Income Fund is acquired),
we are expected to receive certain benefits, including that we will be relieved
from certain ongoing liabilities with respect to the Funds that are acquired by
APF.
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
S-13
<PAGE>
may be realized by Messrs. Seneff and Bourne are likely to exceed the benefits
that they would expect to derive from the Funds if the Acquisition does not
occur.
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 the Cash/Notes Option, in which case you will
receive cash and 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 Prospectus/Consent Solicitation Statement.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, the
assets (and any liabilities) of your Income Fund (if your Income Fund is
acquired by APF) will be transferred to APF in return for APF Shares and/or
cash and 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
S-14
<PAGE>
$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 XV, Ltd. ................................. $(47)
</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 Code, no gain or loss is recognized if (i)
property is transferred to a corporation by one more individuals or entities in
exchange for the stock of that corporation, and (ii) 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 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 the
Cash/Notes Option, 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 (1) 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 (2) 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 Cash/Notes Option, your Income Fund will receive APF
Shares, cash and Notes in exchange for your Income Fund's assets. Because the
principal portion of the Notes will not be due until , 2006, 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 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 (without reduction for
any selling expenses) 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 are 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, cash 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" (i.e., real property and
S-15
<PAGE>
depreciable assets used in a trade or business and held for more than one
year). Your share of gains or losses from the sale of section 1231 assets of
your Income Fund would be combined with any other section 1231 gains and losses
that you recognize in that year. If the result is a net loss, such loss is
characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property will be taxed as ordinary income to the extent of all
prior depreciation deductions taken by your Income Fund prior to sale. In
general, you may only use up to $3,000 of capital losses in excess of capital
gains to offset ordinary income in any taxable year. Any excess loss is carried
forward to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your Income Fund recognizes will be allocated to you and the other
Limited Partners in accordance with the terms of your Income Fund's partnership
agreement. Each Limited Partner will be allocated and must report his, her or
its allocable share of such gain, if any, pursuant to these terms, regardless
of the Limited Partner's decision to receive 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 Cash/Notes Option may
recognize gain in the year of the Acquisition despite the fact that they will
receive only a small amount of cash and no publicly-traded instruments 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 the Cash/Notes Option. See "-- Tax Consequences of
Liquidation and Termination of Your Fund" below.
Tax Consequences of the Liquidation and Termination of Your Fund. If your
Fund is acquired by APF, your Fund will be deemed to have liquidated and
distributed APF Shares and/or cash and 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 cash and 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 pro rata 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 (determined on the closing date of the Acquisition) and your
adjusted tax basis in your Units (adjusted by your distributive share of
income, gain, loss, deduction and credit for the final taxable year of your
Income Fund (including any such items recognized by your Income Fund as a
result of the Acquisition) as well as any distributions you receive in such
final taxable year (other than the distribution of the APF Shares)). 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 cash and Notes in the Acquisition, you will recognize gain to
the extent that the amount of cash you receive in the Acquisition exceeds your
adjusted basis in your Units (adjusted by your distributive share of income,
gain, loss, deduction and credit for the final taxable year of your Income Fund
(including any such items recognized by your Income Fund as a result of the
Acquisition) as well as any distributions you receive in such final taxable
year (other than the distributions of the cash and Notes)). Your basis in the
Notes distributed to you will equal your adjusted basis in your Units, reduced
(but not below zero) by the amount of any cash distributed to you 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.
S-16
<PAGE>
Because the assets of your Income Fund are held for investment and not for
resale, the Acquisition will not result in the recognition of material
unrelated business taxable income by you if you are a tax-exempt investor that
does not hold Units either as a "dealer" or as debt-financed property within
the meaning of section 514, and you are not 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.
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 cash and 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 Prospectus/Consent Solicitation
Statement.
S-17
<PAGE>
SUMMARY SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
APF, FUNDS, ADVISOR AND CNL RESTAURANT FINANCIAL SERVICES GROUP
Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
Historical Pro Forma
-------------------------------------------------- --------------------------------------------
CNL
Restaurant
CNL Income Financial
Fund XV, Services Combined Pro Forma Combined Pro
APF Ltd. Advisor Group Historical Adjustments Forma
------------ ----------- ----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data Reve-
nues:
Rental and earned
income................ $ 22,947,199 $ 2,325,191 $ -- $ -- $ 25,272,390 $ 9,635,208 (a)
35,670 (b) $ 34,943,268
Management fees........ -- -- 21,405,127 5,122,366 26,527,493 (21,036,584)(c)
(2,875,906)(d) 2,615,003
Interest and other
income................ 6,117,911 51,682 751 18,463,647 24,633,991 1,526,547 (e) 26,160,538
------------ ----------- ----------- ------------ ------------ ----------- ------------
Total revenue......... 29,065,110 2,376,873 21,405,878 23,586,013 76,433,874 (12,715,065) 63,718,809
Expenses:
General and
administrative........ 1,539,004 157,269 6,701,115 6,704,482 15,101,870 (1,307,332)(f)
(1,415,100)(g)
(31,627)(h) 12,347,811
Advisory fees.......... 1,248,393 25,475 -- 1,026,231 2,300,099 (2,300,099)(i) --
State taxes............ 397,569 27,763 15,226 220,180 660,738 52,120 (j) 712,858
Depreciation and amor-
tization.............. 2,693,020 204,668 131,539 1,000,493 4,029,720 3,020,021 (k)(l) 7,049,741
Interest expense....... -- -- 105,668 14,234,533 14,340,201 (68,670)(m) 14,271,531
Paid to affiliates..... -- -- 256,456 1,569,202 1,825,658 (1,825,658)(n) --
------------ ----------- ----------- ------------ ------------ ----------- ------------
Total expenses........ 5,877,986 415,175 7,210,004 24,755,121 38,258,286 (3,876,345) 34,381, 941
------------ ----------- ----------- ------------ ------------ ----------- ------------
Net earnings (loss)
before equity in
earnings of joint
ventures/minority
interests, gain (loss)
on sale of properties,
gain on
securitization, and
provision (credit) for
federal income taxes.. 23,187,124 1,961,698 14,195,874 (1,169,108) 38,175,588 (8,838,720) 29,336,868
------------ ----------- ----------- ------------ ------------ ----------- ------------
Equity in earnings of
joint
ventures/minority
interests............. (23,271) 179,502 12,452 168,683 -- 168,683
Gain (loss) on sales of
properties............ -- -- -- -- -- -- --
Gain on
securitization........ -- -- -- 3,018,268 3,018,268 -- 3,018,268
Provision (credit) for
federal income taxes.. -- -- 5,607,415 708,666 6,316,081 (6,316,081)(o) --
------------ ----------- ----------- ------------ ------------ ----------- ------------
Net earnings........... $ 23,163,853 $ 2,141,200 $ 8,588,459 $ 1,152,946 $ 35,046,458 $(2,522,639) $ 32,523,819
============ =========== =========== ============ ============ =========== ============
Other Data:
Weighted average number
of shares of common
stock outstanding
during period......... 47,633,909 N/A N/A N/A N/A -- 73,423,954 (p)
Total properties owned
at end of period...... 357 50 N/A N/A N/A -- 407
Funds from operations.. 26,408,569 2,411,870 N/A N/A N/A -- 37,175,989
Total cash
distributions
declared.............. 26,460,446 2,400,000 N/A N/A N/A -- 37,175,989
Cash distributions
declared per $10,000
investment............ 572 600 N/A N/A N/A -- 506
<CAPTION>
Combined Pro Forma September 30,
Historical September 30, 1998 Historical 1998
-------------------------------------------------- ------------ -------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data
Real estate assets,
net................... $407,663,180 $31,140,903 $ -- $ -- $438,804,083 $ 4,748,482 (q)
26,052,741 (r) $469,605,306
Mortgages/notes
receivable............ 33,523,506 -- $ -- 173,776,981 207,300,487 849,195 (r) 208,149,682
Accounts receivable,
net................... 575,104 -- 7,544,985 7,342,103 15,462,192 (7,854,428)(s) 7,607,764
Investment in/due from
joint ventures........ 631,374 2,743,255 -- -- 3,374,629 402,066 (q) 3,776,695
Total assets........... 566,383,967 36,602,550 8,429,809 197,528,789 808,945,115 24,504,696 833,449,811
Total
liabilities/minority
interest.............. 14,478,585 837,947 5,049,152 185,998,045 206,363,729 (10,845,292)(s)(t) 195,518,437
Total equity........... 551,905,382 35,764,603 3,380,657 11,530,744 602,581,386 35,349,988 (q)(t) 637,931,374
</TABLE>
- -------
S-18
<PAGE>
(a) Represents rental and earned income as if 1) properties that had been
previously constructed and acquired from January 1, 1998 through November
30, 1998 had been acquired and leased on January 1, 1997 and 2) properties
that were developed by APF from January 1, 1998 through November 30, 1998
had been placed in service on May 1, 1997 (assumes a four month development
period.)
<TABLE>
<S> <C>
Rental and earned income on Property Transactions by APF.... $9,635,208
</TABLE>
(b) Represents $35,670 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, 1997.
(c) Represents the elimination of intercompany fees between APF, the Income
Fund, the Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees.......................................... $ (1,569,202)
Secured equipment lease fee............................... (44,426)
Advisory fees............................................. (1,747,858)
Reimbursement of administrative costs..................... (293,215)
Acquisition fees.......................................... (15,392,193)
Underwriting fees......................................... (254,945)
Administrative fees....................................... (148,491)
Executive fee............................................. (310,000)
Guarantee fees............................................ (93,750)
Servicing fee............................................. (1,014,117)
Development fees.......................................... (166,876)
Consulting fee............................................ (1,511)
------------
Total.................................................... $(21,036,584)
============
</TABLE>
(d) Represents the deferral of $2,875,906 in origination fees collected by CNL
Restaurant Financial Services Group that should be amortized over the term
of the loans originated (20 years) in accordance with the Statement of
Financial Accounting Standards #91 "Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases."
(e) Represents interest income of $1,318,870 earned from Other Investments
acquired and mortgage notes issued from January 1, 1998 through November
30, 1998 as if this had occurred on January 1, 1997 and the amortization of
$207,677 of deferred origination fees collected during the year ended
December 31, 1997 and during the nine months ended September 30, 1998,
which were capitalized and deferred in (d) above as if they had been
collected on January 1, 1997. These deferred fees are being amortized and
recorded as interest income.
(f) Represents the elimination of intercompany expenses paid between APF, the
Income Fund, the Advisor and the CNL Restaurant Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs..................... $ (293,215)
Servicing fee............................................. (1,014,117)
------------
$(1,307,332)
============
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by APF were subject
to capitalization during the entire period and 2) costs relating to
properties not developed by APF were subject to capitalization up through
the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs............................ $(1,415,100)
</TABLE>
(h) Represents savings of $31,627 in professional services and administrative
expenses resulting from reporting on one combined company versus 22
separate entities.
(i) Represents the elimination of fees between APF, the Income Fund, the
Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Advisory fees.............................................. $ (1,747,858)
Administrative fees........................................ (148,491)
Executive fee.............................................. (310,000)
Guarantee fees............................................. (93,750)
------------
$(2,300,099)
============
</TABLE>
S-19
<PAGE>
(j) Represents additional state taxes of $52,120 resulting from assuming that
acquisitions from January 1, 1998 through November 30, 1998 had been
acquired on January 1, 1997 and assuming that the Income Fund had operated
under a REIT structure.
(k) Represents an increase in depreciation of the building portion of the
properties acquired from January 1, 1998 through November 30, 1998 as if
they had been acquired on January 1, 1997 and the step up in basis referred
to in footnote (q) from acquiring the Income Fund portfolio using the
straight-line method over the estimated useful lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense.......................................... $1,454,673
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of the CNL
Restaurant Financial Services Group referred to in footnote (q).
<TABLE>
<S> <C>
Amortization of goodwill...................................... $1,565,348
</TABLE>
(m) Represents elimination of interest expense recorded for the amortization of
$350,000 in arrangement fees collected during the year ended December 31,
1997 which were eliminated in footnote (4), II (d ) in the Notes to the Pro
Forma Financial Statements attached to this Supplement.
<TABLE>
<S> <C>
Interest expense............................................... $(68,670)
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees incurred
between APF, the Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Origination fees........................................... $ (1,569,202)
Underwriting fees.......................................... (254,945)
Consulting fee............................................. (1,511)
------------
$(1,825,658)
============
</TABLE>
(o) Represents the elimination of $6,316,081 in the provision for income taxes
as a result of the acquisition. APF expects to continue to qualify as a
REIT and does not expect to incur federal income taxes.
(p) APF Shares issued during the period required to fund acquisitions as if
they had been acquired on January 1, 1997 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 the
proposal to increase the number of authorized APF Shares.
(q) Represents the payment of $450,338 in cash and the issuance of 15,988,867
APF Shares in consideration for the purchase of the CNL Income Fund,
Advisor and CNL Restaurant Financial Services Group at September 30, 1998
using the Exchange Value of $10 per APF share plus estimated transaction
costs. The acquisitions of the Income Fund and the CNL Restaurant Financial
Services Group have accounted for under the purchase accounting method and
goodwill was recognized to the extent the estimated value of the
consideration paid exceeded the fair value of the net tangible assets
acquired. As for the acquisition of the Advisor from a related party, the
consideration paid in excess of the fair value of the net tangible assets
received has been accounted for as costs incurred in acquiring the Advisor
from a related party because the Advisor has not been deemed to qualify as
a "business" for purposes of applying APB Opinion No. 16 "Business
Combinations." Upon consummation of the Acquisition, this expense will be
recorded as an operating expense on APF's statement of earnings. The
Company will not deduct this expense for purposes of calculating funds from
operations due to the nonrecurring and non-cash nature of the expense. As
of September 30, 1998, $249,403 of transaction costs had been incurred by
APF.
<TABLE>
<S> <C>
Income Fund............................................... $ 37,339,012
Advisor................................................... 76,000,000
CNL Restaurant Financial Services Group................... 47,000,000
------------
Total Purchase Price (cash and shares)................... 160,339,012
Less cash paid to Income Fund............................. (450,338)
------------
Share consideration...................................... 159,888,674
Transaction costs of APF.................................. 8,933,000
------------
Total costs incurred..................................... $168,821,674
============
</TABLE>
S-20
<PAGE>
In addition, APF i) used $8,933,000 in cash to pay the transaction costs
related to the Acquisition, ii) made an upward adjustment to the Income Fund
carrying value of land and building on operating leases by $3,596,047, net
investment in direct financing leases by $1,152,435, investment in joint
venture by $402,066, made downward adjustments to the carrying value of
accrued rental income of $1,474,597, made downward adjustments to other
assets of $3,676,099 to adjust historical values to fair value, iii)
recorded goodwill of $41,742,610 for the acquisition of the CNL Restaurant
Financial Services Group, iv) reduced retained earnings by $76,853,546 for
the excess consideration paid over the net assets of the Advisor and removed
the historical common stock balance of $12,000, additional paid in capital
balance of $9,602,287, retained earnings balance of $5,297,114 and partners
capital balance of $35,764,603 of the CNL Income Fund, Advisor and CNL
Restaurant Financial Services Group.
(r) Represents the use of $26,901,936 in cash and cash equivalents at September
30, 1998 to acquire $26,052,741 in properties and issue $849,195 in
mortgage notes which occurred from October 1, 1998 through November 30,
1998.
(s) Represents the elimination by the Income Fund of $5,049 in related party
payables recorded as receivables by the Advisor, the elimination by the CNL
Restaurant Financial Services Group of $6,641,379 in related party payables
recorded as receivables by CNL Restaurant Financial Services Group and the
elimination by APF of $1,208,000 in related party payables recorded as
receivables by the Advisor.
(t) Represents the elimination of income taxes payable of $2,990,864 from
liabilities assumed in the acquisition of the CNL Restaurant Businesses
since the acquisition agreements require that the Advisor and CNL
Restaurant Financial Services Group have no accumulated or current earnings
and profits for federal income tax purposes at the time of the acquisition.
S-21
<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>
Nine Months Ended
September 30, Year Ended December 31,
----------------------- -----------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues (1)............ $ 2,556,375 $ 2,913,298 $ 3,908,014 $ 4,068,610 $ 3,914,985
Net income (2).......... 2,141,200 2,558,259 3,434,905 3,585,059 3,372,468
Cash distributions
declared............... 2,600,000 2,400,000 3,200,000 3,280,000 2,900,001
Net income per Unit
(2).................... 0.53 0.63 0.85 0.89 0.83
Cash distributions
declared
per Unit............... 0.65 0.60 0.80 0.82 0.73
Weighted average number
of Limited Partner
Units outstanding...... 4,000,000 4,000,000 4,000,000 4,000,000 4,000,000
<CAPTION>
September 30, December 31,
----------------------- -----------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total assets............ $36,602,550 $37,047,865 $37,045,723 $36,936,678 $36,516,732
Total partners'
capital................ 35,764,603 36,146,757 36,223,403 35,988,498 35,683,439
</TABLE>
- --------
(1) Revenues include equity in earnings of the joint venture.
(2) Net income for the year ended December 31, 1995, includes $71,023 from loss
on sale of land.
S-22
<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
September 30, 1998, 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
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
The Income Fund's primary source of capital for the nine months ended
September 30, 1998 and 1997, 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
$2,415,807 and $2,550,613 for the nine months ended September 30, 1998 and
1997, respectively. The decrease in cash from operations for the nine months
ended September 30, 1998, as compared to the nine months ended September 30,
1997, 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 nine
months ended September 30, 1998.
In June 1998, the Income Fund acquired a restaurant property in Fort Myers,
Florida 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 September
30, 1998, the Income Fund owned a 14.93% interest in the restaurant property.
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 pending the Income Fund's use of such funds to pay Income
Fund expenses or to make distributions to the partners. At September 30, 1998,
the Income Fund had $1,222,529 invested in such short-term investments, as
compared to $1,614,708 at December 31, 1997. The decrease in cash and cash
equivalents for the nine months ended September 30, 1998, is primarily
attributable to the acquisition of a restaurant property as tenants-in-common
with one of our affiliates, as described above. The funds remaining at
September 30, 1998, after payment of distributions 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,
increased to $837,947 at September 30, 1998, from $822,320 at December 31,
1997, primarily as a result of the Income Fund accruing real estate taxes in
connection with certain Long John Silver's restaurant properties, as described
below in "Results of Operations." We believe that the Income Fund has
sufficient cash on hand to meet its current working capital needs.
Based on cash from operations, and for the nine months ended September 30,
1998, accumulated excess operating reserves, the Income Fund declared
distributions to the Limited Partners of $2,600,000 and $2,400,000 for the nine
months ended September 30, 1998 and 1997, respectively ($800,000 for each of
the quarters ended September 30, 1998 and 1997). This represents distributions
of $0.65 and $0.60 per Unit for the
S-23
<PAGE>
nine months ended September 30, 1998 and 1997, respectively ($0.20 per Unit for
each applicable quarter). No distributions were made to us for the quarters and
nine months ended September 30, 1998 and 1997. No amounts distributed to the
Limited Partners for the nine months ended September 30, 1998 and 1997, 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.
The Years Ended December 31, 1997, 1996 and 1995
Net proceeds to the Income Fund from its offering of Units, after deduction
of organizational and offering expenses, totaled $35,200,000. As of December
31, 1994, approximately $32,088,000 had been used to invest, either directly or
through joint venture arrangements, in 43 restaurant properties (three of which
were under construction at December 31, 1994) and to pay acquisition fees to
one of our affiliates totaling $2,200,000 and to pay certain acquisition
expenses. During 1995, the Income Fund completed construction of the three
restaurant properties acquired in 1994 and acquired two additional restaurant
properties. In addition, in January 1995, the Income Fund received notice from
the tenant of two of its restaurant properties in Knoxville, Tennessee, and one
restaurant property in Leavenworth, Kansas, of the tenant's intention to
exercise its options, in accordance with its lease agreements, to substitute
other restaurant properties for these three restaurant properties. In March
1995, the Income Fund sold its two restaurant properties in Knoxville,
Tennessee, and one restaurant property in Leavenworth, Kansas, to the tenant
for their original purchase prices, excluding acquisition fees and
miscellaneous acquisition expenses and received net sales proceeds totaling
$811,706. The Income Fund used the majority of the net sales proceeds to
acquire two Checkers restaurant properties in Orlando and Bradenton, Florida,
from the tenant. As a result of these transactions, the Income Fund recognized
a loss of $71,023 for financial reporting purposes primarily due to acquisition
fees and miscellaneous acquisition expenses the Income Fund had allocated to
the two restaurant properties in Knoxville, Tennessee, and the restaurant
property in Leavenworth, Kansas, and due to the accrued rental income relating
to future scheduled rent increases for these restaurant properties that the
Income Fund had recorded and reversed at the time of the sale. As a result of
the above transactions, as of December 31, 1995, approximately $34,781,000 had
been used to invest, either directly or through joint venture arrangements in
44 restaurant properties and to pay acquisition fees and certain acquisition
expenses.
In January 1996, the Income Fund invested $122,439 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, 1996, the Income Fund owned
a 15.02% interest in this restaurant property. Upon completion of the Income
Fund's acquisitions in January 1996, the remaining net offering proceeds of
approximately $220,000 were reserved for Income Fund purposes.
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
restaurant properties for approximately $698,700 in excess of their original
purchase price. In October 1996, Wood-Ridge Real Estate
S-24
<PAGE>
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, 1997, the Income Fund had received approximately $52,000,
representing its pro-rata share of the uninvested net sales proceeds.
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 $3,306,595, $3,434,682 and $3,239,370 for the years ended
December 31, 1997, 1996 and 1995, respectively. The decrease in cash from
operations during 1997, as compared to 1996, and the increase during 1996, as
compared to 1995, 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.
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.
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 pending the Income Fund's use of such funds to pay Income
Fund expenses or make distributions to partners. At December 31, 1997, the
Income Fund had $1,614,708 invested in such short-term investments as compared
to $1,536,163 at December 31, 1996.
During 1997, 1996 and 1995, our affiliates incurred on behalf of the Income
Fund $78,821, $86,714 and $94,991, respectively, for certain operating
expenses. In addition, during 1995, certain of our affiliates incurred on
behalf of the Income Fund $2,274 for certain acquisition expenses. As of
December 31, 1997 and 1996, the Income Fund owed $4,311 and $1,355,
respectively, to related parties for such amounts, accounting and
administrative services and management fees. As of February 28, 1998, the
Income Fund had reimbursed the affiliates all such amounts. Other liabilities,
including distributions payable, decreased to $818,009 at December 31, 1997,
from $946,825 at December 31, 1996, partially as a result of the Income Fund
accruing a special distribution payable to the Limited Partners of $80,000 at
December 31, 1996, which was paid in January 1997 from cumulative excess
operating reserves. Total liabilities also decreased as a result of a decrease
in rents paid in advance at December 31, 1997.
Based on cash from operations, the Income Fund declared distributions to the
Limited Partners of $3,200,000, $3,280,000 and $2,900,001 for the years ended
December 31, 1997, 1996 and 1995, respectively. This represents distributions
of $0.80, $0.82 and $0.73 per Unit for the years ended December 31, 1997, 1996
and 1995, respectively. No amounts distributed or to be distributed to the
Limited Partners for the years ended December 31, 1997, 1996 or 1995 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.
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
S-25
<PAGE>
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
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During each of the nine months ended September 30, 1998 and 1997, 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 nine months ended September 30, 1998 and 1997, the Income Fund earned
$2,325,191 and $2,689,968, respectively, in rental income from operating leases
(net of adjustments to accrued rental income) and earned income from direct
financing leases from these restaurant properties, $832,774 and $896,387 of
which was earned during the quarters ended September 30, 1998 and 1997,
respectively. The decrease in rental and earned income during the quarter and
nine months ended September 30, 1998, as compared to the quarter and nine
months ended September 30, 1997, is primarily attributable to the fact that, in
June 1998, the Income Fund stopped receiving rental income from the tenant,
Long John Silver's, Inc., which filed for bankruptcy and rejected the leases
relating to four restaurant properties. As a result, during the nine months
ended September 30, 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.
For the nine months ended September 30, 1997 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 nine months ended September 30, 1998, the Income Fund
also owned an additional restaurant property, held as tenants-in-common with
one of our affiliates. In connection therewith, during the nine months ended
September 30, 1998 and 1997, the Income Fund earned $179,502 and $177,735,
respectively, attributable to net income earned by these joint ventures,
$59,208 and $60,424 of which was earned during the quarters ended September 30,
1998 and 1997, respectively.
Operating expenses, including depreciation and amortization expense, were
$415,175 and $355,039 for the nine months ended September 30, 1998 and 1997,
respectively, $162,799 and $107,513 of which were incurred for the quarters
ended September 30, 1998 and 1997, respectively. The increase in operating
expenses during the quarter and nine months ended September 30, 1998, as
compared to the quarter and nine months ended September 30, 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 quarter and nine months
ended September 30, 1998, is partially attributable to an increase in
depreciation expense due to the fact that during the quarter and nine months
ended September 30, 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 with rejected leases.
The Years Ended December 31, 1997, 1996 and 1995
The Income Fund owned and leased 45 wholly-owned restaurant properties
during 1995 (including two restaurant properties in Knoxville, Tennessee, and
one restaurant property in Leavenworth, Kansas, which were sold in March 1995),
and during 1996 and 1997, owned and leased 42 wholly-owned restaurant
S-26
<PAGE>
properties. In addition, during 1995, the Income Fund was a co-venturer in one
joint venture that owned two restaurant properties, and 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. As of December 31, 1997, the
Income Fund owned, either directly or through joint venture arrangements 49
restaurant properties, which are 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. 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 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, 1997, 1996 and 1995, the Income Fund
earned $3,586,791, $3,596,466 and $3,446,745 respectively, in rental income
from operating leases and earned income from direct financing leases from
restaurant properties wholly-owned by the Income Fund. The increase in rental
and earned income during 1996, as compared to 1995, is primarily attributable
to the acquisition of additional restaurant properties in 1995, and the fact
that, with the exception of the three restaurant properties sold in March 1995,
the restaurant properties owned at December 31, 1995, were operational for a
full year in 1996, as compared to a partial year in 1995.
During the years ended December 31, 1997, 1996 and 1995, the Income Fund
also earned $25,791, $23,318 and $97,539, respectively, in contingent rental
income. Contingent rental income for the year ended December 31, 1996, as
compared to 1995, decreased primarily as a result of decreased 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, 1997, 1996 and 1995, the
Income Fund earned $239,249, $392,862 and $280,606, 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, and the increase during 1996,
as compared to 1995, 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." Due to the fact
that 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, the Income Fund does not anticipate that the sale of the two
restaurant properties will have a material adverse effect on operations.
During at least one of the years ended December 31, 1997, 1996 and 1995,
five lessees (or group of affiliated lessees) of the Income Fund, Flagstar
Corporation, 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 one
restaurant property owned with affiliates as tenants-in-common). As of December
31, 1997, Flagstar Corporation 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 eight restaurants, Foodmaker, Inc. was the lessee under
leases relating to four restaurants and Golden Corral Corporation was lessee
under leases relating to five restaurants. It is anticipated that based on the
minimum rental payments required by the leases, these five lessees (or group of
affiliated lessees) each will continue to contribute more than 10% of the
Income Fund's total rental income in 1998 and subsequent years. In addition,
during at least one of the years ended December 31, 1997, 1996 and 1995, 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 one
restaurant
S-27
<PAGE>
property owned with affiliates as tenants-in-common). In subsequent years, it
is anticipated that these five 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 the leases. Any failure of these lessees or
restaurant chains could materially affect the Income Fund's income.
During the years ended December 31, 1997, 1996 and 1995, the Income Fund
also earned $56,183, $55,964, and $90,095, respectively, in interest and other
income. The decrease in interest and other income during 1996, as compared to
1995, is primarily attributable to a decrease in the amount of funds invested
in short-term, liquid investments due to the acquisition of restaurant
properties during 1995.
Operating expenses, including depreciation and amortization expense, were
$473,109, $483,551 and $471,494 for the years ended December 31, 1997, 1996 and
1995, respectively. 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. The increase in operating expenses during 1996, as
compared to 1995, is primarily a result of the Income Fund incurring additional
taxes relating to the filing of various state tax returns during 1996.
As a result of the sale of the two restaurant properties in Knoxville,
Tennessee, and the restaurant property in Leavenworth, Kansas, as described
above in "Liquidity and Capital Resources," the Income Fund recognized a loss
for financial reporting purposes of $71,023 during the year ended December 31,
1995. The loss was primarily due to acquisition fees and miscellaneous
acquisition expenses the Income Fund had allocated to these restaurant
properties and due to accrued rental income relating to future scheduled rent
increases that the Income Fund had recorded and wrote off at the time of sale.
No restaurant properties were sold during the years ended December 31, 1996 and
1997.
General
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Income Fund's financial position or results of operations.
The Income Fund's leases as of September 30, 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.
The Year 2000 problem is the result of information technology systems and
embedded systems (products which are made with microprocessor (computer) chips
such as HVAC systems, physical security systems and elevators) using a two-
digit format, as opposed to four digits, to indicate the year. Such information
technology and embedded systems may be unable to properly recognize and process
date-sensitive information beginning January 1, 2000.
The Income Fund does not have any information technology systems. Certain of
our affiliates provide all services requiring the use of information technology
systems pursuant to a management agreement with the Income Fund. The
maintenance of embedded systems, if any, at the Income Fund's properties is the
responsibility of the tenants of the properties in accordance with the terms of
the Income Fund's leases. We and our affiliates have established a team
dedicated to reviewing the internal information technology systems used in the
operation of the Income Fund, and the information technology and embedded
systems and the Year 2000 compliance plans of the Income Fund's tenants,
significant suppliers, financial institutions and transfer agent.
S-28
<PAGE>
The information technology infrastructure of our affiliates consists of a
network of personal computers and servers that were obtained from major
suppliers. The affiliates utilize various administrative and financial software
applications on that infrastructure to perform the business functions of the
Income Fund. Our inability and that of our affiliates to identify and timely
correct material Year 2000 deficiencies in the software and/or infrastructure
could result in an interruption in, or failure of, certain of the Income Fund's
business activities or operations. Accordingly, we and our affiliates have
requested and are evaluating documentation from the suppliers of the affiliates
regarding the Year 2000 compliance of their products that are used in the
business activities or operations of the Income Fund. The costs expected to be
incurred by we and our affiliates to become Year 2000 compliant will be
incurred by us and our affiliates; therefore, these costs will have no impact
on the Income Fund's financial position or results of operations.
The Income Fund has material third party relationships with its tenants,
financial institutions and 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. If
any of these third parties are unable to meet their obligations to the Income
Fund because of the Year 2000 deficiencies, such a failure may have a material
impact on the Income Fund. Accordingly, we have requested and are evaluating
documentation from the Income Fund's tenants, financial institutions, and
transfer agent relating to their Year 2000 compliance plans. At this time, we
have not yet received sufficient certifications to be assured that the tenants,
financial institutions, and transfer agent have fully considered and mitigated
any potential material impact of the Year 2000 deficiencies. Therefore, we do
not, at this time, know of the potential costs to the Income Fund of any
adverse impact or effect of any Year 2000 deficiencies by these third parties.
We currently expect that all Year 2000 compliance testing and any necessary
remedial measures on the information technology systems used in the business
activities and operations of the Income Fund will be completed prior to June
30, 1999. Based on the progress we and our affiliates have made in identifying
and addressing the Income Fund's Year 2000 issues and the plan and timeline to
complete the compliance program, we do not foresee significant risks associated
with the Income Fund's Year 2000 compliance at this time. Because we and our
affiliates are still evaluating the status of the systems used in business
activities and operations of the Income Fund and the systems of the third
parties with which the Income Fund conducts its business, we have not yet
developed a comprehensive contingency plan and are unable to identify "the most
reasonably likely worst case scenario" at this time. As we identify significant
risks related to the Income Fund's Year 2000 compliance or if the Income Fund's
Year 2000 compliance program's progress deviates substantially from the
anticipated timeline, we will develop appropriate contingency plans.
S-29
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997.. F-1
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997............................................. F-2
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997............. F-3
Condensed Statements of Cash Flows for the Nine Months Ended
September 30, 1998 and 1997............................................. F-4
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997....................................... F-5
Report of Independent Accountants........................................ F-7
Balance Sheets as of December 31, 1997 and 1996.......................... F-8
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-9
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995........................................................... F-10
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995.................................................................... F-11
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and 1995................................................................ F-12
Unaudited Pro Forma Financial Information................................ F-19
Unaudited Pro Forma Balance Sheet as of September 30, 1998............... F-20
Unaudited Pro Forma Income Statement for the Nine Months Ended September
30, 1998................................................................ F-21
Unaudited Pro Forma Income Statement for the Year Ended December 31,
1997.................................................................... F-22
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements.............................................................. F-23
</TABLE>
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September December
30, 1998 31, 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $1,004,141 and $801,601.. $23,531,327 $22,145,138
Net investment in direct financing leases............. 7,609,576 9,264,307
Investment in joint ventures.......................... 2,743,255 2,561,816
Cash and cash equivalents............................. 1,222,529 1,614,708
Receivables, less allowance for doubtful accounts of
$7,434 in 1998....................................... -- 26,888
Prepaid expenses...................................... 20,315 7,633
Organization costs, less accumulated amortization of
$9,049 and $7,548.................................... 951 2,452
Accrued rental income................................. 1,474,597 1,422,781
----------- -----------
$36,602,550 $37,045,723
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND PARTNERS' CAPITAL
<S> <C> <C>
Accounts payable....................................... $ 1,078 $ 6,991
Accrued and escrowed real estate taxes payable......... 31,820 6,158
Distributions payable.................................. 800,000 800,000
Due to related parties................................. 5,049 4,311
Rents paid in advance and deposits..................... -- 4,860
----------- -----------
Total liabilities...................................... 837,947 822,320
Partners' capital...................................... 35,764,603 36,223,403
----------- -----------
$36,602,550 $37,045,723
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-1
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
------------------- ----------------------
1998 1997 1998 1997
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases.......................... $ 613,294 $ 631,816 $1,849,278 $1,894,349
Adjustments to accrued rental
income.......................... -- -- (250,631) --
Earned income from direct
financing leases................ 219,480 264,571 726,544 795,619
Interest and other income........ 12,045 15,534 51,682 45,595
--------- --------- ---------- ----------
844,819 911,921 2,376,873 2,735,563
--------- --------- ---------- ----------
Expenses:
General operating and
administrative.................. 40,231 31,490 107,194 101,281
Professional services............ 5,358 5,077 18,867 15,189
Management fees to related
parties......................... 8,180 8,847 25,475 26,312
Real estate taxes................ 28,562 -- 31,208 --
State and other taxes............ -- -- 27,763 26,009
Depreciation and amortization.... 80,468 62,099 204,668 186,248
--------- --------- ---------- ----------
162,799 107,513 415,175 355,039
--------- --------- ---------- ----------
Income Before Equity in Earnings of
Joint Ventures.................... 682,020 804,408 1,961,698 2,380,524
Equity in Earnings of Joint
Ventures.......................... 59,208 60,424 179,502 177,735
--------- --------- ---------- ----------
Net Income......................... $ 741,228 $ 864,832 $2,141,200 $2,558,259
========= ========= ========== ==========
Allocation of Net Income:
General partners................. $ 7,412 $ 8,649 $ 21,412 $ 25,583
Limited partners................. 733,816 856,183 2,119,788 2,532,676
--------- --------- ---------- ----------
$ 741,228 $ 864.832 $2,141,200 $2,558,259
========= ========= ========== ==========
Net Income Per Limited Partner
Unit.............................. $ 0.18 $ 0.21 $ 0.53 $ 0.63
========= ========= ========== ==========
Weighted Average Number of Limited
Partner Units Outstanding......... 4,000,000 4,000,000 4,000,000 4,000,000
========= ========= ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
----------------- ------------
1998 1997
----------------- ------------
<S> <C> <C>
General partners:
Beginning balance............................. $ 117,411 $ 83,062
Net income.................................... 21,412 34,349
----------- -----------
138,823 117,411
----------- -----------
Limited partners:
Beginning balance............................. 36,105,992 35,905,436
Net income.................................... 2,119,788 3,400,556
Distributions ($0.65 and $0.80 per limited
partner unit, respectively).................. (2,600,000) (3,200,000)
----------- -----------
35,625,780 36,105,992
----------- -----------
Total partners' capital......................... $35,764,603 $36,223,403
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Net Cash Provided by Operating Activities........... $ 2,415,807 $ 2,550,613
----------- -----------
Cash Flows from Investing Activities:
Investment in joint ventures...................... (207,986) --
Return of capital from joint venture.............. -- 51,950
----------- -----------
Net cash provided by (used in)
investing activities........................... (207,986) 51,950
----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners................. (2,600,000) (2,480,000)
----------- -----------
Net cash used in financing
activities..................................... (2,600,000) (2,480,000)
----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents......................................... (392,179) 122,563
Cash and Cash Equivalents at Beginning
of Period........................................... 1,614,708 1,536,163
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 1,222,529 $ 1,658,726
=========== ===========
Supplemental Schedule of Non-Cash Investing
and Financing Activities
Net investment in direct financing lease
reclassified to land and building on operating
leases as a result of lease termination............ $ 1,588,729 $ --
=========== ===========
Distributions declared and unpaid at end of
period............................................. $ 800,000 $ 800,000
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, 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, 1997.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2. Net Investment in Direct Financing Leases
During the nine months ended September 30, 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 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.
3. Investment in Joint Ventures
In June 1998, the Partnership acquired a 14.93% interest in a property in
Fort Myers, Florida, 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 investments are included in investment in joint
ventures.
F-5
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--Continued
Quarters and Nine Months Ended September 30, 1998 and 1997
Wood-Ridge Real Estate Joint Venture and the Partnership and affiliates as
tenants-in-common in two separate tenancy-in-common arrangements, own and lease
six properties and one property, respectively, to operators 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:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation.................... $6,094,108 $5,563,722
Net investment in direct financing lease..... 829,116 --
Cash......................................... 8,207 10,890
Receivables.................................. -- 5,923
Accrued rental income........................ 117,515 74,001
Other assets................................. 955 1,078
Liabilities.................................. 24,817 18,195
Partners' capital............................ 7,025,084 5,637,419
Revenues..................................... 534,294 650,354
Net income................................... 425,472 522,611
</TABLE>
The Partnership recognized income totaling $179,502 and $177,735 for the
nine months ended September 30, 1998 and 1997, respectively, from these joint
ventures, $59,208 and $60,424 of which was earned during the quarters ended
September 30, 1998 and 1997, respectively.
F-6
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners
CNL Income Fund XV, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund XV, Ltd.
(a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. 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 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 Income Fund XV, Ltd. as
of December 31, 1997 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand l.l.p.
Orlando, Florida
January 19, 1998
F-7
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation............................. $22,145,138 $22,390,701
Net investment in direct financing leases............. 9,264,307 9,351,815
Investment in joint ventures.......................... 2,561,816 2,624,620
Cash and cash equivalents............................. 1,614,708 1,536,163
Receivables, less allowance for doubtful accounts of
$1,458 in 1996....................................... 26,888 30,176
Prepaid expenses...................................... 7,633 7,049
Organization costs, less accumulated amortization of
$7,548 and $5,548.................................... 2,452 4,452
Accrued rental income................................. 1,422,781 991,702
----------- -----------
$37,045,723 $36,936,678
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND PARTNERS' CAPITAL
<S> <C> <C>
Accounts payable....................................... $ 6,991 $ 3,053
Escrowed real estate taxes payable..................... 6,158 8,581
Distributions payable.................................. 800,000 880,000
Due to related parties................................. 4,311 1,355
Rents paid in advance.................................. 4,860 55,191
----------- -----------
Total liabilities...................................... 822,320 948,180
Partners' capital...................................... 36,223,403 35,988,498
----------- -----------
$37,045,723 $36,936,678
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases....... $2,527,261 $2,527,261 $2,492,250
Earned income from direct financing
leases................................... 1,059,530 1,069,205 954,495
Contingent rental income.................. 25,791 23,318 97,539
Interest and other income................. 56,183 55,964 90,095
---------- ---------- ----------
3,668,765 3,675,748 3,634,379
---------- ---------- ----------
Expenses:
General operating and administrative...... 135,714 149,388 150,586
Professional services..................... 24,526 19,881 30,960
Management fees to related parties........ 35,321 35,126 34,213
State and other taxes..................... 29,200 30,924 12,560
Depreciation and amortization............. 248,348 248,232 243,175
---------- ---------- ----------
473,109 483,551 471,494
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Ventures and Loss on Sale of Land.......... 3,195,656 3,192,197 3,162,885
Equity in Earnings of Joint Ventures........ 239,249 392,862 280,606
Loss on Sale of Land........................ -- -- (71,023)
---------- ---------- ----------
Net Income.................................. $3,434,905 $3,585,059 $3,372,468
========== ========== ==========
Allocation of Net Income:
General partners............................ $ 34,349 $ 35,851 $ 34,352
Limited partners............................ 3,400,556 3,549,208 3,338,116
---------- ---------- ----------
$3,434,905 $3,585,059 $3,372,468
========== ========== ==========
Net Income Per Limited Partner Unit......... $ 0.85 $ 0.89 $ 0.83
========== ========== ==========
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 XV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<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,
1994................... $1,000 $ 11,859 $40,000,000 $ (1,185,946) $ 1,174,059 $(4,790,000) $35,210,972
Distributions to limited
partners ($0.73 per
limited
partner unit).......... -- -- -- (2,900,001) -- -- (2,900,001)
Net income.............. -- 34,352 -- -- 3,338,116 -- 3,372,468
------ -------- ----------- ------------ ----------- ----------- -----------
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
====== ======== =========== ============ =========== =========== =========== === ===
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows From Operating Activities:
Cash received from tenants............... $3,228,741 $3,378,973 $3,136,569
Distributions from joint ventures........ 249,318 259,407 237,566
Cash paid for expenses................... (218,106) (246,748) (222,824)
Interest received........................ 46,642 43,050 88,059
---------- ---------- ----------
Net cash provided by operating
activities............................ 3,306,595 3,434,682 3,239,370
---------- ---------- ----------
Cash Flows From Investing Activities:
Proceeds from sale of land............... -- -- 811,706
Additions to land and buildings on
operating leases........................ -- -- (1,625,601)
Investment in direct financing leases.... -- -- (2,412,973)
Investment in joint ventures............. -- (129,939) (720,552)
Return of capital from joint venture..... 51,950 -- --
Other.................................... -- -- 25,150
---------- ---------- ----------
Net cash provided by (used in)investing
activities............................ 51,950 (129,939) (3,922,270)
---------- ---------- ----------
Cash Flows From Financing Activities:
Reimbursement of acquisition costs paid
by related parties on behalf of the
Partnership............................. -- -- (23,507)
Distributions to limited partners........ (3,280,000) (3,200,000) (2,650,003)
---------- ---------- ----------
Net cash used in financing activities.. (3,280,000) (3,200,000) (2,673,510)
---------- ---------- ----------
Net Increase (Decrease) in Cash and Cash
Equivalents............................... 78,545 104,743 (3,356,410)
Cash and Cash Equivalents at Beginning of
year...................................... 1,536,163 1,431,420 4,787,830
---------- ---------- ----------
Cash and Cash Equivalents at End of Year... $1,614,708 $1,536,163 $1,431,420
========== ========== ==========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income................................. $3,434,905 $3,585,059 $3,372,468
---------- ---------- ----------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation............................... 245,563 245,563 241,175
Amortization............................... 2,785 2,669 2,000
Equity in earnings of joint ventures, net
of distributions.......................... 10,069 (133,455) (43,040)
Loss on sale of land....................... -- -- 71,023
Decrease (increase) in receivables......... 3,288 58,013 (38,005)
Decrease in net investment in direct
financing leases.......................... 87,508 77,834 65,572
Increase in prepaid expenses............... (584) (4,234) (2,815)
Increase in accrued rental income.......... (431,079) (431,654) (429,233)
Increase in accounts payable and accrued
expenses.................................. 1,515 1,972 2,586
Increase (decrease) in due to related
parties, excluding reimbursement of
acquisition costs paid in behalf of the
Partnership............................... 2,956 (6,880) 7,683
Increase (decrease) in rents paid in
advance................................... (50,331) 39,795 (10,044)
---------- ---------- ----------
Total adjustments.......................... (128,310) (150,377) (133,098)
---------- ---------- ----------
Net Cash Provided by Operating Activities.. $3,306,595 $3,434,682 $3,239,370
========== ========== ==========
Supplemental Schedule of Non-Cash Financing
Activities:
Distributions declared and unpaid at
December 31............................... $ 800,000 $ 880,000 $ 800,000
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-11
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
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.
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.
Investment in Joint Ventures--The Partnership accounts for its interests in
Wood-Ridge Real Estate Joint Venture and a property in Clinton, North
Carolina, 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.
F-12
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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 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 1997 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 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>
1997 1996
----------- -----------
<S> <C> <C>
Land............................................. $15,579,852 $15,579,852
Buildings........................................ 7,366,887 7,366,887
----------- -----------
22,946,739 22,946,739
Less accumulated depreciation.................... (801,601) (556,038)
----------- -----------
$22,145,138 $22,390,701
=========== ===========
</TABLE>
F-13
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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, 1997, 1996 and 1995, the Partnership recognized
$431,079, $431,654 and $429,233, 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, 1997:
<TABLE>
<S> <C>
1998........................................................... $ 2,096,763
1999........................................................... 2,171,812
2000........................................................... 2,329,693
2001........................................................... 2,333,165
2002........................................................... 2,364,378
Thereafter..................................................... 28,891,694
-----------
$40,187,505
===========
</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>
1997 1996
----------- -----------
<S> <C> <C>
Minimum lease payments receivable................ $19,905,444 $21,052,482
Estimated residual values........................ 2,873,859 2,873,859
Less unearned income............................. (13,514,996) (14,574,526)
----------- -----------
Net investment in direct financing leases........ $ 9,264,307 $ 9,351,815
=========== ===========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998........................................................... $ 1,147,038
1999........................................................... 1,147,038
2000........................................................... 1,149,782
2001........................................................... 1,155,269
2002........................................................... 1,177,626
Thereafter..................................................... 14,128,691
-----------
$19,905,444
===========
</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-14
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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.
In September 1996, Wood-Ridge Real Estate Joint Venture sold its two
properties to the tenant of these properties 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 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 and January 1997, Wood-Ridge Real Estate Joint Venture
reinvested $4,404,046 and $502,598, respectively, of the net sales proceeds
from the sale of the two properties during 1996, in five properties and one
property, respectively. As of December 31, 1997, the Partnership had received
approximately $52,000, representing its pro-rata share of the uninvested net
sales proceeds. As of December 31, 1997, the Partnership owned a 50 percent
interest in the profits and losses of the joint venture.
In January 1996, the Partnership acquired a property in Clinton, North
Carolina, with affiliates of the general partners as tenants-in-common. In
connection therewith, the Partnership contributed $122,439 for a 15.02%
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, and the Partnership and affiliates,
as tenants-in-common, own and lease six properties and one property,
respectively, to operators 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>
1997 1996
---------- ----------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation......................... $5,563,722 $5,178,396
Cash.............................................. 10,890 781
Restricted cash................................... -- 595,426
Receivables....................................... 5,923 15,200
Accrued rental income............................. 74,001 11,971
Other assets...................................... 1,078 15,263
Liabilities....................................... 18,195 33,238
Partners' capital................................. 5,637,419 5,783,799
Revenues.......................................... 650,354 643,646
Gain on sale of land and buildings................ -- 261,106
Net income........................................ 522,611 837,850
</TABLE>
The Partnership recognized income totaling $239,249, $392,862 and $280,606
for the years ended December 31, 1997, 1996 and 1995, respectively, from these
entities.
F-15
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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 sale of properties, 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 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.
During the years ended December 31, 1997, 1996 and 1995, the Partnership
declared distributions to the limited partners of $3,200,000, $3,280,000 and
$2,900,001, 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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................. $3,434,905 $3,585,059 $3,372,468
Depreciation for tax reporting
purposes in excess of depreciation
for financial reporting purposes..... (160,007) (160,007) (139,941)
Direct financing leases recorded as
operating leases for tax reporting
purposes............................. 87,508 77,834 65,572
Loss on sale of land for financial
reporting purposes in excess of loss
for tax reporting purposes........... -- -- 71,023
Equity in earnings of joint ventures
for financial reporting purposes in
excess of equity in earnings of joint
ventures for tax reporting purposes.. 23,823 (158,836) (67,933)
Accrued rental income................. (431,079) (431,654) (429,233)
Rents paid in advance................. (50,331) 39,795 (10,044)
Other................................. (670) 2,127 --
---------- ---------- ----------
Net income for federal income tax
purposes............................. $2,904,149 $2,954,318 $2,861,912
========== ========== ==========
</TABLE>
F-16
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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 parent company of CNL Fund
Advisors, Inc. The other individual general partner, Robert A. Bourne, served
as president of CNL Fund Advisors, Inc. through October 1997. CNL Income Fund
Advisors, Inc. was a wholly owned subsidiary of CNL Group, Inc. until its
merger, effective January 1, 1996, with CNL Fund Advisors, Inc. During the
years ended December 31, 1997, 1996 and 1995, CNL Income Fund Advisors, Inc.
and CNL Fund Advisors, Inc. (hereinafter referred to collectively as the
"Affiliates") each performed certain services for the Partnership, as described
below.
During the years ended December 31, 1997, 1996 and 1995, certain 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 Affiliates 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 Affiliates. 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 $35,321, $35,126 and $34,213 for the years ended
December 31, 1997, 1996 and 1995, respectively.
Certain Affiliates are 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 Affiliates provide 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, 1997, 1996 and 1995, Affiliates of the
general partners provided accounting and administrative services to the
Partnership on a day-to-day basis. The Partnership incurred $78,051, $87,265
and $87,894 for the years ended December 31, 1997, 1996 and 1995, respectively,
for such services.
The due to related parties at December 31, 1997 and 1996, totaled $4,311 and
$1,355, respectively.
F-17
<PAGE>
CNL INCOME FUND XV, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997, 1996 and 1995
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
at least one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Checkers Drive-In
Restaurants, Inc.............................. $716,905 $723,558 $731,967
Long John Silver's, Inc........................ 710,325 714,804 721,162
Flagstar Enterprises, Inc.
and Quincy's Restaurants, Inc................. 635,413 638,042 639,981
Golden Corral Corporation...................... 582,600 531,775 567,697
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 at least one of the
years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Long John Silver's............................. $773,265 $777,743 $758,408
Checkers Drive-In Restaurants.................. 716,905 723,558 731,967
Golden Corral Family
Steakhouse Restaurants........................ 582,600 531,775 567,697
Hardee's....................................... 543,889 546,037 547,539
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. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
F-18
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to the
Company gives effect to the Acquisition, and is based on estimates and
assumptions set for the 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 the Company, the
historical combined financial information of CNL Income Fund XV, Ltd., (the
"CNL 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 the Company, the
CNL Income Fund, Advisor and CNL Restaurant Financial Services Group. The pro
forma balance sheet assumes that the Acquisition occurred on September 30,
1998; the pro forma consolidated statements of earnings assume that the
Property Acquisitions (as defined on page ) and the Acquisition occurred on
January 1, 1997.
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.
UNAUDITED PRO FORMA BALANCE SHEET
September 30, 1998
<TABLE>
<CAPTION>
Historical Pro Forma
----------------------------------------------------------------------------- -----------------------------
CNL Income
Fund XV, CNL Financial CNL Financial Combined
APF Ltd. Advisor Services, Inc. Corp. Portfolios Adjustments Pro Forma
------------ ----------- ---------- -------------- ------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Land and
buildings on
operating
leases, net..... $298,967,972 $23,531,327 $ 0 $ 0 $ 0 $322,499,299 $ 3,596,047 (1)
26,052,741 (2) $352,148,087
Net investment in
direct financing
leases.......... 117,028,760 7,609,576 0 0 0 124,638,336 1,152,435 (1) 125,790,771
Mortgages and
notes
receivable...... 33,523,506 0 0 0 173,776,981 207,300,487 849,195 (2) 208,149,682
Other
Investments..... 16,200,316 0 200,000 0 6,561,628 22,961,944 -- 22,961,944
Investment in
joint ventures.. 631,374 2,743,255 0 0 0 3,374,629 402,066 (1) 3,776,695
Cash and cash
equivalents..... 90,674,289 1,222,529 283,300 599,997 5,098,033 97,878,148 (450,338) (1)
(8,933,000) (1)
(26,901,936) (2) 61,592,874
Receivables...... 575,104 0 7,544,985 6,824,632 517,471 15,462,192 (7,854,428) (3) 7,607,764
Accrued rental
income.......... 3,071,451 1,474,597 0 0 0 4,546,048 (1,474,597) (1) 3,071,451
Other assets..... 5,711,195 21,266 401,524 295,570 3,854,477 10,284,032 41,742,610 (1)
(3,676,099) (1) 48,350,543
------------ ----------- ---------- ---------- ------------ ------------ ----------- ------------
Total assets.... $566,383,967 $36,602,550 $8,429,809 $7,720,199 $189,808,590 $808,945,115 $24,504,696 $833,449,811
============ =========== ========== ========== ============ ============ =========== ============
LIABILITIES &
EQUITY:
Accounts payable
and accrued
liabilities..... $ 379,496 $ 32,898 $ 449,751 $ 193,949 $ 1,236,138 $ 2,292,232 $ -- 2,292,232
Accrued
construction
costs payable... 3,045,304 0 0 0 0 3,045,304 -- 3,045,304
Distributions
payable......... 0 800,000 2,220,000 0 0 3,020,000 -- 3,020,000
Due to related
parties......... 2,552,411 5,049 0 1,452,512 6,556,920 10,566,892 (7,854,428) (3) 2,712,464
Income tax
payable......... 0 0 1,989,003 0 1,001,861 2,990,864 (2,990,864) (4) 0
Line of credit... 6,765,575 0 0 0 0 6,765,575 -- 6,765,575
Notes payable.... 0 0 390,398 28,462 175,528,203 175,947,063 -- 175,947,063
Deferred income.. 1,015,758 0 0 0 0 1,015,758 -- 1,015,758
Rents paid in
advance......... 437,497 0 0 0 0 437,497 -- 437,497
Minority
interest........ 282,544 0 0 0 0 282,544 -- 282,544
Common Stock..... 621,187 0 9,800 2,000 200 633,187 147,889 (1) 781,076
Additional paid
in capital...... 556,830,578 0 482,964 5,231,827 3,887,496 566,432,865 150,126,498 (1) 716,559,363
Accumulated
distributions in
excess of net
earnings........ (5,546,383) 0 2,887,893 811,449 1,597,772 (249,269) (82,150,660) (1)
2,990,864 (4) (79,409,065)
Partners
capital......... 0 35,764,603 0 0 0 35,764,603 (35,764,603) (1) 0
------------ ----------- ---------- ---------- ------------ ------------ ----------- ------------
Total
liabilities and
equity......... $566,383,967 $36,602,550 $8,429,809 $7,720,199 $189,808,590 $808,945,115 $24,504,696 $833,449,811
============ =========== ========== ========== ============ ============ =========== ============
</TABLE>
F-20
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA INCOME STATEMENT
September 30, 1998
<TABLE>
<CAPTION>
Historical Pro Forma
-------------------------------------------------------------------------- -----------------------------
CNL Income
Fund XV, CNL Financial CNL Financial Combined
APF Ltd. Advisor Services Inc. Corp. Portfolios Adjustments Pro Forma
----------- ---------- ---------- ------------- ------------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and
earned income.. $22,947,199 $2,325,191 $ 0 $ 0 $ 0 $25,272,390 $ 9,635,208 (a)
35,670 (b) $ 34,943,268
Fees............ 0 0 21,405,127 5,115,549 6,817 26,527,493 (21,036,584) (c)
(2,875,906) (d) 2,615,003
Interest and
other income... 6,117,911 51,682 751 432,506 18,031,141 24,633,991 1,526,547 (e) 26,160,538
----------- ---------- ---------- --------- ----------- ----------- ----------- ------------
Total revenue... 29,065,110 2,376,873 21,405,878 5,548,055 18,037,958 76,433,874 (12,715,065) 63,718,809
Expenses:
General and
administrative.. 1,539,004 157,269 6,701,115 4,107,311 2,597,171 15,101,870 (1,307,332) (f)
(1,415,100) (g)
(31,627) (h) 12,347,811
Advisory fees... 1,248,393 25,475 0 0 1,026,231 2,300,099 (2,300,099) (i) 0
Fees to
Restaurant
Financial
Services
Group.......... 0 0 256,456 1,569,202 0 1,825,658 (1,825,658) (n) 0
Interest........ 0 0 105,668 3,534 14,230,999 14,340,201 (68,670) (m) 14,271,531
State taxes..... 397,569 27,763 15,226 18,564 201,616 660,738 52,120 (j) 712,858
Depreciation--
other.......... 0 0 75,607 55,056 0 130,663 0 130,663
Depreciation--
property....... 2,684,924 202,541 0 0 0 2,887,465 1,454,673 (k) 4,342,138
Amortization.... 8,096 2,127 55,932 138 945,299 1,011,592 1,565,348 (l) 2,576,940
----------- ---------- ---------- --------- ----------- ----------- ----------- ------------
Total operating
expenses....... 5,877,986 415,175 7,210,004 5,753,805 19,001,316 38,258,286 (3,876,345) 34,381,941
----------- ---------- ---------- --------- ----------- ----------- ----------- ------------
Operating
earnings
(losses)........ 23,187,124 1,961,698 14,195,874 (205,750) (963,358) 38,175,588 (8,838,720) 29,336,868
Equity in
earnings of
joint
ventures/minority
interest....... (23,271) 179,502 0 12,452 0 168,683 0 168,683
Gain on
securitization.. 0 0 0 0 3,018,268 3,018,268 0 3,018,268
----------- ---------- ---------- --------- ----------- ----------- ----------- ------------
Net earnings
(losses) before
income taxes.... 23,163,853 2,141,200 14,195,874 (193,298) 2,054,910 41,362,539 (8,838,720) 32,523,819
Provision
(credit) for
federal income
taxes.......... 0 0 5,607,415 (81,229) 789,895 6,316,081 (6,316,081) (o) 0
----------- ---------- ---------- --------- ----------- ----------- ----------- ------------
Net income....... $23,163,853 $2,141,200 $8,588,459 $(112,069) $ 1,265,015 $35,046,458 $(2,522,639) $ 32,523,819
=========== ========== ========== ========= =========== =========== =========== ============
Earnings per
share........... $ 0.49 $ 0.44
=========== ============
Shares
outstanding:
Weighted
average........ 47,633,909 73,423,954(p)
=========== ============
End of period... 62,118,679 78,107,546
=========== ============
</TABLE>
F-21
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA INCOME STATEMENT
For the year ended December 31, 1997
<TABLE>
<CAPTION>
Historical Pro Forma
---------------------------------------------------------------------------- ----------------------------
CNL
CNL Income CNL Financial Financial Combined
APF Fund XV, Ltd. Advisor Services, Inc. Corp. Portfolios Adjustments Pro Forma
----------- ------------- ---------- -------------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and
earned income.. $15,490,615 $3,612,582 $ 0 $ 0 $ 0 $19,103,197 $24,048,982 (a)
47,560 (b) $43,199,739
Fees............ 0 0 8,310,836 5,965,110 73,704 14,349,650 (9,112,771) (c)
(2,662,141) (d) 2,574,738
Interest and
other income... 3,967,318 56,183 165,569 0 10,932,843 15,121,913 249,395 (e) 15,371,308
----------- ---------- ---------- ---------- ---------- ----------- ----------- -----------
Total Revenue... 19,457,933 3,668,765 8,476,405 5,965,110 11,006,547 48,574,760 12,571,025 61,145,785
Expenses:
General and
administrative.. 1,010,725 160,240 4,266,169 1,889,904 828,848 8,155,886 (742,685) (f)
(1,619,238) (g)
(43,276) (h) 5,750,687
Advisory fees... 804,879 35,321 0 0 1,802,532 2,642,732 (2,642,732) (i) 0
Fees to
Restaurant
Financial
Services
Group.......... 0 0 151,041 594,041 0 745,082 (745,082) (n) 0
Interest........ 0 0 162,153 183,315 8,320,000 8,665,468 (81,594) (m) 8,583,874
State taxes..... 251,358 29,200 12,084 1,294 1,600 295,536 20,016 (j) 315,552
Depreciation--
other.......... 0 0 48,490 14,637 0 63,127 -- 63,127
Depreciation--
property....... 1,784,269 245,563 0 0 0 2,029,832 3,087,977 (k) 5,117,809
Amortization.... 10,793 2,785 18,093 61,324 916,577 1,009,572 2,087,130 (l) 3,096,702
----------- ---------- ---------- ---------- ---------- ----------- ----------- -----------
Total operating
expenses....... 3,862,024 473,109 4,658,030 2,744,515 11,869,557 23,607,235 (679,484) 22,927,751
----------- ---------- ---------- ---------- ---------- ----------- ----------- -----------
Operating
earnings
(losses)........ 15,595,909 3,195,656 3,818,375 3,220,595 (863,010) 24,967,525 13,250,509 38,218,034
Equity in
earnings of
joint
ventures/minority
interest....... (31,453) 239,249 0 (126,627) 0 81,169 -- 81,169
----------- ---------- ---------- ---------- ---------- ----------- ----------- -----------
Net earnings
before income
taxes........... 15,564,456 3,434,905 3,818,375 3,093,968 (863,010) 25,048,694 13,250,509 38,299,203
Provision
(credit) for
federal income
taxes.......... 0 0 1,508,258 1,272,133 (317,785) 2,462,606 (2,462,606) (o) 0
=========== ========== ========== ========== ========== =========== =========== ===========
Net earnings
(losses)........ $15,564,456 $3,434,905 $2,310,117 $1,821,835 $ (545,225) $22,586,088 $15,713,115 $38,299,203
=========== ========== ========== ========== ========== =========== =========== ===========
Earnings per
share........... $ 0.66 $ 0.52
=========== ===========
Shares
outstanding:
Weighted
average........ 23,423,868 74,096,854(p)
=========== ===========
End of period... 36,192,971 74,096,854
=========== ===========
</TABLE>
F-22
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of September 30, 1998 reflects the
transactions of the acquisition of the CNL Income Fund, Advisor and CNL
Restaurant Financial Services Group (the "Acquisition Proposal") as set forth
in this Proxy Statement. The Pro Forma Statements of Earnings for the nine
months ended September 30, 1998, and for the year ended December 31, 1997, have
been prepared to reflect a) the issuance of additional shares and the property
acquisitions completed from January 1, 1997 through November 30, 1998
("Offering and Property Transactions") and b) the transactions of the
Acquisition Proposal as set forth in this Proxy Statement. This unaudited pro
forma financial information has been prepared utilizing the historical
financial statements of the Company and the historical combined financial
information of the CNL Income Fund, Advisor and CNL Restaurant Financial
Services Group and should be read in conjunction with the selected historical
financial data and accompanying notes of the Company, the CNL Income Fund,
Advisor and the CNL Restaurant Financial Services Group. The Pro Forma Balance
Sheet was prepared as if the Offering and Property Transactions and the
Acquisition Proposal occurred on September 30, 1998. The Pro Forma Statements
of Earnings were prepared as if the Property Acquisitions and the Acquisition
Proposal occurred as of January 1, 1997. The pro forma information is unaudited
and is not necessarily indicative of the consolidated operating results which
would have occurred if the Offering and Acquisition Transaction and the
Acquisition Proposal 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 Acquisition
Proposal have been made. Capitalized terms have the meanings as defined in the
Proxy Statement.
2. Method of Accounting
The acquisition of the CNL Income Fund and the CNL Restaurant Financial
Services Group will be accounted for under the purchase accounting method. The
Company 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, the Company 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 operating expense on the Company's consolidated statements of
earnings, but the Company will not deduct this expense for purposes of
calculating funds from operations due to the non-recurring and non-cash nature
of the expense.
All significant intercompany balances and transactions between the Company,
CNL Income Fund, Advisor and CNL Restaurant Financial Services Group have been
eliminated in the pro forma financial statements.
3. Adjustments to Pro Forma Balance Sheet
The following describes the pro forma adjustments to the Pro Forma Balance
Sheet as of September 30, 1998, as if the Acquisition was consummated on such
date. For purposes of the pro forma financial statements, it is assumed that at
an annual meeting of stockholders, the stockholders of the Company approved an
amendment to increase the number of authorized shares to an amount necessary to
enable the Company to issue the shares for the Acquisition.
(1) Represents the payment of $450,338 in cash and the issuance of
15,988,867 common shares in consideration for the purchase of the CNL Income
Fund, Advisor and CNL Restaurant Financial Services Group at September 30, 1998
at a share price of $10 plus estimated transaction costs. The acquisition of
the CNL Income Fund and the CNL Restaurant Financial Services Group has been
accounted for under the purchase accounting method and goodwill was recognized
to the extent that the consideration paid exceeded the fair value of the net
tangible assets acquired. As for the acquisition of the Advisor from a related
party, the
F-23
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
consideration paid in excess of the fair value of the net tangible assets
received has been accounted for as costs incurred in acquiring the Advisor from
a related party because the Advisor has not been deemed to qualify as a
"business" for purposes of applying APB Opinion No. 16 "Business Combinations."
Upon consummation of the Acquisition, this expense will be recorded as an
operating expense on the Company's statement of earnings. The Company will not
deduct this expense for purposes of calculating funds from operations due to
the nonrecurring and non-cash nature of the expense. As of September 30, 1998,
$249,403 of transaction costs had been incurred by the Company.
<TABLE>
<S> <C>
CNL Income Fund................................................ $ 37,339,012
Advisor........................................................ 76,000,000
CNL Restaurant Financial Services Group........................ 47,000,000
------------
Total Purchase Price (cash and shares)......................... 160,339,012
Less cash paid to CNL Income Fund.............................. (450,338)
------------
Share consideration............................................ 159,888,674
Transaction costs of the Company............................... 8,933,000
Total costs incurred........................................... $168,821,674
============
</TABLE>
In addition, the Company i) used $8,933,000 in cash to pay the transaction
costs related to the Acquisition, ii) made an upward adjustment to the CNL
Income Fund carrying value of land and building on operating leases by
$3,596,047, net investment in direct financing leases by $1,152,435, investment
in joint venture by $402,066, made downward adjustments to the carrying value
of accrued rental income of $1,474,597, made downward adjustments to other
assets of $3,676,099 to adjust historical values to fair value, iii) recorded
goodwill of $41,742,610 for the acquisition of the CNL Restaurant Financial
Services Group, iv) reduced retained earnings by $76,853,546 for the excess
consideration paid over the net assets of the Advisor and removed the
historical common stock balance of $12,000, additional paid in capital balance
of $9,602,287, retained earnings balance of $5,297,114 and partners capital
balance of $35,764,603 of the CNL Income Fund, Advisor and CNL Restaurant
Financial Services Group.
(2) Represents the use of $26,901,936 in cash and cash equivalents at
September 30, 1998 to acquire $26,052,741 in properties and issue $849,195 in
mortgage notes which occurred from October 1, 1998 through November 30, 1998.
(3) Represents the elimination by the CNL Income Fund of $5,049 in related
party payables recorded as receivables by the Advisor, the elimination by the
CNL Restaurant Financial Services Group of $6,641,379 in related party payables
recorded as receivables by CNL Restaurant Financial Services Group and the
elimination by the Company of $1,208,000 in related party payables recorded as
receivables by the Advisor.
(4) Represents the elimination of income taxes payable of $2,990,864 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.
4. Adjustments to Pro Forma Income Statements
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the nine months ended September 30, 1998, as if
the Acquisition was consummated as of January 1, 1997.
(a) Represents rental and earned income as if 1) properties that had been
previously constructed and acquired from January 1, 1998 through
November 30, 1998 had been acquired and leased on
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
January 1, 1997 and 2) properties that were developed by the Company
from January 1, 1998 through November 30, 1998 had been placed in
service on May 1, 1997 (assumes a four month development period.)
<TABLE>
<S> <C>
Rental and earned income on Property Transactions by the
Company................................................... $9,635,208
</TABLE>
(b) Represents $35,670 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms
for the leases acquired from the CNL Income Fund as if the leases had
been acquired on January 1, 1997.
(c) Represents the elimination of intercompany fees between the Company,
the CNL Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Origination fees.......................................... $ (1,569,202)
Secured equipment lease fee............................... (44,426)
Advisory fees............................................. (1,747,858)
Reimbursement of administrative costs..................... (293,215)
Acquisition fees.......................................... (15,392,193)
Underwriting fees......................................... (254,945)
Administrative fees....................................... (148,491)
Executive fee............................................. (310,000)
Guarantee fees............................................ (93,750)
Servicing fee............................................. (1,014,117)
Development fees.......................................... (166,876)
Consulting fee............................................ (1,511)
------------
Total................................................... $(21,036,584)
============
</TABLE>
(d) Represents the deferral of $2,875,906 in origination fees collected by
CNL Restaurant Financial Services Group that should be amortized over
the term of the loans originated (20 years) in accordance with the
Statement of Financial Accounting Standards #91 "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring
Loans and Initial Direct Costs of Leases."
(e) Represents interest income of $1,318,870 earned from Other Investments
acquired and mortgage notes issued from January 1, 1998 through
November 30, 1998 as if this had occurred on January 1, 1997 and the
amortization of $207,677 of deferred origination fees collected during
the year ended December 31, 1997 and during the nine months ended
September 30, 1998, which were capitalized and deferred in (d) above as
if they had been collected on January 1, 1997. These deferred fees are
being amortized and recorded as interest income.
(f) Represents the elimination of intercompany expenses paid between the
Company, the CNL Income Fund, the Advisor and the CNL Restaurant
Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs...................... $ (293,215)
Servicing fee.............................................. (1,014,117)
-----------
$(1,307,332)
===========
</TABLE>
F-25
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by the Company
were subject to capitalization during the entire period and 2) costs
relating to properties not developed by the Company were subject to
capitalization up through the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs........................... $(1,415,100)
</TABLE>
(h) Represents savings of $31,627 in professional services and
administrative expenses resulting from reporting on one combined
Company versus 22 separate entities.
(i) Represents the elimination of advisory fees between the Company, the
CNL Income Fund, the Advisor and the CNL Restaurant Financial Services
Group:
<TABLE>
<S> <C>
Advisory fees............................................... $(1,747,858)
Administrative fees......................................... (148,491)
Executive fee............................................... (310,000)
Guarantee fees.............................................. (93,750)
-----------
$(2,300,099)
===========
</TABLE>
(j) Represents additional income taxes of $52,120 resulting from assuming
that acquisitions from January 1, 1998 through November 30, 1998 had
been acquired on January 1, 1997 and assuming that the CNL Income Fund
had operated under a REIT structure.
(k) Represents an increase in depreciation of the building portion of the
properties acquired from January 1, 1998 through November 30, 1998 as
if they had been acquired on January 1, 1997 and the step up in basis
referred to in footnote (2) from acquiring the CNL Income Fund
portfolio using the straight-line method over the estimated useful
lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense.......................................... $1,454,673
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of the
CNL Restaurant Financial Services Group referred to in footnote (2)
<TABLE>
<S> <C>
Amortization of goodwill..................................... $1,565,348
</TABLE>
(m) Represents elimination of interest expense recorded for the
amortization of $350,000 in arrangement fees collected during the year
ended December 31, 1997 which were eliminated in II (d ) below.
<TABLE>
<S> <C>
Interest expense............................................... $(68,670)
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees incurred
between the Company, the CNL Income Fund, the Advisor and the CNL
Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees............................................ $(1,569,202)
Underwriting fees........................................... (254,945)
Consulting fee.............................................. (1,511)
-----------
$(1,825,658)
===========
</TABLE>
(o) Represents the elimination of $6,316,081 in the provision for income
taxes as a result of the Acquisition. The Company expects to continue
to qualify as a REIT and does not expect to incur federal income taxes.
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(p) Common shares issued during the period required to fund acquisitions as
if they had been acquired on January 1, 1997 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 the proposal to increase the number of authorized common
shares of the Company.
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the year ended December 31, 1997, as if the
Acquisition was consummated as of January 1, 1997.
(a) Represents rental and earned income as if 1) properties that had been
previously constructed and acquired from January 1, 1998 through
November 30, 1998 had been acquired and leased on January 1, 1997 and
2) properties that were developed by the Company from January 1, 1997
through November 30, 1998 had been placed in service on May 1, 1997
(assumes a four month development period).
<TABLE>
<S> <C>
Rental and earned income on Property Transactions by the
Company................................................. $24,048,982
</TABLE>
(b) 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 CNL Income Fund as if the leases had
been acquired on January 1, 1997.
(c) Represents the elimination of intercompany fees between the Company,
the CNL Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Origination fees.......................................... $ (594,041)
Secured equipment lease fee............................... (375,219)
Advisory fees............................................. (1,811,001)
Reimbursement of administrative costs..................... (143,697)
Acquisition fees.......................................... (3,887,483)
Underwriting fees......................................... (151,041)
Administrative fees....................................... (269,231)
Executive fee............................................. (250,000)
Guarantee fees............................................ (312,500)
Arrangement fees.......................................... (350,000)
Servicing fee............................................. (598,988)
Development fees.......................................... (369,570)
-----------
Total................................................... $(9,112,771)
</TABLE>
(d) Represents the deferral of $2,662,141 in origination fees collected by
CNL Restaurant Financial Services Group that should be amortized over
the term of the loans originated (20 years) in accordance with the
Statement of Financial Accounting Standards #91 "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring
Loans and Initial Direct Costs of Leases."
(e) Represents the elimination of interest income of $1,931,331 earned
during the year ended December 31, 1997 assuming all monies raised
during 1997 and all cash held on January 1, 1997 was used to effect the
Acquisition on January 1, 1997, represents interest income of
$2,047,619 earned from Other Investments acquired and mortgage notes
issued from January 1, 1998 through November 30, 1998 as if this had
occurred on January 1, 1997 and the recognition of $133,107 of
origination fees collected during the year ended December 31, 1997
which were deferred in (d) and are being amortized and recorded as
interest income.
F-27
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(f) Represents the elimination of intercompany expenses paid between the
Company, the CNL Income Fund, the Advisor and the CNL Restaurant
Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs...................... $ (143,697)
Servicing fee.............................................. (598,988)
----------
$ (742,685)
==========
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by the Company
were subject to capitalization during the entire period and 2) costs
relating to properties not developed by the Company were subject to
capitalization up through the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs........................... $(1,619,238)
</TABLE>
(h) Represents savings of $43,276 in professional services and
administrative expenses resulting from reporting on one combined
Company versus 22 separate entities.
(i) Represents the elimination of advisory fees between the Company, the
CNL Income Fund, the Advisor and the CNL Restaurant Financial Services
Group:
<TABLE>
<S> <C>
Advisory fees.............................................. $(1,811,001)
Administrative fees........................................ (269,231)
Executive fee.............................................. (250,000)
Guarantee fees............................................. (312,500)
-----------
$(2,642,732)
===========
</TABLE>
(j) Represents additional income taxes of $20,016 resulting from assuming
that acquisitions from January 1, 1997 through November 30, 1998 had
been acquired on January 1, 1997 and assuming that the CNL Income Fund
had operated under a REIT structure.
(k) Represents increase in depreciation of the building portion of the
properties acquired from January 1, 1997 through November 30, 1998 as
if they had been acquired on January 1, 1997 and the step up in basis
referred to in footnote (2) from acquiring the CNL Income Fund
portfolio using the straight-line method over the estimated useful
lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense......................................... $3,087,977
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of the
CNL Restaurant Financial Services Group referred to in footnote (2)
<TABLE>
<S> <C>
Amortization of goodwill.................................... $2,087,130
</TABLE>
(m) Represents elimination of yearly amortization of arrangement fees of
$350,000 capitalized as deferred costs and amortized as interest
expense and the capitalization of interest expense during the period
that properties were under development.
<TABLE>
<S> <C>
Amortization of arrangement fees............................ $ (24,144)
Capitalization of interest during development period........ (57,450)
---------
$ (81,594)
=========
</TABLE>
F-28
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(n) Represents the elimination of fees paid to affiliates for fees incurred
between the Company, the CNL Income Fund, the Advisor and the CNL
Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees............................................. $(594,041)
Underwriting fees............................................ (151,041)
---------
(745,082)
=========
</TABLE>
(o) Represents the elimination of $2,462,606 in the provision for income
taxes as a result of the Acquisition. The Company expects to continue
to qualify as a REIT and does not expect to incur federal income taxes.
(p) Common shares issued during the period were assumed to have been issued
and outstanding as of January 1, 1997. For purposes of the pro forma
financial statement, it is assumed that the stockholders approved the
proposal to increase the number of authorized common shares of the
Company.
F-29
<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 eighteen 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
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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"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-4
<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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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 $3,733,901 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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<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 $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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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-32
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
By: /s/ James M. Seneff, Jr.
Its: Chief Executive Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
By: /s/ Robert A. Bourne
Its: President
CNL APF GP Corp.
By: /s/ Robert A. Bourne
Its: President
CNL INCOME FUND 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
B-33
<PAGE>
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 Prospectus/Consent Solicitation Statement.
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.
OVERVIEW
Pursuant to the Prospectus/Consent Solicitation Statement and this
Supplement, you are being asked to approve the Acquisition of your Income Fund
by APF. Your Income Fund is one of 18 limited partnerships (which we refer to
collectively as the Funds) that APF is seeking to acquire. Supplements have
also been prepared for each of the other Funds, copies of which may be obtained
without charge to 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 estate investment trust (or a REIT), formed in 1994,
whose primary business, like that of the Funds, is the ownership of restaurant
properties leased to operators of national and regional restaurant chains on a
triple-net lease basis. As a full-service REIT, 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 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 shares of common stock (or APF Shares) will I receive if my Income
Fund is acquired by APF?
Your Income Fund will receive 4,320,947 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 $10.00 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
approximately 75 million APF Shares through three public offerings at offering
prices
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<PAGE>
per APF share equal to the Exchange Value. At December 31, 1998, of the
approximately $750 million raised by APF, APF has used approximately $550
million to acquire restaurant properties and to make mortgage loans and had
approximately $120 million in uninvested proceeds which it expects to invest
during the first quarter of 1999. The remaining proceeds were used to pay fees
and other offering expenses.
What is the required vote necessary to approve the Acquisition?
Pursuant to the terms of your Income Fund's partnership agreement, APF's
acquisition of your Income Fund may not be consummated without the approval of
greater than 50% of the outstanding 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
Fund?
Yes. Legg Mason Wood Walker, Incorporated 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 Funds, and (c) the method of allocating the APF
Shares among the Funds.
Do you, as the general partners of my Income Fund, recommend that I vote in
favor 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 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 how you want to vote, and sign
and mail it in the enclosed postage-paid return envelope as soon as possible,
so that at the Special Meeting of Limited Partners, your Units may be voted
"For" or "Against" APF's acquisition of your Income Fund. If you sign and send
in your consent form and do not indicate how you want to vote, your consent
form will be counted as a vote "For" the Acquisition. If you do not vote or you
abstain from voting, it will count as a vote "Against" the Acquisition.
In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to certain limitations. If you vote "Against" the Acquisition,
but your Income Fund is nevertheless acquired by APF, you may elect to receive
a payment (which we call the Cash/Notes Option) that is 10% in cash and 90% in
% Callable Notes due , 2006 (or Notes) based on the liquidation value
of your Income Fund, as determined by Valuation Associates, the appraisal firm
that we engaged in connection with the Acquisition. Such liquidation value will
be lower than the aggregate Exchange Value of the APF Shares offered to your
Income Fund in the Acquisition. The Notes will bear interest at a rate equal to
%, which was determined based on 120% of the applicable federal rate as of
, 1999. Please note that you may only receive the Cash/Notes Option if
you have voted "Against" the Acquisition and you elect to receive the
Cash/Notes Option on your consent form. You will receive APF Shares if your
Income Fund elects to be acquired in the Acquisition and you voted "For" the
Acquisition, or you voted "Against" the Acquisition and did not affirmatively
select the Cash/Notes Option. 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 (for example, 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 be based on the difference between the
value of the APF Shares or the tax basis of your Units. If you elect the
Cash/Notes Option, your tax will be based upon your allocable share of the gain
which will be
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<PAGE>
recognized by your Income Fund; your Income Fund's gain will generally equal
the excess, if any, of the value of the APF Shares and cash received by your
Income Fund over the tax basis of your Fund's net assets. Some of the gain may
be subject to the 25% rate of tax applicable to certain 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 $124. To review
the tax consequences to the Limited Partners of the Funds in greater detail,
see pages through of the Prospectus/Consent Solicitation Statement 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 Funds acquired by APF.
Although the majority of APF's assets and the assets of the other Funds
acquired by APF are substantially similar to those of your Income Fund, the
restaurant properties owned by APF and the other 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 Funds' restaurant properties,
see "APF's Business and The Restaurant Properties--Business Objectives and
Strategies" and "--The Restaurant Properties--General" and "Business of the
Funds--Description of Restaurant Properties" in the Prospectus/Consent
Solicitation Statement.
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 Prospectus/Consent Solicitation Statement.
Investment Risks
. Uncertainty Regarding the Exchange Value and Trading Price of APF Shares
Following Listing. Your Income Fund will be receiving 4,320,947 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 is 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 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.
. Decrease in Distributions. In each of the years ended December 31, 1995,
1996 and 1997, your Income Fund made $601, $788 and $820, respectively, in
distributions per $10,000 investment to you. Based on APF's pro forma
financial information, and assuming APF acquires only your Income Fund and
that each Limited Partner of your Income receives only APF Shares, you would
have received, for the year ended December 31, 1997, $558 in distributions
per $10,000 of original investment, which is 32.0% less than the $820
distributed to you as Limited Partner during the same period. 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
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<PAGE>
stockholders for the year ended December 31, 1997 and for the nine months
ended September 30, 1998 is not necessarily indicative of the distributions
you will receive as a stockholder of APF after the Acquisition. See "Cash
Distributions to Limited Partners of Your Fund."
. Conflicts of Interest in the Acquisition; Substantial Benefits to Related
Parties. There are certain conflicts of interest inherent in the structure
of the Acquisition of your Income Fund. 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
that may or may not be aligned with your interests 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.
. Fundamental Change in Nature of 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 September
30, 1998), 401 restaurant properties. The risks inherent in investing in an
operating company such as APF include APF's ability to invest in new
restaurant properties that are not as profitable as APF anticipated, the
incurrence of substantial indebtedness to make future acquisitions of
restaurant properties which it may be unable to repay and making mortgage
loans to prospective operators of national and regional restaurant chains
which may not have the ability to repay.
As an APF stockholder, you will receive the benefits of your investment
through (i) dividend distributions on, and (ii) increases in the value of,
your APF Shares. In addition, 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 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 Cash/Notes Option). An investment in APF may not
outperform your investment in the Income Fund.
. Original Investment Timeframe. 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. We have no current plans to
dispose of your Income Fund's restaurant properties if the Limited Partners
do not approve the Acquisition.
Real Estate/Business Risks
. Risk of Default on Mortgage Loans and Market Risks associated with
Securitizations. 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
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<PAGE>
which could interfere with APF's administration of the mortgage loans and
any collections upon a borrower's default.
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,) and 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 may 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.
. Risks Associated with Leverage. 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. At the time of the consummation of the Acquisition, as a
general policy, APF's Board of Directors will 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 funds from operations and its ability to make
distributions to its stockholders.
. Acquisition and Development Risks. APF plans to pursue its growth strategy
through the acquisition and development of additional restaurant properties.
To the extent that APF does pursue this growth strategy, we do not know that
it 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.
Tax Risks
. Failure of APF to Qualify as a REIT for Tax Purposes. 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
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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.
. Risks Associated with Distribution Requirements. 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 Tax Law. 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 Prospectus/Consent Solicitation Statement.
CONSIDERATION PAID TO INCOME FUND
The following table sets forth, for your Income Fund (i) the aggregate
amount of original Limited Partner investments in each Fund less any
distributions of net sales proceeds paid to the Limited Partners of that Fund,
(ii) the original amount of Limited Partner investments in each Fund less any
distributions of net sales proceeds per average $10,000 investment, (iii) the
number of APF Shares to be paid to your Income Fund, (iv) the estimated value
of the APF Shares paid to your Income Fund, (v) the estimated Acquisition
expenses allocated to your Income Fund, (vi) the estimated value, based on the
Exchange Value, of APF Shares paid to your Income Fund after deducting
Acquisition expenses, and (vii) the estimated value, based on the Exchange
Value, of APF Shares you will receive for each $10,000 of your original
investment:
<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) Fund(2) Fund(3) Expenses Expenses(3) Investment(3)
- ------------- ---------------- ---------- ------------ ----------- ----------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
$45,000,000 $10,000 4,320,947 $43,209,470 $515,521 $42,693,949 $9,488
</TABLE>
- --------
(1) Income Fund has had no distributions of net sales proceeds.
(2) The APF Shares payable to each Fund as set forth in this chart will not
change if APF acquires fewer than all of the Funds in the Acquisition. This
number assumes that none of the Limited Partners of the Fund has elected
the Cash/Notes Option.
(3) 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.
Upon completion of the Acquisition of your Income Fund, the operations and
existence of your Income Fund will cease. For more detailed information, see
"The Acquisition" in the Prospectus/Consent Solicitation Statement. If your
Income Fund does not approve the Acquisition, we do not contemplate that your
Income Fund would be liquidated in the near future. The Acquisition, however,
does not result in an all-cash payment to you in the liquidation of your
investment. For example, if you are eligible for and choose the Cash/Notes
S-6
<PAGE>
Option, you become a Noteholder of APF. You will have exchanged your Units for
unsecured debt obligations of APF which may not be retired in full until
, 2006, a date approximately seven years after the date the Acquisition
of your Income Fund occurs. On the other hand, if you exchange your Units for
APF Shares, you will receive an equity interest in APF whose marketability will
depend upon the market that may develop with respect to the APF Shares, which
will be listed on the NYSE.
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 ...................................................... $ 22,833
Appraisals and Valuation ........................................ 9 ,133
Fairness Opinions ............................................... 41,098
Registration, Listing and Filing Fees............................ --
Soliciting Dealer Fee ........................................... 92,632
Financial Consulting Fees........................................ --
Environmental Fees .............................................. 57,081
Accounting and Other Fees ....................................... 67,563
--------
Subtotal .................................................... $290,340
Closing Transaction Costs
Transfer Fees and Taxes ......................................... 79,993
Legal Fees ...................................................... 68,710
Recording Costs.................................................. --
Other ........................................................... 76,478
--------
Subtotal .................................................... 225,181
--------
Total ........................................................... $515,521
========
</TABLE>
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 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
S-7
<PAGE>
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 as, in our opinion, market
conditions permit), as contemplated by the terms of the partnership agreement.
Special Meeting to Discuss the Acquisition
We have scheduled a special meeting of the Limited Partners of your Income
Fund to discuss the solicitation materials, which include the
Prospectus/Consent Solicitation Statement, 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 (as defined below) and to explain in person our reasons
for recommending that you vote "For" the Acquisition.
VOTING PROCEDURE
The Prospectus/Consent Solicitation Statement, 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.
S-8
<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 Prospectus/Consent Solicitation
Statement. A copy of the Agreement and Plan of Merger dated March 11, 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 December 31, 1999. 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.
The consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and certain 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
(including the Acquisition), 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. The partnership agreement also provide 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
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-9
<PAGE>
During the years ended December 31, 1995, 1996 and 1997 and the nine months
ended September 30, 1998, the aggregate amounts accrued or paid by your Income
Fund 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 years presented, are shown below under "Pro Forma":
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended
-------------------------- September 30,
1995 1996 1997 1998
---------- ------- ------- -------------
<S> <C> <C> <C> <C>
Historical:
General Partner Distributions........ -- -- -- --
Broker/Dealer Commissions(1)......... -- -- -- --
Property Management Fees............. $ 24,128 $39,206 $40,087 $29,073
Due Diligence and Marketing Support
Fees................................ -- -- -- --
Acquisition Fees..................... 1,365,421 -- -- --
Asset Management Fees................ -- -- -- --
Real Estate Disposition Fees(2)...... -- -- -- --
---------- ------- ------- -------
Total historical.................. $1,389,549 $39,206 $40,087 $29,073
Pro Forma:
Cash Distributions on APF Shares..... -- -- -- --
Salary Compensation.................. -- -- -- --
---------- ------- ------- -------
Total pro forma................... -- -- -- --
</TABLE>
- --------
(1) A majority of the fees paid as broker-dealer commissions and due diligence
and marketing support fees were reallowed to other broker-dealers
participating in the offerings of the Income Fund's Units.
(2) 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 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 the Acquisition--Prices for 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>
Nine Months Ended
September 30, 1998
--------------------
1993 1994 1995 1996 1997 Historical Pro Forma
---- ---- ---- ---- ---- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income....... -- $125 $600 $788 $805 $500 $418
Distributions from Return of
Capital........................ -- -- 1 -- 15 100 20
--- ---- ---- ---- ---- ---- ----
Total........................... -- $125 $601 $788 $820 $600 $438
=== ==== ==== ==== ==== ==== ====
</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.
S-10
<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 nine months ended September 30,
1998 is not necessarily indicative of the distributions you will receive as a
stockholder of APF after the Acquisition.
Assuming APF maintains its current level of debt for acquiring future
restaurant properties, the expected distribution rate per APF Share will be
8.8% (assuming a $10.00 per APF Share price based on the Exchange Value, the
annualized dividend per year is expected to be $0.88 per APF Share). Based on
the number of APF Shares that you would receive in the Acquisition per your
average $10,000 original investment and this distribution rate, you would
receive an annual distribution of approximately $835.
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 certain 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 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 Cash/Note Option.
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, our relief 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 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 Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the
S-11
<PAGE>
Cash/Notes Option, constitutes 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 and is the best way to maximize the return on your investment in light
of the values of such consideration.
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 of Valuation Associates and
Legg Mason received fees for its services and notwithstanding that Legg Mason
has previously provided investment banking services to the Funds and to
Commercial Net Lease Realty, Inc., a former affiliate of ours. See "Reports,
Opinions and Appraisals" in the Prospectus/Consent Solicitation Statement.
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 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 cash and promissory 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 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 Cash/Notes Option.
3. Valuation of Alternatives. Based on the appraisal of the Income Fund's
restaurant properties, we estimated the value of your Income Fund as an ongoing
concern and if liquidated. 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-12
<PAGE>
vary, however, from Fund to 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
September 30, 1998 per $10,000 original investment. Since the calculation of
the book value was done on a GAAP basis, it is not indicative of the true fair
market value of your Income Fund. This figure was compared to the (i) value of
the Fund if it commenced an orderly liquidation of its investment portfolio on
December 31, 1998, (ii) value of the Fund if it continued to operate in
accordance with its existing partnership agreement and business plans, and
(iii) estimated value of the APF Shares, based on the Exchange Value, paid to
each Fund per average $10,000 invested.
Summary of Valuations
(per $10,000 original investment)
<TABLE>
<CAPTION>
Estimated Value of
APF Shares per
Average $10,000
GAAP Book Liquidation Going Concern Original Limited
Value Value(1) Value(1) Partners Investment(2)
--------- ----------- ------------- ----------------------
<S> <C> <C> <C> <C>
CNL Income Fund XVI,
Ltd.................... $8,752 $8,616 $9,449 $9,488
</TABLE>
- --------
(1) 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.
(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.
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have an independent
obligation 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 Funds). James M. Seneff, Jr. and
Robert A. Bourne act as the individual general partners of all of the 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.
Benefits to General Partners
As a result of the Acquisition (assuming only your Income Fund is acquired),
we are expected to receive certain benefits, including that we will be relieved
from certain ongoing liabilities with respect to the Funds that are acquired by
APF.
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 Funds if the Acquisition does not occur.
S-13
<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 the Cash/Notes Option, in which case you will
receive cash and 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 Prospectus/Consent Solicitation Statement.
S-14
<PAGE>
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, the
assets (and any liabilities) of your Income Fund (if your Income Fund is
acquired by APF) will be transferred to APF in return for APF Shares and/or
cash and 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.................................. $124
</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 Code, no gain or loss is recognized if (i)
property is transferred to a corporation by one more individuals or entities in
exchange for the stock of that corporation, and (ii) 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 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 the
Cash/Notes Option, 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 (1) 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 (2) 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 Cash/Notes Option, your Income Fund will receive APF
Shares, cash and Notes in exchange for your Income Fund's assets. Because the
principal portion of the Notes will not be due until , 2006, 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 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.
S-15
<PAGE>
The gross profit that your Income Fund realizes from the Acquisition will
generally equal the excess, if any, of the selling price (without reduction for
any selling expenses) 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 are 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, cash 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" (i.e., real property and
depreciable assets used in a trade or business and held for more than one
year). Your share of gains or losses from the sale of section 1231 assets of
your Income Fund would be combined with any other section 1231 gains and losses
that you recognize in that year. If the result is a net loss, such loss is
characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property will be taxed as ordinary income to the extent of all
prior depreciation deductions taken by your Income Fund prior to sale. In
general, you may only use up to $3,000 of capital losses in excess of capital
gains to offset ordinary income in any taxable year. Any excess loss is carried
forward to future years subject to the same limitations.
Allocation of Gain or Loss Among Limited Partners. The amount of the gain or
loss that your Income Fund recognizes will be allocated to you and the other
Limited Partners in accordance with the terms of your Income Fund's partnership
agreement. Each Limited Partner will be allocated and must report his, her or
its allocable share of such gain, if any, pursuant to these terms, regardless
of the Limited Partner's decision to receive 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 Cash/Notes Option may
recognize gain in the year of the Acquisition despite the fact that they will
receive only a small amount of cash and no publicly-traded instruments 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 the Cash/Notes Option. See "--Tax Consequences of
Liquidation and Termination of Your Fund" below.
Tax Consequences of the Liquidation and Termination of Your Fund. If your
Fund is acquired by APF, your Fund will be deemed to have liquidated and
distributed APF Shares and/or cash and 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 cash and 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 pro rata 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 (determined on the closing date of the Acquisition) and your
adjusted tax basis in your Units (adjusted by your distributive share of
income, gain, loss, deduction and credit for the final taxable year of your
Income Fund (including any such items recognized by your Income Fund as a
result of the Acquisition) as well as any distributions you receive in such
S-16
<PAGE>
final taxable year (other than the distribution of the APF Shares)). 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 cash and Notes in the Acquisition, you will recognize gain to
the extent that the amount of cash you receive in the Acquisition exceeds your
adjusted basis in your Units (adjusted by your distributive share of income,
gain, loss, deduction and credit for the final taxable year of your Income Fund
(including any such items recognized by your Income Fund as a result of the
Acquisition) as well as any distributions you receive in such final taxable
year (other than the distributions of the cash and Notes)). Your basis in the
Notes distributed to you will equal your adjusted basis in your Units, reduced
(but not below zero) by the amount of any cash distributed to you 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 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.
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 cash and 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 Prospectus/Consent Solicitation
Statement.
S-17
<PAGE>
SUMMARY SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
APF, FUNDS, ADVISOR AND CNL RESTAURANT FINANCIAL SERVICES GROUP
Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
Historical Pro Forma
---------------------------------------------- -------------------------------
CNL
CNL Restaurant
Income Financial
Fund XVI, Services Combined Pro Forma Combined Pro
APF Ltd. Advisor Group Historical Adjustments Forma
----------- ---------- ---------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data Revenues:
Rental and earned
income................ $22,947,199 $2,975,910 $ -- $ -- $25,923,109 $ 9,635,208 (a)
25,927 (b) $35,584,244
Management fees........ -- -- 21,405,127 5,122,366 26,527,493 (21,044,196)(c)
(2,875,906)(d) 2,607,391
Interest and other
income................ 6,117,911 45,220 751 18,463,647 24,627,529 1,526,547 (e) 26,154,076
----------- ---------- ---------- ---------- ----------- ----------- -----------
Total revenue.......... 29,065,110 3,021,130 21,405,878 23,586,013 77,078,131 (12,732,420) 64,345,711
Expenses:
General and
administrative........ 1,539,004 182,276 6,701,115 6,704,482 15,126,877 (1,311,346)(f)
(1,415,100)(g)
(29,910)(h) 12,370,521
Advisory fees.......... 1,248,393 29,073 -- 1,026,231 2,303,697 (2,303,697)(i) --
State taxes............ 397,569 19,398 15,226 220,180 652,373 61,129 (j) 713,502
Depreciation and
amortization.......... 2,693,020 413,391 131,539 1,000,493 4,238,443 3,067,389 (k)(l) 7,305,832
Interest expense....... -- -- 105,668 14,234,533 14,340,201 (68,670)(m) 14,271,531
Paid to affiliates..... -- -- 256,456 1,569,202 1,825,658 (1,825,658)(n) --
----------- ---------- ---------- ---------- ----------- ----------- -----------
Total expenses 5,877,986 644,138 7,210,004 24,755,121 38,487,249 (3,825,863) 34,661,386
----------- ---------- ---------- ---------- ----------- ----------- -----------
Net earnings (loss)
before equity in
earnings of joint
ventures/ minority
interests, gain (loss)
on sale of properties,
gain on securitization
and provision (credit)
for federal income
taxes.................. 23,187,124 2,376,992 14,195,874 (1,169,108) 38,590,882 (8,906,557) 29,684,325
----------- ---------- ---------- ---------- ----------- ----------- -----------
Equity in earnings of
joint ventures/minority
interests.............. (23,271) 98,414 -- 12,452 87,595 -- 87,595
Provision for loss on
land and building...... -- (204,399) -- -- (204,399) -- (204,399)
Gain on securitization.. -- -- -- 3,018,268 3,018,268 -- 3,018,268
Provision (credit) for
federal income taxes... -- -- 5,607,415 708,666 6,316,081 (6,316,081)(o) --
----------- ---------- ---------- ---------- ----------- ----------- -----------
Net earnings............ $23,163,853 $2,271,007 $8,588,459 $1,152,946 $35,176,265 $(2,590,476) $32,585,789
=========== ========== ========== ========== =========== =========== ===========
Other Data:
Weighted average number
of shares of common
stock outstanding
during period.......... 47,633,909 N/A N/A N/A N/A -- 74,010,787 (p)
Total net-leased
properties at end of
period................. 357 44 N/A N/A N/A -- 401
Funds from operations... $26,408,569 $2,720,533 N/A N/A N/A -- $37,464,183
Total cash distributions
declared............... $26,460,446 $2,700,000 N/A N/A N/A -- $37,464,183
Cash distributions
declared per $10,000
investment............. $ 572 $ 600 N/A N/A N/A -- $ 506
</TABLE>
<TABLE>
<CAPTION>
Historical Combined Pro Forma
September 30, 1998 Historical September 30, 1998
---------------------------------------------- ------------ -------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data
Real estate assets,
net.................... $407,663,180 $35,792,403 $ -- $ -- $443,445,583 $ 7,277,186
26,052,741 (r) $476,775,510
Mortgages/notes
receivable............. 33,523,506 -- $ -- 173,776,981 207,300,487 849,195 (r) 208,149,682
Accounts receivable,
net.................... 575,104 -- 7,544,985 7,342,103 15,462,192 (7,854,557)(s) 7,607,635
Investment in/due from
joint ventures......... 631,374 1,510,306 -- -- 2,141,680 291,069 (q) 2,432,749
Total assets............ 566,383,967 40,366,272 8,429,809 197,528,789 812,708,837 26,838,063 839,546,900
Total
liabilities/minority
interest............... 14,478,585 980,339 5,049,152 185,998,045 206,506,121 (10,845,421)(s)(t) 195,660,700
Total equity............ 551,905,382 39,385,933 3,380,657 11,530,744 606,202,716 37,683,484 (q)(t) 643,886,200
</TABLE>
- --------
S-18
<PAGE>
(a) Represents rental and earned income as if 1) properties that had been
previously constructed and acquired from January 1, 1998 through November
30, 1998 had been acquired and leased on January 1, 1997 and 2) properties
that were developed by APF from January 1, 1998 through November 30, 1998
had been placed in service on May 1, 1997 (assumes a four month development
period.)
<TABLE>
<S> <C>
Rental and earned income on Property Transactions by APF.... $9,635,208
</TABLE>
(b) Represents $25,927 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, 1997.
(c) Represents the elimination of intercompany fees between APF, the Income
Fund, the Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees.......................................... $ (1,569,202)
Secured equipment lease fee............................... (44,426)
Advisory fees............................................. (1,751,456)
Reimbursement of administrative costs..................... (297,229)
Acquisition fees.......................................... (15,392,193)
Underwriting fees......................................... (254,945)
Administrative fees....................................... (148,491)
Executive fee............................................. (310,000)
Guarantee fees............................................ (93,750)
Servicing fee............................................. (1,014,117)
Development fees.......................................... (166,876)
Consulting fee............................................ (1,511)
------------
Total.................................................... $(21,044,196)
============
</TABLE>
(d) Represents the deferral of $2,875,906 in origination fees collected by CNL
Restaurant Financial Services Group that should be amortized over the term
of the loans originated (20 years) in accordance with the Statement of
Financial Accounting Standards #91 "Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases."
(e) Represents interest income of $1,318,870 earned from Other Investments
acquired and mortgage notes issued from January 1, 1998 through November
30, 1998 as if this had occurred on January 1, 1997 and the amortization of
$207,677 of deferred origination fees collected during the year ended
December 31, 1997 and during the nine months ended September 30, 1998,
which were capitalized and deferred in (d) above as if they had been
collected on January 1, 1997. These deferred fees are being amortized and
recorded as interest income.
(f) Represents the elimination of intercompany expenses paid between APF, the
Income Fund, the Advisor and the CNL Restaurant Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs...................... $ (297,229)
Servicing fee.............................................. (1,014,117)
-----------
$(1,311,346)
===========
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by APF were subject
to capitalization during the entire period and 2) costs relating to
properties not developed by APF were subject to capitalization up through
the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs............................ $(1,415,100)
</TABLE>
(h) Represents savings of $29,910 in professional services and administrative
expenses resulting from reporting on one combined company versus 22
separate entities.
(i) Represents the elimination of fees between APF, the Income Fund, the
Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Advisory fees............................................... $(1,751,456)
Administrative fees......................................... (148,491)
Executive fee............................................... (310,000)
Guarantee fees.............................................. (93,750)
-----------
$(2,303,697)
===========
</TABLE>
(j) Represents additional state taxes of $61,129 resulting from assuming that
acquisitions from January 1, 1998 through November 30, 1998 had been
acquired on January 1, 1997 and assuming that the Income Fund had operated
under a REIT structure.
S-19
<PAGE>
(k) Represents an increase in depreciation of the building portion of the
properties acquired from January 1, 1998 through November 30, 1998 as if
they had been acquired on January 1, 1997 and the step up in basis
referred to in footnote (q) from acquiring the Income Fund portfolio using
the straight-line method over the estimated useful lives of generally 30
years.
<TABLE>
<S> <C>
Depreciation expense.......................................... $1,505,509
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of the CNL
Restaurant Financial Services Group referred to in footnote (q).
<TABLE>
<S> <C>
Amortization of goodwill...................................... $1,561,880
</TABLE>
(m) Represents elimination of interest expense recorded for the amortization
of $350,000 in arrangement fees collected during the year ended December
31, 1997 which were eliminated in footnote (4), II (d ) in the Notes to
the Pro Forma Financial Statements attached to this Supplement.
<TABLE>
<S> <C>
Interest expense............................................... $(68,670)
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees incurred
between APF, the Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Origination fees............................................ $(1,569,202)
Underwriting fees........................................... (254,945)
Consulting fee.............................................. (1,511)
-----------
$(1,825,658)
===========
</TABLE>
(o) Represents the elimination of $6,316,081 in the provision for income taxes
as a result of the Acquisition. APF expects to continue to qualify as a
REIT and does not expect to incur federal income taxes.
(p) APF Shares issued during the period required to fund acquisitions as if
they had been acquired on January 1, 1997 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 the
proposal to amend and restate APF's articles of incorporation to increase
the number of authorized APF Shares.
(q) Represents the payment of $515,523 in cash and the issuance of 16,569,395
APF Shares in consideration for the purchase of the Income Fund, Advisor
and CNL Restaurant Financial Services Group at September 30, 1998 using
the Exchange Value of $10 per APF Share plus estimated transaction costs.
The acquisitions of the Income Fund and the CNL Restaurant Financial
Services Group have been accounted for under the purchase accounting
method and goodwill was recognized to the extent that the estimated value
of the consideration paid exceeded the fair value of the net tangible
assets acquired. As for the acquisition of the Advisor from a related
party, the consideration paid in excess of the fair value of the net
tangible assets received has been accounted for as costs incurred in
acquiring the Advisor from a related party because the Advisor has not
been deemed to qualify as a "business" for purposes of applying APB
Opinion No. 16 "Business Combinations." Upon consummation of the
Acquisition, this expense will be recorded as an operating expense on
APF's statement of earnings. APF will not deduct this expense for purposes
of calculating funds from operations due to the nonrecurring and non-cash
nature of the expense. As of September 30, 1998, $249,403 of transaction
costs had been incurred by APF.
<TABLE>
<S> <C>
Income Fund............................................... $ 43,209,473
Advisor................................................... 76,000,000
CNL Restaurant Financial Services Group................... 47,000,000
------------
Total Purchase Price (cash and shares)................... 166,209,473
Less cash paid to Income Fund............................. (515,523)
------------
Share consideration...................................... 165,693,950
Transaction costs of APF.................................. 8,933,000
------------
Total costs incurred..................................... $174,626,950
============
</TABLE>
In addition, APF i) used $8,933,000 in cash to pay the transaction costs
related to the Acquisition, ii) made an upward adjustment to the Income Fund
carrying value of land and building on operating leases by $6,218,790, net
investment in direct financing leases by $1,058,396, investment in joint
venture by $291,069, made downward adjustments to the carrying value of
accrued rental income of $1,398,364, and made downward adjustments to other
assets of $3,678,872 to adjust historical values to fair value, iii)
recorded goodwill of $41,650,124 for the acquisition of the CNL Restaurant
Financial Services Group, iv) reduced retained earnings by $76,703,996 for
the excess consideration paid over the net assets of the Advisor and removed
the historical common stock balance of $12,000, additional paid in capital
balance of $9,602,287, retained earnings balance of $5,297,114 and partners
capital balance of $39,385,933 of the Income Fund, Advisor and CNL
Restaurant Financial Services Group.
(r) Represents the use of $26,901,936 in cash and cash equivalents at
September 30, 1998 to acquire $26,052,741 in properties and issue $849,195
in mortgage notes which occurred from October 1, 1998 through November 30,
1998.
S-20
<PAGE>
(s) Represents the elimination by the Income Fund of $5,178 in related party
payables recorded as receivables by the Advisor, the elimination by the CNL
Restaurant Financial Services Group of $6,641,379 in related party payables
recorded as receivables by CNL Restaurant Financial Services Group and the
elimination by APF of $1,208,000 in related party payables recorded as
receivables by the Advisor.
(t) Represents the elimination of income taxes payable of $2,990,864 from
liabilities assumed in the acquisition of the CNL Restaurant Businesses
since the acquisition agreements require that the Advisor and CNL
Restaurant Financial Services Group have no accumulated or current earnings
and profits for federal income tax purposes at the time of the acquisition.
S-21
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF CNL INCOME FUND XVI, 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
XVI, Ltd." in this Supplement.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
----------------------- -----------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues(1)............. $ 3,119,544 $ 3,318,695 $ 4,455,994 $ 4,438,218 $ 3,023,641
Net income(2)........... 2,271,007 2,753,241 3,660,327 3,748,198 2,430,841
Cash distributions
declared............... 2,790,000 2,700,000 3,600,000 3,543,751 2,437,832
Net income per Unit(2).. 0.50 0.61 0.81 0.82 0.60
Cash distributions
declared per Unit...... 0.62 0.60 0.80 0.79 0.61
Weighted average number
of Limited Partner
Units outstanding...... 4,500,000 4,500,000 4,500,000 4,500,000 4,010,281
<CAPTION>
September 30, December 31,
----------------------- -----------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total assets............ $40,366,272 $41,013,429 $40,938,320 $40,955,642 $41,240,500
Total partners'
capital................ 39,385,933 39,897,840 39,904,926 39,844,599 39,640,152
</TABLE>
- --------
(1) Revenues include equity in earnings of joint venture.
(2) Net income for the nine months ended September 30, 1998 includes $204,399
from provision for loss on land and building. Net income for the nine
months ended September 30, 1997 includes $41,148 from gain on sale of land
and building. Net income for the years ended December 31, 1997 and 1996,
includes $41,148 and $124,305, respectively, from gains on sales of land
and building.
S-22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CNL INCOME FUND XVI, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on
September 2, 1993, to acquire for cash, either directly or through joint
venture arrangements, both newly constructed and existing restaurant
properties, as well as land upon which restaurants were to be constructed,
which are leased primarily to operators of national and regional fast-food and
family-style restaurant chains. The leases are triple-net leases, with the
lessee responsible for all repairs and maintenance, property taxes, insurance
and utilities. As of September 30, 1998, the Income Fund owned 44 restaurant
properties, which included one restaurant property owned by a joint venture in
which the Income Fund is a co-venturer and two restaurant properties owned with
affiliates as tenants-in-common.
Liquidity and Capital Resources
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
The Income Fund's primary source of capital for the nine months ended
September 30, 1998 and 1997, 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
$2,759,611 and $2,923,755 for the nine months ended September 30, 1998 and
1997, respectively. The decrease in cash from operations for the nine months
ended September 30, 1998, as compared to the nine months ended September 30,
1997, 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 nine
months ended September 30, 1998.
In January 1998, the Income Fund reinvested approximately $607,900 of the
net sales proceeds it received from the sale, in March 1997, of the restaurant
property in Oviedo, Florida, in a restaurant property located 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 September
30, 1998, the Income Fund owned a 40.42% interest in this restaurant property.
In addition, during the nine months ended September 30, 1998, the Income
Fund received approximately $162,000 from the developer of the restaurant
property in Farmington, New Mexico. This represents a reimbursement from the
developer upon final reconciliation of total construction costs to the total
construction costs funded by the Income Fund in accordance with the development
agreement. In August 1998, the Income Fund reinvested these proceeds in
Columbus Joint Venture as described below.
In addition, 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 restaurant property. As of September 30,
1998, the Income Fund had contributed $134,507 to purchase land and pay for
construction costs relating to the joint venture. When construction is
completed, the Income Fund will have an approximate 32% interest in the profits
and losses of the joint venture.
Currently, cash reserves and rental income from the Income Fund's restaurant
properties are invested in money market accounts or other short-term, highly
liquid investments pending the use of such funds to pay Income Fund expenses or
to make distributions to partners. At September 30, 1998, the Income Fund had
$1,641,160 invested in such short-term investments, as compared to $1,673,869
at December 31, 1997. The funds remaining at September 30, 1998, after the
payment of distributions and other liabilities, will be used to meet the Income
Fund's working capital and other needs.
S-23
<PAGE>
Total liabilities of the Income Fund, including distributions payable,
decreased to $980,339 at September 30, 1998, from $1,033,394 at December 31,
1997. The decrease was primarily a result of the payment during 1998 of
construction costs accrued for certain restaurant properties 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 operations, and for the nine months ended September 30,
1998, accumulated excess operating reserves, the Income Fund declared
distributions to the Limited Partners of $2,790,000 and $2,700,000 for the nine
months ended September 30, 1998 and 1997, respectively ($900,000 for each of
the quarters ended September 30, 1998 and 1997). This represents distributions
of $0.62 and $0.60 per unit for the nine months ended September 30, 1998 and
1997, respectively ($0.20 per unit for each of the quarters ended September 30,
1998 and 1997). No distributions were made to us for the quarters and nine
months ended September 30, 1998 and 1997. No amounts distributed to the Limited
Partners for the nine months ended September 30, 1998 and 1997, 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.
The Years Ended December 31, 1997, 1996 and 1995
On September 2, 1994, the Income Fund commenced an offering to the public of
up to 4,500,000 Units of limited partnership interest. The Income Fund's
offering of Units terminated on June 12, 1995, at which time the maximum
proceeds of $45,000,000 (4,500,000 Units) had been received from investors. The
Income Fund, therefore, will derive no additional capital resources from the
offering.
Net proceeds to the Income Fund from its offering of Units, after deduction
of organizational and offering expenses, totaled $39,600,000. As of December
31, 1994, approximately $16,300,000 had been used to invest in 22 restaurant
properties (seven of which were undeveloped land on which restaurants were
being constructed as of December 31, 1994) and to pay acquisition fees and
certain acquisition expenses. During the year ended December 31, 1995, the
Income Fund completed construction of the seven restaurant properties acquired
in 1994, and acquired 19 additional restaurant properties at a cost of
approximately $20,900,000 including acquisition fees and miscellaneous
acquisition expenses. As a result of the above transactions, as of December 31,
1995, the Income Fund had acquired 41 restaurant properties and had paid
acquisition fees totaling $2,475,000 to one of our affiliates. During the year
ended December 31, 1996, the Income Fund used its remaining net offering
proceeds to acquire two additional restaurant properties (one of which was
undeveloped land on which a restaurant was constructed), and to establish a
working capital reserve of approximately $60,000 for Income Fund purposes.
As a result of the Income Fund's tenant selling its restaurant business
located on the Income Fund's restaurant property in Appleton, Wisconsin, in
April 1996, the Income Fund sold its restaurant property for $775,000,
resulting in a gain for financial reporting purposes of $124,305. This
restaurant property was originally acquired by the Income Fund in February 1995
and had a cost of approximately $595,100, excluding acquisition fees and
miscellaneous acquisition expenses; therefore, the Income Fund sold the
restaurant property for approximately $179,900 in excess of its original
purchase price. In October 1996, the Income Fund reinvested the net sales
proceeds in a Boston Market restaurant property in Fayetteville, North
Carolina, as tenants-in-common with one of our affiliates. In connection
therewith, the Income Fund and its affiliate entered
S-24
<PAGE>
into an agreement whereby each co-venturer will share in the profits and losses
of the restaurant property in proportion to each co-venturer's interest. The
Income Fund owns an 80.27% interest in the restaurant property. The sale of the
restaurant property in Appleton, Wisconsin, was structured to qualify as a
like-kind exchange transaction in accordance with Section 1031 of the Internal
Revenue Code. As a result, no gain was recognized for federal income tax
purposes. Therefore, the Income Fund was not required to distribute any of the
net sales proceeds from the sale of this restaurant property to Limited
Partners for the purpose of paying federal and state income taxes.
In March 1997, the Income Fund sold its restaurant property in Oviedo,
Florida, for $620,000 and received net sales proceeds of $610,384, resulting in
a gain of $41,148 for financial reporting purposes. This restaurant property
was originally acquired by the Income Fund in November 1994 and had a cost of
approximately $509,700, excluding acquisition fees and miscellaneous
acquisition expenses; therefore, the Income Fund sold the restaurant property
for approximately $100,700 in excess of its original purchase price. In January
1998, the Fund reinvested the net sales proceeds in an IHOP restaurant property
in Memphis, Tennessee, as tenants-in-common with affiliates of the general
partners. In connection therewith, the Fund and its affiliates entered into an
agreement whereby each co-venturer will share in the profits and losses of the
restaurant property in proportion to each co-venturers interest. The Fund owns
a 40.42% interest in the restaurant property.
Currently, the Income Fund's primary source of capital is cash from
operations (which includes cash received from tenants, distributions from the
joint venture and interest received, less cash paid for expenses). Cash from
operations was $3,780,424, $3,753,726 and $2,481,395 for the years ended
December 31, 1997, 1996 and 1995, respectively. The increase in cash from
operations during 1997 and 1996, 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.
None of the restaurant properties owned by the Income Fund is or may be
encumbered. Subject to certain restrictions on borrowing, however, the Income
Fund may borrow funds but will not encumber any of the restaurant properties in
connection with any such borrowing. The Income Fund will not borrow for the
purpose of returning capital to the Limited Partners. The Income Fund will not
borrow under arrangements that would make the Limited Partners liable to
creditors of the Income Fund. We further have represented that we will use our
reasonable efforts to structure any borrowing so that it will not constitute
"acquisition indebtedness" for federal income tax purposes and also will limit
the Income Fund's outstanding indebtedness to three percent of the aggregate
adjusted tax basis of its restaurant properties. In addition, the Income Fund
will not borrow unless it first obtains an opinion of counsel that such
borrowing will not constitute acquisition indebtedness. Certain of our
affiliates from time to time incur certain operating expenses on behalf of the
Income Fund for which the Income Fund reimburses the affiliates without
interest.
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 pending the Income Fund's use of such funds to pay Income
Fund expenses or to make distributions to partners. At December 31, 1997, the
Income Fund had $1,673,869 invested in such short-term investments as compared
to $1,546,203 at December 31, 1996. The funds remaining at December 31, 1997,
after payment of distributions and other liabilities will be used to meet the
Fund's working capital and other needs.
During 1995, certain of our affiliates incurred on behalf of the Income Fund
$258,466 for certain organizational and offering expenses. In addition, during
1996 and 1995, the affiliates incurred on behalf of the Income Fund $9,356 and
$97,589, respectively, for certain acquisition expenses during the years ended
December 31, 1997, 1996 and 1995, the affiliates incurred and $84,319, $105,144
and $131,272, respectively, for certain operating expenses. As of December 31,
1997 and 1996, the Income Fund owed $3,351 and $2,292, respectively, to related
parties for such amounts, accounting and administrative services and management
fees. As of February 28, 1998, the Income Fund had reimbursed the affiliates
all such amounts. Other liabilities, including distributions payable, decreased
to $1,030,043 at December 31, 1997, from $1,108,751 at December 31, 1996,
primarily as a result of the payment during the year ended December 31, 1997,
of
S-25
<PAGE>
construction costs accrued for certain restaurant properties at December 31,
1996. Other liabilities also decreased due to a decrease in rents paid in
advance at December 31, 1997.
Based on cash from operations, the Income Fund declared distributions to the
Limited Partners of $3,600,000, $3,543,751 and $2,437,832 for the years ended
December 31, 1997, 1996 and 1995, respectively. This represents distributions
of $0.80, $0.79 and $0.61 per Unit for the years ended December 31, 1997, 1996
and 1995, respectively. No amounts distributed to the Limited Partners for the
years ended December 31, 1997, 1996 and 1995, 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.
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
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 1997, the Income Fund owned and
leased 42 wholly-owned restaurant properties (including one restaurant property
in Oviedo, Florida, which was sold in March 1997), and during the nine months
ended September 30, 1998, the Income Fund owned and leased 43 wholly-owned
restaurant properties (including two restaurant properties in Madison and
Chattanooga, Tennessee exchanged for two restaurant properties in Lawrence,
Kansas and Indianapolis, Indiana), to operators of fast-food and family-style
restaurant chains. In connection therewith, during the nine months ended
September 30, 1998 and 1997, the Income Fund earned $2,975,910 and $3,204,973,
respectively, in rental income from operating leases (net of adjustments to
accrued rental income) and earned income from direct financing leases from
these restaurant properties, $988,282 and $1,064,223 of which was earned during
the quarters ended September 30, 1998 and 1997, respectively. The decrease in
rental and earned income during the quarter and nine months ended September 30,
1998, as compared to the quarter and nine months ended September 30, 1997, is
partially attributable to the fact that in July 1998, the tenant of the
restaurant property in
Las Vegas, Nevada ceased restaurant operations and vacated the restaurant
property. As a result, during the nine months ended September 30, 1998, the
Income Fund wrote off approximately $77,300 of accrued rental income (non-cash
accounting adjustments relating to the straight-lining of future scheduled rent
increases over the lease term in accordance with generally accepted accounting
principles) relating to this restaurant property. The Income Fund also
established an allowance for doubtful accounts during the nine months ended
September 30, 1998, of approximately $47,000 for rental and earned income
amounts due from this tenant due to the fact that collection of such amounts is
questionable. The Income Fund will continue to pursue the collection of past
due amounts and will recognize such amounts as income if collected. We are
currently seeking either a new tenant or buyer for this restaurant property.
The Income Fund will not recognize any 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 the sale are
reinvested in an additional restaurant property.
In addition, the decrease in rental and earned income during the quarter and
nine months ended September 30, 1998, is partially attributable to the fact
that in June 1998, the Income Fund stopped receiving rental income from the
tenant, Long John Silver's, Inc, which filed for bankruptcy and rejected the
leases relating to
S-26
<PAGE>
two restaurant properties. In addition, during the nine months ended September
30, 1998, the Income Fund wrote off approximately $42,200 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 these two restaurant
properties. We are currently seeking either new tenants or purchasers for these
restaurant properties. The Income Fund will not recognize any 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.
In addition, the decrease in rental and earned income during the nine months
ended September 30, 1998, is partially the result of a decrease in rental
income due to the sale of the restaurant property in Oviedo, Florida, in March
1997. The net sales proceeds were reinvested in a restaurant property in
Memphis, Tennessee, with certain of our affiliates as tenants-in-common,
resulting in an increase in equity in earnings of joint venture, as described
below.
During the nine months ended September 30, 1997, the Income Fund also owned
and leased one restaurant property as tenants-in-common with one of our
affiliates and during the nine months ended September 30, 1998, the Income Fund
owned and leased one restaurant property indirectly through a joint venture
arrangement and two restaurant properties with certain of our affiliates as
tenants-in-common. In connection therewith, during the nine months ended
September 30, 1998 and 1997, the Income Fund earned $98,414 and $55,126,
respectively, attributable to net income earned by these joint ventures,
$33,458 and $18,506 of which was earned during the quarters ended September 30,
1998 and 1997, respectively. The increase in net income earned by joint
ventures during the quarter and nine months ended September 30, 1998, as
compared to the quarter and nine months ended September 30, 1997, is primarily
attributable to the fact that in January 1998, the Income Fund reinvested the
net sales proceeds it received from the 1997 sale of the restaurant property in
Oviedo, Florida, in an IHOP restaurant property in Memphis, Tennessee, with
certain of our affiliates as tenants-in-common.
During at least one of the nine months ended September 30, 1998 and 1997,
four restaurant chains, Denny's, Golden Corral Family Steakhouse Restaurant,
Jack in the Box, and Boston Market, each accounted for more than 10% of the
Income Fund's total rental income (including the Income Fund's share of the
rental income from the restaurant properties owned by the unconsolidated joint
venture in which the Income Fund is a co-venturer and restaurant properties
owned with affiliates as tenants-in-common). It is anticipated that, based on
the minimum rental payments required by the leases, Denny's, Golden Corral
Family Steakhouse Restaurant and Jack in the Box will continue to contribute
more than 10% of the Income Fund's total rental income during the remainder of
1998 and subsequent years. Any failure of these restaurant chains could
materially affect the Income Fund's income.
In October 1998, the tenant of five of the Boston Market restaurant
properties (including one restaurant property held as tenants-in-common with
one of our affiliates) filed for bankruptcy. If the leases are eventually
rejected, the Income Fund anticipates that rental income relating to these
restaurant properties will terminate until new tenants or buyers for the
restaurant properties are located. However, we do not anticipate that any
decrease in rental income due to lost revenues relating to these restaurant
properties will have a material effect on the Income Fund's financial position
or results of operations.
Operating expenses, including depreciation and amortization expense, were
$644,138 and $606,602 for the nine months ended September 30, 1998 and 1997,
respectively, $243,121 and $189,905 of which were incurred for the quarters
ended September 30, 1998 and 1997, respectively. The increase in operating
expenses during the quarter and nine months ended September 30, 1998, as
compared to the quarter and nine months ended September 30, 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 two restaurant properties in June 1998. The
Income Fund will continue to incur certain expenses, such as real estate taxes,
insurance, and maintenance relating to the restaurant properties until new
tenants or purchasers are located. The Income Fund is currently seeking either
new tenants or buyers for these restaurant properties.
S-27
<PAGE>
In addition, the increase in operating expenses during the quarter and nine
months ended September 30, 1998, as compared to the quarter and nine months
ended September 30, 1997, is partially attributable to the fact that during the
quarter and nine months ended September 30, 1998, the Income Fund recorded
approximately $13,100 in real estate tax expense, due to the fact that in
October 1998, the tenant of five Boston Market restaurant properties (including
one restaurant property held as tenants-in-common with certain of our
affiliates) filed for bankruptcy, as described above. If the tenant decides to
reject the leases, the Income Fund will continue to incur certain expenses,
such as real estate taxes, insurance and maintenance until new tenants or
buyers for the restaurant properties are located. If the tenant does not reject
the leases, the Income Fund does not anticipate incurring such expenses in
future periods.
As a result of the sale of the restaurant property in Oviedo, Florida, in
1997 the Income Fund recognized a gain for financial reporting purposes of
$41,148 during the nine months ended September 30, 1997. No restaurant
properties were sold during the nine months ended September 30, 1998.
During the quarter and nine months ended September 30, 1998, the Income Fund
established an allowance for loss on land and building of $204,399 for
financial reporting purposes relating to the restaurant property in Celina,
Ohio. The loss represents the difference between the restaurant property's
carrying value at September 30, 1998 and the current estimate of net realizable
value at September 30, 1998 for this restaurant property. No such allowance was
established during the quarter and nine months ended September 30, 1998.
The Years Ended December 31, 1997, 1996 and 1995
The Income Fund owned and leased 41 wholly-owned restaurant properties
during 1995, 43 wholly-owned restaurant properties (including one restaurant
property in Appleton, Wisconsin, which was sold in April 1996) during 1996, and
42 wholly-owned restaurant properties (including one restaurant property in
Oviedo, Florida, which was sold in March 1997) during 1997. In addition, during
1997 and 1996, the Income Fund owned and leased one restaurant property with an
affiliate, as tenants-in-common. As of December 31, 1997, the Income Fund
owned, either directly or through a joint venture arrangement, 42 restaurant
properties which are subject to long-term, triple-net leases that provide for
minimum base annual rental amounts (payable in monthly installments) ranging
from approximately $21,600 to $220,600. All of the leases provide for
percentage rent based on sales in excess of a specified amount. In addition,
the majority of the leases provide that, commencing in specified lease years
(generally the sixth lease year), the annual base rent required under the terms
of the lease will increase.
During the years ended December 31, 1997, 1996 and 1995, the Income Fund
earned $4,266,069, $4,297,558 and $2,698,956, respectively, in rental income
from operating leases and earned income from direct financing leases from
restaurant properties wholly-owned by the Income Fund. The decrease in rental
and earned income during 1997, as compared to 1996, is primarily attributable
to the sale of the restaurant property in Oviedo, Florida in March 1997 and the
sale of the restaurant property in Appleton Wisconsin in April 1996. The
decrease during 1997 as compared to 1996 is partially offset by the acquisition
of two additional restaurant properties in 1996 that were operational for a
full year in 1997, as compared to a partial year in 1996. The increase in
rental and earned income during 1996, as compared to 1995, is primarily
attributable to the acquisition of additional restaurant properties in 1995,
and the fact that, with the exception of one restaurant property sold in April
1996, the restaurant properties owned at December 31, 1995, were operational
for a full year in 1996, as compared to a partial year in 1995.
During the years ended December 31, 1997 and 1996, the Income Fund earned
$35,604 and $37,600 in contingent rental income as a result of the gross sales
of three restaurant properties meeting the threshold during 1997 and 1996,
under the terms of their leases requiring payment of contingent rental income.
In addition, for the years ended December 31, 1997 and 1996, the Income Fund
earned $73,507 and $19,668 attributable to net income earned by a joint venture
as a result of the Income Fund reinvesting the net sales proceeds it received
from the sale of the restaurant property in Appleton, Wisconsin, in a
restaurant
S-28
<PAGE>
property in Fayetteville, North Carolina, in October 1996, with an affiliate,
as tenants-in-common. The increase in net income earned by this joint venture
during 1997, as compared to 1996, is primarily attributable to the fact that
the restaurant property was operational for a full year in 1997, as compared to
a partial year in 1996.
During at least one of the years ended December 31, 1997, 1996 and 1995,
four lessees of the Income Fund, Golden Corral Corporation, Foodmaker, Inc.,
Checkers Drive-In Restaurants, Inc. and DenAmerica Corp. each contributed more
than 10% of the Income Fund's total rental income (including the Income Fund's
share of rental income from the restaurant property owned with an affiliate as
tenants-in-common). As of December 31, 1997, Golden Corral Corporation was the
lessee under leases relating to six restaurants, Foodmaker, Inc. was the lessee
under leases relating to five restaurants, Checkers Drive-In Restaurants, Inc.
was the lessee under leases relating to seven restaurants, and DenAmerica Corp.
was the lessee under leases relating to eight restaurants. It is anticipated
that, based on the minimum rental payments required by the leases, Golden
Corral Corporation, Foodmaker, Inc. and DenAmerica Corp. each will continue to
contribute more than 10% of the Income Fund's total rental income in 1998 and
subsequent years. In addition, during at least one of the years ended December
31, 1997, 1996 and 1995, five restaurant chains, Golden Corral, Jack in the
Box, Checkers Drive-In Restaurants, Long John Silver's and Denny's each
accounted for more than 10% of the Income Fund's total rental income (including
the Income Fund's share of rental income from the restaurant property owned
with an affiliate as tenants-in-common). In subsequent years, it is anticipated
that Golden Corral, Jack in the Box and Denny's each will continue to account
for more than 10% of the total rental income to which the Income Fund is
entitled under the terms of the leases. Any failure of these lessees or
restaurant chains could materially affect the Income Fund's income.
During the years ended December 31, 1997, 1996 and 1995, the Income Fund
also earned $73,634, $75,160 and $321,137, respectively, in interest income
from investments in money market accounts or other short-term, highly liquid
investments. The decrease in interest income during 1996, as compared to 1995,
is primarily attributable to the decrease in the amount of funds invested in
short-term liquid investments as a result of the acquisition of additional
restaurant properties during 1995 and the payment during 1996 of construction
costs accrued for certain restaurant properties at December 31, 1995.
Operating expenses, including depreciation and amortization expense, were
$836,815, $814,325 and $592,800 for the years ended December 31, 1997, 1996 and
1995, respectively. The increase in operating expenses during 1997 and 1996,
each as compared to the previous year, is partially attributable to an increase
in depreciation expense as the result of the acquisition of additional
restaurant properties during 1996 and 1995, and the fact that the restaurant
properties acquired during 1996 and 1995 were operational for a full year in
1997 and 1996, respectively, as compared to a partial year in 1996 and 1995,
respectively. Operating expenses also increased during 1997 and 1996, each as
compared to the previous year, as a result of the Income Fund incurring
additional taxes relating to the filing of various state tax returns during
1997 and 1996.
As a result of the sale of the restaurant property in Oviedo, Florida, as
described above in "Liquidity and Capital Resources," the Income Fund
recognized a gain of $41,148 for financial reporting purposes, for the year
ended December 31, 1997. As a result of the sale of the restaurant property in
Appleton, Wisconsin, as described in "Liquidity and Capital Resources," the
Income Fund recognized a gain for financial reporting purposes of $124,305 for
the year ended December 31, 1996. No restaurant properties were sold during
1995.
General
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of the consensus did not have a material effect on the
Income Fund's financial position or results of operations.
The Income Fund's leases as of September 30, 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
S-29
<PAGE>
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.
The Year 2000 problem is the result of information technology systems and
embedded systems (products which are made with microprocessor (computer) chips
such as HVAC systems, physical security systems and elevators) using a two-
digit format, as opposed to four digits, to indicate the year. Such information
technology and embedded systems may be unable to properly recognize and process
date-sensitive information beginning January 1, 2000.
The Income Fund does not have any information technology systems. Certain of
our affiliates provide all services requiring the use of information technology
systems pursuant to a management agreement with the Income Fund. The
maintenance of embedded systems, if any, at the Income Fund's properties is the
responsibility of the tenants of the properties in accordance with the terms of
the Income Fund's leases. We and our affiliates have established a team
dedicated to reviewing the internal information technology systems used in the
operation of the Income Fund, and the information technology and embedded
systems and the Year 2000 compliance plans of the Income Fund's tenants,
significant suppliers, financial institutions and transfer agent.
The information technology infrastructure of our affiliates consists of a
network of personal computers and servers that were obtained from major
suppliers. The affiliates utilize various administrative and financial software
applications on that infrastructure to perform the business functions of the
Income Fund. Our inability and that of our affiliates to identify and timely
correct material Year 2000 deficiencies in the software and/or infrastructure
could result in an interruption in, or failure of, certain of the Income Fund's
business activities or operations. Accordingly, we and our affiliates have
requested and are evaluating documentation from the suppliers of the affiliates
regarding the Year 2000 compliance of their products that are used in the
business activities or operations of the Income Fund. The costs expected to be
incurred by us and our affiliates to become Year 2000 compliant will be
incurred by us and our affiliates; therefore, these costs will have no impact
on the Income Fund's financial position or results of operations.
The Income Fund has material third party relationships with its tenants,
financial institutions and 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. If
any of these third parties are unable to meet their obligations to the Income
Fund because of the Year 2000 deficiencies, such a failure may have a material
impact on the Income Fund. Accordingly, we have requested and are evaluating
documentation from the Income Fund's tenants, financial institutions, and
transfer agent relating to their Year 2000 compliance plans. At this time, we
have not yet received sufficient certifications to be assured that the tenants,
financial institutions, and transfer agent have fully considered and mitigated
any potential material impact of the Year 2000 deficiencies. Therefore, we do
not, at this time, know of the potential costs to the Income Fund of any
adverse impact or effect of any Year 2000 deficiencies by these third parties.
We currently expect that all Year 2000 compliance testing and any necessary
remedial measures on the information technology systems used in the business
activities and operations of the Income Fund will be completed prior to June
30, 1999. Based on the progress we and our affiliates have made in identifying
and addressing the Income Fund's Year 2000 issues and the plan and timeline to
complete the compliance program, we do not foresee significant risks associated
with the Income Fund's Year 2000 compliance at this time. Because we and our
affiliates are still evaluating the status of the systems used in business
activities and operations of the Income Fund and the systems of the third
parties with which the Income Fund conducts its business, we have not yet
developed a comprehensive contingency plan and are unable to identify "the most
reasonably likely worst case scenario" at this time. As we identify significant
risks related to the Income Fund's Year 2000 compliance or if the Income Fund's
Year 2000 compliance program's progress deviates substantially from the
anticipated timeline, we will develop appropriate contingency plans.
S-30
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997... F-1
Condensed Statements of Income for the Quarters and Nine Months Ended Sep-
tember 30, 1998 and 1997................................................. F-2
Condensed Statements of Partner's Capital for the Nine Months Ended Sep-
tember 30, 1998 and for the Year Ended December 31, 1997................. F-3
Condensed Statements of Cash Flows for the Nine Months Ended September 30,
1998 and 1997............................................................ F-4
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997........................................ F-6
Report of Independent Accountants......................................... F-9
Balance Sheets as of December 31, 1997 and 1996........................... F-10
Statements of Income for the Years Ended December 31, 1997, 1996 and
1995..................................................................... F-11
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and 1995............................................................ F-12
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
1995..................................................................... F-13
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and 1995................................................................. F-14
Unaudited Pro Forma Financial Information................................. F-22
Unaudited Pro Forma Balance Sheet as of September 30, 1998................ F-23
Unaudited Pro Forma Income Statement for the Nine Months Ended September
30, 1998................................................................. F-24
Unaudited Pro Forma Income Statement for the Year Ended December 31,
1997..................................................................... F-25
Notes and Management's Assumptions to Unaudited Pro Forma Financial State-
ments.................................................................... F-26
</TABLE>
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less accu-
mulated depreciation
and allowance for loss on land and building....... $30,418,876 $30,658,994
Net investment in direct financing leases.......... 5,373,527 5,968,812
Investment in joint ventures....................... 1,510,306 771,684
Cash and cash equivalents.......................... 1,641,160 1,673,869
Restricted cash.................................... -- 627,899
Receivables, less allowance for doubtful accounts
of $51,686 and $879............................... -- 31,946
Prepaid expenses................................... 22,089 9,293
Organization costs, less accumulated amortization
of $8,050 and $6,550.............................. 1,950 3,450
Accrued rental income.............................. 1,398,364 1,192,373
----------- -----------
$40,366,272 $40,938,320
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Construction costs payable......................... $ -- $ 53,278
Accounts payable................................... 2,927 2,707
Accrued and escrowed real estate taxes payable..... 32,363 4,353
Distributions payable.............................. 900,000 900,000
Due to related parties............................. 5,178 3,351
Rents paid in advance and deposits................. 39,871 69,705
----------- -----------
Total liabilities................................ 980,339 1,033,394
Partners' capital.................................. 39,385,933 39,904,926
----------- -----------
$40,366,272 $40,938,320
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-1
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases........................ $ 854,766 $ 888,575 $2,626,090 $2,677,179
Adjustment to accrued rental
income........................ (433) -- (119,505) --
Earned income from direct
financing leases.............. 133,949 175,648 469,325 527,794
Interest and other income...... 10,716 19,767 45,220 58,596
---------- ---------- ---------- ----------
998,998 1,083,990 3,021,130 3,263,569
---------- ---------- ---------- ----------
Expenses:
General operating and
administrative................ 47,302 33,457 121,325 114,516
Professional services.......... 8,320 5,684 26,271 18,996
Management fees to related
parties....................... 9,257 9,823 29,073 29,565
Real estate taxes.............. 29,370 -- 30,209 --
State and other taxes.......... 7 25 19,398 20,559
Loss on termination of direct
financing lease............... 4,471 -- 4,471 --
Depreciation and amortization.. 144,394 140,916 413,391 422,966
---------- ---------- ---------- ----------
243,121 189,905 644,138 606,602
========== ========== ========== ==========
Income Before Equity in Earnings
of Joint Ventures, Gain on Sale
of Land and Provision for Loss
on Land and Building............ 755,877 894,085 2,376,992 2,656,967
Equity in Earnings of Joint
Ventures........................ 33,458 18,506 98,414 55,126
Gain on Sale of Land............. -- -- -- 41,148
Provision for Loss on Land and
Building........................ (204,399) -- (204,399) --
---------- ---------- ---------- ----------
Net Income....................... $ 584,936 $ 912,591 $2,271,007 $2,753,241
========== ========== ========== ==========
Allocation of Net Income:
General partners............... $ 7,327 $ 9,125 $ 24,188 $ 27,120
Limited partners............... 577,609 903,466 2,246,819 2,726,121
---------- ---------- ---------- ----------
$ 5584,936 $ 912,591 $2,271,007 $2,753,241
========== ========== ========== ==========
Net Income Per Limited Partner
Unit............................ $ 0.13 $ 0.20 $ 0.50 $ 0.61
========== ========== ========== ==========
Weighted Average Number of
Limited Partner Units
Outstanding..................... 4,500,000 4,500,000 4,500,000 4,500,000
========== ========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
CNL INCOME FUND XVI LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Year Ended
Nine Months Ended December
September 30, 31,
1998 1997
----------------- -----------
<S> <C> <C>
General partners:
Beginning balance............................. $ 99,615 $ 63,423
Net income.................................... 24,188 36,192
----------- -----------
123,803 99,615
----------- -----------
Limited partners:
Beginning balance............................. 39,805,311 39,781,176
Net income.................................... 2,246,819 3,624,135
Distributions ($0.62 and $0.80 per limited
partner unit, respectively).................. (2,790,000) (3,600,000)
----------- -----------
39,262,130 39,805,311
----------- -----------
Total partners' capital..................... $39,385,933 $39,904,926
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
1998 1997
----------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities.......... $ 2,759,611 $ 2,923,755
----------- -----------
Cash Flows from Investing Activities:
Proceeds from sale of land and building............ -- 610,384
Reimbursement from developer of construction
costs............................................. 161,648 --
Additions to land and buildings on operating
leases............................................ (3,545) (23,501)
Investment in direct financing leases.............. (28,403) (29,257)
Investment in joint ventures....................... (742,404) --
Decrease in restricted cash........................ 610,384 --
----------- -----------
Net cash provided by (used in) investing
activities...................................... (2,320) 557,626
----------- -----------
Cash Flows from Financing Activities:
Distributions to limited partners.................. (2,790,000) (2,700,000)
----------- -----------
Net cash used in financing activities............ (2,790,000) (2,700,000)
----------- -----------
Net Increase (Decrease) in Cash and Cash
Equivalents......................................... (32,709) 781,381
Cash and Cash Equivalents at Beginning of Period..... 1,673,869 1,546,203
----------- -----------
Cash and Cash Equivalents at End of Period........... $ 1,641,160 $ 2,327,584
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS--CONTINUED
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------
1998 1997
-------- --------
<S> <C> <C>
Supplemental Schedule of Non-Cash Investing and Financing
Activities:
Land and building under operating lease exchanged for land
and building under operating lease........................ $827,789 $ --
======== ========
Land and building under direct financing lease exchanged
for land and building under direct financing lease........ $761,334 $ --
======== ========
Net investment in direct financing lease reclassified to
land and building on operating lease as aresult of lease
termination............................................... $534,275 $ --
======== ========
Distributions declared and unpaid at end of period......... $900,000 $900,000
======== ========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine months Ended September 30, 1998 and 1997
1.Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, 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, 1997.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2.Land and Building on Operating Leases
Land and buildings on operating leases consisted of the following at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land.......................................... $15,378,218 $15,259,455
Buildings..................................... 17,094,391 16,836,982
----------- -----------
32,472,609 32,096,437
Less accumulated depreciation................. (1,849,334) (1,437,443)
----------- -----------
30,623,275 30,658,994
Less allowance for loss on land and building.. (204,399) --
----------- -----------
$30,418,876 $30,658,994
=========== ===========
</TABLE>
In May 1998, the tenant of the property in Madison, Tennessee exercised its
option under the terms of its lease agreement, to substitute a replacement
property for the existing, non-performing property. In conjunction therewith,
the Partnership exchanged the non-performing 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 nonmonetary
exchange of similar assets.
During the nine months ended September 30, 1998, the Partnership established
an allowance for loss on land and building of $204,399, relating to the
property located in Celina, Ohio. The allowance represents the difference
between the carrying value of the property at September 30, 1998 and the
current estimate of net realizable value for this property.
F-6
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Nine months Ended September 30, 1998 and 1997
3.Net Investment in Direct Financing Leases
In June 1998, the tenant of the property in Chattanooga, Tennessee exercised
its option under the terms of its lease agreement, to substitute a replacement
property for the existing, non-performing property. In conjunction therewith,
the Partnership exchanged the non-performing 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 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 quarter and nine months ended September 30, 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 #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.
4.Investment in Joint Ventures
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 September 30, 1998, the Partnership had
contributed $134,507, to purchase land and pay construction costs relating to
the joint venture. The Partnership has agreed to contribute approximately
$182,946 in additional construction costs to the joint venture. The Partnership
will 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 two properties held as tenants-in-common with affiliates at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation.................... $2,908,637 $941,142
Cash......................................... 9,842 8,190
Prepaid expenses............................. 197 29
Accrued rental income........................ 47,907 20,171
Liabilities.................................. 90,656 8,163
Partners' capital............................ 2,875,927 961,369
Revenues..................................... 211,863 112,744
Net income................................... 175,432 91,575
</TABLE>
F-7
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Nine months Ended September 30, 1998 and 1997
The Partnership recognized income totaling $98,414 and $55,126 for the nine
months ended September 30, 1998 and 1997, respectively, from these properties,
$33,458 and $18,506 of which was earned for the quarters ended September 30,
1998 and 1997, respectively.
5.Concentration of Credit Risk
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 at least one of the nine month periods
ended September 30:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Denny's................................................. $876,194 $873,738
Golden Corral Family Steakhouse Restaurant.............. 703,784 710,655
Jack in the Box......................................... 417,457 417,457
Boston Market........................................... 372,579 246,975
</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 restaurant chains could significantly
impact the results of operations of the Partnership. However, the general
partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
In October 1998, the tenant of five of the Boston Market properties
(including one property held as tenants-in-common with an affiliate of the
general partners) filed for bankruptcy. If the leases are eventually rejected,
the Partnership anticipates that rental income relating to these properties
will terminate 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. However, the general partners do not anticipate that any
decrease in rental income due to lost revenues relating to these properties
will have a material effect on the Partnership's financial position or results
of operations.
F-8
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners
CNL Income Fund XVI, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund XVI, Ltd.
(a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. 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 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 Income Fund XVI, Ltd.
as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1997,
in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
January 26, 1998
F-9
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation............................. $30,658,994 $31,766,349
Net investment in direct financing leases............. 5,968,812 6,006,496
Investment in joint venture........................... 771,684 774,389
Cash and cash equivalents............................. 1,673,869 1,546,203
Restricted cash....................................... 627,899 --
Receivables, less allowance for doubtful accounts of
$879 and $9,875...................................... 31,946 76,094
Prepaid expenses...................................... 9,293 9,174
Organization costs, less accumulated amortization of
$6,550 and $4,550.................................... 3,450 5,450
Accrued rental income................................. 1,192,373 771,487
----------- -----------
$40,938,320 $40,955,642
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Acquisition and construction costs payable............ $ 53,278 $ 106,036
Accounts payable...................................... 2,707 2,262
Escrowed real estate taxes payable.................... 4,353 3,343
Distributions payable................................. 900,000 900,000
Due to related parties................................ 3,351 2,292
Rents paid in advance and deposits.................... 69,705 97,110
----------- -----------
Total liabilities................................. 1,033,394 1,111,043
Partners' capital..................................... 39,904,926 39,844,599
----------- -----------
$40,938,320 $40,955,642
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases........ $3,562,920 $3,571,244 $2,209,434
Earned income from direct financing
leases.................................... 703,149 726,314 489,522
Contingent rental income................... 35,604 37,600 --
Interest................................... 73,634 75,160 321,137
Other income............................... 7,180 8,232 3,548
---------- ---------- ----------
4,382,487 4,418,550 3,023,641
---------- ---------- ----------
Expenses:
General operating and administrative....... 186,934 183,734 187,800
Professional services...................... 25,352 26,569 59,526
Management fees to related parties......... 40,087 39,206 24,128
State and other taxes...................... 20,559 12,369 3,141
Depreciation and amortization.............. 563,883 552,447 318,205
---------- ---------- ----------
836,815 814,325 592,800
---------- ---------- ----------
Income Before Equity in Earnings of Joint
Venture and Gain on Sale of Land and
Buildings................................... 3,545,672 3,604,225 2,430,841
Equity in Earnings of Joint Venture.......... 73,507 19,668 --
Gain on Sale of Land and Buildings........... 41,148 124,305 --
---------- ---------- ----------
Net Income................................... $3,660,327 $3,748,198 $2,430,841
========== ========== ==========
Allocation of Net Income:
General partners........................... $ 36,192 $ 36,239 $ 24,308
Limited partners........................... 3,624,135 3,711,959 2,406,533
---------- ---------- ----------
$3,660,327 $3,748,198 $2,430,841
========== ========== ==========
Net Income Per Limited Partner Unit.......... $ 0.81 $ 0.82 $ 0.60
========== ========== ==========
Weighted Average Number of Limited Partner
Units Outstanding........................... 4,500,000 4,500,000 4,010,281
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-11
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997, 1996 and 1995
<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,
1994................... $1,000 $ 1,876 $20,174,172 $ (151,434) $ 185,701 $(2,737,282) $17,474,033
Contributions from
limited partners....... -- -- 24,825,828 -- -- -- 24,825,828
Distributions to limited
partners ($0.61 per
limited partner unit).. -- -- -- (2,437,832) -- -- (2,437,832)
Syndication costs....... -- -- -- -- -- (2,652,718) (2,652,718)
Net income.............. -- 24,308 -- -- 2,406,533 -- 2,430,841
------ ------- ----------- ----------- ---------- ----------- -----------
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
====== ======= =========== =========== ========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-12
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows From Operating Activities:
Cash received from tenants.......... $ 3,881,005 $ 4,007,432 $ 2,353,106
Distributions from joint venture.... 76,212 20,279 --
Cash paid for expenses.............. (231,712) (349,145) (194,749)
Interest received................... 54,919 75,160 323,038
----------- ----------- -----------
Net cash provided by operating ac-
tivities......................... 3,780,424 3,753,726 2,481,395
----------- ----------- -----------
Cash Flows From Investing Activities:
Proceeds from sale of land and
buildings.......................... 610,384 775,000 --
Additions to land and buildings on
operating leases................... (23,501) (2,355,627) (16,012,458)
Investment in direct financing
leases............................. (29,257) (405,937) (5,595,236)
Investment in joint venture......... -- (775,000) --
Increase in restricted cash......... (610,384) -- --
Increase in other assets............ -- (58,720)
Other............................... -- -- 20,714
----------- ----------- -----------
Net cash used in investing activi-
ties............................. (52,758) (2,761,564) (21,645,700)
----------- ----------- -----------
Cash Flows From Financing Activities:
Reimbursement of acquisition and
syndication costs paid by related
parties on behalf of the
Partnership........................ -- (2,494) (405,569)
Contributions from limited part-
ners............................... -- -- 24,825,828
Distributions to limited partners... (3,600,000) (3,431,251) (1,798,921)
Payment of syndication costs........ -- -- (2,452,743)
----------- ----------- -----------
Net cash provided by (used in) fi-
nancing activities............... (3,600,000) (3,433,745) 20,168,595
----------- ----------- -----------
Net Increase (Decrease) in Cash and
Cash Equivalents...................... 127,666 (2,441,583) 1,004,290
Cash and Cash Equivalents at Beginning
of Year............................... 1,546,203 3,987,786 2,983,496
----------- ----------- -----------
Cash and Cash Equivalents at End of
Year.................................. $ 1,673,869 $ 1,546,203 $ 3,987,786
=========== =========== ===========
Reconciliation of Net Income to Net
Cash Provided by Operating Activities:
Net income........................... $ 3,660,327 $ 3,748,198 $ 2,430,841
----------- ----------- -----------
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation........................ 561,883 550,447 316,205
Amortization........................ 2,000 2,000 2,000
Equity in earnings of joint venture,
net of distributions............... 2,705 611 --
Gain on sale of land and buildings.. (41,148) (124,305) --
Decrease (increase) in receivables.. 26,633 58,396 (83,993)
Decrease in net investment in direct
financing leases................... 37,684 29,269 16,003
Increase in prepaid expenses........ (119) (8,514) (660)
Increase in accrued rental income... (444,650) (468,201) (299,090)
Increase in accounts payable and ac-
crued expenses..................... 1,455 517 4,036
Increase (decrease) in due to re-
lated parties, excluding reimburse-
ment of acquisition and syndication
costs paid on behalf of the Part-
nership............................ 1,059 (76,259) 76,682
Increase (decrease) in rents paid in
advance and deposits............... (27,405) 41,567 19,371
----------- ----------- -----------
Total adjustments................. 120,097 5,528 50,554
----------- ----------- -----------
Net Cash Provided by Operating Activi-
ties.................................. $ 3,780,424 $ 3,753,726 $ 2,481,395
=========== =========== ===========
Supplemental Schedule of Non-Cash In-
vesting and Financing Activities:
Related parties paid certain acquisi-
tion and syndication costs on behalf
of the Partnership as follows:
Acquisition costs................... $ -- $ 9,356 $ 97,589
Syndication costs................... -- -- 258,466
----------- ----------- -----------
$ -- $ 9,356 $ 356,055
=========== =========== ===========
Distributions declared and unpaid at
December 31........................... $ 900,000 $ 900,000 $ 787,500
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-13
<PAGE>
CNL INCOME FUND XVI, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
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. Under the terms of a registration statement filed with
the Securities and Exchange Commission, the Partnership is authorized to sell a
maximum of 4,500,000 units ($45,000,000) of limited partnership interest. A
total of 4,500,000 units ($45,000,000) of limited partnership interest was
sold.
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.
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.
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-14
<PAGE>
CNL INCOME FUND XVI, LTD
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
1.Significant Accounting Policies--Continued
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 Venture--The Partnership accounts for its interest in a
property in Fayetteville, North Carolina, held as tenants-in-common with an
affiliate, using the equity method since the Partnership shares control with an
affiliate which has 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 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 (Note 6).
Weighted Average Number of Limited Partner Units Outstanding--Net income and
distributions per limited partner unit are calculated based upon the weighted
average number of units of limited partnership interest outstanding during the
period the Partnership was operational.
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 the interior and exterior of the building and carries insurance
coverage for public liability, property damage, fire
F-15
<PAGE>
CNL INCOME FUND XVI, LTD
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
2.Leases--Continued
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>
1997 1996
----------- -----------
<S> <C> <C>
Land............................................. $15,259,455 $15,804,927
Buildings........................................ 16,836,982 16,836,982
----------- -----------
32,096,437 32,641,909
Less accumulated Depreciation.................... (1,437,443) (875,560)
----------- -----------
$30,658,994 $31,766,349
=========== ===========
</TABLE>
In April 1996, the Partnership sold its property in Appleton, Wisconsin, and
received net sales proceeds of $775,000, resulting in a gain of $124,305 for
financial reporting purposes. This property was originally acquired by the
Partnership in February 1995 and had a cost of approximately $595,100,
excluding acquisition fees and miscellaneous acquisition expenses; therefore,
the Partnership sold the property for approximately $179,900 in excess of its
original purchase price.
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.
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, 1997, 1996 and 1995, the Partnership recognized $444,650,
$468,201 and $299,090, 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, 1997:
<TABLE>
<S> <C>
1998........................................................... $ 3,128,262
1999........................................................... 3,177,377
2000........................................................... 3,309,707
2001........................................................... 3,378,687
2002........................................................... 3,401,533
Thereafter..................................................... 38,510,788
-----------
$54,906,354
===========
</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-16
<PAGE>
CNL INCOME FUND XVI, LTD
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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>
1997 1996
----------- -----------
<S> <C> <C>
Minimum lease payments receivable................ $13,526,299 $14,267,132
Estimated residual Values........................ 1,932,560 1,932,560
Less unearned income............................. (9,490,047) (10,193,196)
----------- -----------
Net investment in direct financing leases........ $ 5,968,812 $ 6,006,496
=========== ===========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998........................................................... $ 741,451
1999........................................................... 742,074
2000........................................................... 755,382
2001........................................................... 759,526
2002........................................................... 765,536
Thereafter..................................................... 9,762,330
-----------
$13,526,299
===========
</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 Venture
In October 1996, the Partnership acquired a property in Fayetteville, North
Carolina, with an affiliate of the Partnership that has the same general
partners, as tenants-in-common. In connection therewith, the Partnership
contributed $775,000 for a 80.27% interest in such property. The Partnership
accounts for its investment in this property using the equity method since the
Partnership shares control with an affiliate. Amounts relating to this
investment are presented as an investment in joint venture.
The Partnership and an affiliate, as tenants-in-common, own and lease one
Boston Market property. The following presents the combined, condensed
financial information for the property held as tenants-in-common with an
affiliate at December 31:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Land and building on operating lease, less accumulated
depreciation......................................... $941,142 $960,732
Cash.................................................. 8,190 100
Prepaid expenses...................................... 29 --
Accrued rental income................................. 20,171 3,929
Liabilities........................................... 8,163 23
Partners' capital..................................... 961,369 964,738
Revenues.............................................. 112,744 29,293
Net income............................................ 91,575 24,502
</TABLE>
The Partnership recognized income totalling $73,507 and $19,668 for the
years ended December 31, 1997 and 1996, respectively, from this property held
as tenants-in-common with an affiliate.
F-17
<PAGE>
CNL INCOME FUND XVI, LTD
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
7.Syndication Costs
Syndication costs consisting of legal fees, commissions, the marketing
support and due diligence expense reimbursement fee, printing and other
expenses incurred in connection with the offering totalled $5,390,000. These
offering expenses were charged to the limited partners' capital accounts to
reflect the net capital proceeds of the offering.
8.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, 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 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.
During the years ended December 31, 1997, 1996 and 1995, the Partnership
declared distributions to the limited partners of $3,600,000, $3,543,751 and
$2,437,832, respectively. No distributions have been made to the general
partners to date.
F-18
<PAGE>
CNL INCOME FUND XVI, LTD
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income for financial reporting
purposes............................. $3,660,327 $3,748,198 $2,430,841
Depreciation for tax reporting
purposes less than (in excess of)
depreciation for financial reporting
purposes............................. 3,576 (1,943) (13,929)
Direct financing leases recorded as
operating leases for tax reporting
purposes............................. 37,684 29,269 16,003
Equity in earnings of joint venture
for financial reporting purposes in
excess of equity in earnings of joint
venture for tax reporting purposes... (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....... (8,996) 6,913 2,962
Accrued rental income................. (444,650) (468,201) (299,090)
Rents paid in advance................. (27,405) 47,221 2,595
Other................................. -- 4,008 --
---------- ---------- ----------
Net income for federal income tax
purposes............................. $3,243,823 $3,239,830 $2,139,382
========== ========== ==========
</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 parent company of CNL
Securities, Corp. and CNL Fund Advisors, Inc. The other individual general
partner, Robert A. Bourne, is president of CNL Securities Corp. and served as
president of CNL Fund Advisors, Inc. through October 1997. CNL Income Fund
Advisors, Inc. was a wholly owned subsidiary of CNL Group, Inc. until its
merger, effective January 1, 1996, with CNL Fund Advisors, Inc. During the
years ended December 31, 1997, 1996 and 1995, CNL Income Fund Advisors, Inc.
and CNL Fund Advisors, Inc. (hereinafter referred to collectively as the
"Affiliates") and CNL Securities Corp. each performed certain services for the
Partnership, as described below.
For the year ended December 31, 1995, the Partnership incurred $2,110,195 in
syndication costs due to CNL Securities Corp. for services in connection with
selling limited partnership interests. A substantial portion of these amounts
($1,991,106) was paid as commissions to other broker-dealers.
In addition, for the year ended December 31, 1995, the Partnership incurred
$124,129 as a marketing support and due diligence expense reimbursement fee due
to CNL Securities Corp. This fee equals 0.5% of the limited partner
contributions of $24,825,828 received during the year ended December 31, 1995.
A portion of this fee has been reallowed to other broker-dealers and all due
diligence expenses were paid from such fee.
Additionally, the Partnership incurred $1,365,421 for the year ended
December 31, 1995 in acquisition fees due to the Affiliates for services in
finding, negotiating and acquiring properties on behalf of the Partnership.
These fees represent 5.5% of the limited partner capital contributions of
$24,825,828 received during the year ended December 31, 1995.
F-19
<PAGE>
CNL INCOME FUND XVI, LTD
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
10.Related Party Transactions--Continued
During the years ended December 31, 1997, 1996 and 1995, certain 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 Affiliates 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 geo-graphic area, may or may not be taken, in
whole or in part as to any year, in the sole discretion of the Affiliates. 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
$40,087, $39,206 and $24,128 for the years ended December 31, 1997, 1996 and
1995, respectively.
Certain Affiliates are 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 Affiliates provide 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, 1997, 1996 and 1995, Affiliates provided
accounting and administrative services to the Partnership (including accounting
and administrative services in connection with the offering of units) on a day-
to-day basis. The expenses incurred for these services were classified as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- -------- --------
<S> <C> <C> <C>
Syndication costs............................... $ -- $ -- $159,928
General operating and administrative expenses... 89,270 118,677 114,317
------- -------- --------
$89,270 $118,677 $274,245
======= ======== ========
</TABLE>
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
affiliates had purchased and temporarily held title to these properties in
order to facilitate the acquisition of the properties by the Partnership. The
purchase prices paid by the Partnership represented the costs incurred by the
affiliates to acquire the properties, including closing costs.
The due to related parties at December 31, 1997 and 1996 totalled $3,351 and
$2,292, 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 the property held as tenants-in-common
with an affiliate) for at least one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- --------
<S> <C> <C> <C>
DenAmerica Corp............................ $1,046,845 $1,051,328 $361,810
Golden Corral Corporation.................. 979,009 954,476 663,648
Foodmaker, Inc............................. 556,610 556,610 557,877
Checkers Drive-In Restaurants, Inc......... 237,152 290,041 290,041
</TABLE>
F-20
<PAGE>
CNL INCOME FUND XVI, LTD
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
11. Concentration of Credit Risk--Continue
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 property held as tenants-in-
common with an affiliate) for at least one of the years ended December 31:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- --------
<S> <C> <C> <C>
Denny's................................... $1,164,928 $1,163,621 $461,380
Golden Corral Family Steakhouse
Restaurants.............................. 979,009 954,476 663,648
Jack in the Box........................... 556,610 556,610 557,877
Long John Silver's........................ 406,033 432,495 331,094
Checkers Drive-In Restaurants............. 237,152 290,041 290,041
</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. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the on-going operations
of the lessees.
12.Subsequent Event
In January 1998, the Partnership acquired a property in Memphis, Tennessee,
as tenants-in-common with affiliates of the general partners. In connection
therewith, the Partnership contributed $607,896 for a 40.42% interest in such
property. The Partnership will account for its investment in this property
using the equity method since the Partnership will share control with
affiliates.
F-21
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to the
Company gives effect to the Acquisition, and is based on estimates and
assumptions set for the 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 the Company, the
historical combined financial information of CNL Income Fund XVI, Ltd., (the
"CNL 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 the Company, the
CNL Income Fund, Advisor and CNL Restaurant Financial Services Group. The pro
forma balance sheet assumes that the Acquisition occurred on September 30,
1998; the pro forma consolidated statements of earnings assume that the
Property Acquisitions (as defined on page ) and the Acquisition occurred on
January 1, 1997.
This unaudited pro forma financial information does not purport to be
indicative of the results which actually would have been obtained if the
Acquisition had been effected on the dates indicated or of the results which
may be obtained in the future.
See accompanying notes and management's assumptions to unaudited pro forma
financial statements.
F-22
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA BALANCE SHEET
September 30, 1998
<TABLE>
<CAPTION>
Historical Pro Forma
----------------------------------------------------------------------------- -----------------------------
CNL CNL CNL
Income Fund Financial Financial Combined
APF XVI, Ltd. Advisor Services, Inc. Corp. Portfolios Adjustments Pro Forma
------------ ----------- ---------- -------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Land and
buildings on
operating
leases, net..... $298,967,972 $30,418,876 $ 0 $ 0 $ 0 $329,386,848 $ 6,218,790 (1)
26,052,741 (2) $361,658,379
Net investment in
direct financing
leases.......... 117,028,760 5,373,527 0 0 0 122,402,287 1,058,396 (1) 123,460,683
Mortgages and
notes
receivable...... 33,523,506 0 0 0 173,776,981 207,300,487 849,195 (2) 208,149,682
Other
Investments..... 16,200,316 0 200,000 0 6,561,628 22,961,944 -- 22,961,944
Investment in
joint ventures.. 631,374 1,510,306 0 0 0 2,141,680 291,069 (1) 2,432,749
Cash and cash
equivalents..... 90,674,289 1,641,160 283,300 599,997 5,098,033 98,296,779 (515,523)(1)
(8,933,000)(1)
(26,901,936)(2) 61,946,320
Receivables...... 575,104 0 7,544,985 6,824,632 517,471 15,462,192 (7,854,557)(3) 7,607,635
Accrued rental
income.......... 3,071,451 1,398,364 0 0 0 4,469,815 (1,398,364)(1) 3,071,451
Other assets..... 5,711,195 24,039 401,524 295,570 3,854,477 10,286,805 41,650,124 (1)
(3,678,872)(1) 48,258,057
------------ ----------- ---------- ---------- ------------ ------------ ------------ ------------
Total assets.... $566,383,967 $40,366,272 $8,429,809 $7,720,199 $189,808,590 $812,708,837 $ 26,838,063 $839,546,900
============ =========== ========== ========== ============ ============ ============ ============
LIABILITIES & EQ-
UITY:
Accounts payable
and accrued
liabilities..... $ 379,496 $ 35,290 $ 449,751 $ 193,949 $ 1,236,138 $ 2,294,624 $ -- $ 2,294,624
Accrued
construction
costs payable... 3,045,304 0 0 0 0 3,045,304 -- 3,045,304
Distributions
payable......... 0 900,000 2,220,000 0 0 3,120,000 -- 3,120,000
Due to related
parties......... 2,552,411 5,178 0 1,452,512 6,556,920 10,567,021 (7,854,557)(3) 2,712,464
Income tax
payable......... 0 0 1,989,003 0 1,001,861 2,990,864 (2,990,864)(4) 0
Line of credit... 6,765,575 0 0 0 0 6,765,575 -- 6,765,575
Notes payable.... 0 0 390,398 28,462 175,528,203 175,947,063 -- 175,947,063
Deferred income.. 1,015,758 0 0 0 0 1,015,758 -- 1,015,758
Rents paid in
advance......... 437,497 39,871 0 0 0 477,368 -- 477,368
Minority
interest........ 282,544 0 0 0 0 282,544 -- 282,544
Common Stock..... 621,187 0 9,800 2,000 200 633,187 153,694 (1) 786,881
Additional paid
in capital...... 556,830,578 0 482,964 5,231,827 3,887,496 566,432,865 155,925,969 (1) 722,358,834
Accumulated
distributions in
excess of net
earnings........ (5,546,383) 0 2,887,893 811,449 1,597,772 (249,269) (82,001,110)(1)
2,990,864 (4) (79,259,515)
Partners
capital......... 0 39,385,933 0 0 0 39,385,933 (39,385,933)(1) 0
------------ ----------- ---------- ---------- ------------ ------------ ------------ ------------
Total
liabilities and
equity......... $566,383,967 $40,366,272 $8,429,809 $7,720,199 $189,808,590 $812,708,837 $ 26,838,063 $839,546,900
============ =========== ========== ========== ============ ============ ============ ============
</TABLE>
F-23
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA INCOME STATEMENT
September 30, 1998
<TABLE>
<CAPTION>
Historical
-----------------------------------------------------------------------------
CNL CNL CNL
Income Fund Financial Financial Combined
APF XVI, Ltd. Advisor Services, Inc. Corp. Portfolios
----------- ----------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and earned
income........... $22,947,199 $2,975,910 $ 0 $ 0 $ 0 $25,923,109
Fees.............. 0 0 21,405,127 5,115,549 6,817 26,527,493
Interest and
other income..... 6,117,911 45,220 751 432,506 18,031,141 24,627,529
----------- ---------- ----------- ---------- ----------- -----------
Total revenue... 29,065,110 3,021,130 21,405,878 5,548,055 18,037,958 77,078,131
Expenses:
General and
administrative... 1,539,004 182,276 6,701,115 4,107,311 2,597,171 15,126,877
Advisory fees..... 1,248,393 29,073 0 0 1,026,231 2,303,697
Fees to
Restaurant
Financial
Services Group... 0 0 256,456 1,569,202 0 1,825,658
Interest.......... 0 0 105,668 3,534 14,230,999 14,340,201
State taxes....... 397,569 19,398 15,226 18,564 201,616 652,373
Depreciation--
other............ 0 0 75,607 55,056 0 130,663
Depreciation--
property......... 2,684,924 411,891 0 0 0 3,096,815
Amortization...... 8,096 1,500 55,932 138 945,299 1,010,965
----------- ---------- ----------- ---------- ----------- -----------
Total operating
expenses....... 5,877,986 644,138 7,210,004 5,753,805 19,001,316 38,487,249
----------- ---------- ----------- ---------- ----------- -----------
Operating earnings
(losses).......... 23,187,124 2,376,992 14,195,874 (205,750) (963,358) 38,590,882
Equity in
earnings of
joint
ventures/minority
interest......... (23,271) 98,414 0 12,452 0 87,595
Gain on
securitization... 0 0 0 0 3,018,268 3,018,268
Provision for
loss on
properties....... 0 (204,399) 0 0 0 (204,399)
----------- ---------- ----------- ---------- ----------- -----------
Net earnings
(losses) before
federal income
taxes............. 23,163,853 2,271,007 14,195,874 (193,298) 2,054,910 41,492,346
Provision
(credit) for
federal income
taxes............ 0 0 5,607,415 (81,229) 789,895 6,316,081
----------- ---------- ----------- ---------- ----------- -----------
Net income......... $23,163,853 $2,271,007 $ 8,588,459 $ (112,069) $ 1,265,015 $35,176,265
=========== ========== =========== ========== =========== ===========
Earnings per
share............. $ 0.49
===========
Shares outstanding:
Weighted
average.......... 47,633,909
===========
End of period..... 62,118,679
===========
<CAPTION>
Pro Forma
-------------------------------
Adjustments Pro Forma
---------------- --------------
<S> <C> <C>
Revenues:
Rental and earned
income........... $ 9,635,208 (a)
25,927 (b) $35,584,244
Fees.............. (21,044,196)(c)
(2,875,906)(d) 2,607,391
Interest and
other income..... 1,526,547 (e) 26,154,076
---------------- --------------
Total revenue... (12,732,420) 64,345,711
Expenses:
General and
administrative... (1,311,346)(f)
(1,415,100)(g)
(29,910)(h) 12,370,521
Advisory fees..... (2,303,697)(i) 0
Fees to
Restaurant
Financial
Services Group... (1,825,658)(n) 0
Interest.......... (68,670)(m) 14,271,531
State taxes....... 61,129 (j) 713,502
Depreciation--
other............ 0 130,663
Depreciation--
property......... 1,505,509 (k) 4,602,324
Amortization...... 1,561,880 (l) 2,572,845
---------------- --------------
Total operating
expenses....... (3,825,863) 34,661,386
---------------- --------------
Operating earnings
(losses).......... (8,906,557) 29,684,325
Equity in
earnings of
joint
ventures/minority
interest......... 0 87,595
Gain on
securitization... 0 3,018,268
Provision for
loss on
properties....... 0 (204,399)
---------------- --------------
Net earnings
(losses) before
federal income
taxes............. (8,906,557) 32,585,789
Provision
(credit) for
federal income
taxes............ (6,316,081)(o) 0
---------------- --------------
Net income......... $ (2,590,476) $32,585,789
================ ==============
Earnings per
share............. $ 0.44
==============
Shares outstanding:
Weighted
average.......... 74,010,787(p)
==============
End of period..... 78,688,074
==============
</TABLE>
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA INCOME STATEMENT
For the year ended December 31, 1997
<TABLE>
<CAPTION>
Historical Pro Forma
----------------------------------------------------------------------------- ---------------------------
CNL CNL CNL
Income Financial Financial Combined
APF Fund XVI, Ltd. Advisor Services, Inc. Corp. Portfolios Adjustments Pro Forma
----------- -------------- ---------- -------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and earned
income........... $15,490,615 $4,301,673 $ 0 $ 0 $ 0 $19,792,288 $24,048,982 (a)
22,468 (b) $43,863,738
Fees.............. 0 0 8,310,836 5,965,110 73,704 14,349,650 (9,120,180)(c)
(2,662,141)(d) 2,567,329
Interest and
other income..... 3,967,318 80,814 165,569 0 10,932,843 15,146,544 249,395 (e) 15,395,939
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Total Revenue... 19,457,933 4,382,487 8,476,405 5,965,110 11,006,547 49,288,482 12,538,524 61,827,006
Expenses:
General and
administrative... 1,010,725 212,286 4,266,169 1,889,904 828,848 8,207,932 (745,328)(f)
(1,619,238)(g)
(36,462)(h) 5,806,904
Advisory fees..... 804,879 40,087 0 0 1,802,532 2,647,498 (2,647,498)(i) 0
Fees to
Restaurant
Financial
Services Group... 0 0 151,041 594,041 0 745,082 (745,082)(n) 0
Interest.......... 0 0 162,153 183,315 8,320,000 8,665,468 (81,594)(m) 8,583,874
State taxes....... 251,358 20,559 12,084 1,294 1,600 286,895 23,876 (j) 310,771
Depreciation--
other............ 0 0 48,490 14,637 0 63,127 -- 63,127
Depreciation--
property......... 1,784,269 561,883 0 0 0 2,346,152 3,155,758 (k) 5,501,910
Amortization...... 10,793 2,000 18,093 61,324 916,577 1,008,787 2,082,506 (l) 3,091,293
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Total operating
expenses....... 3,862,024 836,815 4,658,030 2,744,515 11,869,557 23,970,941 (613,062) 23,357,879
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Operating earnings
(losses).......... 15,595,909 3,545,672 3,818,375 3,220,595 (863,010) 25,317,541 13,151,586 38,469,127
Equity in
earnings of
joint
ventures/minority
interest......... (31,453) 73,507 0 (126,627) 0 (84,573) -- (84,573)
Gain on sale of
properties........ 0 41,148 0 0 0 41,148 -- 41,148
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Net earnings before
income taxes...... 15,564,456 3,660,327 3,818,375 3,093,968 (863,010) 25,274,116 13,151,586 38,425,702
Provision
(credit) for
federal income
taxes............ 0 0 1,508,258 1,272,133 (317,785) 2,462,606 (2,462,606)(o) 0
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Net earnings
(losses).......... $15,564,456 $3,660,327 $2,310,117 $1,821,835 $ (545,225) $22,811,510 $15,614,192 $38,425,702
=========== ========== ========== ========== =========== =========== =========== ===========
Earnings per
share............. $ 0.66 $ 0.51
=========== ===========
Shares outstanding:
Weighted
average.......... 23,423,868 74,684,706(p)
=========== ===========
End of period..... 36,192,971 74,684,706
=========== ===========
</TABLE>
F-25
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS
1.Basis of Presentation
The Pro Forma Balance Sheet as of September 30, 1998 reflects the
transactions of the acquisition of the CNL Income Fund, Advisor and CNL
Restaurant Financial Services Group (the "Acquisition Proposal") as set forth
in this Proxy Statement. The Pro Forma Statements of Earnings for the nine
months ended September 30, 1998, and for the year ended December 31, 1997, have
been prepared to reflect a) the issuance of additional shares and the property
acquisitions completed from January 1, 1997 through November 30, 1998
("Offering and Property Transactions") and b) the transactions of the
Acquisition Proposal as set forth in this Proxy Statement. This unaudited pro
forma financial information has been prepared utilizing the historical
financial statements of the Company and the historical combined financial
information of the CNL Income Fund, Advisor and CNL Restaurant Financial
Services Group and should be read in conjunction with the selected historical
financial data and accompanying notes of the Company, the CNL Income Fund,
Advisor and the CNL Restaurant Financial Services Group. The Pro Forma Balance
Sheet was prepared as if the Offering and Property Transactions and the
Acquisition Proposal occurred on September 30, 1998. The Pro Forma Statements
of Earnings were prepared as if the Property Acquisitions and the Acquisition
Proposal occurred as of January 1, 1997. The pro forma information is unaudited
and is not necessarily indicative of the consolidated operating results which
would have occurred if the Offering and Acquisition Transaction and the
Acquisition Proposal 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 Acquisition
Proposal have been made. Capitalized terms have the meanings as defined in the
Proxy Statement.
2.Method of Accounting
The acquisition of the CNL Income Fund and the CNL Restaurant Financial
Services Group will be accounted for under the purchase accounting method. The
Company 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, the Company 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 operating expense on the Company's consolidated statements of
earnings, but the Company will not deduct this expense for purposes of
calculating funds from operations due to the non-recurring and non-cash nature
of the expense.
All significant intercompany balances and transactions between the Company,
CNL Income Fund, Advisor and CNL Restaurant Financial Services Group have been
eliminated in the pro forma financial statements.
3.Adjustments to Pro Forma Balance Sheet
The following describes the pro forma adjustments to the Pro Forma Balance
Sheet as of September 30, 1998, as if the Acquisition was consummated on such
date. For purposes of the pro forma financial statements, it is assumed that at
an annual meeting of stockholders, the stockholders of the Company approved an
amendment to increase the number of authorized shares to an amount necessary to
enable the Company to issue the shares for the Acquisition.
(1) Represents the payment of $515,523 in cash and the issuance of
16,569,395 common shares in consideration for the purchase of the CNL
Income Fund, Advisor and CNL Restaurant Financial Services Group at
September 30, 1998 at a share price of $10 plus estimated transaction
costs. The acquisition of the CNL Income Fund and the CNL Restaurant
Financial Services Group has been accounted for under the purchase
accounting method and goodwill was recognized to the extent that the
consideration paid
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
exceeded the fair value of the net tangible assets acquired. As for the
acquisition of the Advisor from a related party, the consideration paid in
excess of the fair value of the net tangible assets received has been
accounted for as costs incurred in acquiring the Advisor from a related
party because the Advisor has not been deemed to qualify as a "business"
for purposes of applying APB Opinion No. 16 "Business Combinations." Upon
consummation of the Acquisition, this expense will be recorded as an
operating expense on the Company's statement of earnings. The Company will
not deduct this expense for purposes of calculating funds from operations
due to the nonrecurring and non-cash nature of the expense. As of September
30, 1998, $249,403 of transaction costs had been incurred by the Company.
<TABLE>
<S> <C>
CNL Income Fund.............................................. $ 43,209,473
Advisor...................................................... 76,000,000
CNL Restaurant Financial Services Group...................... 47,000,000
------------
Total Purchase Price (cash and shares)..................... 166,209,473
Less cash paid to CNL Income Fund............................ (515,523)
------------
Share consideration........................................ 165,693,950
Transaction costs of the Company............................. 8,933,000
------------
Total costs incurred....................................... $174,626,950
============
</TABLE>
In addition, the Company i) used $8,933,000 in cash to pay the
transaction costs related to the Acquisition, ii) made an upward adjustment
to the CNL Income Fund carrying value of land and building on operating
leases by $6,218,790, net investment in direct financing leases by
$1,058,396, investment in joint venture by $291,069, made downward
adjustments to the carrying value of accrued rental income of $1,398,364,
made downward adjustments to other assets of $3,678,872 to adjust
historical values to fair value, iii) recorded goodwill of $41,650,124 for
the acquisition of the CNL Restaurant Financial Services Group, iv) reduced
retained earnings by $76,703,996 for the excess consideration paid over the
net assets of the Advisor and removed the historical common stock balance
of $12,000, additional paid in capital balance of $9,602,287, retained
earnings balance of $5,297,114 and partners capital balance of $39,385,933
of the CNL Income Fund, Advisor and CNL Restaurant Financial Services
Group.
(2) Represents the use of $26,901,936 in cash and cash equivalents at
September 30, 1998 to acquire $26,052,741 in properties and issue $849,195
in mortgage notes which occurred from October 1, 1998 through November 30,
1998.
(3) Represents the elimination by the CNL Income Fund of $5,178 in
related party payables recorded as receivables by the Advisor, the
elimination by the CNL Restaurant Financial Services Group of $6,641,379 in
related party payables recorded as receivables by CNL Restaurant Financial
Services Group and the elimination by the Company of $1,208,000 in related
party payables recorded as receivables by the Advisor.
(4) Represents the elimination of income taxes payable of $2,990,864
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.
4.Adjustments to Pro Forma Income Statements
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the nine months ended September 30, 1998,
as if the Acquisition was consummated as of January 1, 1997.
F-27
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(a) Represents rental and earned income as if 1) properties that had been
previously constructed and acquired from January 1, 1998 through
November 30, 1998 had been acquired and leased on January 1, 1997 and
2) properties that were developed by the Company from January 1, 1998
through November 30, 1998 had been placed in service on May 1, 1997
(assumes a four month development period.)
<TABLE>
<S> <C>
Rental and earned income on Property Transactions by
the Company.................................................. $9,635,208
</TABLE>
(b) Represents $25,927 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms
for the leases acquired from the CNL Income Fund as if the leases had
been acquired on January 1, 1997.
(c) Represents the elimination of intercompany fees between the Company,
the CNL Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Origination fees.......................................... $ (1,569,202)
Secured equipment lease fee............................... (44,426)
Advisory fees............................................. (1,751,456)
Reimbursement of administrative costs..................... (297,229)
Acquisition fees.......................................... (15,392,193)
Underwriting fees......................................... (254,945)
Administrative fees....................................... (148,491)
Executive fee............................................. (310,000)
Guarantee fees............................................ (93,750)
Servicing fee............................................. (1,014,117)
Development fees.......................................... (166,876)
Consulting fee............................................ (1,511)
------------
Total................................................... $(21,044,196)
============
</TABLE>
(d) Represents the deferral of $2,875,906 in origination fees collected by
CNL Restaurant Financial Services Group that should be amortized over
the term of the loans originated (20 years) in accordance with the
Statement of Financial Accounting Standards #91 "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring
Loans and Initial Direct Costs of Leases."
(e) Represents interest income of $1,318,870 earned from Other Investments
acquired and mortgage notes issued from January 1, 1998 through
November 30, 1998 as if this had occurred on January 1, 1997 and the
amortization of $207,677 of deferred origination fees collected during
the year ended December 31, 1997 and during the nine months ended
September 30, 1998, which were capitalized and deferred in (d) above as
if they had been collected on January 1, 1997. These deferred fees are
being amortized and recorded as interest income.
(f) Represents the elimination of intercompany expenses paid between the
Company, the CNL Income Fund, the Advisor and the CNL Restaurant
Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs...................... $ (297,229)
Servicing fee.............................................. (1,014,117)
-----------
$(1,311,346)
===========
</TABLE>
F-28
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by the Company
were subject to capitalization during the entire period and 2) costs
relating to properties not developed by the Company were subject to
capitalization up through the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs............................ $(1,415,100)
</TABLE>
(h) Represents savings of $29,910 in professional services and
administrative expenses resulting from reporting on one combined
Company versus 22 separate entities.
(i) Represents the elimination of advisory fees between the Company, the
CNL Income Fund, the Advisor and the CNL Restaurant Financial Services
Group:
<TABLE>
<S> <C>
Advisory fees............................................... $(1,751,456)
Administrative fees......................................... (148,491)
Executive fee............................................... (310,000)
Guarantee fees.............................................. (93,750)
-----------
$(2,303,697)
===========
</TABLE>
(j) Represents additional income taxes of $61,129 resulting from assuming
that acquisitions from January 1, 1998 through November 30, 1998 had
been acquired on January 1, 1997 and assuming that the CNL Income Fund
had operated under a REIT structure.
(k) Represents an increase in depreciation of the building portion of the
properties acquired from January 1, 1998 through November 30, 1998 as
if they had been acquired on January 1, 1997 and the step up in basis
referred to in footnote (2) from acquiring the CNL Income Fund
portfolio using the straight-line method over the estimated useful
lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense.......................................... $1,505,509
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of the
CNL Restaurant Financial Services Group referred to in footnote (2)
<TABLE>
<S> <C>
Amortization of goodwill...................................... $1,561,880
</TABLE>
(m) Represents elimination of interest expense recorded for the
amortization of $350,000 in arrangement fees collected during the year
ended December 31, 1997 which were eliminated in II (d ) below.
<TABLE>
<S> <C>
Interest expense............................................... $(68,670)
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees incurred
between the Company, the CNL Income Fund, the Advisor and the CNL
Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees............................................ $(1,569,202)
Underwriting fees........................................... (254,945)
Consulting fee.............................................. (1,511)
-----------
$(1,825,658)
===========
</TABLE>
F-29
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(o) Represents the elimination of $6,316,081 in the provision for income
taxes as a result of the Acquisition. The Company expects to continue
to qualify as a REIT and does not expect to incur federal income taxes.
(p) Common shares issued during the period required to fund acquisitions as
if they had been acquired on January 1, 1997 were assumed to have been
issued and outstanding as of January 1, 1998. For purposes of the
proforma financial statements, it is assumed that the stockholders
approved the proposal to increase the number of authorized common
shares of the Company.
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the year ended December 31, 1997, as if the
Acquisition was consummated as of January 1, 1997.
(a) Represents rental and earned income as if 1) properties that had been
previously constructed and acquired from January 1, 1998 through
November 30, 1998 had been acquired and leased on January 1, 1997 and
2) properties that were developed by the Company from January 1, 1997
through November 30, 1998 had been placed in service on May 1, 1997
(assumes a four month development period.)
<TABLE>
<S> <C>
Rental and earned income on Property Transactions by the
Company.................................................. $24,048,982
</TABLE>
(b) Represents $22,468 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease terms
for the leases acquired from the CNL Income Fund as if the leases had
been acquired on January 1, 1997.
(c) Represents the elimination of intercompany fees between the Company,
the CNL Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Origination fees........................................... $ (594,041)
Secured equipment lease fee................................ (375,219)
Advisory fees.............................................. (1,815,767)
Reimbursement of administrative costs...................... (146,340)
Acquisition fees........................................... (3,887,483)
Underwriting fees.......................................... (151,041)
Administrative fees........................................ (269,231)
Executive fee.............................................. (250,000)
Guarantee fees............................................. (312,500)
Arrangement fees........................................... (350,000)
Servicing fee.............................................. (598,988)
Development fees........................................... (369,570)
-----------
Total.................................................... $(9,120,180)
===========
</TABLE>
(d) Represents the deferral of $2,662,141 in origination fees collected by
CNL Restaurant Financial Services Group that should be amortized over
the term of the loans originated (20 years) in accordance with the
Statement of Financial Accounting Standards #91 "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring
Loans and Initial Direct Costs of Leases."
(e) Represents the elimination of interest income of $1,931,331 earned
during the year ended December 31, 1997 assuming all monies raised
during 1997 and all cash held on January 1, 1997 was
F-30
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
used to effect the Acquisition on January 1, 1997, represents interest
income of $2,047,619 earned from Other Investments acquired and mortgage
notes issued from January 1, 1998 through November 30, 1998 as if this
had occurred on January 1, 1997 and the recognition of $133,107 of
origination fees collected during the year ended December 31, 1997 which
were deferred in (d) and are being amortized and recorded as interest
income.
(f) Represents the elimination of intercompany expenses paid between the
Company, the CNL Income Fund, the Advisor and the CNL Restaurant
Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs........................ $(146,340)
Servicing fee................................................ (598,988)
---------
$(745,328)
=========
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by the Company
were subject to capitalization during the entire period and 2) costs
relating to properties not developed by the Company were subject to
capitalization up through the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs........................... $(1,619,238)
</TABLE>
(h) Represents savings of $36,462 in professional services and
administrative expenses resulting from reporting on one combined
Company versus 22 separate entities.
(i) Represents the elimination of advisory fees between the Company, the
CNL Income Fund, the Advisor and the CNL Restaurant Financial Services
Group:
<TABLE>
<S> <C>
Advisory fees............................................... $(1,815,767)
Administrative fees......................................... (269,231)
Executive fee............................................... (250,000)
Guarantee fees.............................................. (312,500)
-----------
$(2,647,498)
===========
</TABLE>
(j) Represents additional income taxes of $23,876 resulting from assuming
that acquisitions from January 1, 1997 through November 30, 1998 had
been acquired on January 1, 1997 and assuming that the CNL Income Fund
had operated under a REIT structure.
(k) Represents increase in depreciation of the building portion of the
properties acquired from January 1, 1997 through November 30, 1998 as
if they had been acquired on January 1, 1997 and the step up in basis
referred to in footnote (2) from acquiring the CNL Income Fund
portfolio using the straight-line method over the estimated useful
lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense.......................................... $3,155,758
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of the
CNL Restaurant Financial Services Group referred to in footnote (2)
<TABLE>
<S> <C>
Amortization of goodwill..................................... $2,082,506
</TABLE>
F-31
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(m) Represents elimination of yearly amortization of arrangement fees of
$350,000 capitalized as deferred costs and amortized as interest
expense and the capitalization of interest expense during the period
that properties were under development.
<TABLE>
<S> <C>
Amortization of arrangement fees.............................. $(24,144)
Capitalization of interest during development period.......... (57,450)
--------
$(81,594)
========
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees incurred
between the Company, the CNL Income Fund, the Advisor and the CNL
Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees.............................................. $(594,041)
Underwriting fees............................................. (151,041)
---------
$(745,082)
=========
</TABLE>
(o) Represents the elimination of $2,462,606 in the provision for income
taxes as a result of the Acquisition. The Company expects to continue
to qualify as a REIT and does not expect to incur federal income taxes.
(p) Common shares issued during the period were assumed to have been issued
and outstanding as of January 1, 1997. For purposes of the proforma
financial statement, it is assumed that the stockholders approved the
proposal to increase the number of authorized common shares of the
Company.
F-32
<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 XVI, Ltd.
400 East South Street
Orlando, FL 32801-2878
Re: CNL Income Fund XVI, 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 eighteen 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
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 XVI, 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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<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 4,320,947 fully paid and nonassessable APF Common
Shares (2,160,474 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 $38,772,898, 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 56,679,053 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) 4,500,000 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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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 $4,320,947 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 $432,095 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.
B-32
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
By: /s/ James M. Seneff, Jr.
Its: Chief Executive Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
By: /s/ Robert A. Bourne
Its: President
CNL APF GP Corp.
By: /s/ Robert A. Bourne
Its: President
CNL INCOME FUND XVI, 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-33
<PAGE>
Appendix C
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF LIMITED PARTNERSHIP
OF
CNL Income Fund XVI. 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 the 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 XVI, 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 XVI, 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 XVII, LTD.
This Supplement is being furnished to you, as a Limited Partner of CNL
Income Fund XVII, 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 Prospectus/Consent Solicitation Statement.
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.
OVERVIEW
Pursuant to the Prospectus/Consent Solicitation Statement and this
Supplement, you are being asked to approve the Acquisition of your Income Fund
by APF. Your Income Fund is one of 18 limited partnerships (which we refer to
collectively as the Funds) that APF is seeking to acquire. Supplements have
also been prepared for each of the other Funds, copies of which may be obtained
without charge to 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 (or a REIT), formed in
1994, whose primary business, like that of the Funds, is the ownership of
restaurant properties leased to operators of national and regional restaurant
chains on a triple-net lease basis. As a full-service REIT, 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 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 shares of common stock (or APF Shares) will I receive if my Income
Fund is acquired by APF?
Your Income Fund will receive 3,014,377 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 $10.00 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
approximately 75 million APF Shares through three public offerings at offering
prices per APF share equal to the Exchange Value. At December 31, 1998, of the
approximately $750 million raised by APF, APF has used approximately $550
million to acquire restaurant properties and to make mortgage loans and had
approximately $120 million in uninvested proceeds which it expects to invest
during the first quarter of 1999. The remaining proceeds were used to pay fees
and other offering expenses.
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<PAGE>
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
Fund?
Yes. Legg Mason Wood Walker, Incorporated 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 Funds, and (c) the method of allocating the APF
Shares among the Funds.
Do you, as the general partners of my Income Fund, recommend that I vote in
favor 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 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 how you want to vote, and sign
and mail it in the enclosed postage-paid return envelope as soon as possible,
so that at the Special Meeting of Limited Partners, your Units may be voted
"For" or "Against" APF's acquisition of your Income Fund. If you sign and send
in your consent form and do not indicate how you want to vote, your consent
form will be counted as a vote "For" the Acquisition. If you do not vote or you
abstain from voting, it will count as a vote "Against" the Acquisition.
In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to certain limitations. If you vote "Against" the Acquisition,
but your Income Fund is nevertheless acquired by APF, you may elect to receive
a payment (which we call the Cash/Notes Option) that is 10% in cash and 90% in
% Callable Notes due , 2006 (or Notes) based on the liquidation value
of your Income Fund, as determined by Valuation Associates, the appraisal firm
that we engaged in connection with the Acquisition. Such liquidation value will
be lower than the aggregate Exchange Value of the APF Shares offered to your
Income Fund in the Acquisition. The Notes will bear interest at a rate equal to
%, which was determined based on 120% of the applicable federal rate as of
, 1999. Please note that you may only receive the Cash/Notes Option if
you have voted "Against" the Acquisition and you elect to receive the
Cash/Notes Option on your consent form. You will receive APF Shares if your
Income Fund elects to be acquired in the Acquisition and you voted "For" the
Acquisition, or you voted "Against" the Acquisition and did not affirmatively
select the Cash/Notes Option. 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 (for example, 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 be based on the difference between the
value of the APF Shares or the tax basis of your Units. If you elect the
Cash/Notes Option, 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 and cash
received by your Income Fund over the tax basis of your Fund's net assets to
the extent that you or other Limited Partners of your Income Fund vote against
the Acquisition.
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 $229. To review
the tax consequences to the Limited Partners of the
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Funds in greater detail, see pages through of the Prospectus/Consent
Solicitation Statement 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 Funds acquired by APF.
Although the majority of APF's assets and the assets of the other Funds
acquired by APF are substantially similar to those of your Income Fund, the
restaurant properties owned by APF and the other 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 Funds' restaurant properties,
see "APF's Business and The Restaurant Properties -- Business Objectives and
Strategies" and -- The Restaurant Properties -- General" and "Business of the
Funds-- Description of Restaurant Properties" in the Prospectus/Consent
Solicitation Statement.
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 Prospectus/Consent Solicitation Statement.
Investment Risks
. Uncertainty Regarding the Exchange Value and Trading Price of APF Shares
Following Listing. Your Income Fund will be receiving 3,014,377 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 is 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 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.
. Decrease in Distributions. In each of the years ended December 31, 1995,
1996 and 1997, your Income Fund made $79, $550 and $763, respectively, in
distributions per $10,000 investment to you. Based on APF's pro forma
financial information, and assuming APF acquires only your Income Fund and
that each Limited Partner of your Income receives only APF Shares, you
would have received, for the year ended December 31, 1997, $572 in
distributions per $10,000 of original investment, which is 25.0% less than
the $763 distributed to you as Limited Partner during the same period. 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 year ended
December 31, 1997 and for the nine months ended September 30, 1998 is not
necessarily indicative of the distributions you will receive as a
stockholder of APF after the Acquisition. See "Cash Distributions to
Limited Partners of Your Fund."
. Conflicts of Interest in the Acquisition; Substantial Benefits to Related
Parties. There are certain conflicts of interest inherent in the structure
of the Acquisition of your Income Fund. 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
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<PAGE>
the Acquisition that may or may not be aligned with your interests 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.
. Fundamental Change in Nature of 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
September 30, 1998), 385 restaurant properties. The risks inherent in
investing in an operating company such as APF include APF's ability to
invest in new restaurant properties that are not as profitable as APF
anticipated, the incurrence of substantial indebtedness to make future
acquisitions of restaurant properties which it may be unable to repay and
making mortgage loans to prospective operators of national and regional
restaurant chains which may not have the ability to repay.
As an APF stockholder, you will receive the benefits of your investment
through (i) dividend distributions on, and (ii) increases in the value of,
your APF Shares. In addition, 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 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 Cash/Notes Option). An
investment in APF may not outperform your investment in the Income Fund.
. Original Investment Timeframe. 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, 2025. 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 2003 and 2008. We currently have no current
plans to dispose of your Income Fund's restaurant properties if the
Limited Partners do not approve the Acquisition.
Real Estate/Business Risks
. Risk of Default on Mortgage Loans and Market Risks associated with
Securitizations. 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.
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,) and 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 typically
retain a residual-interest security and may 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.
. Risks Associated with Leverage. 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. At the time of the consummation of the Acquisition, as a
general policy, APF's Board of Directors will 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 funds from operations and its ability to make
distributions to its stockholders.
. Acquisition and Development Risks. APF plans to pursue its growth strategy
through the acquisition and development of additional restaurant
properties. To the extent that APF does pursue this growth strategy, we do
not know that it 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.
Tax Risks
. Failure of APF to Qualify as a REIT for Tax Purposes. 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.
. Risks Associated with Distribution Requirements. 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
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<PAGE>
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 Tax Law. 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 Prospectus/Consent Solicitation Statement.
CONSIDERATION PAID TO INCOME FUND
The following table sets forth, for your Income Fund (i) the aggregate
amount of original Limited Partner investments in each Fund less any
distributions of net sales proceeds paid to the Limited Partners of that Fund,
(ii) the original amount of Limited Partner investments in each Fund less any
distributions of net sales proceeds per average $10,000 investment, (iii) the
number of APF Shares to be paid to your Income Fund, (iv) the estimated value
of the APF Shares paid to your Income Fund, (v) the estimated Acquisition
expenses allocated to your Income Fund, (vi) the estimated value, based on the
Exchange Value, of APF Shares paid to your Income Fund after deducting
Acquisition expenses, and (vii) the estimated value, based on the Exchange
Value, of APF Shares you will receive for each $10,000 of your original
investment:
<TABLE>
<CAPTION>
Original
Limited
Partner Estimated
Original Investments Value of APF
Limited Less Any Shares per
Partner Distributions Number of Estimated Average
Investments of Net Sales APF Estimated Value of $10,000
Less Any Proceeds per Shares Value of APF Shares Original
Distributions $10,000 Offered APF Shares Estimated after Limited
of Net Sales Original to Payable to Acquisition Acquisition Partner
Proceeds(1) Investment(1) Fund(2) Fund(3) Expenses Expenses(3) Investment(3)
- ------------- ------------- --------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
$30,000,000 $10,000 3,014,377 $30,143,770 $353,644 $29,790,126 $9,930
</TABLE>
- --------
(1) Income Fund has had no distributions of net sales proceeds.
(2) The APF Shares payable to each Fund as set forth in this chart will not
change if APF acquires fewer than all of the Funds in the Acquisition.
This number assumes that none of the Limited Partners of the Fund has
elected the Cash/Notes Option.
(3) 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.
Upon completion of the Acquisition of your Income Fund, the operations and
existence of your Income Fund will cease. For more detailed information, see
"The Acquisition" in the Prospectus/Consent Solicitation Statement. If your
Income Fund does not approve the Acquisition, we do not contemplate that your
Income Fund would be liquidated in the near future. The Acquisition, however,
does not result in an all-cash payment to you in the liquidation of your
investment. For example, if you are eligible for and choose the Cash/Notes
Option, you become a Noteholder of APF. You will have exchanged your Units for
unsecured debt obligations of APF which may not be retired in full until
, 2006, a date approximately seven years after the date the
Acquisition of your Income Fund occurs. On the other hand, if you exchange
your Units for APF Shares, you will receive an equity interest in APF whose
marketability will depend upon the market that may develop with respect to the
APF Shares, which will be listed on the NYSE.
S-6
<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>
<CAPTION>
Legal Fees.......................................... $15,152
<S> <C>
Appraisals and Valuation............................ 6,060
Fairness Opinions................................... 27,272
Registration, Listing and Filing Fees............... --
Soliciting Dealer Fee............................... 59,325
Financial Consulting Fees........................... --
Environmental Fees.................................. 37,878
Accounting and Other Fees........................... 45,809
-------
Subtotal.......................................... 191,496
</TABLE>
Closing Transaction Costs
<TABLE>
<S> <C>
Transfer Fees and Taxes............................ 63,397
Legal Fees......................................... 47,994
Recording Costs.................................... --
Other.............................................. 50,757
Subtotal......................................... 162,148
--------
Total.............................................. $353,644
</TABLE>
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 Income Fund's restaurant
properties acquired within two years of the initial date of the prospectus
(August 11, 1995). 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:
S-7
<PAGE>
. 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 as, in our opinion, market conditions permit), as
contemplated by the terms of the partnership agreement.
Special Meeting to Discuss the Acquisition
We have scheduled a special meeting of the Limited Partners of your Income
Fund to discuss the solicitation materials, which include the
Prospectus/Consent Solicitation Statement, 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 (as defined below) and to explain in person our reasons
for recommending that you vote "For" the Acquisition.
VOTING PROCEDURE
The Prospectus/Consent Solicitation Statement, 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.
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 Prospectus/Consent Solicitation
Statement. A copy of the Agreement and Plan of Merger dated March 11, 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
S-8
<PAGE>
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 December 31, 1999. 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.
The consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and certain 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
(including the Acquisition), 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. The partnership agreement also provide 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
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, 1995, 1996 and 1997 and the nine months
ended September 30, 1998, the aggregate amounts accrued or paid by your Income
Fund 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 years presented, are shown below under "Pro Forma":
S-9
<PAGE>
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended
--------------------------- September 30,
1995 1996 1997 1998
-------- ---------- ------- -------------
<S> <C> <C> <C> <C>
Historical:
General Partner Distributions...... -- -- -- --
Broker/Dealer Commissions(1)....... -- -- -- --
Property Management Fees........... -- $ 10,482 $25,377 $19,966
Due Diligence and Marketing Support
Fees(1)........................... -- -- -- --
Acquisition Fees................... $256,361 1,093,639 -- --
Asset Management Fees.............. -- -- -- --
Real Estate Disposition Fees(2).... -- -- -- --
-------- ---------- ------- -------
Total historical................. $256,361 $1,104,121 $25,377 $19,966
Pro Forma:
Cash Distributions on APF Shares... -- -- -- --
Salary Compensation................ -- -- -- --
Total pro forma.................. -- -- -- --
</TABLE>
- --------
(1) A majority of the fees paid as broker-dealer commissions and due diligence
and marketing support fees were reallowed to other broker-dealers
participating in the offering of the Income Fund's Units.
(2) 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 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 the Acquisition -- Prices for 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>
Nine Months Ended
Sept. 30, 1998
--------------------
1993 1994 1995 1996 1997 Historical Pro Forma
---- ---- ---- ---- ---- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income....... -- -- $25 $517 $735 $594 $439
Distributions from Return of
Capital(1)..................... -- -- 54 33 28 6 19
--- --- --- ---- ---- ---- ----
Total........................... -- -- $79 $550 $763 $600 $458
=== === === ==== ==== ==== ====
</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 nine months ended September 30,
1998, is not necessarily indicative of the distributions you will receive as a
stockholder of APF after the Acquisition.
Assuming APF maintains its current level of debt for acquiring future
restaurant properties, the expected distribution rate per APF Share will be
8.8% (assuming a $10.00 per APF Share price based on the Exchange Value, the
annualized dividend per year is expected to be $0.88 per APF Share). Based on
the number of APF Shares that you would receive in the Acquisition per your
average $10,000 original investment and this distribution rate, you would
receive an annual distribution of approximately $874.
S-10
<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 certain 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 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 Cash/Note Option.
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, our relief 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 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 Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the Cash/Notes Option, constitutes 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 and is the best way to maximize the return on your
investment in light of the values of such consideration.
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
S-11
<PAGE>
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 of Valuation Associates and
Legg Mason received fees for its services and notwithstanding that Legg Mason
has previously provided investment banking services to the Funds and to
Commercial Net Lease Realty, Inc., a former affiliate of ours. See "Reports,
Opinions and Appraisals" in the Prospectus/Consent Solicitation Statement.
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 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 cash and promissory 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 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 Cash/Notes Option.
3. Valuation of Alternatives. Based on the appraisal of the Income Fund's
restaurant properties, we estimated the value of your Income Fund as an ongoing
concern and if liquidated. 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 Fund to 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
September 30, 1998 per $10,000 original investment. Since the calculation of
the book value was done on a GAAP basis, it is not indicative of the true fair
market value of your Income Fund. This figure was compared to the (i) value of
the Fund if it commenced an orderly liquidation of its investment portfolio on
December 31, 1998, (ii) value of the Fund if it continued to operate in
accordance with its existing partnership agreement and business plans, and
(iii) estimated value of the APF Shares, based on the Exchange Value, paid to
each Fund per average $10,000 invested.
S-12
<PAGE>
Summary of Valuations
(per $10,000 original investment)
<TABLE>
<CAPTION>
Estimated
Value of APF
Shares per Average
Going $10,000 Original
GAAP Book Liquidation Concern Limited Partner
Value Value(1) Value(1) Investment(2)
--------- ----------- -------- ------------------
<S> <C> <C> <C> <C>
CNL Income Fund XVII, Ltd.... $8,740 $9,137 $9,894 $9,930
</TABLE>
- --------
(1) 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.
(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.
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have an independent
obligation 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 Funds). James M. Seneff, Jr. and
Robert A. Bourne act as the individual general partners of all of the 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.
Substantial Benefits to General Partners
As a result of the Acquisition (assuming only your Income Fund is acquired),
we are expected to receive certain benefits, including that we will be relieved
from certain ongoing liabilities with respect to Funds that are acquired by
APF.
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 performanced-based incentives, including stock
options, under APF's 1999 Performance Incentive Plan or any such other 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 Funds if the Acquisition does not occur.
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
S-13
<PAGE>
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 the Cash/Notes Option, in which
case you will receive cash and 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 Prospectus/Consent Solicitation Statement.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, the
assets (and any liabilities) of your Income Fund (if your Income Fund is
acquired by APF) will be transferred to APF in return for APF Shares and/or
cash and 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 XVII, Ltd......................... $229
</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.
S-14
<PAGE>
Under section 351(a) of the Code, no gain or loss is recognized if (i)
property is transferred to a corporation by one more individuals or entities in
exchange for the stock of that corporation, and (ii) 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 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 the
Cash/Notes Option, 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 (1) 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 (2) 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 Cash/Notes Option, your Income Fund will receive APF
Shares, cash and Notes in exchange for your Income Fund's assets. Because the
principal portion of the Notes will not be due until , 2006, 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 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 (without reduction for
any selling expenses) 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 are 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, cash 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" (i.e., real property and
depreciable assets used in a trade or business and held for more than one
year). Your share of gains or losses from the sale of section 1231 assets of
your Income Fund would be combined with any other section 1231 gains and losses
that you recognize in that year. If the result is a net loss, such loss is
characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property will be taxed as ordinary income to the extent of all
prior depreciation deductions taken by your Income Fund prior to sale. In
general, you may only use up to $3,000 of capital losses in excess of capital
gains to offset
S-15
<PAGE>
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 Cash/Notes Option may
recognize gain in the year of the Acquisition despite the fact that they will
receive only a small amount of cash and no publicly-traded instruments 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 the Cash/Notes Option. See "-- Tax Consequences of
Liquidation and Termination of Your Fund" below.
Tax Consequences of the Liquidation and Termination of Your Fund. If your
Fund is acquired by APF, your Fund will be deemed to have liquidated and
distributed APF Shares and/or cash and 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 cash and 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 pro rata 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 (determined on the closing date of the Acquisition) and your
adjusted tax basis in your Units (adjusted by your distributive share of
income, gain, loss, deduction and credit for the final taxable year of your
Income Fund (including any such items recognized by your Income Fund as a
result of the Acquisition) as well as any distributions you receive in such
final taxable year (other than the distribution of the APF Shares)). 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 cash and Notes in the Acquisition, you will recognize gain to
the extent that the amount of cash you receive in the Acquisition exceeds your
adjusted basis in your Units (adjusted by your distributive share of income,
gain, loss, deduction and credit for the final taxable year of your Income Fund
(including any such items recognized by your Income Fund as a result of the
Acquisition) as well as any distributions you receive in such final taxable
year (other than the distributions of the cash and Notes)). Your basis in the
Notes distributed to you will equal your adjusted basis in your Units, reduced
(but not below zero) by the amount of any cash distributed to you 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 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
S-16
<PAGE>
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 cash and 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 Prospectus/Consent Solicitation
Statement.
S-17
<PAGE>
SUMMARY SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
APF, FUNDS, ADVISOR AND CNL RESTAURANT FINANCIAL SERVICES GROUP
Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
Historical Pro Forma
------------------------------------------------- --------------------------------
CNL
CNL Restaurant
Income Financial
Fund XVII, Services Combined Pro Forma Combined
APF Ltd. Advisor Group Historical Adjustments Pro Forma
------------ ----------- ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data
Revenues:
Rental and earned
income............... $ 22,947,199 $ 2,114,810 $ -- $ -- $ 25,062,009 $ 9,635,208 (a)
6,376 (b) $ 34,703,593
Management fees....... -- -- 21,405,127 5,122,366 26,527,493 (21,028,157)(c)
(2,875,906)(d) 2,623,430
Interest and other
income............... 6,117,911 36,667 751 18,463,647 24,618,976 1,526,547 (e) 26,145,523
------------ ----------- ----------- ------------ ------------ ------------ ------------
Total revenue........ 29,065,110 2,151,477 21,405,878 23,586,013 76,208,478 (12,735,932) 63,472,546
Expenses:
General and
administrative....... 1,539,004 122,576 6,701,115 6,704,482 15,067,177 (1,304,414)(f)
(1,415,100)(g)
(21,360)(h) 12,326,303
Advisory fees......... 1,248,393 19,966 -- 1,026,231 2,294,590 (2,294,590)(i) --
State taxes........... 397,569 11,811 15,226 220,180 644,786 41,444 (j) 686,230
Depreciation and
amortization......... 2,693,020 273,084 131,539 1,000,493 4,098,136 3,064,089 (k)(l) 7,162,225
Interest expense...... -- -- 105,668 14,234,533 14,340,201 (68,670)(m) 14,271,531
Paid to affiliates.... -- -- 256,456 1,569,202 1,825,658 (1,825,658)(n) --
------------ ----------- ----------- ------------ ------------ ------------ ------------
Total expenses....... 5,877,986 427,437 7,210,004 24,755,121 38,270,548 (3,824,259) 34,446,289
------------ ----------- ----------- ------------ ------------ ------------ ------------
Net earnings (loss)
before equity in
earnings of joint
ventures/ minority
interests, gain (loss)
on sale of properties,
gain on
securitization, and
provision (credit) for
federal income taxes.. 23,187,124 1,724,040 14,195,874 (1,169,108) 37,937,930 (8,911,673) 29,026,257
------------ ----------- ----------- ------------ ------------ ------------ ------------
Equity in earnings of
joint
ventures/minority
interests............. (23,271) 58,399 -- 12,452 47,580 -- 47,580
Gain (loss) on sales of
properties............ -- -- -- -- -- -- --
Gain on
securitization........ -- -- -- 3,018,268 3,018,268 -- 3,018,268
Provision (credit) for
federal income taxes.. -- -- 5,607,415 708,666 6,316,081 (6,316,081)(o)
------------ ----------- ----------- ------------ ------------ ------------ ------------
Net earnings........... $ 23,163,853 $ 1,782,439 $ 8,588,459 $ 1,152,946 $ 34,687,697 $ (2,595,592) $ 32,092,105
============ =========== =========== ============ ============ ============ ============
Other Data:
Weighted average number
of shares of common
stock outstanding
during period......... 47,633,909 N/A N/A N/A N/A -- 72,704,747(p)
Total net-leased
properties at end of
period................ 357 28 N/A N/A N/A -- 385
Funds from operations.. $ 26,408,569 $ 2,082,213 N/A N/A N/A -- $ 36,817,447
Total cash
distributions
declared.............. $ 26,460,446 $ 1,800,000 N/A N/A N/A -- $ 36,817,447
Cash distributions
declared per $10,000
investment............ $ 572 $ 600 N/A N/A N/A -- $ 506
<CAPTION>
Historical Combined Pro Forma
September 30, 1998 Historical September 30, 1998
------------------------------------------------- ------------ --------------------------------
Balance Sheet Data
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate assets,
net................... $407,663,180 $23,730,228 $ -- $ -- $431,393,408 $ 5,953,402
26,052,741 (r) $463,399,551
Mortgages/notes
receivable............ 33,523,506 -- -- 173,776,981 207,300,487 849,195 (r) 208,149,682
Accounts receivable,
net................... 575,104 22,200 7,544,985 7,342,103 15,484,392 (7,852,741)(s) 7,631,651
Investment in/due from
joint ventures........ 631,374 1,448,628 -- -- 2,080,002 382,821 (q) 2,462,823
Total assets........... 566,383,967 27,368,290 8,429,809 197,528,789 799,710,855 26,702,834 826,413,689
Total
liabilities/minority
interest.............. 14,478,585 1,149,648 5,049,152 185,998,045 206,675,430 (10,895,626)(s)(t) 195,779,804
Total equity........... 551,905,382 26,218,642 3,380,657 11,530,744 593,035,425 37,598,460 (q)(t) 630,633,885
</TABLE>
- --------
S-18
<PAGE>
(a) Represents rental and earned income as if 1) properties that had been
previously constructed and acquired from January 1, 1998 through November
30, 1998 had been acquired and leased on January 1, 1997 and 2) properties
that were developed by APF from January 1, 1998 through November 30, 1998
had been placed in service on May 1, 1997 (assumes a four month development
period.)
<TABLE>
<S> <C>
Rental and earned income on Property Transactions by APF.... $9,635,208
</TABLE>
(b) Represents $6,376 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, 1997.
(c) Represents the elimination of intercompany fees between APF, the Income
Fund, the Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees.......................................... $ (1,569,202)
Secured equipment lease fee............................... (44,426)
Advisory fees............................................. (1,742,349)
Reimbursement of administrative costs..................... (290,297)
Acquisition fees.......................................... (15,392,193)
Underwriting fees......................................... (254,945)
Administrative fees....................................... (148,491)
Executive fee............................................. (310,000)
Guarantee fees............................................ (93,750)
Servicing fee............................................. (1,014,117)
Development fees.......................................... (166,876)
Consulting fee............................................ (1,511)
------------
Total.................................................... $(21,028,157)
============
</TABLE>
(d) Represents the deferral of $2,875,906 in origination fees collected by CNL
Restaurant Financial Services Group that should be amortized over the term
of the loans originated (20 years) in accordance with the Statement of
Financial Accounting Standards #91 "Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases."
(e) Represents interest income of $1,318,870 earned from Other Investments
acquired and mortgage notes issued from January 1, 1998 through November
30, 1998 as if this had occurred on January 1, 1997 and the amortization of
$207,677 of deferred origination fees collected during the year ended
December 31, 1997 and during the nine months ended September 30, 1998,
which were capitalized and deferred in (d) above as if they had been
collected on January 1, 1997. These deferred fees are being amortized and
recorded as interest income.
(f) Represents the elimination of intercompany expenses paid between APF, the
Income Fund, the Advisor and the CNL Restaurant Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs...................... $ (290,297)
Servicing fee.............................................. (1,014,117)
-----------
$(1,304,414)
===========
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by APF were subject
to capitalization during the entire period and 2) costs relating to
properties not developed by APF were subject to capitalization up through
the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs............................ $(1,415,100)
</TABLE>
(h) Represents savings of $21,360 in professional services and administrative
expenses resulting from reporting on one combined Company versus 22
separate entities.
(i) Represents the elimination of fees between APF, the Income Fund, the
Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Advisory fees............................................... $(1,742,349)
Administrative fees......................................... (148,491)
Executive fee............................................... (310,000)
Guarantee fees.............................................. (93,750)
-----------
$(2,294,590)
===========
</TABLE>
(j) Represents additional state taxes of $41,444 resulting from assuming that
acquisitions from January 1, 1998 through November 30, 1998 had been
acquired on January 1, 1997 and assuming that the Income Fund had operated
under a REIT structure.
(k) Represents an increase in depreciation of the building portion of the
properties acquired from January 1, 1998 through November 30, 1998 as if
they had been acquired on January 1, 1997 and the step up in basis referred
to in footnote (q) from acquiring the Income Fund portfolio using the
straight-line method over the estimated useful lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense.......................................... $1,494,128
</TABLE>
S-19
<PAGE>
(l) Represents the amortization of the goodwill on the acquisition of the CNL
Restaurant Financial Services Group referred to in footnote (q).
<TABLE>
<S> <C>
Amortization of goodwill...................................... $1,569,961
</TABLE>
(m) Represents elimination of interest expense recorded for the amortization of
$350,000 in arrangement fees collected during the year ended December 31,
1997 which were eliminated in footnote (4), II (d) in the Notes to the Pro
Forma Financial Statements attached to this Supplement.
<TABLE>
<S> <C>
Interest expense.............................................. $ (68,670)
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees incurred
between APF, the Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Origination fees............................................ $(1,569,202)
Underwriting fees........................................... (254,945)
Consulting fee.............................................. (1,511)
-----------
$(1,825,658)
===========
</TABLE>
(o) Represents the elimination of $6,316,081 in the provision for income taxes
as a result of the acquisition. APF expects to continue to qualify as a
REIT and does not expect to incur federal income taxes.
(p) APF Shares issued during the period required to fund acquisitions as if
they had been acquired on January 1, 1997 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 the
proposal to amend and restate the APF's articles of incorporation to
increase the number of authorized APF shares.
(q) Represents the payment of $353,644 in cash and the issuance of 15,279,012
APF Shares in consideration for the purchase of the Income Fund, Advisor
and CNL Restaurant Financial Services Group at September 30, 1998 using the
exchange value of $10 per APF share plus estimated transaction costs. The
acquisitions of the Income Fund and the CNL Restaurant Financial Services
Group have been accounted for under the purchase accounting method and
goodwill was recognized to the extent that the estimated value of the
consideration paid exceeded the fair value of the net tangible assets
acquired. As for the acquisition of the Advisor from a related party, the
consideration paid in excess of the fair value of the net tangible assets
received has been accounted for as costs incurred in acquiring the Advisor
from a related party because the Advisor has not been deemed to qualify as
a "business" for purposes of applying APB Opinion No. 16 "Business
Combinations." Upon consummation of the Acquisition, this expense will be
recorded as an operating expense on APF's statement of earnings. APF will
not deduct this expense for purposes of calculating funds from operations
due to the nonrecurring and non-cash nature of the expense. As of September
30, 1998, $249,403 of transaction costs had been incurred by APF.
<TABLE>
<S> <C>
Income Fund............................................... $ 30,143,768
Advisor................................................... 76,000,000
CNL Restaurant Financial Services Group................... 47,000,000
------------
Total Purchase Price (cash and shares)................... 153,143,768
Less cash paid to Income Fund............................. (353,644)
------------
Share consideration...................................... 152,790,124
Transaction costs of APF.................................. 8,933,000
------------
Total costs incurred...................................... $161,723,124
============
</TABLE>
In addition, APF i) used $8,933,000 in cash to pay the transaction costs
related to the Acquisition, ii) made an upward adjustment to the Income Fund
carrying value of land and building on operating leases by $5,439,985, net
investment in direct financing leases by $513,417, investment in joint
venture by $382,821, made downward adjustments to the carrying value of
accrued rental income of $573,632, and made downward adjustments to other
assets of $3,786,008 and made downward adjustments to deferred income of
$52,021 to adjust historical values to fair value, iii) recorded goodwill of
$41,865,637 for the acquisition of the CNL Restaurant Financial Services
Group, iv) reduced retained earnings by $77,052,485 for the excess
consideration paid over the net assets of the Advisor and removed the
historical common stock balance of $12,000, additional paid in capital
balance of $9,602,287, retained earnings balance of $5,297,114 and partners
capital balance of $26,218,642 of the Income Fund, Advisor and CNL
Restaurant Financial Services Group.
(r) Represents the use of $26,901,936 in cash and cash equivalents at September
30, 1998 to acquire $26,052,741 in properties and issue $849,195 in
mortgage notes which occurred from October 1, 1998 through November 30,
1998.
(s) Represents the elimination by the Income Fund of $3,362 in related party
payables recorded as receivables by the Advisor, the elimination by the CNL
Restaurant Financial Services Group of $6,641,379 in related party payables
recorded as receivables by CNL Restaurant Financial Services Group and the
elimination by APF of $1,208,000 in related party payables recorded as
receivables by the Advisor.
(t) Represents the elimination of income taxes payable of $2,990,864 from
liabilities assumed in the acquisition of the CNL Restaurant Businesses
since the acquisition agreements require that the Advisor and CNL
Restaurant Financial Services Group have no accumulated or current earnings
and profits for federal income tax purposes at the time of the acquisition.
S-20
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF CNL INCOME FUND XVII, 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
XVII, Ltd." in this Supplement.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
----------------------- ----------------------------------
1998 1997 1997 1996 1995 (1)
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Revenues (2)............ $ 2,209,876 $ 2,055,903 $ 2,772,714 $ 1,444,503 $ 12,153
Net income.............. 1,782,439 1,624,540 2,203,557 1,095,759 8,351
Cash distributions
declared............... 1,800,000 1,687,500 2,287,500 1,166,689 28,275
Net income per Unit..... 0.59 0.54 0.73 0.52 0.02
Cash distributions
declared per Unit...... 0.60 0.56 0.76 0.55 0.08
Weighted average number
of Limited Partner
Units outstanding (3).. 3,000,000 3,000,000 3,000,000 2,121,253 340,780
<CAPTION>
September 30, December 31,
----------------------- ----------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Total assets............ $27,368,290 $27,591,877 $27,524,148 $28,675,007 $4,878,421
Total partners'
capital................ 26,218,642 26,257,186 26,236,203 26,320,146 4,642,233
</TABLE>
- --------
(1) Selected financial data for 1995 represents the period February 10, 1995
(date of inception) through December 31, 1995. Operations did not commence
until November 4, 1995, the date following when the Income Fund received
the minimum offering proceeds of $1,500,000 and such proceeds were released
from escrow.
(2) Revenues include equity in earnings of unconsolidated joint ventures and
minority interest in income of the consolidated joint venture.
(3) Represents the weighted average number of Units outstanding during the
period the Income Fund was operational.
S-21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CNL INCOME FUND XVII, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on
February 10, 1995, 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 are to be constructed, to be
leased primarily to operators of national and regional fast-food, family-style
and casual dining restaurant chains. The leases are triple-net leases, with the
lessee generally responsible for all repairs and maintenance, property taxes,
insurance and utilities. As of September 30, 1998, the Income Fund owned 28
restaurant properties, which includes 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
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
The Income Fund's primary source of capital is 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 $1,881,998 and $1,912,554 for the nine months ended September
30, 1998 and 1997, respectively. The decrease in cash from operations for the
nine months ended September 30, 1998, as compared to the nine months ended
September 30, 1997, is primarily a result of changes in the Income Fund's
working capital.
Other sources and uses of capital included the following during the nine
months ended September 30, 1998.
In September 1997, the Income Fund entered into a joint venture arrangement,
CNL Kingston Joint Venture, with an affiliate of the Income Fund which has the
same general partners, to construct and hold one restaurant property. As of
September 30, 1998, the Income Fund had contributed $311,048 to the joint
venture. Construction of the restaurant was completed in January 1998, and as
of September 30, 1998, the Income Fund owned a 60.06% interest in the profits
and losses of the joint venture.
In addition, during the nine months ended September 30, 1998, the Income
Fund received $306,100 from the developer of the restaurant properties in
Aiken, South Carolina and Weatherford, Texas. This represents a reimbursement
from the developer upon final reconciliation of total construction costs, to
the total construction costs funded by the Income Fund in accordance with the
development agreement.
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 September 30, 1998, the
Income Fund had $1,462,427 invested in such short-term investments, as compared
to $1,238,799 at December 31, 1997. The funds remaining at September 30, 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 of the Income Fund, including distributions payable,
decreased to $720,196 at September 30, 1998, from $765,083 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 operations, the Income Fund declared distributions to the
Limited Partners of $1,800,000 and $1,687,500 for the nine months ended
September 30, 1998 and 1997, respectively ($600,000 for each of the quarters
ended September 30, 1998 and 1997). This represents distributions of $0.60 and
$0.56 per Unit for the nine months ended September 30, 1998 and 1997,
respectively ($0.20 per Unit for each of the quarters ended September 30, 1998
and 1997). No distributions were made to the general partners for the
S-22
<PAGE>
quarters and nine months ended September 30, 1998 and 1997. No amounts
distributed to the Limited Partners for the nine months ended September 30,
1998 and 1997, 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.
The Years Ended December 31, 1997, 1996 and 1995
On September 2, 1995, the Income Fund commenced an offering to the public of
up to 3,000,000 Units of Limited Partnership interest. The Income Fund's
offering of Units terminated on September 19, 1996, at which time the maximum
proceeds of $30,000,000 (3,000,000 Units) had been received from investors. The
Income Fund, therefore, will derive no additional capital resources from the
offering.
Net proceeds to the Income Fund from its offering of Units, after deduction
of organizational and offering expenses, totaled $26,400,000. As of December
31, 1995, approximately $1,539,000 had been used to invest in one restaurant
property and to pay acquisition fees and certain acquisition expenses. During
1996, the Income Fund acquired 23 additional restaurant properties, including
one restaurant property owned by a joint venture in which the Income Fund is a
co-venturer and one restaurant property, owned with an affiliate, as tenants-
in-common, at a cost of approximately $23,406,500, including acquisition fees
and miscellaneous acquisition expenses. During 1997, the Income Fund used the
majority of its remaining net offering proceeds to acquire two additional
restaurant properties, as tenants-in-common, with certain of our affiliates. In
addition, the Income Fund entered into two joint ventures, CNL Mansfield Joint
Venture and CNL Kingston Joint Venture, with certain of our affiliates, to own
an approximate 21% interest and 60.06% interest, respectively, in two
restaurant properties. As a result of the above transactions, as of December
31, 1997, the Income Fund had acquired 28 restaurant properties, including
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, and had paid acquisition fees totaling $1,350,000 to one of our
affiliates. The remaining net offering proceeds of approximately $258,000 from
the Income Fund's offering of Units were reserved for Income Fund purposes.
Until restaurant properties were acquired by the Income Fund, all Income
Fund proceeds were held in short-term, highly liquid investments which we
believed to have appropriate safety of principal. This investment strategy
provided high liquidity in order to facilitate the Income Fund's use of these
funds to acquire restaurant properties at such time as restaurant properties
suitable for acquisition were located.
Currently, the Income Fund's primary source of capital is cash from
operations (which includes cash received from tenants, distributions from the
joint ventures and interest received, less cash paid for expenses). Cash from
operations was $2,495,114, $1,232,948 and $9,012 for the years ended December
31, 1997 and 1996 and the period February 10, 1995 (date of inception) through
December 31, 1995, respectively. The increase in cash from operations during
1997 and 1996, each as compared to the previous year, is primarily a result of
changes in income and expenses as described in "Results of Operations" below.
None of the restaurant properties owned by the Income Fund is or may be
encumbered. Subject to certain restrictions on borrowing, however, the Income
Fund may borrow funds but will not encumber any of the restaurant properties in
connection with any such borrowing. The Income Fund will not borrow for the
purpose of returning capital to the Limited Partners. The Income Fund will not
borrow under arrangements that would make the Limited Partners liable to
creditors of the Income Fund. We further have represented that we will use our
reasonable efforts to structure any borrowing so that it will not constitute
"acquisition indebtedness" for
S-23
<PAGE>
federal income tax purposes and also will limit the Income Fund's outstanding
indebtedness to three percent of the aggregate adjusted tax basis of its
restaurant properties. In addition, the Income Fund will not borrow unless it
first obtains an opinion of counsel that such borrowing will not constitute
acquisition indebtedness. Certain of our affiliates from time to time incur
certain operating expenses on behalf of the Income Fund for which the Income
Fund reimburses the affiliates without interest.
Currently, rental income from the Income Fund's restaurant properties and
cash reserves are invested in money market accounts or other short-term, highly
liquid investments pending the Income Fund's use of such funds to pay Income
Fund expenses or to make distributions to partners. At December 31, 1997, the
Income Fund had $1,238,799 invested in such short-term investments as compared
to $4,716,719 at December 31, 1996. The decrease in the amount invested in
short-term investments during 1997, as compared to 1996, is primarily a result
of the payment of construction costs during 1997 relating to the restaurant
properties that were under construction at December 31, 1996 and the
acquisition of additional restaurant properties through joint ventures and with
certain of our affiliates as tenants-in-common during 1997. The funds remaining
at December 31, 1997, after payment of distribution and other liabilities, were
used during 1998 to meet the Income Fund's working capital and other needs.
During the year ended December 31, 1996 and the period February 10, 1995
(date of inception) through December 31, 1995, certain of our affiliates
incurred on behalf of the Income Fund $231,885 and $356,450, respectively, for
certain organizational and offering expenses. In addition, during the years
ended December 31, 1997 and 1996 and the period February 10, 1995 (date of
inception) through December 31, 1995, the affiliates incurred on behalf of the
Income Fund $11,262, $69,835 and $30,424, respectively, for certain acquisition
expenses and $59,451, $64,906 and $790, respectively, for certain operating
expenses. As of December 31, 1997 and 1996, the Income Fund owed $2,875 and
$17,153, respectively, to related parties for such amounts, accounting and
administrative services and management fees. As of February 28, 1998, the
Income Fund had reimbursed the affiliates all such amounts. Other liabilities,
including distributions payable, decreased to $865,877 at December 31, 1997,
from $2,197,032 at December 31, 1996, as a result of the payment during 1997,
of construction costs accrued for certain restaurant properties at December 31,
1996. The decrease is partially offset by an increase in distributions payable
to the Limited Partners and an increase in deferred rental income at December
31, 1997.
Based on cash from operations, the Income Fund declared distributions to the
Limited Partners of $2,287,500, $1,166,689 and $28,275 for the years ended
December 31, 1997 and 1996 and the period February 10, 1995 (date of inception)
through December 31, 1995, respectively. This represents distributions of
$0.76, $0.55 and $0.08 per Unit for the years ended December 31, 1997 and 1996
and the period February 10, 1995 (date of inception) through December 31, 1995,
respectively. No amounts distributed or to be distributed to the Limited
Partners for the years ended December 31, 1997 and 1996 and the period February
10, 1995 (date of inception) through December 31, 1995, 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 event a tenant's insurance policy lapses or is
insufficient to cover a claim relating to the restaurant properties.
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 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 is
necessary 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 reserves
if, in our discretion, we determine such reserves are required to meet the
Income Fund's working capital needs.
S-24
<PAGE>
Results of Operations
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 1998 and 1997, the Income Fund
and its consolidated joint venture, CNL/GC El Cajon 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 nine months
ended September 30, 1998 and 1997, the Income Fund earned $2,114,810 and
$1,951,596, respectively, in rental income from operating leases and earned
income from direct financing leases from these restaurant properties, $697,907
and $715,430 of which was earned during the quarters ended September 30, 1998
and 1997, respectively. The increase in rental and earned income during the
nine months ended September 30, 1998, as compared to the nine months ended
September 30, 1997, is primarily attributable to the fact that two restaurant
properties were operational for only a partial nine months ended September 30,
1997, as compared to a full nine months ended September 30, 1998, due to
acquisitions by the Income Fund during 1997.
The decrease in rental and earned income during the quarter ended September
30, 1998, as compared to the quarter ended September 30, 1997, is primarily
attributable to a decrease in rental income due to the fact that during 1998,
the Income Fund reduced the monthly base rental income due from the tenants of
the restaurant properties in Aiken, South Carolina and Weatherford, Texas, as a
result of receiving reimbursements of construction costs from the developer, as
described above in "Liquidity and Capital Resources."
In October 1998, the tenant of three Boston Market restaurant properties
filed for bankruptcy. If the leases are eventually rejected, the Income Fund
anticipates that rental income relating to these restaurant properties will
terminate until a new tenant for these restaurant properties is located or
until the restaurant properties are sold and the proceeds from such sales are
reinvested in additional restaurant properties. However, we do not anticipate
that any decrease in rental income due to lost revenues relating to these
restaurant properties will have a material effect on the Income Fund's
financial position or results of operations.
In addition, during the nine months ended September 30, 1998 and 1997, the
Income Fund also owned and leased three restaurant properties with affiliates
as tenants-in-common and two restaurant properties indirectly through joint
venture arrangements. In connection therewith, during the quarters and nine
months ended September 30, 1998 and 1997, the Income Fund earned $105,321 and
$71,795, respectively, attributable to net income earned by these joint
ventures, $35,536 and $26,437 of which were earned during the quarters ended
September 30, 1998 and 1997, respectively. The increase in net income earned by
these joint ventures is primarily due to the fact that the restaurant
properties owned by the joint ventures and the restaurant properties held as
tenants-in-common with certain of our affiliates, were operational for the full
quarter and nine months ended September 30, 1998, as compared to a partial
quarter and nine months ended September 30, 1997.
During at least one of the nine months ended September 30, 1998 and 1997,
five lessees of the Income Fund, Golden Corral Corporation, National Restaurant
Enterprises, Inc., DenAmerica Corp., Foodmaker, Inc., and San Diego Food
Holdings, Inc. each contributed more than 10% of the Income Fund's total rental
and earned income (including the Income Fund's share of total rental and earned
income from joint ventures and properties held as tenants-in-common). As of
September 30, 1998, Golden Corral Corporation, and National Restaurant
Enterprises, Inc., were each lessees under leases relating to three
restaurants, DenAmerica Corporation and Foodmaker, Inc., were each lessees
under leases relating to four restaurants and San Diego Holdings, Inc. was the
lessee under a lease relating to one restaurant. It is anticipated that, based
on the minimum rental payments required by the leases, these tenants will each
continue to contribute more than 10% of the Income Fund's total rental income
during the remainder of 1998 and subsequent years. Any failure of these lessees
could materially affect the Income Fund's income.
Operating expenses, including depreciation and amortization expense, were
$427,437 and $431,363 for the nine months ended September 30, 1998 and 1997,
respectively, of which $157,067 and $139,928 were incurred for the quarters
ended September 30, 1998 and 1997, respectively. The decrease in operating
expenses during
S-25
<PAGE>
the nine months ended September 30, 1998, as compared to the nine months ended
September 30, 1997, is primarily attributable to a decrease in administrative
expenses, which includes services related to accounting; financial, tax and
regulatory compliance and reporting; lease and loan compliance; Limited Partner
distributions and reporting; and investor relations. In addition, operating
expenses also decreased for the nine month period ended September 30, 1998, due
to a decrease in depreciation expense as a result of the reimbursement from the
developer of construction costs relating to the restaurant properties in Aiken,
South Carolina and Weatherford, Texas, as described above in "Liquidity and
Capital Resources."
The decrease in operating expenses during the nine months ended September
30, 1998, as compared to the nine months ended September 30, 1997, was
partially offset by, and the increase during the quarter ended September 30,
1998, as compared to the quarter ended September 30, 1997, was partially
attributable to, the fact that the Income Fund accrued insurance and real
estate taxes as a result of the tenant of three Boston Market restaurant
properties filing for bankruptcy, as described above. If the tenant decides to
reject the leases, the Income Fund will continue to incur certain expenses,
such as real estate taxes, insurance and maintenance until a new tenant or
buyer for these restaurant properties is located.
The Years Ended December 31, 1997, 1996 and 1995
No significant operations commenced until the Income Fund received the
minimum offering proceeds of $1,500,000 on November 3, 1995.
The Income Fund owned and leased one wholly-owned restaurant property during
1995 and 22 wholly-owned restaurant properties during 1996 and 1997. During
1996, the Income Fund owned and leased one restaurant property through a joint
venture arrangement in which the Income Fund is a co-venturer, and owned and
leased one restaurant property with one of our affiliates, as tenants-in-
common. During 1997 the Income Fund was a co-venturer in three joint ventures
that each owned and leased one restaurant property and also owned and leased
three restaurant properties with certain of our affiliates, as tenants-in-
common. As of December 31, 1997, the Income Fund owned, either directly or
through joint venture arrangements, 28 restaurant properties which are 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 $66,200 to $248,700. All of the leases
provide for percentage rent based on sales in excess of a specified amount. In
addition, the majority of the leases provide that, commencing in specified
lease years (generally the sixth lease year), the annual base rent required
under the terms of the lease will increase.
During the years ended December 31, 1997 and 1996, the Income Fund and its
consolidated joint venture, CNL/GC El Cajon Joint Venture, earned $2,642,743
and $1,185,279, respectively, in rental income from operating leases and earned
income from direct financing leases. The increase in rental and earned income
during 1997, as compared to 1996, is primarily attributable to the fact that
the majority of the restaurant properties were operational for a full year in
1997, as compared to a partial year in 1996. In addition, for the years ended
December 31, 1997 and 1996, the Income Fund earned $100,918 and $4,834,
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 1997, as compared to 1996, is
primarily attributable to the Income Fund investing in two restaurant
properties with certain of our affiliates as tenants-in-common and in two joint
ventures in which the Income Fund is a co-venturer, during 1997, as described
above in "Liquidity and Capital Resources." Net income earned by joint ventures
is expected to increase in 1998 as the restaurant properties owned by the joint
ventures or with affiliates as tenants-in-common will be operational for a full
year during 1998 as compared to a partial year during 1997.
During at least one of the years ended December 31, 1997 and 1996 and the
period February 10, 1995 (date of inception) through December 31, 1995, five
lessees, or group of affiliated lessees, of the Income Fund, (i) Golden Corral
Corporation, (ii) National Restaurant Enterprises, Inc., (iii) DenAmerica Corp.
(iv) RTM Indianapolis, Inc. and RTM Southwest Texas, Inc., (hereinafter
referred to as RTM, Inc.) and (v) Foodmaker, Corp., each contributed more than
10% of the Income Fund's total rental income (including rental and earned
S-26
<PAGE>
income from the Income Fund's consolidated joint venture and the Income Fund's
share of rental income from two restaurant properties owned by unconsolidated
joint venture and three restaurant properties owned with separate affiliates as
tenants-in-common). As of December 31, 1997, RTM, Inc., Golden Corral
Corporation and National Restaurant Enterprises, Inc., were each lessee under
leases relating to three restaurants and DenAmerica Corp. and Foodmaker, Inc.,
were each the lessee under leases relating to four restaurants. It is
anticipated that based on the minimum rental payments required by the leases,
Golden Corral Corporation, National Restaurant Enterprises, Inc., DenAmerica
Corp. and Foodmaker, Inc. each will contribute more than 10% of the Income
Fund's total rental income in 1998 and subsequent years. In addition, six
restaurant chains, Golden Corral, Arby's, Denny's, Burger King, Jack in the Box
and Boston Market each accounted for more than 10% of the Income Fund's total
rental income during at least one of the years ended December 31, 1997 and 1996
and the period February 10, 1995 (date of inception) through December 31, 1995
(including rental and earned income from the Income Fund's consolidated joint
venture, the Income Fund's share of rental income from two restaurant
properties owned by unconsolidated joint ventures and three restaurant
properties owned with certain of our affiliates as tenants-in-common). In
subsequent years, it is anticipated that Golden Corral, Jack in the Box, Burger
King and Boston Market, each will contribute more than 10% of the Income Fund's
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
adversely affect the Income Fund's income.
During the years ended December 31, 1997 and 1996 and the period February
10, 1995 (date of inception) through December 31, 1995, the Income Fund also
earned $69,779, $244,406 and $12,153, respectively, in interest income from
investments in money market accounts or other short-term, highly liquid
investments. The decrease in interest income during 1997, as compared to 1996,
is primarily attributable to the decrease in the amount of funds invested in
short-term, liquid investments due to the payment during 1997, of construction
costs accrued at December 31, 1996, the acquisition of two restaurant
properties as tenants-in-common with affiliates, and as a result of acquiring
interests in two joint ventures as described above in "Liquidity and Capital
Resources." The increase in interest income during 1996, as compared to 1995,
was primarily attributable to an increase in the amount of funds invested in
short-term liquid investments as a result of additional Limited Partner
contributions during 1996.
Operating expenses, including depreciation and amortization expense, were
$569,157, $348,744 and $3,802 for the years ended December 31, 1997 and 1996
and the period February 10, 1995 (date of inception) through December 31, 1995,
respectively. The increase in operating expenses during 1996, as compared to
1995, is primarily attributable to an increase in depreciation expense as the
result of the acquisition of additional restaurant properties during 1996. The
increase during 1997, as compared to 1996, is primarily attributable to the
fact that the restaurant properties acquired during 1996 were operational for a
full year in 1997, as compared to a partial year during 1996. In addition,
operating expenses increased during 1997 and 1996, each as compared to the
previous year, as a result of an increase in management fees derived from the
increased rental revenues, as described above. Operating expenses also
increased during 1997, as compared to 1996, as a result of the Income Fund
incurring taxes relating to the filing of various state tax returns during
1997. Operating expenses also increased during 1996, as compared to 1995, as a
result of an increase in administrative expenses associated with operating the
Income Fund and its restaurant properties.
General
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Income Fund's financial position or results of operations.
The Income Fund's leases as of September 30, 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
S-27
<PAGE>
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.
The Year 2000 problem is the result of information technology systems and
embedded systems (products which are made with microprocessor (computer) chips
such as HVAC systems, physical security systems and elevators) using a two-
digit format, as opposed to four digits, to indicate the year. Such information
technology and embedded systems may be unable to properly recognize and process
date-sensitive information beginning January 1, 2000.
The Income Fund does not have any information technology systems. Certain of
our affiliates provide all services requiring the use of information technology
systems pursuant to a management agreement with the Income Fund. The
maintenance of embedded systems, if any, at the Income Fund's properties is the
responsibility of the tenants of the properties in accordance with the terms of
the Income Fund's leases. We and our affiliates have established a team
dedicated to reviewing the internal information technology systems used in the
operation of the Income Fund, and the information technology and embedded
systems and the Year 2000 compliance plans of the Income Fund's tenants,
significant suppliers, financial institutions and transfer agent.
The information technology infrastructure of the affiliates of we consists
of a network of personal computers and servers that were obtained from major
suppliers. The affiliates utilize various administrative and financial software
applications on that infrastructure to perform the business functions of the
Income Fund. Our inability and that of our affiliates to identify and timely
correct material Year 2000 deficiencies in the software and/or infrastructure
could result in an interruption in, or failure of, certain of the Income Fund's
business activities or operations. Accordingly, we and our affiliates have
requested and are evaluating documentation from the suppliers of the affiliates
regarding the Year 2000 compliance of their products that are used in the
business activities or operations of the Income Fund. The costs expected to be
incurred by we and our affiliates to become Year 2000 compliant will be
incurred by the general partners and affiliates; therefore, these costs will
have no impact on the Income Fund's financial position or results of
operations.
The Income Fund has material third party relationships with its tenants,
financial institutions and 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. If
any of these third parties are unable to meet their obligations to the Income
Fund because of the Year 2000 deficiencies, such a failure may have a material
impact on the Income Fund. Accordingly, we have requested and are evaluating
documentation from the Income Fund's tenants, financial institutions, and
transfer agent relating to their Year 2000 compliance plans. At this time, we
have not yet received sufficient certifications to be assured that the tenants,
financial institutions, and transfer agent have fully considered and mitigated
any potential material impact of the Year 2000 deficiencies. Therefore, we do
not, at this time, know of the potential costs to the Income Fund of any
adverse impact or effect of any Year 2000 deficiencies by these third parties.
We currently expect that all Year 2000 compliance testing and any necessary
remedial measures on the information technology systems used in the business
activities and operations of the Income Fund will be completed prior to June
30, 1999. Based on the progress we and our affiliates have made in identifying
and addressing the Income Fund's Year 2000 issues and the plan and timeline to
complete the compliance program, we do not foresee significant risks associated
with the Income Fund's Year 2000 compliance at this time. Because we and our
affiliates are still evaluating the status of the systems used in business
activities and operations of the Income Fund and the systems of the third
parties with which the Income Fund conducts its business, we have not yet
developed a comprehensive contingency plan and are unable to identify "the most
reasonably likely worst case scenario" at this time. As we identify significant
risks related to the Income Fund's Year 2000 compliance or if the Income Fund's
Year 2000 compliance program's progress deviates substantially from the
anticipated timeline, we will develop appropriate contingency plans.
S-28
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997.. F-1
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997............................................. F-2
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997............. F-3
Condensed Statements of Cash Flows for the Nine Months Ended September
30, 1998 and 1997....................................................... F-4
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997....................................... F-5
Report of Independent Accountants........................................ F-7
Balance Sheets as of December 31, 1997 and 1996.......................... F-8
Statements of Income for the Years Ended December 31, 1997, 1996 and the
period February 10, 1995 (date of inception) through Year Ended December
31, 1995................................................................ F-9
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and the period February 10, 1995 (date of inception) through Year
Ended December 31, 1995................................................. F-10
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
the period February 10, 1995 (date of inception) through Year Ended
December 31, 1995....................................................... F-11
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and the period February 10, 1995 (date of inception) through Year Ended
December 31, 1995....................................................... F-13
Unaudited Pro Forma Financial Information................................ F-22
Unaudited Pro Forma Balance Sheet as of September 30, 1998............... F-23
Unaudited Pro Forma Income Statement for the Nine Months Ended September
30, 1998................................................................ F-24
Unaudited Pro Forma Income Statement for the Year Ended December 31,
1997.................................................................... F-25
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements.............................................................. F-26
</TABLE>
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September December
30, 31,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $818,692 and $553,968.... $20,741,467 $21,328,869
Net investment in direct financing leases............. 2,988,761 3,056,783
Investment in joint ventures.......................... 1,448,628 1,328,067
Cash and cash equivalents............................. 1,462,427 1,238,799
Receivables, less allowance for doubtful accounts of
$14,333 in 1997...................................... 22,200 613
Prepaid expenses...................................... 7,219 20
Organization costs, less accumulated amortization of
$5,809 and $4,309 4,191 5,691
Accrued rental income................................. 573,632 357,246
Other assets.......................................... 119,765 104,391
----------- -----------
$27,368,290 $27,420,479
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable...................................... $ 2,868 $ 2,922
Accrued construction costs payable.................... -- 38,834
Accrued real estate taxes payable..................... 20,645 --
Distributions payable................................. 600,000 600,000
Due to related parties................................ 3,362 2,875
Rents paid in advance................................. 41,300 55,762
Deferred rental income................................ 52,021 64,690
----------- -----------
Total liabilities................................... 720,196 765,083
Minority interest..................................... 429,452 419,193
Partners' capital..................................... 26,218,642 26,236,203
----------- -----------
$27,368,290 $27,420,479
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-1
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
-------------------- ------------------------
1998 1997 1998 1997
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases $ 604,073 $ 620,623 $ 1,832,554 $ 1,726,684
Earned income from direct
financing leases 93,834 94,807 282,256 224,912
Interest and other income... 11,128 8,372 36,667 58,641
--------- --------- ----------- -----------
709,035 723,802 2,151,477 2,010,237
--------- --------- ----------- -----------
Expenses:
General operating and
administrative 29,293 26,636 86,909 101,337
Professional services....... 4,393 6,530 15,022 16,595
Real estate taxes........... 20,645 -- 20,645 --
Management fees to related
parties.................... 6,604 6,655 19,966 18,844
State and other taxes....... 7 -- 11,811 6,442
Depreciation and
amortization............... 96,125 100,107 273,084 288,145
--------- --------- ----------- -----------
157,067 139,928 427,437 431,363
--------- --------- ----------- -----------
Income Before Minority
Interest in Income of
Consolidated Joint Venture
and Equity in Earnings of
Unconsolidated Joint
Ventures..................... 551,968 583,874 1,724,040 1,578,874
Minority Interest in Income of
Consolidated Joint Venture... (15,703) (15,697) (46,922) (26,129)
Equity in Earnings of
Unconsolidated
Joint Ventures............... 35,536 26,437 105,321 71,795
--------- --------- ----------- -----------
Net Income.................... $ 571,801 $ 594,614 $ 1,782,439 $ 1,624,540
========= ========= =========== ===========
Allocation of Net Income:
General partners............ $ (282) $ (54) $ (176) $ (630)
Limited partners............ 572,083 594,668 1,782,615 1,625,170
--------- --------- ----------- -----------
$ 571,801 $ 594,614 $ 1,782,439 $ 1,624,540
========= ========= =========== ===========
Net Income Per Limited Partner
Unit......................... $ 0.19 $ 0.20 $ 0.59 $ 0.54
========= ========= =========== ===========
Weighted Average Number of
Limited
Partner Units Outstanding.... 3,000,000 3,000,000 3,000,000 3,000,000
========= ========= =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months
Ended Year Ended
September December
30, 1998 31, 1997
----------- -----------
<S> <C> <C>
General partners:
Beginning balance.................................. $ (551) $ 288
Net income......................................... (176) (839)
----------- -----------
(727) (551)
----------- -----------
Limited partners:
Beginning balance.................................. 26,236,754 26,319,858
Net income......................................... 1,782,615 2,204,396
Distributions ($0.60 and $0.76 per limited partner
unit, respectively)............................... (1,800,000) (2,287,500)
----------- -----------
26,219,369 26,236,754
----------- -----------
Total partners' capital.......................... $26,218,642 $26,236,203
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------
1998 1997
---------- -----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities........... $1,881,998 $ 1,912,554
---------- -----------
Cash Flows from Investing Activities:
Additions to land and buildings on operating
leases 306,100 (1,978,420)
Investment in direct financing leases............. -- (1,130,497)
Investment in joint ventures...................... (127,807) (1,050,402)
---------- -----------
Net cash provided by (used in) investing
activities..................................... 178,293 (4,159,319)
---------- -----------
Cash Flows from Financing Activities:
Reimbursement of acquisition costs paid by related
parties on behalf of the Partnership -- (25,434)
Contributions from minority interest.............. -- 278,170
Distributions to limited partners................. (1,800,000) (1,577,584)
Distributions to hold of minority interest........ (36,663) (29,184)
---------- -----------
Net cash used in financing activities........... (1,836,663) (1,354,032)
---------- -----------
Net Increase (Decrease) in Cash and Cash Equivalents.. 223,628 (3,600,797)
Cash and Cash Equivalents at Beginning
of Period............................................ 1,238,799 4,716,719
---------- -----------
Cash and Cash Equivalents at End of
Period............................................... $1,462,427 $ 1,115,922
========== ===========
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
Related parties paid certain acquisition costs on
behalf of the Partnership as follows:.............. $ -- $ 11,253
========== ===========
Land and building under operating lease exchanged
for land and building under operating lease........ $ 899,654 $ --
========== ===========
Distributions declared and unpaid at end of period.. $ 600,000 $ 600,000
========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ending
December 31, 1998. Amounts as of December 31, 1997, 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
XVII, Ltd. (the "Partnership") for the year ended December 31, 1997.
The Partnership accounts for its 80 percent interest in the accounts of
CNL/GC El Cajon Joint Venture using the consolidation method. Minority interest
represents the minority joint venture partner's proportionate share of the
equity in the Partnership's consolidated joint venture. All significant
intercompany accounts and transactions have been eliminated.
Certain items in the prior year's financial statements have been
reclassified to conform to 1998 presentation. These reclassifications had no
effect on partners' capital or net income.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2. Land and Buildings on Operating Leases
In June 1998, the tenant of the property in Troy, Ohio, exercised its option
under the terms of its lease agreement to substitute the existing property for
a replacement property. In conjunction therewith, the Partnership exchanged the
property in Troy, Ohio, with a property in Inglewood, California. The lease for
the property in Troy, Ohio, was amended to allow the property in Inglewood,
California 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
Inglewood, California, at the net book value of the property in Troy, Ohio. No
gain or loss was recognized due to this being accounted for as a nonmonetary
exchange of similar assets.
3. 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
and properties held as tenants-in-common), for at least one of the nine month
periods ended September 30:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Golden Corral Corporation................ $339,073 $349,449
National Restaurant Enterprises, Inc..... 328,582 208,212
DenAmerica Corp.......................... 323,884 319,740
Foodmaker, Inc........................... 262,135 240,487
San Diego Food Holdings, Inc............. 237,131 133,858
</TABLE>
F-5
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Nine Months Ended September 30, 1998 and 1997
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 could significantly impact the
results of operations of the Partnership. However, the general partners believe
that the risk of such a default is reduced due to the essential or important
nature of these properties for the ongoing operations of the lessees.
F-6
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners
CNL Income Fund XVII, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund XVII,
Ltd. (a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. These financial statements
and financial statement schedule 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 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 provides 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 Income Fund XVII, Ltd.
as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the years ended December 31, 1997 and 1996 and the
period February 10, 1995 (date of inception) through December 31, 1995 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
February 4, 1998
F-7
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation............................. $21,328,869 $21,364,032
Net investment in direct financing leases............. 3,056,783 1,982,164
Investment in joint ventures.......................... 1,328,067 201,171
Cash and cash equivalents............................. 1,238,799 4,716,719
Receivables, less allowance for
doubtful accounts of $14,333
and $4,469............................................ 613 63,253
Organization costs, less accumulated amortization of
$4,309 and $2,309.................................... 5,691 7,691
Accrued rental income................................. 460,915 167,216
Other assets.......................................... 104,411 172,761
----------- -----------
$27,524,148 $28,675,007
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
<CAPTION>
Accounts payable...................................... $ 2,922 $ 2,985
<S> <C> <C>
Accrued construction costs payable.................... 38,834 1,560,712
Distributions payable................................. 600,000 490,084
Due to related parties................................ 2,875 17,153
Rents paid in advance................................. 55,762 52,769
Deferred rental income................................ 168,359 90,482
----------- -----------
Total liabilities..................................... 868,752 2,214,185
Minority interest..................................... 419,193 140,676
Partners' capital..................................... 26,236,203 26,320,146
----------- -----------
$27,524,148 $28,675,007
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-8
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
February 10,
1995 (Date)
of
Inception)
Year Ended December through Year
31, Ended
---------------------- December 31,
1997 1996 1995
---------- ---------- ------------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases..... $2,323,256 $1,054,534 $ --
Earned income from direct financing
leases................................. 319,487 130,745 --
Interest................................ 69,779 244,406 12,153
Other income............................ 1,128 9,984 --
---------- ---------- -------
2,713,650 1,439,669 12,153
---------- ---------- -------
Expenses:
General operating and administrative.... 128,168 144,728 3,360
Professional services................... 21,877 14,326 133
Management fee to related party......... 25,377 10,482 --
State and other taxes................... 6,443 -- --
Depreciation and amortization........... 387,292 179,208 309
---------- ---------- -------
569,157 348,744 3,802
---------- ---------- -------
Income Before Minority Interest in Income
of Consolidated Joint Venture and Equity
in Earnings of Unconsolidated Joint
Ventures................................. 2,144,493 1,090,925 8,351
Minority Interest in Income of
Consolidated Joint Venture............... (41,854) -- --
Equity in Earnings of Unconsolidated Joint
Ventures................................. 100,918 4,834 --
---------- ---------- -------
Net Income................................ $2,203,557 $1,095,759 $ 8,351
========== ========== =======
Allocation of Net Income:
General partners........................ $ (839) $ (709) $ (3)
Limited partners........................ 2,204,396 1,096,468 8,354
---------- ---------- -------
$2,203,557 $1,095,759 $ 8,351
========== ========== =======
Net Income per Limited Partner Unit....... $ 0.73 $ 0.52 $ 0.02
========== ========== =======
Weighted Average Number of Limited Partner
Units Outstanding........................ 3,000,000 2,121,253 340,780
========== ========== =======
</TABLE>
See accompanying notes to financial statements.
F-9
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997 and 1996 and the Period February 10, 1995 (Date
of Inception)
through December 31, 1995
<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 at Inception,
(February 10, 1995).... $ -- $ -- $ -- $ -- $ -- $ -- $ --
Contributions from
general partners....... 1,000 -- -- -- -- -- 1,000
Contributions from
limited partners....... -- -- 5,696,921 -- -- -- 5,696,921
Distributions to limited
partners
($0.08 per limited
partner unit).......... -- -- -- (28,275) -- -- (28,275)
Syndication costs....... -- -- -- -- -- (1,035,764) (1,035,764)
Net income.............. -- (3) -- -- 8,354 -- 8,351
------ ------ ----------- ----------- ---------- ----------- -----------
Balance, December 31,
1995................... 1,000 (3) 5,696,921 (28,275) 8,354 (1,035,764) 4,642,233
Contributions from
limited partners....... -- -- 24,303,079 -- -- -- 24,303,079
Distributions to limited
partners
($0.55 per limited
partner unit).......... -- -- -- (1,166,689) -- -- (1,166,689)
Syndication costs....... -- -- -- -- -- (2,554,236) (2,554,236)
Net income.............. -- (709) -- -- 1,096,468 -- 1,095,759
------ ------ ----------- ----------- ---------- ----------- -----------
Balance, December 31,
1996................... 1,000 (712) 30,000,000 (1,194,964) 1,104,822 (3,590,000) 26,320,146
Distributions to limited
partners
($0.76 per limited
partner unit).......... -- -- -- (2,287,500 -- -- (2,287,500)
Net income.............. -- (839) -- -- 2,204,396 -- 2,203,557
------ ------ ----------- ----------- ---------- ----------- -----------
Balance, December 31,
1997................... $1,000 $1,551) $30,000,000 $(3,482,464) $3,309,218 $(3,590,000) $26,236,203
====== ====== =========== =========== ========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
February 10,
1995 (Date
of
Inception)
through
Year Ended December 31, December 31,
1997 1996 1995
----------- ------------ ------------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows from Operating Activities:
Cash received from tenants........... $ 2,502,057 $ 1,149,196 --
Distributions from unconsolidated
joint ventures...................... 106,346 4,985 --
Cash paid for expenses............... (183,068) (165,639) (3,141)
Interest received.................... 69,779 244,406 12,153
----------- ------------ ----------
Net cash provided by operating
activities......................... 2,495,114 1,232,948 9,012
----------- ------------ ----------
Cash Flows From Investing Activities:
Additions to land and buildings on
operating leases.................... (1,740,491) (19,735,346) (332,928)
Investment in direct financing
leases.............................. (1,130,497) (1,784,925) --
Investment in joint ventures......... (1,135,681) (201,501) --
Increase in other assets............. -- -- (221,282)
Other................................ -- 410 (410)
----------- ------------ ----------
Net cash used in investing
activities......................... (4,006,669) (21,721,362) (554,620)
----------- ------------ ----------
Cash Flows From Financing Activities:
Reimbursement of acquisition,
organization and syndication costs
paid by related parties on behalf
of the Partnership.................. (25,444) (326,483) (347,907)
Contributions from general
partners............................ -- -- 1,000
Contributions from limited
partners............................ -- 24,303,079 5,696,921
Contributions from holder of
minority interest................... 278,170 140,676 --
Distributions to limited partners.... (2,177,584) (703,681) (1,199)
Distributions to holder of minority
interest............................ (41,507) -- --
Payment of syndication costs......... -- (2,407,317) (604,348)
----------- ------------ ----------
Net cash provided by (used
in)financing activities............ (1,966,365) 21,006,274 4,744,467
----------- ------------ ----------
Net Increase (Decrease) in Cash and
Cash Equivalents...................... (3,477,920) 517,860 4,198,859
Cash and Cash Equivalents at Beginning
of Period............................. 4,716,719 4,198,859 --
----------- ------------ ----------
Cash and Cash Equivalents at End of
Period................................ $ 1,238,799 $ 4,716,719 $4,198,859
=========== ============ ==========
Reconciliation of Net Income to Net
Cash Provided by Operating Activities:
Net income............................ $ 2,203,557 $ 1,095,759 $ 8,351
----------- ------------ ----------
Adjustments to reconcile net income
to net cash provided by operating
activities: Depreciation............. 376,973 176,995 --
Amortization........................ 10,319 2,213 309
Minority interest in income
consolidated joint venture......... 41,854 -- --
Equity in earnings of unconsolidated
joint ventures, net of
distributions...................... 5,428 151 --
Decrease (increase) in receivables.. 39,518 (40,131) --
Decrease in net investment in direct
financing leases................... 30,454 16,345 --
Increase in accrued rental income... (293,699) (167,216) --
Increase (decrease) in accounts
payable and accrued expenses....... (63) 2,985 --
Increase (decrease) in due to
related parties, excluding
acquisition, organization and
syndication costs paid on behalf of
the Partnership.................... (97) 2,596 352
Increase in rents paid in advance... 2,993 52,769 --
Increase in deferred rental income.. 77,877 90,482 --
----------- ------------ ----------
Total adjustments................. 291,557 137,189 661
----------- ------------ ----------
Net Cash Provided by Operating
Activities............................ $ 2,495,114 $ 1,232,948 $ 9,012
=========== ============ ==========
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Related parties paid certain
acquisition, organization and
syndication costs on behalf of the
Partnership as follows:
Acquisition costs................... $ 11,262 $ 69,836 $ 30,424
Organization costs.................. -- -- 10,000
Syndication costs................... -- 231,885 346,450
----------- ------------ ----------
$ 11,262 $ 301,721 $ 386,874
=========== ============ ==========
Distributions declared and unpaid at
December 31.......................... $ 600,000 $ 490,084 $ 27,076
=========== ============ ==========
</TABLE>
See accompanying notes to financial statements.
F-11
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997 and 1996 and the Period February 10, 1995
(Date of Inception) through December 31, 1995
1. Significant Accounting Policies
Organization and Nature of Business--CNL Income Fund XVII, 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, family-style and casual dining restaurant chains. Under
the terms of a registration statement filed with the Securities and
Exchange Commission, the Partnership was authorized to sell a maximum of
3,000,000 units ($30,000,000) of limited partnership interest. A total of
3,000,000 units ($30,000,000) of limited partnership interest were sold.
The Partnership was a development stage enterprise from February 10, 1995
through November 3, 1995. Since operations had not begun, activities
through November 3, 1995, were devoted to organization of the Partnership.
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) (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 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 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 deferred 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
F-12
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997 and 1996 and the Period February 10, 1995
(Date of Inception) through December 31, 1995
1. Significant Accounting Policies--Continued
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.
Investment in Joint Ventures--The Partnership accounts for its 80 percent
interest in CNL/GC El Cajon 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 Kingston Joint Venture and CNL
Mansfield Joint Venture, and a property in Corpus Christi, Texas, a
property in Akron, Ohio, and a property in Fayetteville, North Carolina,
for which each 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, certificates of deposit 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, certificates of deposit 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 amortized over five years using
the straight-line method upon commencement of operations.
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 (Note 6).
Weighted Average Number of Limited Partner Units Outstanding--Net income
and distributions per limited partner unit are calculated based upon the
weighted average number of units of limited partnership interest
outstanding during the period the Partnership was operational.
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
F-13
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997 and 1996 and the Period February 10, 1995
(Date of Inception) through December 31, 1995
1.Significant Accounting Policies--Continued
liabilities to prepare these financial statements in conformity with
generally accepted accounted 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 1997 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 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 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 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>
1997 1996
----------- -----------
<S> <C> <C>
Land........................................... $10,357,191 $10,148,827
Buildings...................................... 11,525,646 11,168,540
----------- -----------
21,882,837 21,317,367
Less accumulated depreciation.................. (553,968) (176,995)
----------- -----------
21,328,869 21,140,372
Construction in progress....................... -- 223,660
----------- -----------
$21,328,869 $21,364,032
=========== ===========
</TABLE>
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, 1997 and 1996, the Partnership recognized $293,699 and
$167,216, respectively, of such rental income.
F-14
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997 and 1996 and the Period February 10, 1995
(Date of Inception) through December 31, 1995
3. Land and Buildings on Operating Leases--Continued
The following is a schedule of the future minimum lease payments to be
received on noncancellable operating leases at December 31, 1997:
<TABLE>
<S> <C>
1998.......................................................... $ 2,160,765
1999.......................................................... 2,173,058
2000.......................................................... 2,185,696
2001.......................................................... 2,279,375
2002.......................................................... 2,336,127
Thereafter.................................................... 30,028,040
-----------
$41,163,061
===========
</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>
1997 1996
---------- ----------
<S> <C> <C>
Minimum lease payments receivable................ $7,636,851 $4,301,029
Estimated residual values........................ 775,896 499,627
Less unearned income............................. (5,355,964) (2,818,492)
---------- ----------
Net investment in direct financing leases........ $3,056,783 $1,982,164
========== ==========
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998........................................................... $ 411,927
1999........................................................... 411,927
2000........................................................... 411,927
2001........................................................... 411,927
2002........................................................... 411,927
Thereafter..................................................... 5,577,216
----------
$7,636,851
==========
</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
In October 1996, the Partnership acquired an approximate 20 percent
interest in a property in Fayetteville, North Carolina, as tenants-in-
common, with an affiliate of the general partners. The Partnership accounts
F-15
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997 and 1996 and the Period February 10, 1995
(Date of Inception) through December 31, 1995
5. Investment in Joint Ventures--Continued
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.
In January 1997, the Partnership acquired an approximate 27 percent
interest in a property in Corpus Christi, Texas, and an approximate 37
percent interest in a property in Akron, Ohio, each as tenants-in-common,
with affiliates of the general partners. The Partnership accounts for its
investment in these properties using the equity method since the
Partnership shares control with affiliates, and amounts relating to these
investments are included in investment in joint ventures.
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, 1997, the Partnership and its co-venture partner
had contributed $163,964 and $616,245, respectively, to the joint venture
to acquire the restaurant property. As of December 31, 1997, the
Partnership and its co-venture partner owned a 21 percent and 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.
In September 1997, the Partnership entered into a joint venture
arrangement, CNL Kingston Joint Venture, with an affiliate of the
Partnership which has the same general partners, to construct and hold one
restaurant property. As of December 31, 1997, the Partnership and its co-
venture partner had contributed $183,241 and $121,855, respectively, to CNL
Kingston Joint Venture to fund construction costs relating to the property
owned by the joint venture. The partnership and its co-venture partner have
agreed to contribute approximately $128,700 and $85,600, respectively, in
additional construction costs to the joint venture. When construction is
completed, the Partnership and its co-venture partner expect to have a
60.06 and 39.94 percent interest, respectively, in the profits and losses
of the joint venture. As of December 31, 1997, the Partnership owned a
60.06% 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.
CNL Mansfield Joint Venture and CNL Kingston 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>
1997 1996
---------- --------
<S> <C> <C>
Land and buildings on operating leases, less
accumulated depreciation.......................... $4,495,671 $960,732
Cash............................................... 8,936 100
Accrued rental income.............................. 65,395 3,929
Other assets....................................... 1,931 --
Liabilities........................................ 228,896 23
Partners' capital.................................. 4,343,037 964,738
Revenues........................................... 453,481 29,293
Net income......................................... 375,257 24,502
</TABLE>
F-16
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997 and 1996 and the Period February 10, 1995
(Date of Inception) through December 31, 1995
5. Investment in Joint Ventures--Continued
The Partnership recognized income totaling $100,918 and $4,834 for the
years ended December 31, 1997 and 1996 from these joint ventures and the
properties held as tenants-in-common with affiliates.
6. Syndication Costs
Syndication costs consisting of legal fees, commissions, a due diligence
expense reimbursement fee, printing and other expenses incurred in
connection with the offering totaled $3,590,000. These offering expenses
were charged to the limited partners' capital accounts to reflect the net
capital proceeds of the offering.
7. Allocations and Distributions
Generally, distributions of net cash flow, as defined in the limited
partnership agreement of the Partnership, are made 95 percent to the
limited partners and five percent to the general partners; provided,
however, that for any particular year, the five percent of net cash flow to
be distributed to the general partners will be subordinated to receipt by
the limited partners in that year of an eight percent noncumulative,
noncompounded return on their aggregate invested capital contributions (the
"Limited Partners' 8% Return").
Generally, net income (determined without regard to any depreciation and
amortization deductions and gains and losses from the sale of properties)
is allocated between the limited partners and the general partners first,
in an amount not to exceed the net cash flow distributed to the partners
attributable to such year in the same proportions as such net cash flow is
distributed; and thereafter, 99 percent to the limited partners and one
percent to the general partners. All deductions for depreciation and
amortization are allocated 99 percent to the limited partners and one
percent to the general partners.
Net sales proceeds from the sale of a property generally will be
distributed first to the limited partners in an amount sufficient to
provide them with the return of their invested capital contributions, plus
their cumulative Limited Partners' 8% Return. The general partners will
then receive a return of their capital contributions and, to the extent
previously subordinated and unpaid, a five percent interest in all net cash
flow distributions. Any remaining net 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 will be, in general, allocated in the
same manner as net sales proceeds are distributable. Any loss will be
allocated first, on a pro rata basis to the partners with positive balances
in their capital accounts; and thereafter, 95 percent to the limited
partners and five percent to the general partners.
During the years ended December 31, 1997 and 1996 and during the period
February 10, 1995 (date of inception) through December 31, 1995, the
Partnership declared distributions to the limited partners of $2,287,500,
$1,166,689 and $28,275, respectively. No distributions have been made to
the general partners to date.
F-17
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997 and 1996 and the Period February 10, 1995
(Date of Inception) through December 31, 1995
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, 1997 and 1996 and the period February 10, 1995 (date of
inception) through December 31, 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- -------
<S> <C> <C> <C>
Net income for financial reporting
purposes.................................. $2,203,557 $1,095,759 $ 8,351
Depreciation for financial reporting
purposes in excess of depreciation for tax
reporting purposes........................ 25,005 13,226 --
Direct financing leases recorded as
operating leases for tax reporting
purposes.................................. 30,454 16,345 --
Equity in earnings of unconsolidated joint
venture for financial reporting purposes
in excess of equity in earnings of
unconsolidated joint ventures for tax
reporting purposes........................ (3,650) (479) --
Minority interest in timing differences of
consolidated joint venture................ 217 --
Capitalization of administrative expenses
for tax reporting purposes................ 1,557 11,940 3,493
Amortization for tax reporting purposes (in
excess of) less than amortization for
financial reporting purposes.............. 1,667 (2,025) 309
Accrued rental income...................... (293,699) (167,216) --
Deferred rental income..................... 80,635 90,482 --
Rents paid in advance...................... 2,993 52,769 --
Other...................................... 9,865 4,163 --
---------- ---------- -------
Net income for federal income tax
purposes.................................. $2,058,601 $1,114,964 $12,153
========== ========== =======
</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 parent company of CNL
Securities Corp. and CNL Fund Advisors, Inc. James M. Seneff, Jr. is
director and chief executive officer of CNL Securities Corp. and 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, is director and president of CNL Securities Corp., is director,
vice chairman of the board of directors and treasurer of CNL Fund Advisors,
Inc. and served as president of CNL Fund Advisors, Inc. through October 31,
1997.
For the year ended December 31, 1996 and the period February 10, 1995 (Date
of Inception) through December 31, 1995, the Partnership incurred
$2,065,762 and $484,238, respectively, in syndication costs due to CNL
Securities Corp. for services in connection with selling limited
partnership interests. A substantial portion of these amounts ($2,359,831)
was paid as commissions to other broker-dealers.
In addition, for the year ended December 31, 1996 and the period February
10, 1995 (Date of Inception) through December 31, 1995, the Partnership
incurred $121,515 and $28,485, respectively, as a due diligence expense
reimbursement fee due to CNL Securities Corp. This fee equals 0.5% of the
limited
F-18
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997 and 1996 and the Period February 10, 1995
(Date of Inception) through December 31, 1995
9. Related Party Transactions--Continued
partner contributions of $30,000,000. The majority of this fee was
reallowed to other broker-dealers for payment of bona fide due diligence
expenses.
Additionally, the Partnership incurred $1,093,639 and $256,361 for the year
ended December 31, 1996 and the period February 10, 1995 (Date of
Inception) through December 31, 1995, respectively, in acquisition fees due
to CNL Fund Advisors, Inc. for services in finding, negotiating and
acquiring properties on behalf of the Partnership. These fees represent
4.5% of the limited partner capital contributions of $30,000,000.
During the years ended December 31, 1997 and 1996, and the period February
10, 1995 (Date of Inception) through December 31, 1995, CNL Fund Advisors,
Inc. acted as manager of the Partnership's properties pursuant to a
management agreement with the Partnership. In connection therewith, the
Partnership agreed to pay CNL Fund Advisors, Inc. an annual, 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 CNL Fund Advisors, Inc. 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 CNL Fund Advisors, Inc. shall
determine. The Partnership incurred management fees of $25,377 and $10,482
for the years ended December 31, 1997 and 1996. No such fees were incurred
for the period February 10, 1995 (date of inception) through December 31,
1995.
During the years ended December 31, 1997 and 1996 and for the period
February 10, 1995 (date of inception) through December 31, 1995, Affiliates
provided accounting and administrative services to the Partnership
(including accounting and administrative services in connection with the
offering of units) on a day-to-day basis. The expenses incurred for these
services were classified as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- -------- --------
<S> <C> <C> <C>
Syndication costs................................. $ -- $177,683 $133,982
General operating and administrative expenses..... 90,700 96,729 2,659
------- -------- --------
$90,700 $274,412 $136,641
======= ======== ========
</TABLE>
The due to related parties at December 31, 1997 and 1996 totaled $2,875 and
$17,153, respectively.
During 1996, the Partnership acquired from affiliates of the general
partners three properties, one of which was held with another affiliate as
tenants-in-common, for an aggregate purchase price of $1,667,140. The
affiliates of the general partners had purchased and temporarily held title
to these properties in order to facilitate the acquisition of these
properties by the Partnership. The purchase prices paid by the Partnership
represented the costs incurred by the affiliates of the general partners to
acquire the properties, including closing costs.
During 1997, the Partnership and affiliates of the general partners
acquired two properties as tenants-in- common for an aggregate purchase
price of $718,932 from CNL BB Corp., an affiliate of the general partners.
CNL BB Corp. had purchased and temporarily held title to these properties
in order to facilitate
F-19
<PAGE>
CNL INCOME FUND XVII, LTD.
(A Florida Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997 and 1996 and the Period February 10, 1995
(Date of Inception) through December 31, 1995
9. Related Party Transactions--Continued
the acquisition of the properties by the Partnership and the affiliates.
The purchase price paid by the Partnership and the affiliates represented
the costs incurred by CNL BB Corp. to acquire and carry the property,
including closing costs.
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 rental and earned income from the Partnership's consolidated
joint venture, the Partnership's share of rental income from the
unconsolidated joint ventures and the three properties held as tenants-in-
common with affiliates of the general partners) for at least one of the
years ended December 31, 1997 and 1996 and the period February 10, 1995
(date of inception) through December 31, 1995:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- ----
<S> <C> <C> <C>
Golden Corral Corporation........................... $467,275 $286,307 $--
DenAmerica Corp..................................... 427,800 250,535 --
National Restaurant Enterprises, Inc................ 376,461 197,882 --
Foodmaker, Inc...................................... 326,007 116,658 --
RTM Indianapolis, Inc. and RTM Southwest, Texas,
Inc................................................ 269,010 133,200 --
</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 rental and
earned income from the Partnership's consolidated joint venture, the
Partnership's share of total rental income from the unconsolidated joint
ventures and the three properties held as tenants-in-common with affiliates
of the general partners) for at least one of the years ended December 31,
1997 and 1996 and the period February 10, 1995 (date of inception through
December 31, 1995):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- ----
<S> <C> <C> <C>
Golden Corral Family Steakhouse Restaurants......... $680,316 $286,307 $--
Burger King......................................... 410,876 197,882 --
Jack in the Box..................................... 326,007 116,659 --
Boston Market....................................... 299,744 105,682 --
Arby's.............................................. 269,010 133,200 --
Denny's............................................. 252,968 250,535 --
</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 of these lessees or restaurant chains
could significantly impact the results of operations of the Partnership.
However, the general partners believe that the risk of such a default is
reduced due to the essential or important nature of these properties for
the on-going operations of the lessees.
F-20
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to the
Company gives effect to the Acquisition, and is based on estimates and
assumptions set for the 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 the Company, the
historical combined financial information of CNL Income Fund XVII, Ltd., (the
"CNL 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 the Company, the
CNL Income Fund, Advisor and CNL Restaurant Financial Services Group. The pro
forma balance sheet assumes that the Acquisition occurred on September 30,
1998; the pro forma consolidated statements of earnings assume that the
Property Acquisitions (as defined on page ) and the Acquisition occurred on
January 1, 1997.
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.
UNAUDITED PRO FORMA BALANCE SHEET
September 30, 1998
<TABLE>
<CAPTION>
Historical
---------------------------------------------------------------------------------
CNL Financial
CNL Income Services, CNL Financial Combined
APF Fund XVII, Ltd. Advisor Inc. Corp. Portfolios
------------ --------------- ---------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Land and
buildings on
operating
leases, net..... $298,967,972 $20,741,467 $ 0 $ 0 $ 0 $319,709,439
Net investment in
direct
financing
leases.......... 117,028,760 2,988,761 0 0 0 120,017,521
Mortgages and
notes
receivable...... 33,523,506 0 0 0 173,776,981 207,300,487
Other
Investments..... 16,200,316 0 200,000 0 6,561,628 22,961,944
Investment in
joint ventures.. 631,374 1,448,628 0 0 0 2,080,002
Cash and cash
equivalents..... 90,674,289 1,462,427 283,300 599,997 5,098,033 98,118,046
Receivables...... 575,104 22,200 7,544,985 6,824,632 517,471 15,484,392
Accrued rental
income.......... 3,071,451 573,632 0 0 0 3,645,083
Other assets..... 5,711,195 131,175 401,524 295,570 3,854,477 10,393,941
------------ ----------- ---------- ---------- ------------ ------------
Total assets.... $566,383,967 $27,368,290 $8,429,809 $7,720,199 $189,808,590 $799,710,855
============ =========== ========== ========== ============ ============
Liabilities &
Equity:
Accounts payable
and accrued
liabilities..... $ 379,496 $ 23,513 $ 449,751 $ 193,949 $ 1,236,138 $ 2,282,847
Accrued
construction
costs payable... 3,045,304 0 0 0 0 3,045,304
Distributions
payable......... 0 600,000 2,220,000 0 0 2,820,000
Due to related
parties......... 2,552,411 3,362 0 1,452,512 6,556,920 10,565,205
Income tax
payable......... 0 0 1,989,003 0 1,001,861 2,990,864
Line of credit... 6,765,575 0 0 0 0 6,765,575
Notes payable.... 0 0 390,398 28,462 175,528,203 175,947,063
Deferred income.. 1,015,758 52,021 0 0 0 1,067,779
Rents paid in
advance......... 437,497 41,300 0 0 0 478,797
Minority
interest........ 282,544 429,452 0 0 0 711,996
Common Stock..... 621,187 0 9,800 2,000 200 633,187
Additional paid
in capital...... 556,830,578 0 482,964 5,231,827 3,887,496 566,432,865
Accumulated
distributions in
excess of net
earnings........ (5,546,383) 0 2,887,893 811,449 1,597,772 (249,269)
Partners
capital......... 0 26,218,642 0 0 0 26,218,642
------------ ----------- ---------- ---------- ------------ ------------
Total
liabilities and
equity......... $566,383,967 $27,368,290 $8,429,809 $7,720,199 $189,808,590 $799,710,855
============ =========== ========== ========== ============ ============
<CAPTION>
Pro Forma
------------------------------
Adjustments Pro Forma
---------------- -------------
<S> <C> <C>
Assets:
Land and
buildings on
operating
leases, net..... $ 5,439,985 (1)
26,052,741 (2) $351,202,165
Net investment in
direct
financing
leases.......... 513,417 (1) 120,530,938
Mortgages and
notes
receivable...... 849,195 (2) 208,149,682
Other
Investments..... -- 22,961,944
Investment in
joint ventures.. 382,821 (1) 2,462,823
Cash and cash
equivalents..... (353,644)(1)
(8,933,000)(1)
(26,901,936)(2) 61,929,466
Receivables...... (7,852,741)(3) 7,631,651
Accrued rental
income.......... (573,632)(1) 3,071,451
Other assets..... 41,865,636 (1)
(3,786,008)(1) 48,473,569
---------------- -------------
Total assets.... $ 26,702,834 $826,413,689
================ =============
Liabilities &
Equity:
Accounts payable
and accrued
liabilities..... $ -- $ 2,282,847
Accrued
construction
costs payable... -- 3,045,304
Distributions
payable......... -- 2,820,000
Due to related
parties......... (7,852,741)(3) 2,712,464
Income tax
payable......... (2,990,864)(4) 0
Line of credit... -- 6,765,575
Notes payable.... -- 175,947,063
Deferred income.. (52,021)(1) 1,015,758
Rents paid in
advance......... -- 478,797
Minority
interest........ -- 711,996
Common Stock..... 140,790 (1) 773,977
Additional paid
in capital...... 143,035,047 (1) 709,467,912
Accumulated
distributions in
excess of net
earnings........ (82,349,599)(1)
2,990,864 (4) (79,608,004)
Partners
capital......... (26,218,642)(1) 0
---------------- -------------
Total
liabilities and
equity......... $ 26,702,834 $826,413,689
================ =============
</TABLE>
F-22
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA INCOME STATEMENT
September 30, 1998
<TABLE>
<CAPTION>
Historical
--------------------------------------------------------------------------------
CNL Financial
CNL Income Services, CNL Financial Combined
APF Fund XVII, Ltd. Advisor Inc. Corp. Portfolios
----------- --------------- ----------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and
earned income.. $22,947,199 $2,114,810 $ 0 $ 0 $ 0 $25,062,009
Fees............ 0 0 21,405,127 5,115,549 6,817 26,527,493
Interest and
other income... 6,117,911 36,667 751 432,506 18,031,141 24,618,976
----------- ---------- ----------- ---------- ----------- -----------
Total revenue... 29,065,110 2,151,477 21,405,878 5,548,055 18,037,958 76,208,478
Expenses:
General and
administrative.. 1,539,004 122,576 6,701,115 4,107,311 2,597,171 15,067,177
Advisory fees... 1,248,393 19,966 0 0 1,026,231 2,294,590
Fees to
Restaurant
Financial
Services
Group.......... 0 0 256,456 1,569,202 0 1,825,658
Interest........ 0 0 105,668 3,534 14,230,999 14,340,201
State taxes..... 397,569 11,811 15,226 18,564 201,616 644,786
Depreciation
other.......... 0 0 75,607 55,056 0 130,663
Depreciation
property....... 2,684,924 265,510 0 0 0 2,950,434
Amortization.... 8,096 7,574 55,932 138 945,299 1,017,039
----------- ---------- ----------- ---------- ----------- -----------
Total operating
expenses....... 5,877,986 427,437 7,210,004 5,753,805 19,001,316 38,270,548
----------- ---------- ----------- ---------- ----------- -----------
Operating
earnings
(losses)........ 23,187,124 1,724,040 14,195,874 (205,750) (963,358) 37,937,930
Equity in
earnings of
joint
ventures/minority
interest....... (23,271) 58,399 0 12,452 0 47,580
Gain on
securitization.. 0 0 0 0 3,018,268 3,018,268
----------- ---------- ----------- ---------- ----------- -----------
Net earnings
(losses) before
income taxes.... 23,163,853 1,782,439 14,195,874 (193,298) 2,054,910 41,003,778
Provision
(credit) for
federal income
taxes.......... 0 0 5,607,415 (81,229) 789,895 6,316,081
----------- ---------- ----------- ---------- ----------- -----------
Net income....... $23,163,853 $1,782,439 $ 8,588,459 $ (112,069) $ 1,265,015 $34,687,697
=========== ========== =========== ========== =========== ===========
Earnings per
share........... $ 0.49
===========
Shares
outstanding:
Weighted
average........ 47,633,909
===========
End of period... 62,118,679
===========
<CAPTION>
Pro Forma
-------------------------------
Adjustments Pro Forma
---------------- --------------
<S> <C> <C>
Revenues:
Rental and
earned income.. $ 9,635,208 (a)
6,376 (b) $34,703,593
Fees............ (21,028,157)(c)
(2,875,906)(d) 2,623,430
Interest and
other income... 1,526,547 (e) 26,145,523
---------------- --------------
Total revenue... (12,735,932) 63,472,546
Expenses:
General and
administrative.. (1,304,414)(f)
(1,415,100)(g)
(21,360)(h) 12,326,303
Advisory fees... (2,294,590)(i) 0
Fees to
Restaurant
Financial
Services
Group.......... (1,825,658)(n) 0
Interest........ (68,670)(m) 14,271,531
State taxes..... 41,444 (j) 686,230
Depreciation
other.......... 0 130,663
Depreciation
property....... 1,494,128 (k) 4,444,562
Amortization.... 1,569,961 (l) 2,587,000
---------------- --------------
Total operating
expenses....... (3,824,259) 34,446,289
---------------- --------------
Operating
earnings
(losses)........ (8,911,673) 29,026,257
Equity in
earnings of
joint
ventures/minority
interest....... 0 47,580
Gain on
securitization.. 0 3,018,268
---------------- --------------
Net earnings
(losses) before
income taxes.... (8,911,673) 32,092,105
Provision
(credit) for
federal income
taxes.......... (6,316,081)(o) 0
---------------- --------------
Net income....... $ (2,595,592) $32,092,105
================ ==============
Earnings per
share........... $ 0.44
==============
Shares
outstanding:
Weighted
average........ 72,704,747(p)
==============
End of period... 77,397,691
==============
</TABLE>
F-23
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA INCOME STATEMENT
For the year ended December 31, 1997
<TABLE>
<CAPTION>
Historical Pro Forma
-------------------------------------------------------------------------- ---------------------------
CNL Income CNL
Fund CNL Financial Financial Combined
APF XVII, Ltd. Advisor Services, Inc. Corp. Portfolios Adjustments Pro Forma
----------- ---------- ---------- -------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and
earned income.. $15,490,615 $2,642,743 $ 0 $ 0 $ 0 $18,133,358 $24,048,982 (a)
8,501 (b) $42,190,841
Fees............ 0 0 8,310,836 5,965,110 73,704 14,349,650 (9,097,117)(c)
(2,662,141)(d) 2,590,392
Interest and
other income... 3,967,318 70,907 165,569 0 10,932,843 15,136,637 249,395 (e) 15,386,032
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Total Revenue... 19,457,933 2,713,650 8,476,405 5,965,110 11,006,547 47,619,645 12,547,620 60,167,265
Expenses:
General and
administrative.. 1,010,725 150,045 4,266,169 1,889,904 828,848 8,145,691 (736,975)(f)
(1,619,238)(g)
(35,362)(h) 5,754,116
Advisory fees... 804,879 25,377 0 0 1,802,532 2,632,788 (2,632,788)(i) 0
Fees to
Restaurant
Financial
Services
Group.......... 0 0 151,041 594,041 0 745,082 (745,082)(n) 0
Interest........ 0 0 162,153 183,315 8,320,000 8,665,468 (81,594)(m) 8,583,874
State taxes..... 251,358 6,443 12,084 1,294 1,600 272,779 16,758 (j) 289,537
Depreciation
other.......... 0 0 48,490 14,637 0 63,127 -- 63,127
Depreciation
property....... 1,784,269 376,972 0 0 0 2,161,241 3,140,583 (k) 5,301,824
Amortization.... 10,793 10,320 18,093 61,324 916,577 1,017,107 2,093,282 (l) 3,110,389
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Total operating
expenses....... 3,862,024 569,157 4,658,030 2,744,515 11,869,557 23,703,283 (600,416) 23,102,867
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Operating
earnings
(losses)........ 15,595,909 2,144,493 3,818,375 3,220,595 (863,010) 23,916,362 13,148,036 37,064,398
Equity in
earnings of
joint
ventures/minority
interest....... (31,453) 59,064 0 (126,627) 0 (99,016) -- (99,016)
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Net earnings
before income
taxes........... 15,564,456 2,203,557 3,818,375 3,093,968 (863,010) 23,817,346 13,148,036 36,965,382
Provision
(credit) for
federal income
taxes.......... 0 0 1,508,258 1,272,133 (317,785) 2,462,606 (2,462,606)(o) 0
----------- ---------- ---------- ---------- ----------- ----------- ----------- -----------
Net earnings
(losses)........ $15,564,456 $2,203,557 $2,310,117 $1,821,835 $ (545,225) $21,354,740 $15,610,642 $36,965,382
=========== ========== ========== ========== =========== =========== =========== ===========
Earnings per
share........... $ 0.66 $ 0.50
=========== ===========
Shares
outstanding:
Weighted
average........ 23,423,868 73,376,135(p)
=========== ===========
End of period... 36,192,971 73,376,135
=========== ===========
</TABLE>
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS
1. Basis of Presentation
The Pro Forma Balance Sheet as of September 30, 1998 reflects the
transactions of the acquisition of the CNL Income Fund, Advisor and CNL
Restaurant Financial Services Group (the "Acquisition Proposal") as set forth
in this Proxy Statement. The Pro Forma Statements of Earnings for the nine
months ended September 30, 1998, and for the year ended December 31, 1997, have
been prepared to reflect a) the issuance of additional shares and the property
acquisitions completed from January 1, 1997 through November 30, 1998
("Offering and Property Transactions") and b) the transactions of the
Acquisition Proposal as set forth in this Proxy Statement. This unaudited pro
forma financial information has been prepared utilizing the historical
financial statements of the Company and the historical combined financial
information of the CNL Income Fund, Advisor and CNL Restaurant Financial
Services Group and should be read in conjunction with the selected historical
financial data and accompanying notes of the Company, the CNL Income Fund,
Advisor and the CNL Restaurant Financial Services Group. The Pro Forma Balance
Sheet was prepared as if the Offering and Property Transactions and the
Acquisition Proposal occurred on September 30, 1998. The Pro Forma Statements
of Earnings were prepared as if the Property Acquisitions and the Acquisition
Proposal occurred as of January 1, 1997. The pro forma information is unaudited
and is not necessarily indicative of the consolidated operating results which
would have occurred if the Offering and Acquisition Transaction and the
Acquisition Proposal 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 Acquisition
Proposal have been made. Capitalized terms have the meanings as defined in the
Proxy Statement.
2. Method of Accounting
The acquisition of the CNL Income Fund and the CNL Restaurant Financial
Services Group will be accounted for under the purchase accounting method. The
Company 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, the Company 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 operating expense on the Company's consolidated statements of
earnings, but the Company will not deduct this expense for purposes of
calculating funds from operations due to the non-recurring and non-cash nature
of the expense.
All significant intercompany balances and transactions between the Company,
CNL Income Fund, Advisor and CNL Restaurant Financial Services Group have been
eliminated in the pro forma financial statements.
3. Adjustments to Pro Forma Balance Sheet
The following describes the pro forma adjustments to the Pro Forma Balance
Sheet as of September 30, 1998, as if the Acquisition was consummated on such
date. For purposes of the pro forma financial statements, it is assumed that at
an annual meeting of stockholders, the stockholders of the Company approved an
amendment to increase the number of authorized shares to an amount necessary to
enable the Company to issue the shares for the Acquisition.
(1) Represents the payment of $353,644 in cash and the issuance of
15,279,012 common shares in consideration for the purchase of the CNL
Income Fund, Advisor and CNL Restaurant Financial Services Group at
September 30, 1998 at a share price of $10 plus estimated transaction
costs. The acquisition of the CNL Income Fund and the CNL Restaurant
Financial Services Group has been accounted for under the purchase
accounting method and goodwill was recognized to the extent that the
consideration paid exceeded the fair value of the net tangible assets
acquired. As for the
F-25
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
acquisition of the Advisor from a related party, the consideration paid
in excess of the fair value of the net tangible assets received has been
accounted for as costs incurred in acquiring the Advisor from a related
party because the Advisor has not been deemed to qualify as a "business"
for purposes of applying APB Opinion No. 16 "Business Combinations."
Upon consummation of the Acquisition, this expense will be recorded as
an operating expense on the Company's statement of earnings. The Company
will not deduct this expense for purposes of calculating funds from
operations due to the nonrecurring and non-cash nature of the expense.
As of September 30, 1998, $249,403 of transaction costs had been
incurred by the Company.
<TABLE>
<CAPTION>
CNL Income Fund.......................................... $ 30,143,768
<S> <C>
Advisor.................................................. 76,000,000
CNL Restaurant Financial Services Group.................. 47,000,000
------------
Total Purchase Price (cash and shares)................. 153,143,768
Less cash paid to CNL Income Fund........................ (353,644)
------------
Share consideration.................................... 152,790,124
Transaction costs of the Company......................... 8,933,000
------------
Total costs incurred................................... $161,723,124
============
</TABLE>
In addition, the Company i) used $8,933,000 in cash to pay the
transaction costs related to the Acquisition, ii) made an upward
adjustment to the CNL Income Fund carrying value of land and building on
operating leases by $5,439,985, net investment in direct financing
leases by $513,417, investment in joint venture by $382,821, made
downward adjustments to the carrying value of accrued rental income of
$573,632, made downward adjustments to other assets of $3,786,008 and
made downward adjustments to deferred income of $52,021 to adjust
historical values to fair value, iii) recorded goodwill of $41,865,637
for the acquisition of the CNL Restaurant Financial Services Group, iv)
reduced retained earnings by $77,052,485 for the excess consideration
paid over the net assets of the Advisor and removed the historical
common stock balance of $12,000, additional paid in capital balance of
$9,602,287, retained earnings balance of $5,297,114 and partners capital
balance of $26,218,642 of the CNL Income Fund, Advisor and CNL
Restaurant Financial Services Group.
(2) Represents the use of $26,901,936 in cash and cash equivalents at
September 30, 1998 to acquire $26,052,741 in properties and issue
$849,195 in mortgage notes which occurred from October 1, 1998 through
November 30, 1998.
(3) Represents the elimination by the CNL Income Fund of $3,362 in related
party payables recorded as receivables by the Advisor, the elimination
by the CNL Restaurant Financial Services Group of $6,641,379 in related
party payables recorded as receivables by CNL Restaurant Financial
Services Group and the elimination by the Company of $1,208,000 in
related party payables recorded as receivables by the Advisor.
(4) Represents the elimination of income taxes payable of $2,990,864 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.
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
4. Adjustments to Pro Forma Income Statements
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the nine months ended September 30, 1998, as
if the Acquisition was consummated as of January 1, 1997.
(a) Represents rental and earned income as if 1) properties that had
been previously constructed and acquired from January 1, 1998
through November 30, 1998 had been acquired and leased on January
1, 1997 and 2) properties that were developed by the Company from
January 1, 1998 through November 30, 1998 had been placed in
service on May 1, 1997 (assumes a four month development period).
<TABLE>
<S> <C>
Rental and earned income on Property Transactions
by the Company............................................. $9,635,208
</TABLE>
(b) Represents $6,376 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the CNL Income Fund as if the
leases had been acquired on January 1, 1997.
(c) Represents the elimination of intercompany fees between the
Company, the CNL Income Fund, the Advisor and the CNL Restaurant
Financial Services Group:
<TABLE>
<S> <C>
Origination fees........................................ $ (1,569,202)
Secured equipment lease fee............................. (44,426)
Advisory fees........................................... (1,742,349)
Reimbursement of administrative costs................... (290,297)
Acquisition fees........................................ (15,392,193)
Underwriting fees....................................... (254,945)
Administrative fees..................................... (148,491)
Executive fee........................................... (310,000)
Guarantee fees.......................................... (93,750)
Servicing fee........................................... (1,014,117)
Development fees........................................ (166,876)
Consulting fee.......................................... (1,511)
------------
Total.................................................. $(21,028,157)
============
</TABLE>
(d) Represents the deferral of $2,875,906 in origination fees collected
by CNL Restaurant Financial Services Group that should be amortized
over the term of the loans originated (20 years) in accordance with
the Statement of Financial Accounting Standards #91 "Accounting for
Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases."
(e) Represents interest income of $1,318,870 earned from Other
Investments acquired and mortgage notes issued from January 1, 1998
through November 30, 1998 as if this had occurred on January 1,
1997 and the amortization of $207,677 of deferred origination fees
collected during the year ended December 31, 1997 and during the
nine months ended September 30, 1998, which were capitalized and
deferred in (d) above as if they had been collected on January 1,
1997. These deferred fees are being amortized and recorded as
interest income.
F-27
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(f) Represents the elimination of intercompany expenses paid between
the Company, the CNL Income Fund, the Advisor and the CNL
Restaurant Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs.................... $ (290,297)
Servicing fee............................................ (1,014,117)
-----------
$(1,304,414)
===========
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during
the period as if 1) costs relating to properties developed by the
Company were subject to capitalization during the entire period and
2) costs relating to properties not developed by the Company were
subject to capitalization up through the time that EITF 97-11
became effective.
<TABLE>
<S> <C>
General and administrative costs.......................... $(1,415,100)
</TABLE>
(h) Represents savings of $21,360 in professional services and
administrative expenses resulting from reporting on one combined
Company versus 22 separate entities.
(i) Represents the elimination of advisory fees between the Company,
the CNL Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Advisory fees............................................. $(1,742,349)
Administrative fees....................................... (148,491)
Executive fee............................................. (310,000)
Guarantee fees............................................ (93,750)
-----------
$(2,294,590)
===========
</TABLE>
(j) Represents additional income taxes of $41,444 resulting from
assuming that acquisitions from January 1, 1998 through November
30, 1998 had been acquired on January 1, 1997 and assuming that the
CNL Income Fund had operated under a REIT structure.
(k) Represents an increase in depreciation of the building portion of
the properties acquired from January 1, 1998 through November 30,
1998 as if they had been acquired on January 1, 1997 and the step
up in basis referred to in footnote (2) from acquiring the CNL
Income Fund portfolio using the straight-line method over the
estimated useful lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense........................................ $1,494,128
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of
the CNL Restaurant Financial Services Group referred to in footnote
(2)
<TABLE>
<S> <C>
Amortization of goodwill.................................... $1,569,961
</TABLE>
(m) Represents elimination of interest expense recorded for the
amortization of $350,000 in arrangement fees collected during the
year ended December 31, 1997 which were eliminated in II (d )
below.
<TABLE>
<S> <C>
Interest expense............................................ $ (68,670)
</TABLE>
F-28
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(n) Represents the elimination of fees paid to affiliates for fees
incurred between the Company, the CNL Income Fund, the Advisor and
the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees.......................................... $(1,569,202)
Underwriting fees......................................... (254,945)
Consulting fee............................................ (1,511)
-----------
$(1,825,658)
===========
</TABLE>
(o) Represents the elimination of $6,316,081 in the provision for
income taxes as a result of the Acquisition. The Company expects to
continue to qualify as a REIT and does not expect to incur federal
income taxes.
(p) Common shares issued during the period required to fund
acquisitions as if they had been acquired on January 1, 1997 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 the proposal to increase the number
of authorized common shares of the Company.
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the year ended December 31, 1997, as if the
Acquisition was consummated as of January 1, 1997.
(a) Represents rental and earned income as if 1) properties that had
been previously constructed and acquired from January 1, 1998
through November 30, 1998 had been acquired and leased on January
1, 1997 and 2) properties that were developed by the Company from
January 1, 1997 through November 30, 1998 had been placed in
service on May 1, 1997 (assumes a four month development period).
<TABLE>
<S> <C>
Rental and earned income on Property Transactions
by the Company............................................ $24,048,982
</TABLE>
(b) Represents $8,501 in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the CNL Income Fund as if the
leases had been acquired on January 1, 1997.
(c) Represents the elimination of intercompany fees between the
Company, the CNL Income Fund, the Advisor and the CNL Restaurant
Financial Services Group:
<TABLE>
<S> <C>
Origination fees......................................... $ (594,041)
Secured equipment lease fee.............................. (375,219)
Advisory fees............................................ (1,801,057)
Reimbursement of administrative costs.................... (137,987)
Acquisition fees......................................... (3,887,483)
Underwriting fees........................................ (151,041)
Administrative fees...................................... (269,231)
Executive fee............................................ (250,000)
Guarantee fees........................................... (312,500)
Arrangement fees......................................... (350,000)
Servicing fee............................................ (598,988)
Development fees......................................... (369,570)
-----------
Total................................................... $(9,097,117)
===========
</TABLE>
F-29
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(d) Represents the deferral of $2,662,141 in origination fees collected
by CNL Restaurant Financial Services Group that should be amortized
over the term of the loans originated (20 years) in accordance with
the Statement of Financial Accounting Standards #91 "Accounting for
Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases."
(e) Represents the elimination of interest income of $1,931,331 earned
during the year ended December 31, 1997 assuming all monies raised
during 1997 and all cash held on January 1, 1997 was used to effect
the Acquisition on January 1, 1997, represents interest income of
$2,047,619 earned from Other Investments acquired and mortgage
notes issued from January 1, 1998 through November 30, 1998 as if
this had occurred on January 1, 1997 and the recognition of
$133,107 of origination fees collected during the year ended
December 31, 1997 which were deferred in (d) and are being
amortized and recorded as interest income.
(f) Represents the elimination of intercompany expenses paid between
the Company, the CNL Income Fund, the Advisor and the CNL
Restaurant Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs..................... $ (137,987)
Servicing fee............................................. (598,988)
----------
$ (736,975)
==========
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during
the period as if 1) costs relating to properties developed by the
Company were subject to capitalization during the entire period and
2) costs relating to properties not developed by the Company were
subject to capitalization up through the time that EITF 97-11
became effective.
<TABLE>
<S> <C>
General and administrative costs.......................... $(1,619,238)
</TABLE>
(h) Represents savings of $35,362 in professional services and
administrative expenses resulting from reporting on one combined
Company versus 22 separate entities.
(i) Represents the elimination of advisory fees between the Company,
the CNL Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Advisory fees............................................. $(1,801,057)
Administrative fees....................................... (269,231)
Executive fee............................................. (250,000)
Guarantee fees............................................ (312,500)
-----------
$(2,632,788)
===========
</TABLE>
(j) Represents additional income taxes of $16,758 resulting from
assuming that acquisitions from January 1, 1997 through November
30, 1998 had been acquired on January 1, 1997 and assuming that the
CNL Income Fund had operated under a REIT structure.
(k) Represents increase in depreciation of the building portion of the
properties acquired from January 1, 1997 through November 30, 1998
as if they had been acquired on January 1, 1997 and the step up in
basis referred to in footnote (2) from acquiring the CNL Income
Fund portfolio using the straight-line method over the estimated
useful lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense........................................ $3,140,583
</TABLE>
F-30
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO UNAUDITED
PRO FORMA FINANCIAL STATEMENTS--(Continued)
(l) Represents the amortization of the goodwill on the acquisition of
the CNL Restaurant Financial Services Group referred to in footnote
(2)
<TABLE>
<S> <C>
Amortization of goodwill.................................... $2,093,282
</TABLE>
(m) Represents elimination of yearly amortization of arrangement fees
of $350,000 capitalized as deferred costs and amortized as interest
expense and the capitalization of interest expense during the
period that properties were under development.
<TABLE>
<S> <C>
Amortization of arrangement fees............................ $(24,144)
Capitalization of interest during development period........ (57,450)
--------
$(81,594)
========
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees
incurred between the Company, the CNL Income Fund, the Advisor and
the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees............................................ $(594,041)
Underwriting fees........................................... (151,041)
---------
(745,082)
=========
</TABLE>
(o) Represents the elimination of $2,462,606 in the provision for
income taxes as a result of the Acquisition. The Company expects to
continue to qualify as a REIT and does not expect to incur federal
income taxes.
(p) Common shares issued during the period were assumed to have been
issued and outstanding as of January 1, 1997. For purposes of the
pro forma financial statement, it is assumed that the stockholders
approved the proposal to increase the number of authorized common
shares of the Company.
F-31
<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 XVII, Ltd.
400 East South Street
Orlando, FL 32801-2878
Re: CNL Income Fund XVII, 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 eighteen Florida limited partnerships (the "CNL
Income Funds") served by Messrs. Seneff, Bourne and CNL Realty Corporation as
general partners (the "General Partners"). Each CNL Income Fund has executed a
merger agreement with the Acquiror on terms similar to the Merger Agreement.
The transactions to occur under such merger agreements are referred to as the
"Merger Transactions."
In connection with our opinion, we have, among other things:
(i) reviewed the Merger Agreement and the merger agreements for each of
the Merger Transactions;
(ii) reviewed the Registration Statement on Form S-4 with respect to the
Merger Transactions as filed on March 12, 1999;
(iii) reviewed the financial statements and the related filings of the
Partnership and the other CNL Income Funds on Form 10-K for the year ended
December 31, 1997 and Form 10-Q for the nine months ended September 30,
1998;
(iv) reviewed the financial statements and the related filings of the
Acquiror on Form 10-K for the year ended December 31, 1997 and Form 10-Q
for the nine months ended September 30, 1998;
(v) reviewed certain internal information concerning the business and
operations of the Partnership and the other CNL Income Funds furnished to
us by the General Partners, including a draft of the Partnership's and the
other CNL Income Funds' Form 10-K for the year ended December 31, 1998,
cash flow projections and operating budgets;
A-1
<PAGE>
(vi) reviewed certain internal information concerning the business and
operations of the Acquiror furnished to us by management of the Acquiror,
including a draft of the Acquiror's Form 10-K for the year ended December
31, 1998, cash flow projections and operating budgets;
(vii) reviewed certain financial data and operating statistics relating
to the Partnership, the other CNL Income Funds and the Acquiror provided by
the General Partners and the Acquiror and compared them with similar
information of selected public companies that we deemed relevant to our
inquiry;
(viii) reviewed the appraisal (the "Appraisal") of the properties of the
Partnership and the other CNL Income Funds prepared by Valuation Associates
and dated January 6, 1999;
(ix) held meetings and discussions with certain directors, officers and
employees of the General Partners and the Acquiror concerning the
operations, financial condition and future prospects of the Partnership,
the other CNL Income Funds and the Acquiror; and
(x) conducted such other financial studies, analyses and investigations
and considered such other information as we deemed appropriate.
In connection with our review, we relied, without independent verification,
on the accuracy and completeness of all information that was publicly
available, supplied or otherwise communicated to Legg Mason by or on behalf of
the Partnership, the other CNL Income Funds and the Acquiror. We have further
relied upon the assurances of the General Partners that they are unaware of any
factors that would materially alter the conclusions made in Legg Mason's
fairness opinion, including developments or trends that have materially
affected or are reasonably likely to materially affect such conclusions. Legg
Mason assumed that the financial forecasts (and the assumptions and bases
thereof) examined by it were reasonably prepared and reflected the best
currently available estimates and good faith judgments of the General Partners
and the Acquiror as to the future performance of the Partnership, the other CNL
Income Funds and the Acquiror, respectively. Legg Mason has relied on these
forecasts and does not in any respect assume any responsibility for the
accuracy or completeness thereof. Legg Mason also assumed, with the consent of
the General Partners, that any material liabilities (contingent or otherwise,
known or unknown) of the Partnership, the other CNL Income Funds and the
Acquiror are as set forth in the financial statements of the Partnership, the
other CNL Income Funds and the Acquiror, respectively. Legg Mason also assumed
with the consent of the General Partners that the table prepared by or for the
General Partners of the allocation of Share Consideration among the General
Partners and the limited partners of the Partnership has been prepared in
accordance with and complies with the terms and conditions of the partnership
agreement of the Partnership. Legg Mason also assumed that the Appraisal was
reasonably prepared by and reflected the good faith judgments of Valuation
Associates and Legg Mason does not in any respect assume any responsibility for
the accuracy or completeness thereof. Legg Mason did not make an independent
evaluation or appraisal of the assets or liabilities (contingent or otherwise)
of the Partnership, the other CNL Income Funds or the Acquiror. Our opinion is
necessarily based upon financial, economic, market and other conditions and
circumstances existing and disclosed to us on the date hereof.
We have acted as financial advisor to the General Partners and will receive
a fee for our services. It is understood that this letter is for the
information of the General Partners in their evaluation of the Merger
Transactions and our opinion does not constitute a recommendation to the
General Partners or any limited partner of the Partnership or any of the other
CNL Income Funds as to how such partner should vote on the Merger or the Merger
Transactions, as the case may be, or as to whether such partner should elect to
receive the Share Consideration or cash and promissory notes of the Acquiror.
We were not requested to, nor did we, solicit the interest of any other party
in acquiring interests in the Partnership or its assets. Additionally, our
opinion does not compare the relative merits of the Merger and the Merger
Transactions with those of any other transaction or business strategy which
were or might have been considered by the General Partners as alternatives to
the Merger and the Merger Transactions.
It should be noted that in rendering this opinion with respect to the
fairness, from a financial point of view, of (i) the Share Consideration to be
offered with respect to the Partnership, (ii) the aggregate Common
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Stock offered with respect to the CNL Income Funds and (iii) the method of
allocating the shares of Common Stock of the Acquiror among the CNL Income
Funds, Legg Mason has neither addressed, nor are we rendering any opinion with
respect to, any other aspect of the Merger Transactions, including (a) the
value or fairness of the cash and promissory notes option, (b) the prices at
which the shares of Common Stock may trade following the Merger Transactions or
the trading value of the shares to be offered compared with the current fair
market value of the portfolios or other assets of the Partnership and the other
CNL Income Funds if liquidated in real estate markets, (c) the tax effect of
any aspect of the Merger Transactions, (d) the fairness of the amounts or
allocation of the costs of the Merger Transactions or the amounts of such costs
allocated to the limited partners or, (e) any other matters with respect to any
specific individual partner or class of partners of the Partnership or the
other CNL Income Funds.
Based upon and subject to the foregoing, we are of the opinion that, as of
the date hereof, the Share Consideration offered to the Partnership and its
limited partners in the Merger, the aggregate shares of Common Stock offered by
the Acquiror with respect to the CNL Income Funds in the Merger Transactions
and the method of allocating the shares of Common Stock among the CNL Income
Funds in the Merger Transactions are fair from a financial point of view.
Very truly yours,
/s/ Legg Mason Wood Walker,
Incorporated
-------------------------------------
Legg Mason Wood Walker, Incorporated
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Appendix B
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 XVII, 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 3,014,377 fully paid and nonassessable APF Common
Shares (1,507,189 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 $27,410,839, 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 57,985,623 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) 3,000,000 units of limited partnership interests. All of the
outstanding Fund Interests have been duly authorized, are validly issued, fully
paid, and nonassessable. There are no outstanding or authorized options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights, or other contracts or commitments that could require the Fund to issue,
sell, or otherwise cause to become outstanding any additional ownership
interests. There are no outstanding or authorized stock appreciation, phantom
stock, profit participation, or similar rights with respect to the Fund.
7.3 Authorization of Transaction. The Fund has full power and authority
(including full limited partnership power and authority) to execute and deliver
this Agreement and, upon the affirmative vote of a majority of the outstanding
limited partnership Fund Interests, will have full power and authority
(including limited partnership power and authority) to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of the Fund, enforceable in accordance with its terms and conditions, subject
to bankruptcy, insolvency, moratorium and rights of creditors generally. The
Fund is not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
7.4 Noncontravention. Except as set forth in Section 7.4 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby,
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will (i) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which the Fund is subject or any
provision of the certificate of limited partnership or limited partnership
agreement of the Fund or (ii) result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice or consent
under any agreement, contract, lease, license, instrument, or other arrangement
to which the Fund is a party or by which it is bound or to which any of its
assets is subject (or result in the imposition of any Security Interest upon
any of its assets).
7.5 Title to Assets. The Fund has good title to, or a valid leasehold
interest in, the properties and assets used by it, located on its premises, or
set forth in its most recent quarterly report on Form 10-Q filed with the SEC
(the "Most Recent 10-Q") or acquired after the date thereof, free and clear of
all Security Interests, except for properties and assets disposed of in the
Ordinary Course of Business since the date of the Most Recent 10-Q.
7.6 Subsidiaries. The Fund does not have any Subsidiaries, operating or
otherwise.
7.7 Reports and Financial Statements. The Fund has filed all required
reports, schedules, forms, statements and other documents with the SEC since
January 1, 1996 (along with any such documents filed subsequent to the date
hereof, the "Fund SEC Documents"). All of the Fund SEC Documents (other than
preliminary material), as of their respective filing dates, complied in all
material respects with all applicable requirements of the Securities Act and
the Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such Fund SEC Documents. None of the Fund SEC
Documents at the time of filing contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the extent
such statements have been modified or superseded by later filed Fund SEC
Documents. There is no unresolved violation by any governmental entity of which
the Fund has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to the Fund could have a Material
Adverse Effect on the Fund. The financial statements of the Fund included in
the Fund SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with GAAP
(except, the case of interim financial statements, as permitted by Forms 10-Q
and 8-K of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly presented, in
accordance with the applicable requirements of GAAP, the financial position of
the Fund as of the dates thereof and the results of operations and cash flows
of the Fund for the periods then ended (subject, in the case of interim
financial statements, to normal year-end adjustments).
7.8 Events Subsequent to the Most Recent 10-Q. Since the date of the Most
Recent 10-Q nothing has had a Material Adverse Effect on the Fund. Without
limiting the generality of the foregoing, since that date, except as set forth
in the appropriately lettered paragraph of Section 7.8 of the Disclosure
Schedule:
(a) the Fund has not sold, leased, transferred, or assigned any of its
assets, tangible or intangible, other than for a fair consideration (as
reasonably determined by the General Partners) in the Ordinary Course of
Business;
(b) the Fund has not entered into any agreement, contract, lease, or license
(or series of related agreements, contracts, leases, and licenses) involving
more than $50,000 except in the Ordinary Course of Business;
(c) no party (including the Fund) has accelerated, terminated, modified, or
canceled any agreement, contract, lease, or license (or series of related
agreements, contracts, leases, and licenses) to which the Fund is a party or by
which it is bound except in the Ordinary Course of Business;
(d) the Fund has not imposed any Security Interest upon any of its assets,
tangible or intangible except in the Ordinary Course of Business;
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(e) the Fund has not made any capital expenditure (or series of related
capital expenditures) involving more than $50,000 except in the Ordinary Course
of Business;
(f) the Fund has not made any capital investment in, any loan to, or any
acquisition of the securities or assets of any other Person (or series of
related capital investments, loans, and acquisitions) outside the Ordinary
Course of Business;
(g) the Fund has not issued any note, bond, or other debt security or
created, incurred, assumed, or guaranteed any indebtedness for borrowed money
or capitalized lease obligation outside the Ordinary Course of Business;
(h) the Fund has not delayed or postponed the payment of accounts payable
and other Liabilities outside the Ordinary Course of Business;
(i) the Fund has not canceled, compromised, waived, or released any right or
claim (or series of related rights and claims) outside the Ordinary Course of
Business;
(j) the Fund has not granted any license or sublicense of any rights under
or with respect to any Intellectual Property;
(k) there has been no change made or authorized in the certificate of
limited partnership or limited partnership agreement of the Fund;
(l) the Fund has not issued, sold, or otherwise disposed of any ownership
interests, or granted any options, warrants, or other rights to purchase or
obtain (including upon conversion, exchange, or exercise) any ownership
interests in the Fund;
(m) the Fund has not declared, set aside, or paid any dividend or made any
distribution with respect to its ownership interests (whether in cash or in
kind) or redeemed, purchased, or otherwise acquired any of its ownership
interests other than distributions consistent with past practices;
(n) the Fund has not experienced any material damage, destruction, or loss
(whether or not covered by insurance) to its property;
(o) the Fund has not made any loan to, or entered into any other transaction
with, any of the General Partners or the directors, officers, or employees of
the corporate General Partner outside the Ordinary Course of Business;
(p) the Fund has not entered into any employment contract or collective
bargaining agreement, written or oral, or modified the terms of any existing
such contract or agreement;
(q) the Fund has not made or pledged to make any charitable or other capital
contribution outside the Ordinary Course of Business;
(r) to the Knowledge of the General Partners, there has not been any other
material occurrence, event, incident, action, failure to act, or transaction
outside the Ordinary Course of Business involving the Fund; and
(s) the Fund is not under any legal obligation, whether written or oral, to
do any of the foregoing.
7.9 Undisclosed Liabilities. The Fund does not have any Liability (and, to
the Knowledge of the General Partners, there is no Basis for any present or
future action, suit, proceeding, hearing, investigation, charge, complaint,
claim, or demand against it giving rise to any Liability), except for (i)
Liabilities set forth on the face of the Most Recent Balance Sheet (rather than
in any notes thereto) and (ii) Liabilities which have arisen after the date of
the Most Recent Balance Sheet in the Ordinary Course of Business (none of which
results
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from, arises out of, relates to, is in the nature of, or was caused by any
breach of contract, breach of warranty, tort, infringement, or violation of
law) or which are not in the aggregate material.
7.10 Legal Compliance. Except as disclosed in the Fund SEC Documents, the
Fund has complied in all material respects with all applicable laws (including
rules, regulations, codes, plans, injunctions, judgments, orders, decrees,
rulings, and charges thereunder), the violation of which could cause a Material
Adverse Effect to the Fund, of federal, state, local, and foreign governments
(and all agencies thereof), and no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand, or notice has been filed or
commenced against it alleging any failure so to comply.
7.11 Tax Matters.
(a) The Fund has filed all material Tax Returns that it was required to
file, including, without limitation, any material Tax Returns required to be
filed with any state. All such Tax Returns were correct and complete in all
material respects. All Taxes owed by the Fund (as shown on any filed Tax
Return) have been paid. The Fund currently is not the beneficiary of any
extension of time within which to file any Tax Return. No claim has ever been
made by an authority in a jurisdiction where the Fund does not file Tax Returns
that it is or may be subject to taxation by that jurisdiction. There are no
Security Interests on any of the assets of the Fund that arose in connection
with any failure (or alleged failure) to pay any Tax.
(b) The Fund has withheld and, if due, paid all Taxes required to have been
withheld and paid in connection with amounts paid or owing to any independent
contractor, creditor, Partner, or other third party.
(c) The General Partners do not expect any authority to assess any
additional Taxes for any period for which Tax Returns have been filed. There is
no dispute or claim concerning any Tax Liability of the Fund either (A) claimed
or raised by any authority in writing or (B) as to which any of the General
Partners has Knowledge. Section 7.11(c) of the Disclosure Schedule lists all
federal, state, local, and foreign income Tax Returns filed with respect to the
Fund for taxable periods ended on or after December 31, 1996, indicates those
Tax Returns that have been audited, and indicates those Tax Returns that
currently are the subject of audit. The General Partners have made available to
APF and the Operating Partnership correct and complete copies of all federal
income Tax Returns, examination reports, and statements of deficiencies
assessed against or agreed to by the Fund since December 31, 1996.
(d) The Fund has not waived any statute of limitations in respect of Taxes
or agreed to any extension of time with respect to a Tax assessment or
deficiency.
(e) The Fund has not filed a consent under Code (S)341(f) concerning
collapsible corporations. The Fund has not made any payments, is not obligated
to make any payments, and is not a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be
deductible under Code (S)280G. The Fund has disclosed on its federal income Tax
Returns all positions taken therein that could give rise to a substantial
understatement of federal income Tax within the meaning of Code (S)6662. The
Fund is not a party to any Tax allocation or sharing agreement. The Fund (A)
has not been a member of an Affiliated Group filing a consolidated federal
income Tax Return (other than a group the common parent of which was the Fund)
or (B) has any Liability for the Taxes of any Person (other than the Fund)
under Treas. Reg. (S)1.1502-6 (or any similar provision of state, local, or
foreign law), as a transferee or successor, by contract, or otherwise.
7.12 Real Property.
Section 7.12(a) of the Disclosure Schedule lists and describes briefly all
real property owned, leased or subleased by the Fund. Section 7.12(b) of the
Disclosure Schedule lists all leases and subleases to which the Fund is a
party, and the General Partners have made available to APF correct and complete
copies of all such
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leases and subleases (as amended to date). With respect to each lease and
sublease listed in Section 7.12(b) of the Disclosure Schedule:
(a) the lease or, to the Knowledge of the General Partners, the sublease is
legal, valid, binding, enforceable, and in full force and effect, except as may
be affected by bankruptcy, insolvency, moratorium and the rights of creditors
generally;
(b) no consent is required with respect to the lease or sublease as a result
of this Agreement, and the actions contemplated by this Agreement will not
result in the change of any terms of the lease or sublease or otherwise affect
the ongoing validity of the lease or sublease;
(c) no party to the lease or sublease is in breach or default, and no event
has occurred which, with notice or lapse of time, would constitute a breach or
default or permit termination, modification, or acceleration thereunder;
(d) no party to the lease or, to knowledge of the General Partners, sublease
has repudiated any provision thereof;
(e) there are no disputes, oral agreements, or forbearance programs in
effect as to the lease or, to the Knowledge of the General Partners, sublease;
(f) the Fund has not assigned, transferred, conveyed, mortgaged, deeded in
trust, or encumbered any interest in the leasehold or subleasehold;
(g) all facilities leased or subleased thereunder have received all
approvals of governmental authorities (including licenses and permits) required
by the Fund in connection with the operation thereof and, to the Knowledge of
the General Partners, have been operated and maintained in all material
respects in accordance with applicable laws, rules, and regulations; and
(h) all facilities leased or subleased thereunder are supplied with
utilities and other services necessary for the operation of said facilities.
7.13 Intellectual Property.
(a) The Fund owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of the Fund as presently conducted. Each item of Intellectual
Property owned or used by the Fund immediately prior to the Closing hereunder
will be owned or available for use by the Fund on identical terms and
conditions immediately subsequent to the Closing hereunder. The Fund has taken
all necessary action to maintain and protect each item of Intellectual Property
that it owns or uses.
(b) The Fund has not Knowingly interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual Property
rights of third parties, and neither the General Partners nor any of the
corporate General Partner's directors and officers (and employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that the Fund
must license or refrain from using any Intellectual Property rights of any
third party). To the Knowledge of the General Partners, no third party has
interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Intellectual Property rights of the Fund which are material
to the operation of the Fund's business.
(c) The Fund has no patent or registration which has been issued to the Fund
with respect to any of its Intellectual Property.
(d) Section 7.13(d) of the Disclosure Schedule identifies each item of
Intellectual Property that any third party owns and that the Fund uses pursuant
to license, sublicense, agreement, or permission. The General
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Partners have made available to APF and the Operating Partnership correct and
complete copies of all such licenses, sublicenses, agreements, and permissions
(as amended to date).
(e) To the Knowledge of the General Partners, nothing will interfere with,
infringe upon, misappropriate, or otherwise come into conflict with, any
Intellectual Property rights of third parties as a result of the continued
operation of the Fund's business as presently conducted.
7.14 Tangible Assets. The Fund owns or leases all buildings, machinery,
equipment, and other tangible assets used in the conduct of its business as
presently conducted. Each such tangible asset is free from all material
defects, has been maintained in accordance with normal industry practice, is in
good operating condition and repair (subject to normal wear and tear), and is
suitable for the purposes for which it presently is used. The Most Recent
Balance Sheet sets forth all of the assets, in the opinion of the General
Partners, necessary to conduct the Fund's business as it is currently being
conducted.
7.15 Contracts. Section 7.15 of the Disclosure Schedule lists all of the
following types of contracts and other agreements to which the Fund is a party:
(a) any agreement (or group of related agreements) for the lease of personal
property to or from any Person providing for lease payments in excess of
$25,000 per annum;
(b) any agreement concerning a partnership or joint venture;
(c) any agreement (or group of related agreements) under which it has
created, incurred, assumed, or guaranteed any indebtedness for borrowed money,
or any capitalized lease obligation or under which it has imposed a Security
Interest on any of its assets, tangible or intangible;
(d) any agreement concerning confidentiality or noncompetition;
(e) any agreement with any General Partner or any of their Affiliates (other
than the Fund);
(f) any agreement under which it has advanced or loaned any amount to any of
the General Partners or the corporate General Partner's directors, officers,
and employees outside the Ordinary Course of Business; or
(g) any agreement under which the consequences of a default or termination
could have a Material Adverse Effect.
The General Partners have made available to APF and the Operating
Partnership a correct and complete copy of each written agreement listed in
Section 7.15 of the Disclosure Schedule (as amended to date) which is not
included as an exhibit to a Fund SEC Document and a written summary setting
forth the terms and conditions of each oral agreement referred to in Section
7.15 of the Disclosure Schedule. With respect to each agreement set forth in
Section 7.15 of the Disclosure Schedule or filed as an exhibit to a Fund SEC
Document: (A) the agreement is legal, valid, binding, enforceable, and in full
force and effect (except as may be affected by bankruptcy, insolvency,
moratorium or the rights of creditors generally); (B) the agreement will
continue to be legal, valid, binding, enforceable, and in full force and effect
on identical terms following the consummation of the transactions contemplated
hereby (except as may be affected by bankruptcy, insolvency, moratorium or the
rights of creditors generally); (C) no party is in breach or default, and no
event has occurred which with notice or lapse of time would constitute a breach
or default, or permit termination, modification, or acceleration, under the
agreement; and (D) no party has repudiated any provision of the agreement.
7.16 Notes and Accounts Receivable. All notes and accounts receivable of the
Fund are reflected properly on its books and records, are valid receivables
subject to no setoffs or counterclaims, and are current and collectible in
accordance with their terms at their recorded amounts, subject only to the
reserve for bad debts set forth on the face of the Most Recent Balance Sheet
(rather than in any notes thereto) as adjusted for the passage of time through
the Closing Date in accordance with the past custom and practice of the Fund.
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7.17 Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of the Fund.
7.18 Insurance. Section 7.18 of the Disclosure Schedule sets forth the
following information with respect to each insurance policy (including
policies providing property, casualty, liability, and workers' compensation
coverage and bond and surety arrangements) to which the Fund has been a party,
a named insured, or otherwise the beneficiary of coverage at any time within
the past five years (or such lesser periods as the Fund has actively engaged
in business or owned any material assets): (i) the name, address, and
telephone number of the agent; (ii) the name of the insurer, the name of the
policyholder, and the name of each covered insured; and (iii) the policy
number and the period of coverage. With respect to each current insurance
policy, to the Knowledge of the General Partners and the Fund: (A) the policy
is legal, valid, binding, enforceable, and in full force and effect; (B) the
policy will continue to be legal, valid, binding, enforceable, and in full
force and effect on identical terms following the consummation of the
transactions contemplated hereby; (C) neither the Fund nor any other party to
the policy is in breach or default (including with respect to the payment of
premiums or the giving of notices), and no event has occurred which, with
notice or the lapse of time, would constitute such a breach or default, or
permit termination, modification, or acceleration, under the policy; and (D)
no party to the policy has repudiated any provision thereof. The Fund has been
covered during the past five years (or such lesser periods as the Fund has
actively engaged in business or owned any material assets) by insurance in
scope and amount customary and reasonable for the businesses in which it has
engaged during the aforementioned period. Section 7.18 of the Disclosure
Schedule describes any self-insurance arrangements affecting the Fund.
7.19 Litigation. Section 7.19 of the Disclosure Schedule sets forth each
instance, not already disclosed in the Fund SEC Documents, in which the Fund
(i) is subject to any outstanding injunction, judgment, order, decree, ruling,
or charge or (ii) is a party to or, to its Knowledge, is threatened to be made
a party to any action, suit, proceeding, hearing, or investigation of, in, or
before any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator. None of the
actions, suits, proceedings, hearings, and investigations set forth in Section
7.19 of the Disclosure Schedule or the Fund SEC Documents could result in any
Material Adverse Effect on the Fund. None of the General Partners has any
reason to believe that any additional such action, suit, proceeding, hearing,
or investigation may be brought or threatened against the Fund.
7.20 Tenants. To the Knowledge of any of the General Partners, no current
tenant of a property owned by the Fund presently intends to materially change
its relationship with the owner of the property, either due to the
transactions contemplated hereby or otherwise.
7.21 Employees. The Fund does not have and has never had any employees,
officers or directors. The Fund is not and has never been a party to or had
any liability with respect to any Employee Benefit Plan.
7.22 Guaranties. The Fund is not a guarantor of and is not otherwise liable
for any liability or obligation (including indebtedness) of any other Person.
7.23 Registration Statement. The information furnished by the Fund for
inclusion in the Registration Statement will not, as of the effective date of
the Registration Statement, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading.
7.24 Environmental Matters. The Fund is currently in compliance with all
material environmental laws, ordinances, regulations and orders applicable to
its business or properties, and, to the Knowledge of the General Partners, the
tenants' present uses of the Fund's properties, whether leased or owned, do
not materially violate any such laws, ordinances, regulations or orders. The
Fund is not subject to any Liability or claim in connection with any
environmental law or any use, treatment, storage or disposal of any hazardous
substance or material or pollutant or any spill, leakage, discharge or release
of any hazardous substance or material or pollutant as a result of having
owned or operated any business prior to the Effective Time, which if a
violation existed would have a Material Adverse Effect on the Fund.
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7.25 Vote Required. The affirmative vote of at least a majority of the
outstanding Fund Interests is the only vote of any security holder in the Fund
(under applicable law or otherwise) required to approve the Merger, this
Agreement and the other transactions contemplated hereby.
7.26 Disclosure. The representations and warranties contained in this
Article VII do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements and
information contained in this Article VII not misleading.
ARTICLE VIII
Pre-Closing Covenants
The Parties agree as follows with respect to the period between the
execution of this Agreement and the Closing.
8.1 General. Each of the Parties will use its reasonable best efforts to
take all action and to do all things necessary, proper, or advisable in order
to consummate and make effective the transactions contemplated by this
Agreement (including satisfaction, but not waiver, of the closing conditions
set forth in Article X below).
8.2 Notices and Consents. The General Partners shall give any notices to
third parties and obtain any third party consents referred to in Sections 5.1,
5.2, 7.3 and 7.4 above and the related sections of the Disclosure Schedule.
APF, the OP General Partner and the Operating Partnership shall give any
notices to third parties and obtain any third party consents referred to in
Sections 6.4 and 6.5 above. Each of the Parties shall give any notices to, make
any filings with, and use its reasonable best efforts to obtain any
authorizations, consents, and approvals of governments and governmental
agencies in connection with the matters referred to in Sections 5.1, 6.4 and
7.3 above.
8.3 Maintenance of Business; Prohibited Acts. During the period from the
date of this Agreement to the Effective Time, the General Partners will not,
and will not cause the Fund to, take any action that adversely affects the
ability of the Fund (i) to pursue its business in the ordinary course, (ii) to
seek to preserve intact its current business organizations, and (iii) to
preserve its relationships with its tenants; and the General Partners will not
allow the Fund to, without the OP General Partner's prior written consent,
which consent shall not be unreasonably withheld:
(a) issue, deliver, sell, dispose of, pledge or otherwise encumber, or
authorize or propose the issuance, delivery, sale, disposition or pledge or
other encumbrance of (i) any additional ownership interests (including the Fund
Interests), or any securities or rights convertible into, exchangeable for or
evidencing the right to subscribe for any of its ownership interests, or any
rights, warrants, options, calls, commitments or any other agreements of any
character to purchase or acquire any of its ownership interests or any other
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for any of its ownership interests, or (ii) any other securities
in respect of, in lieu of or in substitution for the Fund Interests outstanding
on the date hereof;
(b) redeem, purchase or otherwise acquire, or propose to redeem, purchase or
otherwise acquire, any of its outstanding securities (including the Fund
Interests);
(c) split, combine, subdivide or reclassify any of its ownership interests
or otherwise make any payments to the Partners; provided, however, that nothing
shall prohibit: (i) the payment of any ordinary distribution in respect of its
ownership interests at such times and in such manner and amount as may be
consistent with the Fund's past practice (which in any event shall include any
and all compensation paid or payable or expenses reimbursed or reimbursable for
the period from December 31, 1998 through the Effective Time, to the extent not
otherwise paid or distributed to the Partners), or (ii) any distribution of
property necessary for the representation and warranty set forth in Section
7.11 to be true and correct;
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(d) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization (other
than the Merger);
(e) make any acquisition, by means of merger, consolidation or otherwise, of
any direct or indirect ownership interest in or assets comprising any business
enterprise or operation outside the Ordinary Course of Business;
(f) other than as may be necessary to consummate the Merger, adopt any
amendments to its certificate of limited partnership or limited partnership
agreement;
(g) incur any indebtedness for borrowed money or guarantee such indebtedness
or agree to become contingently liable, by guaranty or otherwise, for the
obligations or indebtedness of any other person or make any loans, advances or
capital contributions to, or investments in, any other corporation, any
partnership or other legal entity or to any other persons, outside the Ordinary
Course of Business;
(h) engage in the conduct of any business the nature of which is materially
different from the business in which the Fund is currently engaged;
(i) enter into any agreement providing for acceleration of payment or
performance or other consequence as a result of a change of control of the
Fund;
(j) forgive any indebtedness owed to the Fund or convert or contribute by
way of capital contribution any such indebtedness owed;
(k) authorize or enter into any agreement providing for management services
to be provided by the Fund to any third party or an increase in management fees
paid by any third party under existing management agreements;
(l) mortgage, pledge, encumber, sell, lease or transfer any material assets
of the Fund except as contemplated by this Agreement;
(m) authorize or announce an intention to do any of the foregoing, or enter
into any contract, agreement, commitment or arrangement to do any of the
foregoing; or
(n) perform any act or omit to take any action that would make any of the
representations made above inaccurate or materially misleading as of the
Effective Time.
8.4 Full Access. The General Partners shall permit representatives of APF
and the OP General Partner to have full access at all reasonable times, and in
a manner so as not to interfere with the normal business operations of the Fund
to all premises, properties, personnel, books, records (including Tax records),
contracts, and documents of or pertaining to the Fund. APF, the OP General
Partner and the Operating Partnership shall permit representatives of the
General Partners and the Fund to have full access at all reasonable times, and
in a manner so as not to interfere with the normal business operations of APF
and the Operating Partnership to all premises, properties, personnel, books,
records (including Tax records), contracts, and documents of or pertaining to
APF, the OP General Partner and the Operating Partnership. The Parties agree
that any information obtained in connection with the exercise of their rights
pursuant to this Section 8.4 shall be Confidential Information for purposes of
this Agreement.
8.5 Notice of Developments. Each Party will give prompt written notice to
the others of any material adverse development causing a breach of any of its
own representations and warranties in Articles V, VI or VII above, as
applicable. No disclosure by any Party pursuant to this Section 8.5, however,
shall be deemed to amend or supplement the Disclosure Schedule or to prevent or
cure any misrepresentation, breach of warranty, or breach of covenant.
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8.6 Reorganization. From and after the date hereof and prior to the
Effective Time, except for the transactions contemplated or permitted herein,
each of APF, the Operating Partnership, the General Partners and the Fund shall
use reasonable efforts to conduct its business and file Tax Returns in a manner
that would not jeopardize the qualification of APF after the Effective Time as
a real estate investment trust as defined within Section 856 of the Code.
8.7 Fund Partner Approval. The General Partners hereby agree to vote the
Fund Interests owned by them in favor of this Agreement and the transactions
contemplated hereby and agree, subject to the satisfaction of their fiduciary
duties as general partners under Florida law, as reasonably determined by the
General Partners, to recommend that the limited Partners of the Fund vote their
Fund Interests in favor of this Agreement and the transactions contemplated
hereby.
8.8 Delivery of Certain Financial Statements.
(a) In addition to disclosure in Fund SEC Documents required to be filed by
the Fund, promptly after they are available, and in any event not later than
the tenth business day prior to the Closing Date, the Fund shall provide to APF
and the OP General Partner with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by the Fund and each of the
General Partners that such balance sheets (including the related notes, if any)
present fairly, in all material respects, the financial position of the Fund as
of their respective dates, and the other related statements (including the
related notes, if any) included therein present fairly, in all material
respects, the results of its operations and cash flows for the respective
periods or as of the respective dates set forth therein, all in conformity with
GAAP consistently applied during the periods involved, except as otherwise
stated in the notes thereto, subject to normal year-end audit adjustments.
(b) In addition to disclosure in APF SEC Documents required to be filed by
APF, promptly after they are available, and in any event not later than the
tenth business day prior to the Closing Date, APF shall provide to the Fund and
the General Partners with (i) true and correct copies of its unaudited
consolidated balance sheet as of the most recently completed calendar quarter
and (ii) true and correct copies of its unaudited balance sheet as of the last
day of each month occurring after the date hereof and prior to the Closing Date
and the related unaudited statements of income and cash flows for the year to
date ending on the last day of each such month. Delivery of such financial
statements shall be deemed to be a representation by APF that such balance
sheets (including the related notes, if any) present fairly, in all material
respects, the financial position of APF as of their respective dates, and the
other related statements (including the related notes, if any) included therein
present fairly, in all material respects, the results of its operations and
cash flows for the respective periods or as of the respective dates set forth
therein, all in conformity with GAAP consistently applied during the periods
involved, except as otherwise stated in the notes thereto, subject to normal
year-end audit adjustments.
8.9 State Takeover Statutes. APF, the APF Board of Directors, the Operating
Partnership, the Fund and the General Partners shall (i) take all action
necessary so that no "fair price," "business combination," "moratorium,"
"control share acquisition" or any other anti-takeover statute or similar
statute enacted under state or federal laws of the United States or similar
statute or regulation, including without limitation, the control share
acquisition provisions of Section 3-701 et seq. of the Maryland GCL and the
business combination provisions of Section 3-601 et seq of the Maryland GCL
(each, a "Takeover Statute"), is or becomes applicable to the Merger, this
Agreement or any of the other transactions contemplated by this Agreement, and
(ii) if any Takeover Statute becomes applicable to the Merger, this Agreement
or any other transaction contemplated by this Agreement, take all action
necessary to minimize the effect of such Takeover Statute on the Merger and the
other transactions contemplated by this Agreement.
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8.10 Exclusivity. None of the General Partners shall solicit, initiate, or
encourage the submission of any proposal or offer from any Person relating to
the acquisition of any capital stock or other voting securities or any
substantial portion of the assets of the Fund (including any acquisition
structured as a merger, consolidation, or share exchange). The General Partners
shall notify APF and the Operating Partnership immediately if any Person makes
any proposal, offer, inquiry, or contact with respect to any of the foregoing.
8.11 Listing. APF shall effect, at or before the issuance of any APF Common
Shares issued as Share Consideration pursuant to Article IV, authorization for
listing or quotation of such APF Common Shares on the NYSE, subject to official
notice of issuance.
8.12 Maintenance of APF's Business. During the period from the date of this
Agreement to the Effective Time, APF will not take any action that adversely
affects the ability of APF (i) to pursue its business in the ordinary course,
(ii) to seek to preserve intact its current business organizations (iii) to
preserve its relationships with its tenants and (iv) will not take any action
to affect it status as a REIT for federal income tax purposes.
8.13 Registration of Share Consideration. APF shall cause the Registration
Statement to become effective prior to the Closing Date.
8.14 Delivery and Approval of Disclosure Schedule and Schedule 1. Within
fifteen (15) business days after the date of this Agreement the General
Partners shall deliver to APF the Disclosure Schedule and APF shall deliver to
the General Partners Schedule 1. Within fifteen (15) business days after APF
receives the Disclosure Schedule it shall give the General Partners notice
either that the disclosures in the Disclosure Schedule are, as to substance,
satisfactory to APF, in its sole and absolute discretion, or that they are not
satisfactory and that APF terminate this Merger Agreement pursuant to Section
11.2. Likewise, within fifteen (15) business days after the General Partners
receive Schedule 1, the General Partners shall give APF notice either that the
disclosures in Schedule 1 are, as to substance, satisfactory to them, in their
sole and absolute discretion, or that they are not satisfactory and that such
General Partners terminate the Agreement pursuant to Section 11.2. In the case
of both APF and the General Partners, the failure of either to give the notice
specified above within the applicable fifteen (15) business day period shall
constitute approval of the Disclosure Schedule or Schedule 1, as applicable.
8.15 Certain Acquisitions. APF or its Subsidiaries shall acquire CNL Fund
Advisors, Inc., CNL Financial Corp. and CNL Financial Services, Inc.
(collective, the "CNL Restaurant Services Group") substantially in accordance
with the terms and conditions set forth in their respective merger agreements
dated on or about the date hereof or such other terms that are mutually agreed
to by the parties.
ARTICLE IX
Post-Closing Covenants
The Parties agree as follows with respect to the period following the
Closing:
9.1 General. In the event that at any time after the Closing any further
action is necessary or desirable to carry out the purposes of this Agreement,
each of the Parties will take such further action (including the execution and
delivery of such further instruments and documents) as any other Party
reasonably may request, all at the sole cost and expense of the requesting
Party (unless the requesting Party is entitled to indemnification therefor
under Article XII below). The General Partners acknowledge and agree that from
and after the Closing, the Surviving Partnership will be entitled to possession
of all documents, books, records (including Tax records), agreements, and
financial data of any sort relating to the Fund.
9.2 Litigation Support. In the event and for so long as any Party actively
is contesting or defending against any action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand in connection
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with (i) any transaction contemplated under this Agreement or (ii) any fact,
situation, circumstance, status, condition, activity, practice, plan,
occurrence, event, incident, action, failure to act, or transaction on or prior
to the Closing Date involving the Fund, each of the other Parties will
cooperate with it and its counsel in the contest or defense, make available
their personnel, and provide such testimony and access to their books and
records as shall be necessary in connection with the contest or defense, all at
the sole cost and expense of the contesting or defending Party (unless the
contesting or defending Party is entitled to indemnification therefor under
Article XII below).
9.3 Transition. The General Partners will not take any action that is
designed or intended to have the effect of discouraging any tenant, lessor,
licensor, customer, supplier, or other business associate of the Fund from
maintaining the same business relationships with the Surviving Partnership
after the Closing as it maintained with the Fund prior to the Closing.
9.4 Confidentiality.
(a) The General Partners and the Fund will treat and hold as such all of the
Confidential Information, refrain from using any of the Confidential
Information except in connection with this Agreement, and deliver promptly to
APF or the OP General Partner, as applicable, or destroy, at the request and
option of APF or the OP General Partner, as applicable, all tangible
embodiments (and all copies) of the Confidential Information which are in its
possession. In the event that any of the General Partners or the Fund is
requested or required (by oral question or request for information or documents
in any legal proceeding, interrogatory, subpoena, civil investigative demand,
or similar process) to disclose any Confidential Information, such General
Partner or the Fund, as applicable, will notify APF or the OP General Partner,
as applicable, promptly of the request or requirement so that such Party may
seek an appropriate protective order or waive compliance with the provisions of
this Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, such General Partner or the Fund is, on the advice of
counsel, compelled to disclose any Confidential Information to any tribunal or
else stand liable for contempt, then such General Partner or the Fund, as
applicable, may disclose the Confidential Information to such tribunal;
provided, however, that such General Partner or the Fund, as applicable, shall
use its best efforts to obtain, at the request of APF or the OP General
Partner, as applicable, an order or other assurance that confidential treatment
will be accorded to such portion of the Confidential Information required to be
disclosed as APF or the OP General Partner, as applicable, shall designate.
(b) APF, the OP General Partner and the Operating Partnership will treat and
hold as such all of the Confidential Information, refrain from using any of the
Confidential Information except in connection with this Agreement, and, if the
Closing does not occur, deliver promptly to the Fund General Partners, as
applicable, or destroy, at the request and option of the Fund or the General
Partners, as applicable, all tangible embodiments (and all copies) of the
Confidential Information which are in its possession. Prior to the Closing and
if the Closing does not occur, in the event that any of APF, the OP General
Partner or the Operating Partnership is requested or required (by oral question
or request for information or documents in any legal proceeding, interrogatory,
subpoena, civil investigative demand, or similar process) to disclose any
Confidential Information, APF, the OP General Partner or the Operating
Partnership, as applicable, will notify the Fund or the General Partners, as
applicable, promptly of the request or requirement so that such Party may seek
an appropriate protective order or waive compliance with the provisions of this
Section 9.4. If, in the absence of a protective order or the receipt of a
waiver hereunder, APF, the OP General Partner or the Operating Partnership is,
on the advice of counsel, compelled to disclose any Confidential Information to
any tribunal or else stand liable for contempt, then APF, the OP General
Partner or the Operating Partnership, as applicable, may disclose the
Confidential Information to such tribunal; provided, however, that APF, the OP
General Partner or the Operating Partnership, as applicable, shall use its best
efforts to obtain, at the request of the Fund or the General Partners, as
applicable, an order or other assurance that confidential treatment will be
accorded to such portion of the Confidential Information required to be
disclosed as the Fund or the General Partners, as applicable, shall designate.
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9.5 Covenant Not to Compete. Unless employed by the Surviving Partnership or
APF after the Closing, for a period of three years from and after the Closing
Date, none of the General Partners will engage directly or indirectly in any
business serving the restaurant industry that the Surviving Partnership or APF
conducts as of the Closing Date, except existing restaurant businesses and
properties currently owned or advised by affiliates of CNL Group, Inc.,
including CNL Advisory Services, Inc. In addition, and not in lieu of the
foregoing, for a period of three years from and after the Closing Date, James
M. Seneff, Jr. hereby covenants and agrees not to engage or participate,
directly or indirectly, as principal, agent, executive, employee, employer,
consultant, stockholder, partner or in any other individual capacity
whatsoever, in the conduct or management of, or own any stock or any other
equity investment in or debt of, any business that relates to the ownership,
acquisition or development of "restaurant operations"; provided, however, for
the purposes of this Agreement, "restaurant operations" shall not include the
ownership, acquisition or development of hotel and health care properties that
contain restaurant operations and those entities set forth on Schedule 9.5, and
provided further, the noncompetition covenant shall not operate to preclude Mr.
Seneff's ownership of APF Common Shares and of up to 5% of the equity
securities of companies whose common stock is publicly traded that are engaged
in owning, operating, franchising or making are engaged in owning, operating,
franchising or making loans to restaurants and restaurant companies. If the
final judgment of a court of competent jurisdiction declares that any term or
provision of this Section 9.5 is invalid or unenforceable, the Parties agree
that the court making the determination of invalidity or unenforceability shall
have the power to reduce the scope, duration, or area of the term or provision,
to delete specific words or phrases, or to replace any invalid or unenforceable
term or provision with a term or provision that is valid and enforceable and
that comes closest to expressing the intention of the invalid or unenforceable
term or provision, and this Agreement shall be enforceable as so modified after
the expiration of the time within which the judgment may be appealed.
9.6 Tax Matters.
(a) If there is an adjustment to any item reported on a pre-closing Tax
Return that results in an increase in the Taxes payable by the Fund or any of
the General Partners, and such adjustment results in a corresponding adjustment
to items reported on a post-closing Tax Return with the result that the Taxes
payable either by APF, any of its Subsidiaries, or by any consolidated group of
companies of which APF or any Subsidiary are then members are reduced, or a
refund of Taxes is increased, then any APF Indemnity Claim that the General
Partners or Fund owes APF or the Operating Partnership pursuant to Article XII
below shall be reduced by the amount by which such Taxes are reduced or such
refunds are increased.
(b) Any refund or credit of Taxes (including any statutory interest thereon)
received by APF or any of its Subsidiaries attributable to periods ending on or
prior to or including the Closing Date that were paid by the Fund pursuant to
this Agreement shall reduce any APF Indemnity Claim that the General Partners
or the Fund owes APF pursuant to Article XII below by an amount equal to the
amount of such refund or credit.
(c) In the event that APF or any of its Subsidiaries receives notice,
whether orally or in writing, of any pending or threatened federal, state,
local or foreign tax examinations, claims settlements, proposed adjustments or
related matters with respect to Taxes that could affect the Fund or the General
Partners, or if the Fund or any of the General Partners receives notice of such
matters that could affect APF or any of its Subsidiaries, the party receiving
such notice shall notify in writing the potentially affected party within ten
(10) days thereof. The failure of either party to give the notice required by
this Section shall not impair such party's rights under this Agreement except
to the extent that the other party demonstrates that it has been damaged
thereby.
(d) The General Partners shall have the responsibility for, and shall be
entitled, at their expense, to contest, control, compromise, reasonably settle
or appeal all proceedings with respect to pre-closing Taxes.
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ARTICLE X
Conditions to Obligation to Close
10.1 Conditions to Each Party's Obligation. The respective obligations of
APF, the OP General Partner, the Operating Partnership, the Fund and the
General Partners to consummate the transactions contemplated by this Agreement
are subject to the fulfillment at or prior to the Closing Date of each of the
following conditions, which conditions may be waived upon the written consent
of APF and the General Partners:
(a) Governmental Approvals and Consents. The Parties shall have received all
other authorizations, consents, and approvals of governments and governmental
agencies referred to in Sections 5.1, 6.4, and 7.3 above.
(b) No Injunction or Proceedings. There shall not be any action, suit, or
proceeding pending or threatened before any court or quasi-judicial or
administrative agency of any federal, state, local, or foreign jurisdiction or
before any arbitrator wherein an unfavorable injunction, judgment, order,
decree, ruling, or charge would, in the reasonable judgment of APF or the
General Partners, (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions contemplated
by this Agreement to be rescinded following consummation, or (C) materially
adversely affect the right of the Surviving Partnership to own its assets and
to operate its businesses (and no such injunction, judgment, order, decree,
ruling, or charge shall be in effect).
(c) No Suspension of Trading, Etc. At the Effective Time, there shall be no
declaration of a banking moratorium by federal or state authorities or any
suspension of payments by banks in the United States (whether mandatory or not)
or of the extension of credit by lending institutions in the United States, or
commencement of war or other international, armed hostility or national
calamity directly or indirectly involving the United States, which war,
hostility or calamity (or any material acceleration or worsening thereof), in
the sole judgment of APF, would have a Material Adverse Effect on the Fund or,
in the sole judgment of any of the General Partners, would have a Material
Adverse Effect on APF.
(d) Shareholder/Partner Approvals. The stockholders of APF shall have
approved APF's Amended and Restated Articles of Incorporation in the form
attached hereto as Exhibit A, and the Partners of the Fund shall have approved
the Merger Proposal, amendments to the partnership agreement, if any.
(e) Registration of Share Consideration. The Registration Statement shall
have become effective under the Securities Act and shall not be the subject of
any stop order or proceedings by the SEC seeking a stop order.
10.2 Conditions to Obligation of APF, the OP General Partner and the
Operating Partnership. The obligations of APF, the OP General Partner and the
Operating Partnership to consummate the transactions to be performed by them in
connection with the Closing are subject to satisfaction on or prior to December
31, 1999 of the following conditions:
(a) the General Partners and the Fund shall have delivered to APF and the OP
General Partner a certificate to the effect that:
(i) the representations and warranties set forth in Article V and
Article VII above are true and correct in all material respects at and as
of the Closing Date;
(ii) the General Partners and the Fund have performed and complied with
all of their covenants hereunder in all material respects at and as of the
Closing Date;
(iii) the General Partners and the Fund have procured all of the
material third-party consents specified in, respectively, Section 5.2 and
Section 7.4 above and the related sections of the Disclosure Schedule; and
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<PAGE>
(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 $3,014,377 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 $301,438 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 XVII, 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 XVII, 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 February 10, 1995, 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 of new general partner(s), if applicable: N/A
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<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 XVII, 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 XVII, 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 XVIII, LTD.
This Supplement is being furnished to you, as a Limited Partner of CNL
Income Fund XVIII, 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 Prospectus/Consent Solicitation Statement.
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.
OVERVIEW
Pursuant to the Prospectus/Consent Solicitation Statement and this
Supplement, you are being asked to approve the Acquisition of your Income Fund
by APF. Your Income Fund is one of 18 limited partnerships (which we refer to
collectively as the Funds) that APF is seeking to acquire. Supplements have
also been prepared for each of the other Funds, copies of which may be obtained
without charge to 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 (or a REIT), formed in
1994, whose primary business, like that of the Funds, is the ownership of
restaurant properties leased to operators of national and regional restaurant
chains on a triple-net lease basis. As a full-service REIT, 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 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 shares of common stock (or APF Shares) will I receive if my Income
Fund is acquired by APF?
Your Income Fund will receive 3,299,149 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 $10.00 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
approximately 75 million APF Shares through three public offerings at offering
prices per APF share equal to the Exchange Value. At December 31, 1999, of the
approximately $750 million raised by APF, APF has used approximately $550
million to acquire restaurant properties and to make mortgage loans and had
approximately $120 million in univested proceeds which APF expects to invest
during the first quarter of 1999. The remaining proceeds were used to pay fees
and other offering expenses.
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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
Fund?
Yes. Legg Mason Wood Walker, Incorporated 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 Funds, and (c) the method of allocating the APF
Shares among the Funds.
Do you, as the general partners of my Income Fund, recommend that I vote in
favor 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 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 how you want to vote, and sign
and mail it in the enclosed postage-paid return envelope as soon as possible,
so that at the Special Meeting of Limited Partners, your Units may be voted
"For" or "Against" APF's acquisition of your Income Fund. If you sign and send
in your consent form and do not indicate how you want to vote, your consent
form will be counted as a vote "For" the Acquisition. If you do not vote or you
abstain from voting, it will count as a vote "Against" the Acquisition.
In the event that my Income Fund is acquired by APF, may I choose to receive
something other than APF Shares?
Yes, subject to certain limitations. If you vote "Against" the Acquisition,
but your Income Fund is nevertheless acquired by APF, you may elect to receive
a payment (which we call the Cash/Notes Option) that is 10% in cash and 90% in
% Callable Notes due , 2006 (or Notes) based on the liquidation value of
your Income Fund, as determined by Valuation Associates, the appraisal firm
that we engaged in connection with the Acquisition. Such liquidation value will
be lower than the aggregate Exchange Value of the APF Shares offered to your
Income Fund in the Acquisition. The Notes will bear interest at a rate equal to
%, which was determined based on 120% of the applicable federal rate as of
, 1999. Please note that you may only receive the Cash/Notes Option if
you have voted "Against" the Acquisition and you elect to receive the
Cash/Notes Option on your consent form. You will receive APF Shares if your
Income Fund elects to be acquired in the Acquisition and you voted "For" the
Acquisition, or you voted "Against" the Acquisition and did not affirmatively
select the Cash/Notes Option. 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 (for example, 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 be based on the difference between the
value of the APF Shares or the tax basis of your Units. If you elect the
Cash/Notes Option, 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 and cash
received by your Income Fund over the tax basis of your Fund's net assets to
the extent that you or other Limited Partners of your Income Fund vote against
the Acquisition.
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 $(525). To
review the tax consequences to the Limited Partners of the
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Funds in greater detail, see pages through of the Prospectus/Consent
Solicitation Statement 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 Funds acquired by APF.
Although the majority of APF's assets and the assets of the other Funds
acquired by APF are substantially similar to those of your Income Fund, the
restaurant properties owned by APF and the other 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 Funds' restaurant properties,
see "APF's Business and The Restaurant Properties--Business Objectives and
Strategies" and "--The Restaurant Properties--General" and "Business of the
Funds--Description of Restaurant Properties" in the Prospectus/Consent
Solicitation Statement.
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 Prospectus/Consent Solicitation Statement.
Investment Risks
. Uncertainty Regarding the Exchange Value and Trading Price of APF Shares
Following Listing. Your Income Fund will be receiving 3,299,149 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 is 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 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.
. Decrease in Distributions. In each of the years ended December 31, 1995,
1996 and 1997, your Income Fund made $111, $575 and $559, respectively in
distributions per $10,000 investment to you. Based on APF's pro forma
financial information, and assuming APF acquires only your Income Fund and
that each Limited Partner of your Income receives only APF Shares, you would
have received, for the year ended December 31, 1997, $528 in distributions
per $10,000 of original investment, which is 5.5% less than the $559
distributed to you as Limited Partner during the same period. 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 year ended December 31, 1997 is not necessarily
indicative of the distributions you will receive as a stockholder of APF
after the Acquisition. See "Cash Distributions to Limited Partners of Your
Fund."
. Conflicts of Interest in the Acquisition; Substantial Benefits to Related
Parties. There are certain conflicts of interest inherent in the structure
of the Acquisition of your Income Fund. 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
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<PAGE>
members of APF, Messrs. Seneff and Bourne, have an interest in the
completion of the Acquisition that may or may not be aligned with your
interests 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 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.
. Fundamental Change in Nature of 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 September
30, 1998), 381 restaurant properties. The risks inherent in investing in an
operating company such as APF include APF's ability to invest in new
restaurant properties that are not as profitable as APF anticipated, the
incurrence of substantial indebtedness to make future acquisitions of
restaurant properties which it may be unable to repay and making mortgage
loans to prospective operators of national and regional restaurant chains
which may not have the ability to repay.
As an APF stockholder, you will receive the benefits of your investment
through (i) dividend distributions on, and (ii) increases in the value of,
your APF Shares. In addition, 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 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 Cash/Notes Option). An investment in APF may not
outperform your investment in the Income Fund.
. Original Investment Timeframe. 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, 2025. 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 2005 and 2010. We have no current plans to
dispose of your Income Fund's restaurant properties if the Limited Partners
do not approve the Acquisition.
Real Estate/Business Risks
. Risk of Default on Mortgage Loans and Market Risks associated with
Securitizations. 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.
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,) and seek a
different source for funding its operations than securitizations.
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<PAGE>
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 may 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.
. Risks Associated with Leverage. 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. At the time of the consummation of the Acquisition, as a
general policy, APF's Board of Directors will 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 funds from operations and its ability to make
distributions to its stockholders.
. Acquisition and Development Risks. APF plans to pursue its growth strategy
through the acquisition and development of additional restaurant
properties. To the extent that APF does pursue this growth strategy, we do
not know that it 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.
Tax Risks
. Failure of APF to Qualify as a REIT for Tax Purposes. 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.
. Risks Associated with Distribution Requirements. 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
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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 Tax Law. 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 Prospectus/Consent Solicitation Statement.
CONSIDERATION PAID TO INCOME FUND
The following table sets forth, for your Income Fund (i) the aggregate
amount of original Limited Partner investments in each Fund less any
distributions of net sales proceeds paid to the Limited Partners of that Fund,
(ii) the original amount of Limited Partner investments in each Fund less any
distributions of net sales proceeds per average $10,000 investment, (iii) the
number of APF Shares to be paid to your Income Fund, (iv) the estimated value
of the APF Shares paid to your Income Fund, (v) the estimated Acquisition
expenses allocated to your Income Fund, (vi) the estimated value, based on the
Exchange Value, of APF Shares paid to your Income Fund after deducting
Acquisition expenses, and (vii) the estimated value, based on the Exchange
Value, of APF Shares you will receive for each $10,000 of your original
investment:
<TABLE>
<CAPTION>
Original
Limited
Partner
Original Investments
Limited Less Any
Partner Distribution Estimated Estimated Value
Investments of Net Sales Number of Value of of APF Shares
Less Any Proceeds per APF APF Estimated Value per Average
Distribution $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) Fund(2) Fund(3) Expenses Expenses(3) Investment(3)
- ------------ ------------- ---------- ----------- ----------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
$35,000,000 $10,000 3,299,149 $32,991,490 $390,024 $32,601,466 $9,315
</TABLE>
- --------
(1) Income Fund has had no distributions of net sales proceeds.
(2) The APF Shares payable to each Fund as set forth in this chart will not
change if APF acquires fewer than all of the Funds in the Acquisition.
This number assumes that none of the Limited Partners of the Fund has
elected the Cash/Notes Option.
(3) 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.
Upon completion of the Acquisition of your Income Fund, the operations and
existence of your Income Fund will cease. For more detailed information, see
"The Acquisition" in the Prospectus/Consent Solicitation Statement. If your
Income Fund does not approve the Acquisition, we do not contemplate that your
Income Fund would be liquidated in the near future. The Acquisition, however,
does not result in an all-cash payment to you in the liquidation of your
investment. For example, if you are eligible for and choose the Cash/Notes
Option, you become a Noteholder of APF. You will have exchanged your Units for
unsecured debt obligations of APF which may not be retired in full until
, 2006, a date approximately seven years after the date the Acquisition of
your Income Fund occurs. On the other hand, if you exchange your Units for APF
Shares, you will receive an equity interest in APF whose marketability will
depend upon the market that may develop with respect to the APF Shares, which
will be listed on the NYSE.
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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....................................................... $ 16,046
Appraisals and Valuation......................................... 6,419
Fairness Opinions................................................ 28,883
Registration, Listing and Filing Fees............................ --
Soliciting Dealer Fee............................................ 62,067
Financial Consulting Fees........................................ --
Environmental Fees............................................... 40,116
Accounting and Other Fees........................................ 52,600
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Subtotal....................................................... 206,131
Closing Transaction Costs
Transfer Fees and Taxes.......................................... 81,281
Legal Fees....................................................... 48,843
Recording Costs.................................................. --
Other............................................................ 53,769
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Subtotal....................................................... 183,893
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Total............................................................ $390,024
========
</TABLE>
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 Income Fund's restaurant
properties acquired within two years of the initial date of the prospectus
(October 1996). 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:
S-7
<PAGE>
. 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 as, in our opinion, market
conditions permit), as contemplated by the terms of the partnership agreement.
Special Meeting to Discuss the Acquisition
We have scheduled a special meeting of the Limited Partners of your Income
Fund to discuss the solicitation materials, which include the
Prospectus/Consent Solicitation Statement, 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 (as defined below) and to explain in
person our reasons for recommending that you vote "For" the Acquisition.
VOTING PROCEDURE
The Prospectus/Consent Solicitation Statement, 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.
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 Prospectus/Consent Solicitation
Statement. A copy of the Agreement and Plan of Merger dated March 11, 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
S-8
<PAGE>
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 December
31, 1999. 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.
The consent form consists of two parts. Part A seeks your consent to APF's
Acquisition of your Income Fund and certain 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
(including the Acquisition), 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. The partnership agreement also provide 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
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, 1995, 1996 and 1997 and the nine months
ended September 30, 1998, the aggregate amounts accrued or paid by your Income
Fund 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 years presented, are shown below under "Pro Forma":
S-9
<PAGE>
<TABLE>
<CAPTION>
Nine
Months
Year Ended December 31, Ended
---------------------------- September 30,
1995 1996 1997 1998
-------- -------- ---------- -------------
<S> <C> <C> <C> <C>
Historical:
General Partner Distributions..... -- -- -- --
Broker/Dealer Commissions(1)......
Property Management Fees.......... -- $ 12 $ 14,720 $21,323
Due Diligence and Marketing
Support Fees.....................
Acquisition Fees.................. -- 378,982 1,157,577 38,441
Asset Management Fees.............
Real Estate Disposition Fees(2)... -- -- -- --
-------- -------- ---------- -------
Total historical................ -- $378,994 $1,172,297 $59,764
Pro Forma:
Cash Distributions on APF Shares.. -- -- -- --
Salary Compensation............... -- -- -- --
-------- -------- ---------- -------
Total pro forma................. -- -- -- --
</TABLE>
- --------
(1) A majority of the fees paid as broker-dealer commissions and due diligence
and marketing support fees were reallowed to other broker-dealers
participating in the offering of the Income Fund's Units.
(2) 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 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 the Acquisition--Prices for 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>
Nine Months Ended
Year Ended December 31, Sept. 30, 1998
------------------------ --------------------
1993 1994 1995 1996 1997 Historical Pro Forma
---- ---- ---- ---- ---- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Distributions from Income....... -- -- -- $ 53 $507 $540 $408
Distributions from Return of
Capital(1)..................... -- -- -- 58 68 19 18
--- --- --- ---- ---- ---- ----
Total......................... -- -- -- $111 $575 $559 $426
=== === === ==== ==== ==== ====
</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 nine months ended September 30,
1998 is not necessarily indicative of the distributions you will receive as a
stockholder of APF after the Acquisition.
Assuming APF maintains its current level of debt for acquiring future
restaurant properties, the expected distribution rate per APF Share will be
8.8% (assuming a $10.00 per APF Share price based on the Exchange Value, the
annualized dividend per year is expected to be $0.88 per APF Share). Based on
the number of APF Shares that you would receive in the Acquisition per your
average $10,000 original investment and this distribution rate, you would
receive an annual distribution of approximately $820.
S-10
<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 certain 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 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 Cash/Note Option.
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, our relief 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 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 Fund. We believe that the form and amount of consideration
offered to us and the Limited Partners, including dissenting Limited Partners
who select the Cash/Notes Option, constitutes 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 and is the best way to maximize the return on your
investment in light of the values of such consideration.
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
S-11
<PAGE>
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
of Valuation Associates and Legg Mason received fees for its services and
notwithstanding that Legg Mason has previously provided investment banking
services to the Funds and to Commercial Net Lease Realty, Inc., a former
affiliate of ours. See "Reports, Opinions and Appraisals" in the
Prospectus/Consent Solicitation Statement.
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 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 cash and promissory 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 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 Cash/Notes Option.
3. Valuation of Alternatives. Based on the appraisal of the Income Fund's
restaurant properties, we estimated the value of your Income Fund as an ongoing
concern and if liquidated. 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 Fund to 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
September 30, 1998 per $10,000 original investment. Since the calculation of
the book value was done on a GAAP basis, it is not indicative of the true fair
market value of your Income Fund. This figure was compared to the (i) value of
the Fund if it commenced an orderly liquidation of its investment portfolio on
December 31, 1998, (ii) value of the Fund if it continued to operate in
accordance with its existing partnership agreement and business plans, and
(iii) estimated value of the APF Shares, based on the Exchange Value, paid to
each Fund per average $10,000 invested.
S-12
<PAGE>
Summary of Valuations
(per $10,000 original investment)
<TABLE>
<CAPTION>
Estimated Value
of APF Shares
Payable to per
Average $10,000
GAAP Book Liquidation Going Concern Original Limited
Value Value(1) Value(1) Partner Investment(2)
--------- ----------- ------------- ---------------------
<S> <C> <C> <C> <C>
CNL Income Fund XVIII,
Ltd.................... $8,730 $8,569 $9,284 $9,315
</TABLE>
- --------
(1) 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.
(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.
CONFLICTS OF INTEREST
Affiliated General Partners
As the general partners of your Income Fund, we each have an independent
obligation 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 Funds). James M. Seneff, Jr. and
Robert A. Bourne act as the individual general partners of all of the 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.
Benefits to General Partners
As a result of the Acquisition (assuming only your Income Fund is acquired),
we are expected to receive certain benefits, including that we will be relieved
from certain ongoing liabilities with respect to Funds that are acquired by
APF.
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 Funds if the Acquisition does not occur.
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
S-13
<PAGE>
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 the Cash/Notes Option, in which
case you will receive cash and 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 Prospectus/Consent Solicitation Statement.
Tax Consequences of the Acquisition
In connection with the Acquisition and for federal income tax purposes, the
assets (and any liabilities) of your Income Fund (if your Income Fund is
acquired by APF) will be transferred to APF in return for APF Shares and/or
cash and 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 XVIII, Ltd........................ $(525)
</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-14
<PAGE>
Under section 351(a) of the Code, no gain or loss is recognized if (i)
property is transferred to a corporation by one more individuals or entities in
exchange for the stock of that corporation, and (ii) 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 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 the
Cash/Notes Option, 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 (1) 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 (2) 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 Cash/Notes Option, your Income Fund will receive APF
Shares, cash and Notes in exchange for your Income Fund's assets. Because the
principal portion of the Notes will not be due until , 2006, 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 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 (without reduction for
any selling expenses) 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 are 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, cash 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" (i.e., real property and
depreciable assets used in a trade or business and held for more than one
year). Your share of gains or losses from the sale of section 1231 assets of
your Income Fund would be combined with any other section 1231 gains and losses
that you recognize in that year. If the result is a net loss, such loss is
characterized as an ordinary loss. If the result is a net gain, it is
characterized as a capital gain, except that the gain will be treated as
ordinary income to the extent that you have "non-recaptured section 1231
losses." For these purposes, the term "non-recaptured section 1231 losses"
means your aggregate section 1231 losses for the five most recent prior years
that have not been previously recaptured. However, gain recognized on the sale
of personal property will be taxed as ordinary income to the extent of all
prior depreciation deductions taken by your Income Fund
S-15
<PAGE>
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 Cash/Notes Option may
recognize gain in the year of the Acquisition despite the fact that they will
receive only a small amount of cash and no publicly-traded instruments 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 the Cash/Notes Option. See "--Tax Consequences of
Liquidation and Termination of Your Fund" below.
Tax Consequences of the Liquidation and Termination of Your Fund. If your
Fund is acquired by APF, your Fund will be deemed to have liquidated and
distributed APF Shares and/or cash and 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 cash and 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 pro rata 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 (determined on the closing date of the Acquisition) and your
adjusted tax basis in your Units (adjusted by your distributive share of
income, gain, loss, deduction and credit for the final taxable year of your
Income Fund (including any such items recognized by your Income Fund as a
result of the Acquisition) as well as any distributions you receive in such
final taxable year (other than the distribution of the APF Shares)). 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 cash and Notes in the Acquisition, you will recognize gain to
the extent that the amount of cash you receive in the Acquisition exceeds your
adjusted basis in your Units (adjusted by your distributive share of income,
gain, loss, deduction and credit for the final taxable year of your Income Fund
(including any such items recognized by your Income Fund as a result of the
Acquisition) as well as any distributions you receive in such final taxable
year (other than the distributions of the cash and Notes)). Your basis in the
Notes distributed to you will equal your adjusted basis in your Units, reduced
(but not below zero) by the amount of any cash distributed to you 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 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)
S-16
<PAGE>
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.
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 cash and 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 Prospectus/Consent Solicitation
Statement.
S-17
<PAGE>
SUMMARY SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
APF, FUNDS, ADVISOR AND CNL RESTAURANT FINANCIAL SERVICES GROUP
Nine Months Ended September 30, 1998
<TABLE>
<CAPTION>
Historical
--------------------------------------------------
CNL
CNL Restaurant Pro Forma
Income Financial --------------------------------
Fund XVIII, Services Combined Pro Forma Combined
APF Ltd. Advisor Group Historical Adjustments Pro Forma
------------ ----------- ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Data
Revenues:
Rental and earned
income............... $ 22,947,199 $ 2,228,324 $ -- $ -- $ 25,175,523 $ 9,747,393 (a)
(326)(b) $ 34,922,590
Management fees....... -- -- 21,405,127 5,122,366 26,527,493 (21,396,113)(c)
(2,875,906)(d) 2,255,474
Interest and other
income............... 6,117,911 114,967 751 18,463,647 24,697,276 1,526,547 (e) 26,223,823
------------ ----------- ----------- ------------ ------------ ------------ ------------
Total revenue......... 29,065,110 2,343,291 21,405,878 23,586,013 76,400,292 (12,998,405) 63,401,887
Expenses:
General and
administrative....... 1,539,004 155,272 6,701,115 6,704,482 15,099,873 (1,306,230)(f)
(1,415,100)(g)
(36,629)(h) 12,341,914
Advisory fees......... 1,248,393 21,180 -- 1,026,231 2,295,804 (2,295,804)(i) --
State taxes........... 397,569 8,605 15,226 220,180 641,580 44,873 (j) 686,453
Depreciation and
amortization......... 2,693,020 268,305 131,539 1,000,493 4,093,357 3,021,504 (k)(l) 7,114,861
Interest expense...... -- -- 105,668 14,234,533 14,340,201 (68,670)(m) 14,271,531
Paid to affiliates.... -- -- 256,456 1,569,202 1,825,658 (1,825,658)(n) --
------------ ----------- ----------- ------------ ------------ ------------ ------------
Total expenses........ 5,877,986 453,362 7,210,004 24,755,121 38,296,473 (3,881,714) 34,414,759
------------ ----------- ----------- ------------ ------------ ------------ ------------
Net earnings (loss)
before equity in
earnings of joint
ventures/minority
interests, gain (loss)
on sale of properties,
gain on
securitization, and
provision (credit) for
federal income taxes.. 23,187,124 1,889,929 14,195,874 (1,169,108) 38,103,819 (9,116,691) 28,987,128
------------ ----------- ----------- ------------ ------------ ------------ ------------
Equity in earnings of
joint
ventures/minority
interests............. (23,271) -- -- 12,452 (10,819) -- (10,819)
Gain (loss) on sales of
properties............ -- -- -- -- -- --
Gain on
securitization........ -- -- -- 3,018,268 3,018,268 -- 3,018,268
Provision (credit) for
federal income taxes.. -- -- 5,607,415 708,666 6,316,081 (6,316,081)(o) --
------------ ----------- ----------- ------------ ------------ ------------ ------------
Net earnings........... $ 23,163,853 $ 1,889,929 $ 8,588,459 $ 1,152,946 $ 34,795,187 $ (2,800,610) $ 31,994,577
============ =========== =========== ============ ============ ============ ============
Other Data:
Weighted average number
of shares of common
stock outstanding
during period......... 47,633,909 N/A N/A N/A N/A -- 72,989,400(p)
Total net-leased
properties at end of
period................ 357 24 N/A N/A N/A -- 381
Funds from operations.. $ 26,408,569 $ 2,225,186 N/A N/A N/A -- $ 36,712,817
Total cash
distributions
declared.............. $ 26,460,446 $ 1,957,764 N/A N/A N/A -- $ 36,712,817
Cash distributions
declared per $10,000
investment............ $ 572 $ 560 N/A N/A N/A -- $ 503
<CAPTION>
Historical Combined Pro Forma
September 30, 1998 Historical September 30, 1998
-------------------------------------------------- ------------ --------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Real estate assets,
net................... $407,663,180 $28,975,053 $ -- $ -- $436,638,233 $ 4,600,528 (q)
26,052,741 (r) $467,291,502
Mortgages/notes
receivable............ 33,523,506 -- -- 173,776,981 207,300,487 849,195 (r) 208,149,682
Accounts receivable,
net................... 575,104 -- 7,544,985 7,342,103 15,462,192 (7,864,031)(s) 7,598,161
Investment in/due from
joint ventures........ 631,374 166,224 -- -- 797,598 25,943 (q) 823,541
Total assets........... 566,383,967 31,426,399 8,429,809 197,528,789 803,768,964 25,181,603 828,950,567
Total
liabilities/minority
interest.............. 14,478,585 870,294 5,049,152 185,998,045 206,396,076 (10,971,664)(s)(t) 195,424,412
Total equity........... 551,905,382 30,556,105 3,380,657 11,530,744 597,372,888 36,153,267 (q)(t) 633,526,155
</TABLE>
- --------
S-18
<PAGE>
(a) Represents rental and earned income as if 1) properties that had been
previously constructed and acquired from January 1, 1998 through November
30, 1998 had been acquired and leased on January 1, 1997 and 2) properties
that were developed by APF from January 1, 1998 through November 30, 1998
had been placed in service on May 1, 1997 (assumes a four month development
period.)
<TABLE>
<S> <C>
Rental and earned income on Property Transactions by APF....... $9,635,208
Rental and earned income on Property Transactions by the Income
Fund.......................................................... 112,185
----------
$9,747,393
==========
</TABLE>
(b) Represents $(326) 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, 1997.
(c) Represents the elimination of intercompany fees between APF, the Income
Fund, the Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees............................................. $ (1,569,202)
Secured equipment lease fee.................................. (44,426)
Advisory fees................................................ (1,743,563)
Reimbursement of administrative costs........................ (292,113)
Acquisition fees............................................. (15,757,119)
Underwriting fees............................................ (254,945)
Administrative fees.......................................... (148,491)
Executive fee................................................ (310,000)
Guarantee fees............................................... (93,750)
Servicing fee................................................ (1,014,117)
Development fees............................................. (166,876)
Consulting fee............................................... (1,511)
------------
Total....................................................... $(21,396,113)
============
</TABLE>
(d) Represents the deferral of $2,875,906 in origination fees collected by CNL
Restaurant Financial Services Group that should be amortized over the term
of the loans originated (20 years) in accordance with the Statement of
Financial Accounting Standards #91 "Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases."
(e) Represents interest income of $1,318,870 earned from Other Investments
acquired and mortgage notes issued from January 1, 1998 through November
30, 1998 as if this had occurred on January 1, 1997 and the amortization of
$207,677 of deferred origination fees collected during the year ended
December 31, 1997 and during the nine months ended September 30, 1998,
which were capitalized and deferred in (d) above as if they had been
collected on January 1, 1997. These deferred fees are being amortized and
recorded as interest income.
(f) Represents the elimination of intercompany expenses paid between APF, the
Income Fund, the Advisor and the CNL Restaurant Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs......................... $ (292,113)
Servicing fee................................................. (1,014,117)
-----------
$(1,306,230)
===========
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by APF were subject
to capitalization during the entire period and 2) costs relating to
properties not developed by APF were subject to capitalization up through
the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs............................... $(1,415,100)
</TABLE>
(h) Represents savings of $36,629 in professional services and administrative
expenses resulting from reporting on one combined Company versus 22
separate entities.
(i) Represents the elimination of fees between APF, the Income Fund, the
Advisor and the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Advisory fees.................................................. $(1,743,563)
Administrative fees............................................ (148,491)
Executive fee.................................................. (310,000)
Guarantee fees................................................. (93,750)
-----------
$(2,295,804)
===========
</TABLE>
(j) Represents additional state taxes of $44,873 resulting from assuming that
acquisitions from January 1, 1998 through November 30, 1998 had been
acquired on January 1, 1997 and assuming that the Income Fund had operated
under a REIT structure.
(k) Represents an increase in depreciation of the building portion of the
properties acquired from January 1, 1998 through November 30, 1998 as if
they had been acquired on January 1, 1997 and the step up in basis referred
to in footnote (v) from acquiring the CNL Income Fund portfolio using the
straight-line method over the estimated useful lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense............................................ $ 1,453,419
</TABLE>
S-19
<PAGE>
(l) Represents the amortization of the goodwill on the acquisition of the CNL
Restaurant Financial Services Group referred to in footnote (q).
<TABLE>
<S> <C>
Amortization of goodwill........................................ $ 1,568,085
</TABLE>
(m) Represents elimination of interest expense recorded for the amortization of
$350,000 in arrangement fees collected during the year ended December 31,
1997 which were eliminated in footnote (4), II (d ) in the Notes to the Pro
Forma Financial Statements attached to this Supplement.
<TABLE>
<S> <C>
Interest expense............................................... $ (68,670)
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees incurred
between the Company, the CNL Income Fund, the Advisor and the CNL
Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees............................................... $(1,569,202)
Underwriting fees.............................................. (254,945)
Consulting fee................................................. (1,511)
-----------
$(1,825,658)
===========
</TABLE>
(o) Represents the elimination of $6,316,081 in the provision for income taxes
as a result of the acquisition. APF expects to continue to qualify as a
REIT and does not expect to incur federal income taxes.
(p) APF Shares issued during the period required to fund acquisitions as if
they had been acquired on January 1, 1997 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 the
proposal to increase the number of authorized APF Shares.
(q) Represents the payment of $390,024 in cash and the issuance of 15,560,146
APF Shares in consideration for the purchase of the Income Fund, Advisor
and CNL Restaurant Financial Services Group at September 30, 1998 using the
Exchange Value of $10 per APF Share plus estimated transaction costs. The
acquisition of the Income Fund and the CNL Restaurant Financial Services
Group have been accounted for under the purchase accounting method and
goodwill was recognized to the extent that the estimated value of
consideration paid exceeded the fair value of the net tangible assets
acquired. As for the acquisition of the Advisor from a related party, the
consideration paid in excess of the fair value of the net tangible assets
received has been accounted for as costs incurred in acquiring the Advisor
from a related party because the Advisor has not been deemed to qualify as
a "business" for purposes of applying APB Opinion No. 16 "Business
Combinations." Upon consummation of the Acquisition, this expense will be
recorded as an operating expense on the APF's statement of earnings. APF
will not deduct this expense for purposes of calculating funds from
operations due to the nonrecurring and non-cash nature of the expense. As
of September 30, 1998, $249,403 of transaction costs had been incurred by
APF.
<TABLE>
<S> <C>
Income Fund.................................................. $ 32,991,488
Advisor...................................................... 76,000,000
CNL Restaurant Financial Services Group...................... 47,000,000
------------
Total Purchase Price (cash and shares)...................... 155,991,488
Less cash paid to Income Fund................................ (390,024)
------------
Share consideration......................................... 155,601,464
Transaction costs of APF..................................... 8,933,000
------------
Total costs incurred........................................ $164,534,464
============
</TABLE>
In addition, APF i) used $8,933,000 in cash to pay the transaction costs
related to the Acquisition, ii) made an upward adjustment to the Income
Fund carrying value of land and building on operating leases by $3,521,698,
net investment in direct financing leases by $1,078,830, investment in
joint venture by $25,943, made downward adjustments to the carrying value
of accrued rental income of $189,143, made downward adjustments to other
assets of $3,884,257 and made downward adjustments to deferred income of
$116,769 to adjust historical values to fair value, iii) recorded goodwill
of $41,815,587 for the acquisition of the CNL Restaurant Financial Services
Group, iv) reduced retained earnings by $76,971,555 for the excess
consideration paid over the net assets of the Advisor and removed the
historical common stock balance of $12,000, additional paid in capital
balance of $9,602,287, retained earnings balance of $5,297,114 and partners
capital balance of $30,556,105 of the Income Fund, Advisor and CNL
Restaurant Financial Services Group.
(r) Represents the use of $26,901,936 in cash and cash equivalents at September
30, 1998 to acquire $26,052,741 in properties and issue $849,195 in
mortgage notes which occurred from October 1, 1998 through November 30,
1998.
(s) Represents the elimination by the Income Fund of $14,652 in related party
payables recorded as receivables by the Advisor, the elimination by the CNL
Restaurant Financial Services Group of $6,641,379 in related party payables
recorded as receivables by CNL Restaurant Financial Services Group and the
elimination by the Company of $1,208,000 in related party payables recorded
as receivables by the Advisor.
(t) Represents the elimination of income taxes payable of $2,990,864 from
liabilities assumed in the acquisition of CNL Restaurant Businesses since
the acquisition agreements require that the Advisor and CNL Restaurant
Financial Services Group have no accumulated or current earnings and
profits for federal income tax purposes at the time of the acquisition.
S-20
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF CNL INCOME FUND XVIII, 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
XVIII, Ltd." in this Supplement.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Year Ended December 31,
----------------------- -------------------------------
1998 1997 1997 1996 1995(1)
----------- ----------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C>
Revenues................ $ 2,343,291 $ 813,495 $ 1,453,242 $ 31,614 --
Net income.............. 1,889,929 619,012 1,154,760 26,910 --
Cash distributions
declared (2)........... 1,957,764 800,312 1,310,885 57,846 --
Net income per Unit..... 0.54 0.32 0.51 0.05 --
Cash distributions
declared per Unit(2)... 0.56 0.41 0.57 0.11 --
Weighted average number
of Limited Partner
Units outstanding(3)... 3,496,435 1,945,482 2,279,801 503,436 --
<CAPTION>
September 30, December 31,
----------------------- -------------------------------
1998 1997 1997 1996 1995
----------- ----------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C>
Total assets............ $31,426,399 $26,420,616 $31,823,613 $7,240,324 $256,890
Total partners'
capital................ 30,556,105 24,580,613 29,846,580 6,996,213 1,000
</TABLE>
- --------
(1) Selected financial data for 1995 represents the period February 10, 1995
(date of inception) through December 31, 1995. Operations did not commence
until October 12, 1996, the date following when the Income Fund received
the minimum offering proceeds of $1,500,000, and such proceeds were
released from escrow.
(2) Approximately 12% and 53% of cash distributions ($0.07 and $0.06 per Unit,
respectively) for the years ended December 31, 1997 and 1996, respectively,
represents 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 income on a GAAP basis. The Income Fund has not
treated such amounts as a return of capital for purposes of calculating the
Limited Partners' return on their invested capital contributions.
(3) Represents the weighted average number of Units outstanding during the
period the Income Fund was operational.
S-21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF CNL INCOME FUND XVIII, LTD.
Introduction
The Income Fund is a Florida limited partnership that was organized on
February 10, 1995, 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 are to be constructed,
which are leased primarily to operators of selected national and regional
fast-food, family-style and casual dining restaurant chains. The leases are
triple-net leases, with the lessee generally responsible for all repairs and
maintenance, property taxes, insurance and utilities. As of September 30,
1998, the Income Fund owned 24 restaurant properties, which included one
restaurant property owned by a joint venture in which the Income Fund is a co-
venturer.
Liquidity and Capital Resources
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
On September 20, 1996, the Income Fund commenced an offering to the public
of up to 3,500,000 Units of limited partnership interest pursuant to a
registration statement on Form S-11 under the Securities Act of 1933, as
amended, effective August 11, 1995. The Income Fund's offering of Units
terminated on February 6, 1998 at which time the maximum offering proceeds of
3,500,000 Units ($35,000,000) had been received from investors. The Income
Fund therefore will derive no additional capital resources from the offering.
As of September 30, 1998, net proceeds to the Income Fund from its offering
of units, after deduction of organizational and offering expenses, totaled
$30,800,000. Of this amount, approximately $29,855,600 had been used to invest
or committed for investment in 24 restaurant properties, including one
restaurant property owned by a joint venture in which the Income Fund is a co-
venturer, and to pay acquisition fees and certain acquisition expenses,
leaving approximately $944,400 of offering proceeds available for investment
in restaurant properties. As of September 30, 1998, the Income Fund had
incurred $1,575,000 in acquisition fees to one of our affiliates.
The Income Fund presently is negotiating to acquire additional restaurant
properties, but as of October 20, 1998, had not acquired any such restaurant
properties.
During the nine months ended September 30, 1998 and 1997, 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 $2,158,678 and $909,568, respectively. The
increase in cash from operations for the nine months ended September 30, 1998,
as compared to the nine months ended September 30, 1997, 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 nine
months ended September 30, 1998.
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 September 30, 1998, the Income Fund had
contributed $166,025 to purchase land and pay for construction costs relating
to the joint venture. When construction is completed, the Income Fund will
have an approximate 40% interest in the profits and losses of the joint
venture.
Until restaurant properties are acquired by the Income Fund, all Income
Fund proceeds are held in short-term, highly liquid investments which we
believe to have appropriate safety of principal. This investment strategy
provides high liquidity in order to facilitate the Income Fund's use of these
funds to acquire restaurant properties at such time as restaurant properties
suitable for acquisition are located. At September 30, 1998, the
S-22
<PAGE>
Income Fund had $1,866,555 invested in such short-term investments, as compared
to $4,143,327 at December 31, 1997. The decrease in the amount invested in
short-term investments is primarily attributable to acquiring one additional
restaurant property and investing in Columbus Joint Venture, as described
above, and as a result of the payment during the nine months ended September
30, 1998, of construction costs accrued for certain restaurant properties at
December 31, 1997. The funds remaining at September 30, 1998, will be used to
purchase and develop additional restaurant properties, to pay acquisition
costs, to pay Limited Partner distributions, to meet the Income Fund's working
capital and other needs and, in our discretion, to create cash reserves.
During the nine months ended September 30, 1997, certain of our affiliates
incurred on behalf of the Income Fund $210,866 for certain organizational and
offering expenses. In addition, during the nine months ended September 30, 1998
and 1997, certain of our affiliates incurred on behalf of the Income Fund
$35,864 and $125,693, respectively, for certain acquisition expenses and
$65,271 and $35,259, respectively, for certain operating expenses. As of
September 30, 1998 and 1997, the Income Fund owed $14,652 and $75,844,
respectively, to related parties for such amounts, fees and other
reimbursements. As of October 20, 1998, the Income Fund had reimbursed all such
amounts. Amounts payable to other parties, including distributions payable,
decreased to $725,865 at September 30, 1998, from $1,629,719 at December 31,
1997, primarily as a result of the payment during the nine months ended
September 30, 1998, of construction costs accrued for certain restaurant
properties at December 31, 1997.
Based on cash from operations, the Income Fund declared distributions to the
Limited Partners of $1,957,764 and $800,312 for the nine months ended September
30, 1998 and 1997, respectively ($700,000 and $379,266 for the quarters ended
September 30, 1998 and 1997, respectively). This represents distributions of
$0.56 and $0.41 per weighted average Limited Partner unit outstanding for the
nine months ended September 30, 1998 and 1997, respectively ($0.20 and $0.15
per unit for the quarters ended September 30, 1998 and 1997, respectively). No
distributions were made to us for the quarters and nine months ended September
30, 1998 and 1997. No amounts distributed to the Limited Partners for the nine
months ended September 30, 1998 and 1997, 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.
The Years Ended December 31, 1997, 1996 and 1995
As of December 31, 1997, the Income Fund had accepted subscriptions for
3,500,000 Units and had received subscription proceeds for 3,414,576 Units,
representing $34,145,759 of capital contributed by Limited Partners pursuant to
its public offering of Units. The remaining proceeds of $854,241, representing
the remaining 85,424 Units were received during the period January 1, 1998
through February 6, 1998.
As of December 31, 1997, net proceeds to the Income Fund from its offering
of Units, after deduction of organizational and offering expenses, totaled
$30,022,641. During 1996, the Income Fund invested or committed for investment
approximately $2,960,800 of such proceeds in two restaurant properties and to
pay acquisition fees and certain acquisition expenses. During 1997, the Income
Fund completed construction of the restaurant property under construction in
1996 and acquired 20 additional restaurant properties (one of which was under
construction as of December 31, 1997 and completed in February 1998). As a
result of the above transactions, as of December 31, 1997, the Income Fund had
invested approximately $27,645,000 of the net
S-23
<PAGE>
proceeds in 22 restaurant properties, and to pay acquisition fees and
miscellaneous acquisition expenses, leaving approximately $2,377,700 of net
offering proceeds available for investment in restaurant properties. As of
December 31, 1997, the Income Fund had paid $1,536,559 in acquisition fees to
one of our affiliates.
Currently, the Income Fund's primary source of capital is cash from
operations (which includes cash received from tenants and interest received,
less cash paid for expenses). Cash from operations was $1,361,610 and $27,146
for the years ended December 31, 1997 and 1996. The increase in cash from
operations for the year ended December 31, 1997, as compared to the year ended
December 31, 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.
None of the restaurant properties owned or to be acquired by the Income Fund
is or may be encumbered. Subject to certain restrictions on borrowing, however,
the Income Fund may borrow funds but will not encumber any of the restaurant
properties in connection with any such borrowing. The Income Fund will not
borrow for the purpose of returning capital to the Limited Partners or 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 expenses on behalf of the Income Fund for which the Income Fund
reimburses the affiliates without interest.
Until restaurant properties are acquired by the Income Fund, all Income Fund
proceeds are held in short-term, highly liquid investments which we believe to
have appropriate safety of principal. This investment strategy provides high
liquidity in order to facilitate the Income Fund's use of these funds to
acquire restaurant properties at such time as restaurant properties suitable
for acquisition are located. At December 31, 1997, the Income Fund had
$4,143,327 invested in such short-term investments, as compared to $5,371,325
at December 31, 1996. The decrease in the amount invested in short-term
investments is primarily a result of the payment during 1997, of costs relating
to the restaurant property that was under construction at December 31, 1996 and
the acquisition of additional restaurant properties during 1997. The funds
remaining at December 31, 1997 were used to pay construction costs relating to
several restaurant properties that were incurred but unpaid at December 31,
1997, to purchase and develop additional restaurant properties, to pay
acquisition costs, to pay distributions, to meet the Income Fund's working
capital and other needs and, in our discretion, to create cash reserves.
During the years ended December 31, 1997 and 1996, and the period February
10, 1995 (date of inception) through December 31, 1995, certain of our
affiliates incurred on behalf of the Income Fund $211,216, $285,858 and
$196,174, respectively, for certain organizational and offering expenses. In
addition, during 1997 and 1996, affiliates incurred $134,138 and $18,036,
respectively, for certain acquisition expenses and $44,166 and $893,
respectively, for certain operating expenses. As of December 31, 1997 and 1996,
the Income Fund owed $118,231 and $83,889, respectively, to related parties for
such amounts, fees and other reimbursements. As of March 13, 1998, the Income
Fund had reimbursed the affiliates all such amounts. Amounts payable to other
parties, including distributions payable, increased to $1,629,719 at December
31, 1997, as compared to $160,222 at December 31, 1996, primarily as a result
of an increase in distributions payable to Limited Partners and an increase in
construction costs payable at December 31, 1997.
Based on cash from operations, the Income Fund declared distributions to the
Limited Partners of $1,310,885 and $57,846, respectively, for the years ended
December 31, 1997 and 1996 (representing distributions of $0.57 and $0.11 per
Unit, respectively, based on the weighted average number of Units outstanding
during the period the Income Fund was operational). No amounts distributed or
to be distributed to the Limited Partners for the years ended December 31, 1997
and 1996, are required to be or have been treated by the Income Fund as a
return of capital for purposes of calculating the Limited Partners' return on
their adjusted capital contributions.
S-24
<PAGE>
We have obtained contingent liability and property coverage for the Income
Fund. This insurance policy 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.
Income Fund net income is expected to increase in 1998, as rental income
increases due to the acquisition of additional restaurant properties during
1998 and the fact that restaurant properties acquired during 1997 will earn
rental income for a full year in 1998, as compared to a partial year in 1997.
Accordingly, we believe that the anticipated decrease in the Income Fund's
liquidity in 1998, due to its investment of the remaining net offering proceeds
in additional restaurant properties and the payment of construction costs
relating to several restaurant properties incurred but unpaid at December 31,
1997, will not have an adverse effect on the Income Fund's operations during
1998.
Due to low operating expenses, ongoing cash flow from rental income obtained
from restaurant properties after they are acquired and the fact that the Income
Fund will not enter into a commitment to purchase a restaurant property until
sufficient cash is available for such purchase, we do not believe that working
capital reserves are necessary at this time. In addition, because all of 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 is
necessary 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 reserves
if, in our discretion, we determine such reserves are required to meet the
Income Fund's working capital needs.
Results of Operations
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
During the nine months ended September 30, 1997, the Income Fund owned and
leased 20 wholly-owned restaurant properties, three of which were under
construction, and during the nine months ended September 30, 1998, the Income
Fund owned and leased 23 wholly-owned restaurant properties, to operators of
fast-food and family-style restaurant chains. In connection therewith, during
the nine months ended September 30, 1998 and 1997, the Income Fund earned
$2,228,324 and $711,461, respectively, in rental income from operating leases
and earned income from direct financing leases from these restaurant
properties, $781,638 and $437,927 of which was earned for the quarters ended
September 30, 1998 and 1997, respectively. The increase in rental and earned
income during the quarter and nine months ended September 30, 1998, as compared
to the quarter and nine months ended September 30, 1997, is primarily
attributable to the acquisition of additional restaurant properties subsequent
to September 30, 1997, and the fact that restaurant properties acquired during
the quarter and nine months ended September 30, 1997, were operational for the
full quarter and nine months ended September 30, 1998, as compared to a partial
quarter and nine months ended September 30, 1997.
In October 1998, the tenant of four Boston Market restaurant properties
filed for bankruptcy. If the leases are eventually rejected, the Income Fund
anticipates that rental income relating to these restaurant properties will
terminate until a new tenant is located or until the restaurant properties are
sold and the proceeds from such sales are reinvested in additional restaurant
properties. However, we do not anticipate that any decrease in rental income
due to lost revenues relating to these restaurant properties will have a
material effect on the Income Fund's financial position or results of
operations.
Operating expenses, including depreciation and amortization, were $453,362
and $194,483 for the nine months ended September 30, 1998 and 1997,
respectively, $171,052 and $87,845 of which was incurred during the quarters
ended September 30, 1998 and 1997, respectively. The increase in operating
expenses during the quarter and nine months ended September 30, 1998, as
compared to the quarter and nine months ended September 30, 1997, is primarily
attributable to an increase in depreciation expense as the result of the
acquisition of additional restaurant properties subsequent to September 30,
1997, and the fact that restaurant properties acquired during the quarter and
nine months ended September 30, 1997, were operational for the full
S-25
<PAGE>
quarter and nine months ended September 30, 1998, as compared to a partial
quarter and nine months ended September 30, 1997.
Operating expenses also increased during the quarter and nine months ended
September 30, 1998 as a result of an increase in administrative expenses for
services related to accounting; financial, tax and regulatory compliance and
reporting; lease and loan compliance; Limited Partner distributions and
reporting; and investor relations (including administrative services in
connection with selling Units of limited partnership interest) and management
fees as a result of the increase in rental revenues, as described above. The
increase during the nine months ended September 30, 1998 was also due to the
Income Fund incurring additional taxes relating to the filing of various state
tax returns during 1998.
In addition, the increase in operating expenses during the quarter and nine
months ended September 30, 1998, as compared to the quarter and nine months
ended September 30, 1997, is partially attributable to the fact that during the
quarter and nine months ended September 30, 1998, the Income Fund recorded
approximately $23,500 in real estate tax expenses due to the fact that in
October 1998, the tenant of the four Boston Market restaurant properties filed
for bankruptcy, as described above. If the tenant decides to reject the leases,
the Income Fund will continue to incur certain expenses, such as real estate
taxes, insurance and maintenance until a new tenant or buyer for these
restaurant properties is located.
The Years Ended December 31, 1997, 1996 and 1995
No significant operations commenced until the Income Fund received and
released from escrow the minimum offering proceeds of $1,500,000 on October 11,
1996.
The Income Fund owned and leased two restaurant properties in 1996 and 22
restaurant properties in 1997 (including one restaurant property which was
under construction at December 31, 1997), which are 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 $60,400 to $243,600. 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 the sixth lease year), the annual base rent required under the terms
of the lease will increase.
During the years ended December 31, 1997 and 1996, the Income Fund earned
$1,290,621 and $1,373, respectively, in rental income from operating leases and
earned income from direct financing leases. The increase in rental and earned
income during 1997, as compared to 1996, is primarily attributable to the
acquisition of additional restaurant properties subsequent to December 31,
1996. Because the Income Fund did not commence significant operations until it
received the minimum offering proceeds on October 11, 1996, and has not yet
acquired all of its restaurant properties, Income Fund revenues for the year
ended December 31, 1997, represent only a portion of revenues which the Income
Fund is expected to earn during the full year in which the Income Fund's
restaurant properties are operational.
During at least one of the years ended December 31, 1997 and 1996, six
lessees, or group of affiliated lessees, of the Income Fund, Golden Corral
Corporation, Foodmaker, Inc., Tiffany, L.L.C., IHOP restaurant properties,
Inc., Platinum Rotisserie, L.L.C. and Carrols Corporation each contributed more
than 10% of the Income Fund's total rental income. As of December 31, 1997,
Golden Corral Corporation and Foodmaker, Inc. were each the lessee under leases
relating to four restaurants, Tiffany, L.L.C. was the lessee under a lease
relating to one restaurant, IHOP restaurant properties, Inc. was the lessee
under leases relating to two restaurants, Platinum Rotisserie, L.L.C. was the
lessee under a lease relating to one restaurant and Carrols Corporation was the
lessee under a lease relating to one restaurant. In addition, during at least
one of the years ended December 31, 1997 and 1996, five restaurant chains,
Golden Corral, Jack in the Box, Boston Market, IHOP and Burger King each
accounted for more than 10% of the Income Fund's total rental income. Because
the Income Fund's first restaurant property was not purchased until December
1996, the foregoing information regarding the lessees and restaurant chains
which contributed a significant amount of the Income Fund's total
S-26
<PAGE>
rental income during the years ended December 31, 1997 and 1996, may or may not
be representative of the lessees and restaurant chains which will account for
more than 10% of the Income Fund's rental income during 1998 and subsequent
years. Because the Income Fund has not completed its acquisition of restaurant
properties as yet, it is not possible to determine which lessees or restaurant
chains will contribute more than 10% of the Income Fund's total rental income
during 1998 and subsequent years. In the event that certain lessees or
restaurant chains contribute more than 10% of the Income Fund's rental income
in future years, any failure of such lessees or restaurant chains could
materially adversely affect the Income Fund's income.
During the years ended December 31, 1997 and 1996, the Income Fund earned
$162,621 and $30,241 in interest income from investments in money market
accounts or other short-term, highly liquid investments. The increase in
interest income during 1997, as compared to 1996, is primarily attributable to
the increase in the amount of funds invested in short-term liquid investments
as a result of additional Limited Partner capital contributions during 1997. As
of December 31, 1997, the majority of these funds had been invested in
restaurant properties; therefore, the Income Fund expects interest income to
decrease in 1998.
Operating expenses, including depreciation and amortization expense, were
$298,482 and $4,704 for the years ended December 31, 1997 and 1996. The
increase in operating expenses during 1997 is primarily attributable to an
increase in depreciation expenses as the result of the acquisition of
additional restaurant properties during 1997. Operating expenses also increased
during 1997, as compared to 1996, as a result of an increase in administrative
expenses associated with operating the Income Fund and its restaurant
properties and an increase in management fees as a result of the increase in
rental revenues. The dollar amount of operating expenses is expected to
increase, and the amount of general operating and administrative expenses as a
percentage of total revenues is expected to decrease, in 1998 as the Income
Fund acquires additional restaurant properties and the restaurant property
under construction becomes operational.
General
In March 1998, the Financial Accounting Standards Board reached a consensus
in EITF 97-11, entitled "Accounting for Internal Costs Relating to Real Estate
restaurant property Acquisitions." EITF 97-11 provides that internal costs of
identifying and acquiring operating restaurant property should be expensed as
incurred. Due to the fact that the Income Fund does not have an internal
acquisitions function and instead, contracts these services from CNL Fund
Advisors, Inc., one of our affiliates, EITF 97-11 had no material effect on the
Income Fund's financial position or results of operations.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Income Fund's financial position or results of operations.
The Income Fund's leases as of September 30, 1998, and the leases the Income
Fund expects to enter into, are or are expected to be on a triple-net basis and
contain provisions that management believes will 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.
The Year 2000 problem is the result of information technology systems and
embedded systems (products which are made with microprocessor (computer) chips
such as HVAC systems, physical security systems and elevators) using a two-
digit format, as opposed to four digits, to indicate the year. Such information
technology and embedded systems may be unable to properly recognize and process
date-sensitive information beginning January 1, 2000.
S-27
<PAGE>
The Income Fund does not have any information technology systems. Certain of
our affiliates provide all services requiring the use of information technology
systems pursuant to a management agreement with the Income Fund. The
maintenance of embedded systems, if any, at the Income Fund's properties is the
responsibility of the tenants of the properties in accordance with the terms of
the Income Fund's leases. We and our affiliates have established a team
dedicated to reviewing the internal information technology systems used in the
operation of the Income Fund, and the information technology and embedded
systems and the Year 2000 compliance plans of the Income Fund's tenants,
significant suppliers, financial institutions and transfer agent.
The information technology infrastructure of our affiliates consists of a
network of personal computers and servers that were obtained from major
suppliers. The affiliates utilize various administrative and financial software
applications on that infrastructure to perform the business functions of the
Income Fund. Our inability and that of our affiliates to identify and timely
correct material Year 2000 deficiencies in the software and/or infrastructure
could result in an interruption in, or failure of, certain of the Income Fund's
business activities or operations. Accordingly, we and our affiliates have
requested and are evaluating documentation from the suppliers of the affiliates
regarding the Year 2000 compliance of their products that are used in the
business activities or operations of the Income Fund. The costs expected to be
incurred by us and our affiliates to become Year 2000 compliant will be
incurred by us and our affiliates; therefore, these costs will have no impact
on the Income Fund's financial position or results of operations.
The Income Fund has material third party relationships with its tenants,
financial institutions and 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. If
any of these third parties are unable to meet their obligations to the Income
Fund because of the Year 2000 deficiencies, such a failure may have a material
impact on the Income Fund. Accordingly, we have requested and are evaluating
documentation from the Income Fund's tenants, financial institutions, and
transfer agent relating to their Year 2000 compliance plans. At this time, we
have not yet received sufficient certifications to be assured that the tenants,
financial institutions, and transfer agent have fully considered and mitigated
any potential material impact of the Year 2000 deficiencies. Therefore, we do
not, at this time, know of the potential costs to the Income Fund of any
adverse impact or effect of any Year 2000 deficiencies by these third parties.
We currently expect that all Year 2000 compliance testing and any necessary
remedial measures on the information technology systems used in the business
activities and operations of the Income Fund will be completed prior to June
30, 1999. Based on the progress we and our affiliates have made in identifying
and addressing the Income Fund's Year 2000 issues and the plan and timeline to
complete the compliance program, we do not foresee significant risks associated
with the Income Fund's Year 2000 compliance at this time. Because we and our
affiliates are still evaluating the status of the systems used in business
activities and operations of the Income Fund and the systems of the third
parties with which the Income Fund conducts its business, we have not yet
developed a comprehensive contingency plan and are unable to identify "the most
reasonably likely worst case scenario" at this time. As we identify significant
risks related to the Income Fund's Year 2000 compliance or if the Income Fund's
Year 2000 compliance program's progress deviates substantially from the
anticipated timeline, we will develop appropriate contingency plans.
S-28
<PAGE>
FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Balance Sheets as of September 30, 1998 and December 31, 1997.. F-1
Condensed Statements of Income for the Quarters and Nine Months Ended
September 30, 1998 and 1997............................................. F-2
Condensed Statements of Partner's Capital for the Nine Months Ended
September 30, 1998 and for the Year Ended December 31, 1997............. F-3
Condensed Statements of Cash Flows for the Nine Months Ended September
30, 1998 and 1997....................................................... F-4
Notes to Condensed Financial Statements for the Quarters and Nine Months
Ended September 30, 1998 and 1997....................................... F-6
Report of Independent Accountants........................................ F-9
Balance Sheets as of December 31, 1997 and 1996.......................... F-10
Statements of Income for the Years Ended December 31, 1997, 1996 and the
period February 10, 1995 (date of inception) through year ended December
31, 1995................................................................ F-11
Statements of Partner's Capital for the Years Ended December 31, 1997,
1996 and the period February 10, 1995 (date of inception) through year
ended December 31, 1995................................................. F-12
Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and
the period February 10, 1995 (date of inception) through year ended
December 31, 1995....................................................... F-13
Notes to Financial Statements for the Years Ended December 31, 1997, 1996
and the period February 10, 1995 (date of inception) through year ended
December 31, 1995....................................................... F-14
Unaudited Pro Forma Financial Information................................ F-22
Unaudited Pro Forma Balance Sheet as of September 30, 1998............... F-23
Unaudited Pro Forma Income Statement for the Nine Months Ended September
30, 1998................................................................ F-24
Unaudited Pro Forma Income Statement for the Year Ended December 31,
1997.................................................................... F-25
Notes and Management's Assumptions to Unaudited Pro Forma Financial
Statements.............................................................. F-26
</TABLE>
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation of $407,185 and
$140,380.......................................... $22,157,631 $21,311,062
Net investment in direct financing leases.......... 6,817,422 6,004,878
Investment in joint venture........................ 166,224 --
Cash and cash equivalents.......................... 1,866,555 4,143,327
Receivables, less allowance for doubtful accounts
of $790 in 1998................................... -- 68,000
Prepaid expenses................................... 11,203 --
Organization costs, less accumulated amortization
of $3,911 and $2,411.............................. 6,089 7,589
Accrued rental income.............................. 189,143 111,867
Other assets....................................... 212,132 160,532
----------- -----------
$31,426,399 $31,807,255
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable................................... $ 2,365 $ 10,456
Accrued construction costs payable................. -- 1,108,627
Accrued real estate taxes payable.................. 23,500 --
Distributions payable.............................. 700,000 510,636
Due to related parties............................. 14,652 118,231
Rents paid in advance.............................. 13,008 28,277
Deferred rental income............................. 116,769 184,448
----------- -----------
Total liabilities................................ 870,294 1,960,675
=========== ===========
Partners' capital.................................. 30,556,105 29,846,580
----------- -----------
$31,426,399 $31,807,255
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-1
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
-------------------- ---------------------
1998 1997 1998 1997
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Revenues:
Rental income from operating
leases........................ $ 611,530 $ 314,510 $1,758,037 $ 525,308
Earned income from direct
financing leases.............. 170,108 123,417 470,287 186,153
Interest and other income...... 14,189 32,728 114,967 102,034
--------- --------- ---------- ---------
795,827 470,655 2,343,291 813,495
--------- --------- ---------- ---------
Expenses:
General operating and
administrative................ 46,347 32,870 117,608 87,976
Professional services.......... 4,184 5,863 14,164 18,267
Management fees to related
parties....................... 7,651 4,707 21,180 9,232
Real estate taxes.............. 23,500 -- 23,500 --
State and other taxes.......... -- -- 8,605 424
Depreciation and amortization.. 89,370 44,405 268,305 78,584
--------- --------- ---------- ---------
171,052 87,845 453,362 194,483
--------- --------- ---------- ---------
Net Income....................... $ 624,775 $ 382,810 $1,889,929 $ 619,012
========= ========= ========== =========
Allocation of Net Income:
General partners............... $ (752) $ (444) $ (678) $ (786)
Limited partners............... 625,527 383,254 1,890,607 619,798
--------- --------- ---------- ---------
$ 624,775 $ 382,810 $1,889,929 $ 619,012
========= ========= ========== =========
Net Income Per Limited Partner
Unit............................ $ 0.18 $ 0.15 $ 0.54 $ 0.32
========= ========= ========== =========
Weighted Average Number of
Limited Partner Units
Outstanding..................... 3,500,000 2,507,828 3,496,435 1,945,482
========= ========= ========== =========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF PARTNERS' CAPITAL
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, December 31,
1998 1997
----------------- ------------
<S> <C> <C>
General partners:
Beginning balance............................. $ (428) $ 993
Net income.................................... (678) (1,421)
----------- -----------
(1,106) (428)
----------- -----------
Limited partners:
Beginning balance............................. 29,847,008 6,995,220
Contributions................................. 854,241 25,723,944
Syndication costs............................. (76,881) (2,717,452)
Net income.................................... 1,890,607 1,156,181
Distributions ($0.56 and $0.57 per weighted
average limited partner unit, respectively).. (1,957,764) (1,310,885)
----------- -----------
30,557,211 29,847,008
----------- -----------
Total partners' capital......................... $30,556,105 $29,846,580
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------
1998 1997
----------- ------------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Net Cash Provided by Operating Activities......... $ 2,158,678 $ 909,568
----------- ------------
Cash Flows from Investing Activities:
Additions to land and buildings on operating
leases......................................... (2,219,314) (13,810,648)
Investment in direct financing leases........... (876,076) (5,838,231)
Investment in joint venture..................... (166,025) --
Increase in other assets........................ (51,600) --
Other........................................... -- 80
----------- ------------
Net cash used in investing activities......... (3,313,015) (19,648,799)
----------- ------------
Cash Flows from Financing Activities:
Reimbursement of acquisition and syndication
costs paid by related parties on behalf of the
Partnership.................................... (37,135) (338,567)
Contributions from limited partners............. 854,241 19,964,832
Distributions to limited partners............... (1,768,400) (476,754)
Payment of syndication costs.................... (161,141) (2,037,781)
Other........................................... (10,000) (77,000)
----------- ------------
Net cash provided by (used in) financing
activities................................... (1,122,435) 17,034,730
----------- ------------
Net Decrease in Cash and Cash Equivalents........... (2,276,772) (1,704,501)
Cash and Cash Equivalents at Beginning of Period.... 4,143,327 5,371,325
----------- ------------
Cash and Cash Equivalents at End of Period.......... $ 1,866,555 $ 3,666,824
=========== ============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS--CONTINUED
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------
1998 1997
-------- --------
<S> <C> <C>
Supplemental Schedule of Non-Cash
Investing and Financing Activities:
Related parties paid certain acquisition and syndication
costs on behalf of the Partnership as follows:
Acquisition costs........................................ $ 35,864 $125,693
Syndication costs........................................ -- 210,866
-------- --------
$ 35,864 $336,559
======== ========
Distributions declared and unpaid at end of period......... $700,000 $379,266
======== ========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Quarters and Nine Months Ended September 30, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared
in accordance with the instructions to Form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. The financial statements reflect all adjustments, consisting of
normal recurring adjustments, which are, in the opinion of management,
necessary to a fair statement of the results for the interim periods presented.
Operating results for the quarter and nine months ended September 30, 1998, may
not be indicative of the results that may be expected for the year ended
December 31, 1998. Amounts as of December 31, 1997, 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
XVIII, Ltd. (the "Partnership") for the year ended December 31, 1997.
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.
In March 1998, the Financial Accounting Standards Board reached a consensus
in EITF 97-11, entitled "Accounting for Internal Costs Relating to Real Estate
Property Acquisitions." EITF 97-11 provides that internal costs of identifying
and acquiring operating Property should be expensed as incurred. Due to the
fact that the Partnership does not have an internal acquisitions function and
instead, contracts these services from CNL Fund Advisors, Inc., an affiliate of
the general partners, EITF 97-11 had no material effect on the Partnership's
financial position or results of operations.
In May 1998, the Financial Accounting Standards Board reached a consensus in
EITF 98-9, entitled "Accounting for Contingent Rent in the Interim Financial
Periods." Adoption of this consensus did not have a material effect on the
Partnership's financial position or results of operations.
2. 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 September 30, 1998, the Partnership had
contributed $166,025, to purchase land and pay construction costs relating to
the joint venture. The Partnership has agreed to contribute approximately
$225,811 in additional construction costs to the joint venture. The Partnership
will have an approximate 40 percent interest in the profits and losses of the
joint venture. 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 the joint venture at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Land and construction in progress............... $497,989 $--
Cash............................................ 8,950 --
Liabilities..................................... 90,650 --
Partners' capital............................... 416,289 --
</TABLE>
F-6
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Nine Months Ended September 30, 1998 and 1997
2. Investment in Joint Ventures--Continued
The Company did not recognize any income from this joint venture because the
property owned by the joint venture was not operational as of September 30,
1998.
3. Related Party Transactions
During the nine months ended September 30, 1998 and 1997, the Partnership
incurred $72,610 and $1,697,011, respectively, in syndication costs due to CNL
Securities Corp. for services in connection with selling units of limited
partnership interest. During the nine months ended September 30, 1998 and 1997,
a substantial portion of these amounts ($67,539 and $1,591,343, respectively)
was reallowed to other broker-dealers.
In addition, during the nine months ended September 30, 1998 and 1997, the
Partnership incurred $4,271 and $99,824, respectively, in due diligence expense
reimbursement fees due to CNL Securities Corp. These fees equal 0.5% of the
limited partner contributions of $854,241 and $19,964,832, received during the
nine months ended September 30, 1998 and 1997, respectively. The majority of
these fees were reallowed to other broker- dealers for payment of bona fide due
diligence expenses.
Additionally, during the nine months ended September 30, 1998 and 1997, the
Partnership incurred $38,441 and $898,417, respectively, in acquisition fees
due to CNL Fund Advisors, Inc. for services in finding, negotiating and
acquiring properties on behalf of the Partnership. These fees represent 4.5% of
the limited partner capital contributions received during the nine months ended
September 30, 1998 and 1997, and are included in land and buildings on
operating leases, net investment in direct financing leases, investment in
joint venture, and other assets.
In addition, during the nine months ended September 30, 1998 and 1997, the
Partnership incurred management fees of $21,180 and $9,232, respectively, due
to CNL Fund Advisors, Inc.
During the nine months ended September 30, 1998 and 1997, certain affiliates
of the general partners provided various administrative services to the
Partnership, including services related to accounting; financial, tax and
regulatory compliance and reporting; lease and loan compliance; limited
partners distributions and reporting; due diligence and marketing; and investor
relations (including administrative services in connection with selling units
of limited partnership interest), on a day-to-day basis. The expenses incurred
for these services were classified as follows for the nine months ended
September 30:
<TABLE>
<CAPTION>
1998 1997
------- --------
<S> <C> <C>
Syndication costs........................................ $ -- $212,279
General operating and administrative expenses............ 77,601 70,404
------- --------
$77,601 $282,683
======= ========
</TABLE>
F-7
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS--(Continued)
Quarters and Nine Months Ended September 30, 1998 and 1997
3. Related Party Transactions--Continued
The amounts due to related parties consisted of the following at:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Due to CNL Securities Corp.:
Commissions................................... $ -- $ 79,069
Due diligence expense reimbursement fee....... -- 5,191
------- --------
-- 84,260
------- --------
Due to CNL Fund Advisors, Inc.:
Expenditures incurred on behalf of the
Partnership.................................. 10,220 1,737
Acquisition fees.............................. -- 29,757
Accounting and administrative services........ 2,484 1,921
Management fees............................... 1,948 556
------- --------
14,652 33,971
------- --------
$14,652 $118,231
======= ========
</TABLE>
F-8
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners
CNL Income Fund XVIII, Ltd.
We have audited the accompanying balance sheets of CNL Income Fund XVIII,
Ltd. (a Florida limited partnership) as of December 31, 1997 and 1996 and the
related statements of income, partners' capital and cash flows for each of the
three years in the period ended December 31, 1997. 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 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 Income Fund XVIII, Ltd.
as of December 31, 1997 and 1996, and the results of its operations and its
cash flows for the years ended December 31, 1997 and 1996 and the period
February 10, 1995 (date of inception) through December 31, 1995, in conformity
with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Orlando, Florida
February 4, 1998
F-9
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
----------- ----------
<S> <C> <C>
ASSETS
Land and buildings on operating leases, less
accumulated depreciation.............................. $21,311,062 $1,530,768
Net investment in direct financing leases.............. 6,004,878 --
Cash and cash equivalents.............................. 4,143,327 5,371,325
Receivables............................................ 68,000 3,711
Organization costs, less accumulated amortization of
$2,411 and $411....................................... 7,589 9,589
Accrued rental income.................................. 128,225 146
Other assets........................................... 160,532 324,785
----------- ----------
$31,823,613 $7,240,324
=========== ==========
LIABILITIES AND PARTNERS' CAPITAL
Accounts payable....................................... $ 10,456 $ 104,514
Accrued construction costs payable..................... 1,108,627 --
Distributions payable.................................. 510,636 55,708
Due to related parties................................. 118,231 83,889
Rents paid in advance.................................. 28,277 --
Deferred rental income................................. 200,806 --
----------- ----------
Total liabilities.................................... 1,977,033 244,111
Partners' capital...................................... 29,846,580 6,996,213
----------- ----------
$31,823,613 $7,240,324
=========== ==========
</TABLE>
See accompanying notes to financial statements.
F-10
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
February 10,
1995 (Date
Year Ended of Inception)
December 31, through
------------------- December 31,
1997 1996 1995
---------- ------- -------------
<S> <C> <C> <C>
Revenues:
Rental income from operating leases...... $ 950,316 $ 1,373 $--
Earned income from direct financing
leases.................................. 340,305 -- --
Interest and other income................ 162,621 30,241 --
---------- ------- ---
1,453,242 31,614 --
---------- ------- ---
Expenses:
General operating and administrative..... 123,708 3,980 --
Professional services.................... 20,429 -- --
Management fees to related party......... 11,842 12 --
State and other taxes.................... 424 -- --
Depreciation and amortization............ 142,079 712 --
---------- ------- ---
298,482 4,704 --
---------- ------- ---
Net Income................................. $1,154,760 $26,910 $--
========== ======= ===
Allocation of Net Income:
General partners......................... $ (1,421) $ (7) $--
Limited partners......................... 1,156,181 26,917 --
---------- ------- ---
$1,154,760 $26,910 $--
========== ======= ===
Net Income per Limited Partner Unit........ $ 0.51 $ 0.05 $--
========== ======= ===
Weighted Average Number of Limited Partner
Units Outstanding......................... 2,279,801 503,436 --
========== ======= ===
</TABLE>
See accompanying notes to financial statements.
F-11
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF PARTNERS' CAPITAL
Years Ended December 31, 1997 and 1996 and the Period
February 10, 1995 (Date of Inception) through December 31, 1995
<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, February 10,
1995 (Date of
Inception)............. $ -- $ -- $ -- $ -- $ -- $ -- $ --
Contributions from
general partners..... 1,000 -- -- -- -- -- 1,000
------ ------- ----------- ----------- ---------- ----------- -----------
Balance, December 31,
1995................... 1,000 -- -- -- -- -- 1,000
Contributions from
limited partners..... -- -- 8,421,815 -- -- -- 8,421,815
Distributions to
limited partners
($0.11 per limited
partner unit)........ -- -- -- (57,846) -- -- (57,846)
Syndication costs..... -- -- -- -- -- (1,395,666) (1,395,666)
Net income............ -- (7) -- -- 26,917 -- 26,910
------ ------- ----------- ----------- ---------- ----------- -----------
Balance, December 31,
1996................... 1,000 (7) 8,421,815 (57,846) 26,917 (1,395,666) 6,996,213
Contributions from
limited partners..... -- -- 25,723,944 -- -- -- 25,723,944
Distributions to
limited partners
($0.57 per limited
partner unit)........ -- -- -- (1,310,885) -- -- (1,310,885)
Syndication costs..... -- -- -- -- -- (2,717,452) (2,717,452)
Net income............ -- (1,421) -- -- 1,156,181 -- 1,154,760
------ ------- ----------- ----------- ---------- ----------- -----------
Balance, December 31,
1997................... $1,000 $(1,428) $34,145,759 $(1,368,731) $1,183,098 $(4,113,118) $29,846,580
====== ======= =========== =========== ========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-12
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
February 10,
1995 (Date
of Inception)
Year Ended December 31, through
------------------------- December 31,
1997 1996 1995
------------ ----------- -------------
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows From Operating Activities:
Cash received from tenants................ $ 1,353,968 $ -- $ --
Interest received......................... 161,826 30,241 --
Cash paid for expenses.................... (154,038) (3,095) --
------------ ----------- --------
Net cash provided by operating
activities.............................. 1,361,756 27,146 --
------------ ----------- --------
Cash Flows From Investing Activities:
Additions to land and buildings on
operating leases......................... (18,581,999) (1,533,446) --
Investment in direct financing leases..... (5,962,087) -- --
Increase in other assets.................. -- (276,848) --
Other..................................... 107 (107) (20)
------------ ----------- --------
Net cash used in investing activities.... (24,543,979) (1,810,401) (20)
------------ ----------- --------
Cash Flows From Financing Activities:
Reimbursement of acquisition,
organization and syndication costs paid
by related parties
on behalf of the Partnership............. (396,548) (497,420) --
Contributions from general partners....... -- -- 1,000
Contributions from limited partners....... 25,723,944 8,498,815 --
Distributions to limited partners......... (855,957) (2,138) --
Payment of syndication costs.............. (2,450,214) (845,657) --
Other..................................... (67,000) -- --
------------ ----------- --------
Net cash provided by financing
activities.............................. 21,954,225 7,153,600 1,000
------------ ----------- --------
Net Increase (Decrease) in Cash and Cash
Equivalents............................... (1,227,998) 5,370,345 980
Cash and Cash Equivalents at Beginning of
Period.................................... 5,371,325 980 --
------------ ----------- --------
Cash and Cash Equivalents at End of
Period.................................... $ 4,143,327 $ 5,371,325 $ 980
============ =========== ========
Reconciliation of Net Income to Net Cash
Provided by Operating Activities:
Net income................................ $ 1,154,760 $ 26,910 $ --
------------ ----------- --------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation.............................. 140,079 301 --
Amortization.............................. 2,000 411 --
Increase in receivables................... (66,771) (1,227) --
Decrease in net investment in direct
financing leases......................... 28,084 -- --
Increase in accrued rental income......... (128,079) (146) --
Increase in accounts payable.............. 398 57 --
Increase in due to related parties,
excluding acquisition, organization and
syndication costs paid on behalf of
the Partnership.......................... 2,202 820 --
Increase in rents paid in advance......... 28,277 -- --
Increase in deferred rental income........ 200,806 -- --
Other..................................... -- 20 --
------------ ----------- --------
Total adjustments........................ 206,996 236 --
------------ ----------- --------
Net Cash Provided by Operating Activities.. $ 1,361,756 $ 27,146 $ --
============ =========== ========
Supplemental Schedule of Non-Cash Investing
and Financing Activities:
Related parties paid certain acquisition,
organization and syndication costs on
behalf of the Partnership as follows:
Acquisition costs......................... $ 134,138 $ 18,036 $ --
Organization costs........................ -- -- 10,000
Syndication costs......................... 211,216 285,858 186,174
------------ ----------- --------
$ 345,354 $ 303,894 $196,174
============ =========== ========
Distributions declared and unpaid at
December 31.............................. $ 510,636 $ 55,708 $ --
============ =========== ========
</TABLE>
See accompanying notes to financial statements.
F-13
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1997 and 1996 and the Period
February 10, 1995 (Date of Inception) through December 31, 1995
1. Significant Accounting Policies
Organization and Nature of Business--CNL Income Fund XVIII, 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, family-style
and casual dining restaurant chains. Under the terms of a registration
statement filed with the Securities and Exchange Commission, the Partnership is
authorized to sell a maximum of 3,500,000 units ($35,000,000) of limited
partnership interest. A total of 3,414,576 units ($34,145,759) of limited
partnership interest had been sold as of December 31, 1997.
The Partnership was a development stage enterprise from February 10, 1995
through October 11, 1996. Since operations had not begun, activities through
October 11, 1996, were devoted to organization of the Partnership.
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 direct financing or 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) (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 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 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
F-14
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997 and 1996 and the Period
February 10, 1995 (Date of Inception) through December 31, 1995
1. Significant Accounting Policies--(Continued)
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.
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 amortized over five years using
the straight-line method upon commencement of operations.
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 (Note 5).
Rents Paid in Advance--Rents paid in advance by lessees for future periods
are deferred upon receipt and are recognized as revenues during the period in
which the rental income is earned. Rents paid in advance include "interim rent"
payments required to be paid under the terms of certain leases for construction
properties equal to a pre-determined rate times the amount funded by the
Partnership during the period commencing with the effective date of the lease
to the date minimum annual rent becomes payable. Once minimum annual rent
becomes payable, the "interim rent" payments are amortized and recorded as
income either (i) over the lease term so as to produce a constant periodic rate
of return for leases accounted for using the direct financing method, or (ii)
over the lease term using the straight-line method for leases accounted for
using the operating method, whichever is applicable.
Weighted Average Number of Limited Partner Units Outstanding--Net income and
distributions per limited partner unit are calculated based upon the weighted
average number of units of limited partnership interest outstanding during the
period the Partnership was operational.
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
F-15
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997 and 1996 and the Period
February 10, 1995 (Date of Inception) through December 31, 1995
1. Significant Accounting Policies--(Continued)
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 to 1997 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 Partnership's 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 the majority of the leases are operating
leases. The leases have initial terms of 15 to 26 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 the 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>
1997 1996
----------- ----------
<S> <C> <C>
Land.............................................. $10,812,849 $ 852,578
Building.......................................... 9,476,977 659,134
----------- ----------
20,289,826 1,511,712
Less accumulated depreciation..................... (140,380) (301)
----------- ----------
20,149,446 1,511,411
Construction in progress.......................... 1,161,616 19,357
----------- ----------
$21,311,062 $1,530,768
=========== ==========
</TABLE>
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, 1997 and 1996, the Partnership recognized $128,079 and $146,
respectively, of such rental income.
F-16
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997 and 1996 and the Period
February 10, 1995 (Date of Inception) through December 31, 1995
3. Land and Buildings on Operating Leases--(Continued)
The following is a schedule of the future minimum lease payments to be
received on the noncancellable operating leases at December 31, 1997:
<TABLE>
<S> <C>
1998........................................................... $ 1,840,935
1999........................................................... 1,855,422
2000........................................................... 1,857,340
2001........................................................... 1,858,867
2002........................................................... 1,934,126
Thereafter..................................................... 23,592,272
-----------
$32,938,962
===========
</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 leases based on a percentage of
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>
1997 1996
----------- ----
<S> <C> <C>
Minimum lease payments receivable....................... $13,241,374 $--
Estimated residual values............................... 1,773,526 --
Less unearned income.................................... (9,010,022) --
----------- ----
Net investment in direct financing leases............... $ 6,004,878 $--
=========== ====
</TABLE>
The following is a schedule of future minimum lease payments to be received
on direct financing leases at December 31, 1997:
<TABLE>
<S> <C>
1998........................................................... $ 677,167
1999........................................................... 677,167
2000........................................................... 677,167
2001........................................................... 677,167
2002........................................................... 683,170
Thereafter..................................................... 9,849,536
-----------
$13,241,374
===========
</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-17
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997 and 1996 and the Period
February 10, 1995 (Date of Inception) through December 31, 1995
5. Syndication Costs
Syndication costs consisting of legal fees, commissions, the due diligence
expense reimbursement fee, printing and other expenses incurred in connection
with the offering totaled $2,717,452 and $1,395,666 for the years ended
December 31, 1997 and 1996, respectively. These offering expenses were charged
to the limited partners' capital accounts to reflect the net capital proceeds
of the offering. All organizational and offering expenses, as defined in the
Partnership's prospectus, which exceed three percent of the total gross
proceeds received from the sale of units of the Partnership will be paid or
reimbursed by the general partners and will not be the responsibility of the
Partnership.
6. Allocations and Distributions
Generally, distributions of net cash flow, as defined in the limited
partnership agreement of the Partnership, are made 95 percent to the limited
partners and five percent to the general partners; provided, however, that for
any particular year, the five percent of net cash flow to be distributed to the
general partners will be subordinated to receipt by the limited partners in
that year of an eight percent noncumulative, noncompounded return on their
aggregate invested capital contributions (the "Limited Partners' 8% Return").
Generally, net income (determined without regard to any depreciation and
amortization deductions and gains and losses from the sale of properties) is
allocated between the limited partners and the general partners first, in an
amount not to exceed the net cash flow distributed to the partners attributable
to such year in the same proportions as such net cash flow is distributed; and
thereafter, 99 percent to the limited partners and one percent to the general
partners. All deductions for depreciation and amortization are allocated 99
percent to the limited partners and one percent to the general partners.
Net sales proceeds from the sale of a property generally will be distributed
first to the limited partners in an amount sufficient to provide them with the
return of their invested capital contributions, plus their cumulative Limited
Partners' 8% Return. The general partners will then receive a return of their
capital contributions and, to the extent previously subordinated and unpaid, a
five percent interest in all net cash flow distributions. Any remaining net
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 will be, in general, allocated in the
same manner as net sales proceeds are distributable. Any loss will be allocated
first, on a pro rata basis to the partners with positive balances in their
capital accounts; and thereafter, 95 percent to the limited partners and five
percent to the general partners.
During the years ended December 31, 1997 and 1996, the Partnership declared
distributions to the limited partners of $1,310,885 and $57,846. No
distributions have been made to the general partners to date.
F-18
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997 and 1996 and the Period
February 10, 1995 (Date of Inception) through December 31, 1995
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, 1997 and 1996 and the period February 10, 1995 (date of inception)
through December 31, 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ------- ----
<S> <C> <C> <C>
Net income for financial reporting purposes..... $1,154,760 $26,910 $--
Depreciation for tax reporting purposes in
excess of depreciation for financial reporting
purposes....................................... (45,009) (386) --
Direct financing leases recorded as operating
leases for tax reporting purposes.............. 28,084 -- --
Capitalization of administrative expenses for
tax reporting purposes......................... -- 3,662
Accrued rental income........................... (128,079) (146) --
Deferred rental income.......................... 281,415 --
Rents paid in advance........................... 28,277 -- --
Amortization for financial reporting purposes
(less than) in excess of amortization for tax
reporting purposes............................. (732) 183 --
Other........................................... 34 -- --
---------- ------- ----
Net income for federal income tax purposes...... $1,318,750 $30,223 $--
========== ======= ====
</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 parent company of CNL Securities
Corp. and CNL Fund Advisors, Inc. James M. Seneff, Jr. is director and chief
executive officer of CNL Securities Corp. and 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, is director and president
of CNL Securities Corp., is director, vice chairman of the board of directors
and treasurer of CNL Fund Advisors, Inc. and served as president of CNL Fund
Advisors, Inc through October 1997.
CNL Securities Corp. is entitled to receive selling commissions amounting to
8.5% of the total amount raised from the sale of units of limited partnership
interest for services in connection with the formation of the Partnership and
the offering of units, a substantial portion of which is paid as commissions to
other broker-dealers. For the years ended December 31, 1997 and 1996, the
Partnership incurred $2,186,535 and $715,854, respectively, as syndication
costs for such fees, of which $2,050,986 and $673,534, respectively, was or
will be reallowed to other broker-dealers.
In addition, CNL Securities Corp. is entitled to receive a due diligence
expense reimbursement fee equal to 0.5% of the total amount raised from the
sale of units of limited partnership interest, a portion of which may be
reallowed to other broker-dealers and from which all due diligence expenses
will be paid. For the years ended December 31, 1997 and 1996, the Partnership
incurred $128,620 and $42,109, respectively, of such fees. The majority of
these fees were reallowed to other broker-dealers for payment of bona fide due
diligence expenses.
F-19
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997 and 1996 and the Period
February 10, 1995 (Date of Inception) through December 31, 1995
8. Related Party Transactions--(Continued)
CNL Fund Advisors, Inc. is entitled to receive acquisition fees for services
in finding, negotiating and acquiring properties on behalf of the Partnership
equal to 4.5% of the total amount raised from the sale of units of limited
partnership interest. For the years ended December 31, 1997 and 1996, the
Partnership incurred $1,157,577 and $378,982, respectively, of such fees. Such
fees are included in land and buildings, net investment in direct financing
leases and other assets.
The Partnership and CNL Fund Advisors, Inc. have entered into a management
agreement pursuant to which CNL Fund Advisors, Inc. receives annual management
fees 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 CNL Fund
Advisors, Inc. 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 CNL Fund Advisors, Inc. shall determine. For the years ended
December 31, 1997 and 1996, the Partnership incurred $11,842 and $12,
respectively, for such management fees.
During the years ended December 31, 1997 and 1996, and the period February
10, 1995 (date of inception) through December 31, 1995, CNL Fund Advisors, Inc.
and its affiliates provided accounting and administrative services to the
Partnership (including accounting and administrative services in connection
with the offering of units) on a day-to-day basis. For the years ended December
31, 1997 and 1996, and the period February 10, 1995 (date of inception) through
December 31, 1995, the expenses incurred for these services were classified as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Syndication costs................................. $212,279 $106,887 $37,586
General operating and administrative expenses..... 98,207 2,980 --
-------- -------- -------
$310,486 $109,867 $37,586
======== ======== =======
</TABLE>
The due to related parties consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Due to CNL Securities Corp.:
Commissions.............................................. $79,069 $44,186
Marketing support and due diligence expense reimbursement
fee..................................................... 5,191 2,599
-------- -------
84,260 46,785
-------- -------
Due to CNL Fund Advisors, Inc. and its affiliates:
Expenditures incurred on behalf of the Partnership....... 1,737 2,788
Acquisition fees......................................... 29,757 23,392
Accounting and administrative services................... 1,921 10,912
Management fees.......................................... 556 12
-------- -------
33,971 37,104
-------- -------
$118,231 $83,889
======== =======
</TABLE>
F-20
<PAGE>
CNL INCOME FUND XVIII, LTD.
(A Florida Limited Partnership)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Years Ended December 31, 1997 and 1996 and the Period
February 10, 1995 (Date of Inception) through December 31, 1995
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 for at least one of the periods
ended:
<TABLE>
<CAPTION>
February 10,
1995
(Date of
Inception)
through
December 31, December 31, December 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Golden Corral Corp.................. $241,395 $ -- $--
Foodmaker, Inc...................... 240,261 -- --
Tiffany, L.L.C...................... 154,153 -- --
IHOP Properties, Inc................ 152,343 -- --
Platinum Rotisserie, L.L.C.......... 133,591 -- --
Carrols Corporation................. 100,312 1,373 --
</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 for at least one of the
periods ended:
<TABLE>
<CAPTION>
February 10,
1995
(Date of
Inception)
through
December 31, December 31, December 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Golden Corral....................... $395,548 $ -- $--
Jack in the Box..................... 240,261 -- --
Boston Market....................... 231,489 -- --
IHOP................................ 152,343 -- --
Burger King......................... 100,312 1,373 --
</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. However, the
general partners believe that the risk of such a default is reduced due to the
essential or important nature of these properties for the ongoing operations of
the lessees.
10. Subsequent Events
During the period January 1, 1997 through February 4, 1998, the Partnership
received capital contributions for an additional 74,408 units ($744,077) of
limited partnership interest.
F-21
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information with respect to the
Company gives effect to the Acquisition, and is based on estimates and
assumptions set for the 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 the Company, the
historical combined financial information of CNL Income Fund XVIII, Ltd., (the
"CNL 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 the Company, the
CNL Income Fund, Advisor and CNL Restaurant Financial Services Group. The pro
forma balance sheet assumes that the Acquisition occurred on September 30,
1998; the pro forma consolidated statements of earnings assume that the
Property Acquisitions (as defined on page ) and the Acquisition occurred on
January 1, 1997.
This unaudited pro forma financial information does not purport to be
indicative of the results which actually would have been obtained if the
Acquisition had been effected on the dates indicated or of the results which
may be obtained in the future.
See accompanying notes and management's assumptions to unaudited pro forma
financial statements.
F-22
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA BALANCE SHEET
September 30, 1998
<TABLE>
<CAPTION>
Historical
-----------------------------------------------------------------------------------
CNL Income CNL Financial CNL Financial Combined
APF Fund XVIII, Ltd. Advisor Services, Inc. Corp. Portfolios
------------ ---------------- ---------- -------------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Land and buildings
on operating
leases, net...... $298,967,972 $22,157,631 $ 0 $ 0 $ 0 $321,125,603
Net investment in
direct financing
leases........... 117,028,760 6,817,422 0 0 0 123,846,182
Mortgages and
notes
receivable....... 33,523,506 0 0 0 173,776,981 207,300,487
Other
investments...... 16,200,316 0 200,000 0 6,561,628 22,961,944
Investment in
joint ventures... 631,374 166,224 0 0 0 797,598
Cash and cash
equivalents...... 90,674,289 1,866,555 283,300 599,997 5,098,033 98,522,174
Receivables....... 575,104 0 7,544,985 6,824,632 517,471 15,462,192
Accrued rental
income........... 3,071,451 189,143 0 0 0 3,260,594
Other assets...... 5,711,195 229,424 401,524 295,570 3,854,477 10,492,190
------------ ----------- ---------- ---------- ------------ ------------
Total assets.... $566,383,967 $31,426,399 $8,429,809 $7,720,199 $189,808,590 $803,768,964
============ =========== ========== ========== ============ ============
Liabilities &
Equity:
Accounts payable
and accrued
liabilities...... $ 379,496 $ 25,865 $ 449,751 $ 193,949 $ 1,236,138 $ 2,285,199
Accrued
construction
costs payable.... 3,045,304 0 0 0 0 3,045,304
Distributions
payable.......... 0 700,000 2,220,000 0 0 2,920,000
Due to related
parties.......... 2,552,411 14,652 0 1,452,512 6,556,920 10,576,495
Income tax
payable.......... 0 0 1,989,003 0 1,001,861 2,990,864
Line of credit.... 6,765,575 0 0 0 0 6,765,575
Notes payable..... 0 0 390,398 28,462 175,528,203 175,947,063
Deferred income... 1,015,758 116,769 0 0 0 1,132,527
Rents paid in
advance.......... 437,497 13,008 0 0 0 450,505
Minority
interest......... 282,544 0 0 0 0 282,544
Common stock...... 621,187 0 9,800 2,000 200 633,187
Additional paid in
capital.......... 556,830,578 0 482,964 5,231,827 3,887,496 566,432,865
Accumulated
distributions in
excess of net
earnings......... (5,546,383) 0 2,887,893 811,449 1,597,772 (249,269)
Partners capital.. 0 30,556,105 0 0 0 30,556,105
------------ ----------- ---------- ---------- ------------ ------------
Total
liabilities and
equity......... $566,383,967 $31,426,399 $8,429,809 $7,720,199 $189,808,590 $803,768,964
============ =========== ========== ========== ============ ============
<CAPTION>
Pro Forma
------------------------------
Adjustments Pro Forma
---------------- -------------
<S> <C> <C>
Assets:
Land and buildings
on operating
leases, net...... $ 3,521,698 (1)
26,052,741 (2) $350,700,042
Net investment in
direct financing
leases........... 1,078,830 (1) 124,925,012
Mortgages and
notes
receivable....... 849,195 (2) 208,149,682
Other
investments...... -- 22,961,944
Investment in
joint ventures... 25,943 (1) 823,541
Cash and cash
equivalents...... (390,024)(1)
(8,933,000)(1)
(26,901,936)(2) 62,297,214
Receivables....... (7,864,031)(3) 7,598,161
Accrued rental
income........... (189,143)(1) 3,071,451
Other assets...... 41,815,587 (1)
(3,884,257)(1) 48,423,520
---------------- -------------
Total assets.... $ 25,181,603 $828,950,567
================ =============
Liabilities &
Equity:
Accounts payable
and accrued
liabilities...... $ -- $ 2,285,199
Accrued
construction
costs payable.... -- 3,045,304
Distributions
payable.......... -- 2,920,000
Due to related
parties.......... (7,864,031)(3) 2,712,464
Income tax
payable.......... (2,990,864)(4) 0
Line of credit.... -- 6,765,575
Notes payable..... -- 175,947,063
Deferred income... (116,769)(1) 1,015,758
Rents paid in
advance.......... -- 450,505
Minority
interest......... -- 282,544
Common stock...... 143,601 (1) 776,788
Additional paid in
capital.......... 145,843,576 (1) 712,276,441
Accumulated
distributions in
excess of net
earnings......... (82,268,669)(1)
2,990,864 (4) (79,527,074)
Partners capital.. (30,556,105)(1) 0
---------------- -------------
Total
liabilities and
equity......... $ 25,181,603 $828,950,567
================ =============
</TABLE>
F-23
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA INCOME STATEMENT
September 30, 1998
<TABLE>
<CAPTION>
Historical
----------------------------------------------------------------------------------
CNL Income CNL Financial CNL Financial Combined
APF Fund XVIII, Ltd. Advisor Services, Inc. Corp. Portfolios
----------- ---------------- ----------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and earned
income........... $22,947,199 $2,228,324 $ 0 $ 0 $ 0 $25,175,523
Fees.............. 0 0 21,405,127 5,115,549 6,817 26,527,493
Interest and other
income........... 6,117,911 114,967 751 432,506 18,031,141 24,697,276
----------- ---------- ----------- ---------- ----------- -----------
Total revenue... 29,065,110 2,343,291 21,405,878 5,548,055 18,037,958 76,400,292
Expenses:
General and
administrative... 1,539,004 155,272 6,701,115 4,107,311 2,597,171 15,099,873
Advisory fees..... 1,248,393 21,180 0 0 1,026,231 2,295,804
Fees to Restaurant
Financial
Services Group... 0 0 256,456 1,569,202 0 1,825,658
Interest.......... 0 0 105,668 3,534 14,230,999 14,340,201
State taxes....... 397,569 8,605 15,226 18,564 201,616 641,580
Depreciation--
other............ 0 0 75,607 55,056 0 130,663
Depreciation--
property......... 2,684,924 266,805 0 0 0 2,951,729
Amortization...... 8,096 1,500 55,932 138 945,299 1,010,965
----------- ---------- ----------- ---------- ----------- -----------
Total operating
expenses....... 5,877,986 453,362 7,210,004 5,753,805 19,001,316 38,296,473
----------- ---------- ----------- ---------- ----------- -----------
Operating earnings
(losses).......... 23,187,124 1,889,929 14,195,874 (205,750) (963,358) 38,103,819
Equity in earnings
of joint
ventures/minority
interest......... (23,271) 0 0 12,452 0 (10,819)
Gain on
securitization... 0 0 0 0 3,018,268 3,018,268
----------- ---------- ----------- ---------- ----------- -----------
Net earnings
(losses) before
income taxes...... 23,163,853 1,889,929 14,195,874 (193,298) 2,054,910 41,111,268
Provision (credit)
for federal
income taxes..... 0 0 5,607,415 (81,229) 789,895 6,316,081
----------- ---------- ----------- ---------- ----------- -----------
Net income......... $23,163,853 $1,889,929 $ 8,588,459 $ (112,069) $ 1,265,015 $34,795,187
=========== ========== =========== ========== =========== ===========
Earnings per
share............. $ 0.49
===========
Shares outstanding:
Weighted average.. 47,633,909
===========
End of period..... 62,118,679
===========
<CAPTION>
Pro Forma
-------------------------------
Adjustments Pro Forma
---------------- --------------
<S> <C> <C>
Revenues:
Rental and earned
income........... $ 9,747,393 (a)
(326)(b) $34,922,590
Fees.............. (21,396,113)(c)
(2,875,906)(d) 2,255,474
Interest and other
income........... 1,526,547 (e) 26,223,823
---------------- --------------
Total revenue... (12,998,405) 63,401,887
Expenses:
General and
administrative... (1,306,230)(f)
(1,415,100)(g)
(36,629)(h) 12,341,914
Advisory fees..... (2,295,804)(i) 0
Fees to Restaurant
Financial
Services Group... (1,825,658)(n) 0
Interest.......... (68,670)(m) 14,271,531
State taxes....... 44,873 (j) 686,453
Depreciation--
other............ -- 130,663
Depreciation--
property......... 1,453,419(k) 4,405,148
Amortization...... 1,568,085(l) 2,579,050
---------------- --------------
Total operating
expenses....... (3,881,714) 34,414,759
---------------- --------------
Operating earnings
(losses).......... (9,116,691) 28,987,128
Equity in earnings
of joint
ventures/minority
interest......... -- (10,819)
Gain on
securitization... -- 3,018,268
---------------- --------------
Net earnings
(losses) before
income taxes...... (9,116,691) 31,994,577
Provision (credit)
for federal
income taxes..... (6,316,081)(o) 0
---------------- --------------
Net income......... $ (2,800,610) $31,994,577
================ ==============
Earnings per
share............. $ 0.44
==============
Shares outstanding:
Weighted average.. 72,989,400(p)
==============
End of period..... 77,678,825
==============
</TABLE>
F-24
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
UNAUDITED PRO FORMA INCOME STATEMENT
For the year ended December 31, 1997
<TABLE>
<CAPTION>
Historical
---------------------------------------------------------------------------------
CNL Income CNL Financial CNL Financial Combined
APF Fund XVIII, Ltd. Advisor Services, Inc. Corp. Portfolios
----------- ---------------- ---------- -------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental and earned
income........... $15,490,615 $1,290,621 $ 0 $ 0 $ 0 $16,781,236
Fees............. 0 0 8,310,836 5,965,110 73,704 14,349,650
Interest and
other income..... 3,967,318 162,621 165,569 0 10,932,843 15,228,351
----------- ---------- ---------- ---------- ----------- -----------
Total revenue... 19,457,933 1,453,242 8,476,405 5,965,110 11,006,547 46,359,237
Expenses:
General and
administrative... 1,010,725 144,137 4,266,169 1,889,904 828,848 8,139,783
Advisory fees.... 804,879 11,842 0 0 1,802,532 2,619,253
Fees to
Restaurant
Financial
Services Group 0 0 151,041 594,041 0 745,082
Interest......... 0 0 162,153 183,315 8,320,000 8,665,468
State taxes...... 251,358 424 12,084 1,294 1,600 266,760
Depreciation--
other............ 0 0 48,490 14,637 0 63,127
Depreciation--
property......... 1,784,269 140,079 0 0 0 1,924,348
Amortization..... 10,793 2,000 18,093 61,324 916,577 1,008,787
----------- ---------- ---------- ---------- ----------- -----------
Total operating
expenses........ 3,862,024 298,482 4,658,030 2,744,515 11,869,557 23,432,608
----------- ---------- ---------- ---------- ----------- -----------
Operating earnings
(losses)......... 15,595,909 1,154,760 3,818,375 3,220,595 (863,010) 22,926,629
Equity in
earnings of joint
ventures/minority
interest......... (31,453) 0 0 (126,627) 0 (158,080)
----------- ---------- ---------- ---------- ----------- -----------
Net earnings
before income
taxes............ 15,564,456 1,154,760 3,818,375 3,093,968 (863,010) 22,768,549
Provision
(credit) for
federal income
taxes............ 0 0 1,508,258 1,272,133 (317,785) 2,462,606
----------- ---------- ---------- ---------- ----------- -----------
Net earnings
(losses)......... $15,564,456 $1,154,760 $2,310,117 $1,821,835 $ (545,225) $20,305,943
=========== ========== ========== ========== =========== ===========
Earnings per
share............ $ 0.66
===========
Shares
outstanding:
Weighted
average.......... 23,423,868
===========
End of period.... 36,192,971
===========
<CAPTION>
Pro Forma
------------------------------- -----------
Adjustments Pro Forma
--------------- --------------- ---
<S> <C> <C> <C> <C> <C>
Revenues:
Rental and earned
income........... $25,281,493 (a)
(25,739)(b) $ 42,036,990
Fees............. (9,529,378)(c)
(2,662,141)(d) 2,158,131
Interest and
other income..... 249,395 (e) 15,477,746
--------------- --------------- ---
Total revenue... 13,313,630 59,672,867
Expenses:
General and
administrative... (732,620)(f)
(1,619,238)(g)
(42,003)(h) 5,745,922
Advisory fees.... (2,619,253)(i) 0
Fees to
Restaurant
Financial
Services Group (745,082)(n) 0
Interest......... (81,594)(m) 8,583,874
State taxes...... 18,376 (j) 285,136
Depreciation--
other............ -- 63,127
Depreciation--
property......... 3,220,794 (k) 5,145,142
Amortization..... 2,090,779 (l) 3,099,566
--------------- --------------- ---
Total operating
expenses........ (509,841) 22,922,767
--------------- --------------- ---
Operating earnings
(losses)......... 13,823,471 36,750,100
Equity in
earnings of joint
ventures/minority
interest......... -- (158,080)
--------------- --------------- ---
Net earnings
before income
taxes............ 13,823,471 36,592,020
Provision
(credit) for
federal income
taxes............ (2,462,606)(o) 0
--------------- --------------- ---
Net earnings
(losses)......... $16,286,077 $ 36,592,020
=============== =============== ===
Earnings per
share............ $ 0.50
=============== ===
Shares
outstanding:
Weighted
average.......... 73,661,356 (p)
=============== ===
End of period.... 73,661,356
=============== ===
</TABLE>
F-25
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
Notes and Management's Assumptions to Unaudited
Pro Forma Financial Statements
1. Basis of Presentation
The Pro Forma Balance Sheet as of September 30, 1998 reflects the
transactions of the acquisition of the CNL Income Fund, Advisor and CNL
Restaurant Financial Services Group (the "Acquisition Proposal") as set forth
in this Proxy Statement. The Pro Forma Statements of Earnings for the nine
months ended September 30, 1998, and for the year ended December 31, 1997, have
been prepared to reflect a) the issuance of additional shares and the property
acquisitions completed from January 1, 1997 through November 30, 1998
("Offering and Property Transactions") and b) the transactions of the
Acquisition Proposal as set forth in this Proxy Statement. This unaudited pro
forma financial information has been prepared utilizing the historical
financial statements of the Company and the historical combined financial
information of the CNL Income Fund, Advisor and CNL Restaurant Financial
Services Group and should be read in conjunction with the selected historical
financial data and accompanying notes of the Company, the CNL Income Fund,
Advisor and the CNL Restaurant Financial Services Group. The Pro Forma Balance
Sheet was prepared as if the Offering and Property Transactions and the
Acquisition Proposal occurred on September 30, 1998. The Pro Forma Statements
of Earnings were prepared as if the Property Acquisitions and the Acquisition
Proposal occurred as of January 1, 1997. The pro forma information is unaudited
and is not necessarily indicative of the consolidated operating results which
would have occurred if the Offering and Acquisition Transaction and the
Acquisition Proposal 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 Acquisition
Proposal have been made. Capitalized terms have the meanings as defined in the
Proxy Statement.
2. Method of Accounting
The acquisition of the CNL Income Fund and the CNL Restaurant Financial
Services Group will be accounted for under the purchase accounting method. The
Company 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, the Company 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 operating expense on the Company's consolidated statements of
earnings, but the Company will not deduct this expense for purposes of
calculating funds from operations due to the non-recurring and non-cash nature
of the expense.
All significant intercompany balances and transactions between the Company,
CNL Income Fund, Advisor and CNL Restaurant Financial Services Group have been
eliminated in the pro forma financial statements.
3. Adjustments to Pro Forma Balance Sheet
The following describes the pro forma adjustments to the Pro Forma Balance
Sheet as of September 30, 1998, as if the Acquisition was consummated on such
date. For purposes of the pro forma financial statements, it is assumed that at
an annual meeting of stockholders, the stockholders of the Company approved an
amendment to increase the number of authorized shares to an amount necessary to
enable the Company to issue the shares for the Acquisition.
(1) Represents the payment of $390,024 in cash and the issuance of
15,560,146 common shares in consideration for the purchase of the CNL
Income Fund, Advisor and CNL Restaurant Financial Services Group at
September 30, 1998 at a share price of $10 plus estimated transaction
costs.
F-26
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
Notes and Management's Assumptions to Unaudited
Pro Forma Financial Statements--(Continued)
3. Adjustments to Pro Forma Balance Sheet--(Continued)
The acquisition of the CNL Income Fund and the CNL Restaurant Financial
Services Group has been accounted for under the purchase accounting method
and goodwill was recognized to the extent that the consideration paid
exceeded the fair value of the net tangible assets acquired. As for the
acquisition of the Advisor from a related party, the consideration paid in
excess of the fair value of the net tangible assets received has been
accounted for as costs incurred in acquiring the Advisor from a related
party because the Advisor has not been deemed to qualify as a "business"
for purposes of applying APB Opinion No. 16 "Business Combinations." Upon
consummation of the Acquisition, this expense will be recorded as an
operating expense on the Company's statement of earnings. The Company will
not deduct this expense for purposes of calculating funds from operations
due to the nonrecurring and non-cash nature of the expense. As of September
30, 1998, $249,403 of transaction costs had been incurred by the Company.
<TABLE>
<S> <C>
CNL Income Fund.............................................. $ 32,991,488
Advisor...................................................... 76,000,000
CNL Restaurant Financial Services Group...................... 47,000,000
------------
Total Purchase Price (cash and shares)..................... 155,991,488
Less cash paid to CNL Income Fund............................ (390,024)
------------
Share consideration........................................ 155,601,464
Transaction costs of the Company............................. 8,933,000
------------
Total costs incurred....................................... $164,534,464
============
</TABLE>
In addition, the Company i) used $8,933,000 in cash to pay the
transaction costs related to the Acquisition, ii) made an upward adjustment
to the CNL Income Fund carrying value of land and building on operating
leases by $3,521,698, net investment in direct financing leases by
$1,078,830, investment in joint venture by $25,943, made downward
adjustments to the carrying value of accrued rental income of $189,143,
made downward adjustments to other assets of $3,884,257 and made downward
adjustments to deferred income of $116,769 to adjust historical values to
fair value, iii) recorded goodwill of $41,815,587 for the acquisition of
the CNL Restaurant Financial Services Group, iv) reduced retained earnings
by $76,971,555 for the excess consideration paid over the net assets of the
Advisor and removed the historical common stock balance of $12,000,
additional paid in capital balance of $9,602,287, retained earnings balance
of $5,297,114 and partners capital balance of $30,556,105 of the CNL Income
Fund, Advisor and CNL Restaurant Financial Services Group.
(2) Represents the use of $26,901,936 in cash and cash equivalents at
September 30, 1998 to acquire $26,052,741 in properties and issue $849,195
in mortgage notes which occurred from October 1, 1998 through November 30,
1998.
(3) Represents the elimination by the CNL Income Fund of $14,652 in
related party payables recorded as receivables by the Advisor, the
elimination by the CNL Restaurant Financial Services Group of $6,641,379 in
related party payables recorded as receivables by CNL Restaurant Financial
Services Group and the elimination by the Company of $1,208,000 in related
party payables recorded as receivables by the Advisor.
(4) Represents the elimination of income taxes payable of $2,990,864
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.
F-27
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
Notes and Management's Assumptions to Unaudited
Pro Forma Financial Statements--(Continued)
4. Adjustments to Pro Forma Income Statements
(I) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the nine months ended September 30, 1998, as
if the Acquisition was consummated as of January 1, 1997.
(a) Represents rental and earned income as if 1) properties that had
been previously constructed and acquired from January 1, 1998
through November 30, 1998 had been acquired and leased on January
1, 1997 and 2) properties that were developed by the Company from
January 1, 1998 through November 30, 1998 had been placed in
service on May 1, 1997 (assumes a four month development period).
<TABLE>
<S> <C>
Rental and earned income on Property Transactions by the
Company.................................................. $9,635,208
Rental and earned income on Property Transactions by the
CNL Income Fund.......................................... 112,185
----------
$9,747,393
==========
</TABLE>
(b) Represents $(326) in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the CNL Income Fund as if the
leases had been acquired on January 1, 1997.
(c) Represents the elimination of intercompany fees between the
Company, the CNL Income Fund, the Advisor and the CNL Restaurant
Financial Services Group:
<TABLE>
<S> <C>
Origination fees........................................ $ (1,569,202)
Secured equipment lease fee............................. (44,426)
Advisory fees........................................... (1,743,563)
Reimbursement of administrative costs................... (292,113)
Acquisition fees........................................ (15,757,119)
Underwriting fees....................................... (254,945)
Administrative fees..................................... (148,491)
Executive fee........................................... (310,000)
Guarantee fees.......................................... (93,750)
Servicing fee........................................... (1,014,117)
Development fees........................................ (166,876)
Consulting fee.......................................... (1,511)
------------
Total................................................. $(21,396,113)
============
</TABLE>
(d) Represents the deferral of $2,875,906 in origination fees collected
by CNL Restaurant Financial Services Group that should be amortized
over the term of the loans originated (20 years) in accordance with
the Statement of Financial Accounting Standards #91 "Accounting for
Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases."
(e) Represents interest income of $1,318,870 earned from Other
Investments acquired and mortgage notes issued from January 1, 1998
through November 30, 1998 as if this had occurred on January 1,
1997 and the amortization of $207,677 of deferred origination fees
collected during the year ended December 31, 1997 and during the
nine months ended September 30, 1998, which were capitalized and
deferred in (d) above as if they had been collected on January 1,
1997. These deferred fees are being amortized and recorded as
interest income.
F-28
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
Notes and Management's Assumptions to Unaudited
Pro Forma Financial Statements--(Continued)
4. Adjustments to Pro Forma Income Statements--(Continued)
(f) Represents the elimination of intercompany expenses paid between the
Company, the CNL Income Fund, the Advisor and the CNL Restaurant
Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs...................... $ (292,113)
Servicing fee.............................................. (1,014,117)
-----------
$(1,306,230)
===========
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during the
period as if 1) costs relating to properties developed by the Company
were subject to capitalization during the entire period and 2) costs
relating to properties not developed by the Company were subject to
capitalization up through the time that EITF 97-11 became effective.
<TABLE>
<S> <C>
General and administrative costs........................... $(1,415,100)
</TABLE>
(h) Represents savings of $36,629 in professional services and
administrative expenses resulting from reporting on one combined
Company versus 22 separate entities.
(i) Represents the elimination of advisory fees between the Company, the
CNL Income Fund, the Advisor and the CNL Restaurant Financial Services
Group:
<TABLE>
<S> <C>
Advisory fees............................................... $(1,743,563)
Administrative fees......................................... (148,491)
Executive fee............................................... (310,000)
Guarantee fees.............................................. (93,750)
-----------
$(2,295,804)
===========
</TABLE>
(j) Represents additional income taxes of $44,873 resulting from assuming
that acquisitions from January 1, 1998 through November 30, 1998 had
been acquired on January 1, 1997 and assuming that the CNL Income Fund
had operated under a REIT structure.
(k) Represents an increase in depreciation of the building portion of the
properties acquired from January 1, 1998 through November 30, 1998 as
if they had been acquired on January 1, 1997 and the step up in basis
referred to in footnote (2) from acquiring the CNL Income Fund
portfolio using the straight-line method over the estimated useful
lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense.......................................... $1,453,419
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of the
CNL Restaurant Financial Services Group referred to in footnote (2):
<TABLE>
<S> <C>
Amortization of goodwill..................................... $1,568,085
</TABLE>
(m) Represents elimination of interest expense recorded for the
amortization of $350,000 in arrangement fees collected during the year
ended December 31, 1997 which were eliminated in II (d) below.
<TABLE>
<S> <C>
Interest expense............................................... $(68,670)
</TABLE>
F-29
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
Notes and Management's Assumptions to Unaudited
Pro Forma Financial Statements--(Continued)
4. Adjustments to Pro Forma Income Statements--(Continued)
(n) Represents the elimination of fees paid to affiliates for fees
incurred between the Company, the CNL Income Fund, the Advisor and
the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees........................ $(1,569,202)
Underwriting fees....................... (254,945)
Consulting fee.......................... (1,511)
-----------
$(1,825,658)
===========
</TABLE>
(o) Represents the elimination of $6,316,081 in the provision for
income taxes as a result of the Acquisition. The Company expects to
continue to qualify as a REIT and does not expect to incur federal
income taxes.
(p) Common shares issued during the period 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 the proposal to increase the number of authorized common
shares of the Company.
(II) The following describes the pro forma adjustments to the Pro Forma
Statement of Earnings for the year ended December 31, 1997, as if the
Acquisition was consummated as of January 1, 1997.
(a) Represents rental and earned income as if 1) properties that had
been previously constructed and acquired from January 1, 1998 through
November 30, 1998 had been acquired and leased on January 1, 1997 and
2) properties that were developed by the Company from January 1, 1997
through November 30, 1998 had been placed in service on May 1, 1997
(assumes a four month development period).
<TABLE>
<S> <C>
Rental and earned income on Property
Transactions by the Company............. $24,048,982
Rental and earned income on Property
Transactions by the CNL Income Fund..... 1,232,511
-----------
$25,281,493
===========
</TABLE>
(b) Represents $(25,739) in accrued rental income resulting from the
straight-lining of scheduled rent increases throughout the lease
terms for the leases acquired from the CNL Income Fund as if the
leases had been acquired on January 1, 1997.
(c) Represents the elimination of intercompany fees between the
Company, the CNL Income Fund, the Advisor and the CNL Restaurant
Financial Services Group:
<TABLE>
<S> <C>
Origination fees........................ $ (594,041)
Secured equipment lease fee............. (375,219)
Advisory fees........................... (1,787,522)
Reimbursement of administrative costs... (133,632)
Acquisition fees........................ (4,337,634)
Underwriting fees....................... (151,041)
Administrative fees..................... (269,231)
Executive fee........................... (250,000)
Guarantee fees.......................... (312,500)
Arrangement fees........................ (350,000)
Servicing fee........................... (598,988)
Development fees........................ (369,570)
-----------
Total................................. $(9,529,378)
===========
</TABLE>
F-30
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
Notes and Management's Assumptions to Unaudited
Pro Forma Financial Statements--(Continued)
4. Adjustments to Pro Forma Income Statements--(Continued)
(d) Represents the deferral of $2,662,141 in origination fees collected
by CNL Restaurant Financial Services Group that should be amortized
over the term of the loans originated (20 years) in accordance with
the Statement of Financial Accounting Standards #91 "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring
Loans and Initial Direct Costs of Leases."
(e) Represents the elimination of interest income of $1,931,331 earned
during the year ended December 31, 1997 assuming all monies raised
during 1997 and all cash held on January 1, 1997 was used to effect
the Acquisition on January 1, 1997, represents interest income of
$2,047,619 earned from Other Investments acquired and mortgage notes
issued from January 1, 1998 through November 30, 1998 as if this had
occurred on January 1, 1997 and the recognition of $133,107 of
origination fees collected during the year ended December 31, 1997
which were deferred in (d) and are being amortized and recorded as
interest income.
(f) Represents the elimination of intercompany expenses paid between
the Company, the CNL Income Fund, the Advisor and the CNL Restaurant
Financial Services Group.
<TABLE>
<S> <C>
Reimbursement of administrative costs...................... $(133,632)
Servicing fee.............................................. (598,988)
---------
$(732,620)
=========
</TABLE>
(g) Represents capitalization of incremental costs associated with the
acquisition, development and leasing of properties acquired during
the period as if 1) costs relating to properties developed by the
Company were subject to capitalization during the entire period and
2) costs relating to properties not developed by the Company were
subject to capitalization up through the time that EITF 97-11 became
effective.
<TABLE>
<S> <C>
General and administrative costs......................... $(1,619,238)
</TABLE>
(h) Represents savings of $42,003 in professional services and
administrative expenses resulting from reporting on one combined
Company versus 22 separate entities.
(i) Represents the elimination of advisory fees between the Company,
the CNL Income Fund, the Advisor and the CNL Restaurant Financial
Services Group:
<TABLE>
<S> <C>
Advisory fees............................................. $(1,787,522)
Administrative fees....................................... (269,231)
Executive fee............................................. (250,000)
Guarantee fees............................................ (312,500)
-----------
$(2,619,253)
===========
</TABLE>
(j) Represents additional income taxes of $18,376 resulting from
assuming that acquisitions from January 1, 1997 through November 30,
1998 had been acquired on January 1, 1997 and assuming that the CNL
Income Fund had operated under a REIT structure.
(k) Represents increase in depreciation of the building portion of the
properties acquired from January 1, 1997 through November 30, 1998 as
if they had been acquired on January 1, 1997 and the step
F-31
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
Notes and Management's Assumptions to Unaudited
Pro Forma Financial Statements--(Continued)
4. Adjustments to Pro Forma Income Statements--(Continued)
up in basis referred to in footnote (2) from acquiring the CNL Income
Fund portfolio using the straight-line method over the estimated
useful lives of generally 30 years.
<TABLE>
<S> <C>
Depreciation expense........................................ $3,220,794
</TABLE>
(l) Represents the amortization of the goodwill on the acquisition of
the CNL Restaurant Financial Services Group referred to in footnote
(2):
<TABLE>
<S> <C>
Amortization of goodwill................................... $2,090,779
</TABLE>
(m) Represents elimination of yearly amortization of arrangement fees
of $350,000 capitalized as deferred costs and amortized as interest
expense and the capitalization of interest expense during the period
that properties were under development.
<TABLE>
<S> <C>
Amortization of arrangement fees............................ $(24,144)
Capitalization of interest during development period........ (57,450)
--------
$(81,594)
========
</TABLE>
(n) Represents the elimination of fees paid to affiliates for fees
incurred between the Company, the CNL Income Fund, the Advisor and
the CNL Restaurant Financial Services Group:
<TABLE>
<S> <C>
Origination fees............................................ $(594,041)
Underwriting fees........................................... (151,041)
---------
$(745,082)
=========
</TABLE>
(o) Represents the elimination of $2,462,606 in the provision for
income taxes as a result of the Acquisition. The Company expects to
continue to qualify as a REIT and does not expect to incur federal
income taxes.
(p) Common shares issued during the period were assumed to have been
issued and outstanding as of January 1, 1997. For purposes of the pro
forma financial statement, it is assumed that the stockholders
approved the proposal to increase the number of authorized common
shares of the Company.
F-32
<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 XVIII, Ltd.
400 East South Street
Orlando, FL 32801-2878
Re: CNL Income Fund XVIII, 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 eighteen 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
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 XVIII, 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-1
<PAGE>
"Affiliated Group" means any affiliated group within the meaning of Code
(S)1504, or any similar group defined under a similar provision of state, local
or foreign law.
"Agreement" means this Agreement, as amended from time to time.
"APF" has the meaning set forth in the preface above.
"APF Common Shares" shall mean the shares of common stock, par value $0.01,
of APF.
"APF Indemnity Claim" has the meaning set forth in Section 12.1 below.
"APF SEC Documents" has the meaning set forth in Section 6.7 below.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act, or transaction that forms the basis for any specified
consequence.
"Business Combination" has the meaning set forth in Section 4.1(b) below.
"Cash/Note Option" has the meaning set forth in Section 4.4 below.
"Closing" has the meaning set forth in Section 2.3 below.
"CNL Income Funds" has the meaning set forth in the second paragraph of the
Recitals above.
"Closing Date" has the meaning set forth in Section 2.3 below.
"Code" means the Internal Revenue Code of 1986, as amended.
"Confidential Information" means any information concerning the businesses
and affairs of the Fund, the Operating Partnership or APF, if any, that is not
already generally available to the public.
"Delaware RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Disclosure Schedule" has the meaning set forth in the first paragraph of
Article VII below.
"Dissenting Partners" has the meaning set forth in Section 4.4 below.
"Effective Time" has the meaning set forth in Section 2.2 below.
"Employee Benefit Plan" means any (a) nonqualified deferred compensation or
retirement plan or arrangement which is an Employee Pension Benefit Plan, (b)
tax-qualified defined contribution retirement plan or arrangement which is an
Employee Pension Benefit Plan, (c) tax-qualified defined benefit retirement
plan or arrangement which is an Employee Pension Benefit Plan (including any
Multiemployer Plan), or (d) Employee Welfare Benefit Plan or material fringe
benefit plan or program.
"Fairness Opinion" has the meaning set forth in the third paragraph of the
Recitals above.
"Florida RULPA" has the meaning set forth in the first paragraph of the
Recitals above.
"Fund" has the meaning set forth in the preface above.
"Fund Articles of Merger" has the meaning set forth in Section 2.2 below.
"Fund Fairness Opinion" has the meaning set forth in the fifth paragraph of
the recitals above.
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"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 3,299,149 fully paid and nonassessable APF Common
Shares (1,649,575 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 $29,990,331, 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 57,700,851 APF Common Shares which may be issued in connection with
APF's acquisition of the other 17 CNL Income Funds in the Proposed Acquisitions
and the 12,300,000 APF Shares which may be issued in connection with APF's
acquisition of CNL Fund Advisors, Inc., CNL Financial Services, Inc. and CNL
Financial Corp., there are outstanding on the date hereof no options, warrants,
calls, rights, commitments or any other agreements of any character to which
APF is a party or by which it may be bound, requiring it to issue, transfer,
sell, purchase, register, redeem, or acquire any shares of capital stock or any
securities or rights convertible into, exchangeable for or evidencing the right
to subscribe for or acquire any shares of its capital stock. All of the
outstanding general partner interests of the Operating Partnership are owned by
the OP General Partner, and all of the outstanding limited partner interests of
the Operating Partnership are owned by the OP Limited Partnership, and there
are outstanding on the date hereof no options, warrants, rights, commitments or
any other agreements of any character to which the Operating Partnership or any
partner thereof is a party or which it may be bound requiring it to issue,
transfer, sell, purchase, register, redeem or acquire any interest in the
Operating Partnership.
6.3 Authorization for Common Stock. The Share Consideration will, when
issued, be duly authorized, validly issued, fully paid and nonassessable, and
no stockholder of APF will have any preemptive right or similar rights of
subscription or purchase in respect thereof. The Share Consideration will be
registered under the Securities Act and will be registered or exempt from
registration under all applicable state securities laws. The Share
Consideration will, when issued, be approved for listing on the NYSE, subject
to official notice of issuance.
6.4 Authorization of Transaction. APF, the OP General Partner and the
Operating Partnership have full power and authority (including full corporate
and limited partnership, as applicable, power and authority) to
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execute and deliver this Agreement and to perform their obligations hereunder.
The execution, delivery and performance by APF, the OP General Partner and the
Operating Partnership of this Agreement have been duly and validly authorized
by the boards of directors of APF and the OP General Partner. This Agreement
constitutes the valid and legally binding obligation of APF, the OP General
Partner and the Operating Partnership, enforceable in accordance with its terms
and conditions. None of APF, the OP General Partner or the Operating
Partnership needs to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
6.5 Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which, APF, the OP General Partner or the
Operating Partnership is subject or any provision of APF's or the OP General
Partner's articles of incorporation or by-laws or the Operating Partnership's
certificate of limited partnership or limited partnership agreement or (ii)
result in a breach of, constitute a default under, result in the acceleration
of, create in any party the right to accelerate, terminate, modify, or cancel,
or require any notice or consent under any agreement, contract, lease, license,
instrument, or other arrangement to which APF, the OP General Partner or the
Operating Partnership is a party or by which it is bound or to which any of its
assets is subject or (iii) result in the imposition of a Security Interest upon
any of its assets.
6.6 Title to Assets. APF has good title to, or a valid leasehold interest
in, the properties and assets used by it, located on its premises, or set forth
in its most recent quarterly report on Form 10-Q filed with the SEC or acquired
after the date thereof, free and clear of all Security Interests, except for
properties and assets disposed of in the Ordinary Course of Business since the
date of its most recent quarterly report on Form 10-Q.
6.7 Reports and Financial Statements. APF has filed all required reports,
schedules, forms, statements and other documents with the SEC since January 1,
1996 (along with any such documents filed subsequent to the date hereof, the
"APF SEC Documents"). All of the APF SEC Documents (other than preliminary
material), as of their respective filing dates, complied in all material
respects with all applicable requirements of the Securities Act and the
Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such APF SEC Documents. None of the APF SEC Documents
at the time of filing contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading, except to the extent such statements have
been modified or superseded by later filed APF SEC Documents. There is no
unresolved violation, criticism or exception by any governmental entity of
which APF has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to APF could have a Material Adverse
Effect on APF. The financial statements of APF included in the APF SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with GAAP (except, the case
of interim financial statements, as permitted by Forms 10-Q and 8-K of the SEC)
applied on a consistent basis during the periods involved (except as may be
indicated in the notes thereto) and fairly presented, in accordance with the
applicable requirements of GAAP, the financial position of APF as of the dates
thereof and the results of operations and cash flows of APF for the periods
then ended (subject, in the case of interim financial statements, to normal
year-end adjustments).
6.8 Events Subsequent to September 30, 1998. Since September 30, 1998,
nothing has occurred which has had or would reasonably be expected to have a
Material Adverse Effect on APF.
6.9 Litigation. Except as publicly disclosed by APF in its APF SEC Documents
or on Schedule 1, there is no suit, claim, action, proceeding or investigation
pending or, to the Knowledge of APF, threatened against APF or any of its
Subsidiaries or any of their respective properties or assets which (a) if
adversely determined, could reasonably be expected to have a Material Adverse
Effect on APF or (b) as of the date hereof, questions
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the validity of this Agreement or any action to be taken by APF in connection
with the consummation of the transactions contemplated hereby or could
otherwise prevent or delay the consummation of the transactions contemplated by
this Agreement. Except as publicly disclosed by APF in any APF SEC Document,
none of APF or its Subsidiaries is subject to any outstanding order, writ,
injunction or decree which, insofar as can be reasonably foreseen in the
future, could reasonably be expected to have a Material Adverse Effect on APF
or would prevent or delay the consummation of the transactions contemplated
hereby.
6.10 Registration Statement; Proxy Statement. None of the information
supplied or to be supplied by APF for inclusion or incorporation by reference
in (i) the Registration Statement to be filed by APF with the SEC in connection
with the Merger will, at the time the Registration Statement becomes effective
under the Securities Act, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading and (ii) the proxy statement sent by APF to its
shareholders pertaining to the Merger will, at the date mailed to shareholders
and at the times of the meeting of shareholders to be held in connection with
the Merger, contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they are
made, not misleading. If at any time prior to the Effective Time any event with
respect to APF, its officers and directors or any of its Subsidiaries should
occur which is required to be described in an amendment of, or a supplement to,
the Registration Statement or the proxy statement, APF shall promptly so advise
the General Partners and such event shall be so described, and such amendment
or supplement (which the General Partners shall have a reasonable opportunity
to review) shall be promptly filed with the SEC. The Registration Statement
will comply as to form in all material respects with the provisions of the
Securities Act and the rules and regulations thereunder.
6.11 No Undisclosed Liabilities; Absence of Changes. Except as and to the
extent publicly disclosed by APF in its APF SEC Documents or disclosed in
Schedule 1, as of December 31, 1998, to APF's Knowledge, none of APF or its
Subsidiaries had any liabilities or obligations of any nature, whether or not
accrued, contingent or otherwise, and whether due or to become due or asserted
or unasserted, which are not fully reflected in, reserved against or otherwise
described in the consolidated balance sheet of APF and its consolidated
Subsidiaries (including the notes thereto) as of such date or which could
reasonably be expected to have a Material Adverse Effect on APF. Except as
publicly disclosed by APF in any reports filed by it with the APF SEC
Documents, since December 31, 1998, the business of APF and its Subsidiaries
has been carried on only in the ordinary and usual course, to APF's Knowledge,
none of APF or its Subsidiaries has incurred any liabilities of any nature,
whether or not accrued, contingent or otherwise, and whether due or to become
due or asserted or unasserted, which could reasonably be expected to have, and
there have been no events, changes or effects with respect to APF or its
Subsidiaries Known to APF having or which could reasonably be expected to have,
a Material Adverse Effect on APF.
6.12 Brokers' Fees. Except for the fees and expenses paid to Merrill Lynch &
Co. with respect to the delivery of the Fairness Opinion to the Special
Committee and in connection with the financial services provided by Salomon
Smith Barney, none of APF, the OP General Partner or the Operating Partnership
has any Liability or obligation to pay any fees or commissions to any broker,
finder, or agent with respect to the transactions contemplated by this
Agreement.
6.13 Qualification as a REIT. APF is a "real estate investment trust" for
federal income tax purposes. The consummation of the transactions contemplated
by this Agreement will not cause APF to cease to qualify as a "real estate
investment trust" for federal income tax purposes.
6.14 Compliance with Applicable Law. Except as publicly disclosed by APF in
its APF SEC Documents, to APF's Knowledge, it and its Subsidiaries hold all
permits, licenses, variances, exemptions, order and approvals of all
governmental entities necessary for the lawful conduct of their respective
businesses, except for failures to hold such permits, licenses, variances,
exemptions, orders and approvals which could not reasonably be expected to have
a Material Adverse Effect on APF. Except as publicly disclosed by APF in its
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APF SEC Documents, to APF's Knowledge, APF and its Subsidiaries are in
compliance with the material terms of its permits, except where the failure so
to comply could not reasonably be expected to have a Material Adverse Effect on
APF. Except as publicly disclosed by APF, the businesses of APF and its
Subsidiaries are not, to APF's Knowledge, being conducted in violation of any
law, ordinance or regulation of any governmental entity except that no
representation or warranty is made in this Section 6.14 with respect to
environmental laws and except for violations or possible violations which do
not, and, insofar as reasonably can be foreseen, in the future will not, have a
Material Adverse Effect on APF. Except as publicly disclosed by APF in its APF
SEC Documents, no investigation or review by any governmental entity with
respect to APF or its Subsidiaries is pending or, to the Knowledge of APF,
threatened, nor, to the Knowledge of APF, has any government entity indicated
an intention to conduct the same, other than, in each case, those which APF
reasonably believes will not have a Material Adverse Effect on APF.
6.15 Intellectual Property.
(a) APF owns or has the right to use pursuant to license, sublicense,
agreement, or permission all Intellectual Property used in the operation of the
businesses of APF as presently conducted. Each item of Intellectual Property
owned or used by APF immediately prior to the Closing hereunder will be owned
or available for use by APF on identical terms and conditions immediately
subsequent to the Closing hereunder. APF has taken all necessary action to
maintain and protect each item of Intellectual Property that it owns or uses.
(b) APF has not interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of third
parties, and none of APF's directors or officers (or employees with
responsibility for Intellectual Property matters) has ever received any written
charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that APF must
license or refrain from using any Intellectual Property rights of any third
party). No third party has interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of APF which
are material to the operation of APF's business.
(c) APF has no patent or registration which has been issued to APF with
respect to any of its Intellectual Property.
(d) Nothing will interfere with, infringe upon, misappropriate, or otherwise
come into conflict with, any Intellectual Property rights of third parties as a
result of the continued operation of APF's business as presently conducted.
6.16 Insurance. With respect to each current insurance policy to which APF
is a party, a named insured or is otherwise the beneficiary of coverage, to the
knowledge of APF: (i) the policy is legal, valid, binding, enforceable, and in
full force and effect; (ii) the policy will continue to be legal, valid,
binding, enforceable, and in full force and effect on identical terms following
the consummation of the transactions contemplated hereby; (iii) neither APF nor
any other party to the policy is in breach or default (including with respect
to the payment of premiums or the giving of notices), and no event has occurred
which, with notice or the lapse of time, would constitute such a breach or
default, or permit termination, modification, or acceleration, under the
policy; and (iv) no party to the policy has repudiated any provision thereof.
6.17 Tenants. To the Knowledge of APF and except as set forth on Schedule
1, no current tenant of a property owned by APF, which as of the date of APF's
most recent quarterly report on Form 10-Q represented more than 5% of APF's
total revenues, presently intends to materially change its relationship with
the owner of the property, either due to the transactions contemplated hereby
or otherwise.
6.18 Disclosure. APF is in compliance in all material respects with its
obligation under the Securities Exchange Act to publicly disclose material
information in a timely fashion.
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ARTICLE VII
Representations and Warranties Concerning the Fund
The General Partners and the Fund jointly and severally represent and
warrant to APF and the Operating Partnership that the statements contained in
this Article VII are correct and complete as of the date hereof, except as set
forth in the disclosure schedule delivered by the General Partners and the Fund
to APF and the Operating Partnership in accordance with the provisions of
Section 8.14 (the "Disclosure Schedule"). Nothing in the Disclosure Schedule
shall be deemed adequate to disclose an exception to a representation or
warranty made herein, however, unless the Disclosure Schedule identifies the
exception with particularity and describes the relevant facts in reasonable
detail. Without limiting the generality of the foregoing, the mere listing (or
inclusion of a copy) of a document or other item shall not be deemed adequate
to disclose an exception to a representation or warranty made herein (unless
the representation or warranty has to do with the existence of the document or
other item itself). The Disclosure Schedule will be arranged in paragraphs
corresponding to the lettered and numbered paragraphs contained in this Article
VII.
7.1 Organization, Qualification, and Corporate Power. The Fund is a limited
partnership duly organized, validly existing, and in good standing under the
laws of Florida. The Fund is duly authorized to conduct business and is in good
standing under the laws of each jurisdiction where such qualification is
required, except where the failure to so qualify or obtain authorization would
not have a Material Adverse Effect on the Fund. Except as set forth in Section
7.1(a) of the Disclosure Schedule, the Fund has full limited partnership power
and authority and all licenses, permits, and authorizations necessary to carry
on the businesses in which it is engaged and to own and use the properties
owned and used by it, except where the failure to so qualify or obtain
authorization would not have a Material Adverse Effect on the Fund. Section
7.1(b) of the Disclosure Schedule lists the directors and officers of the
corporate General Partner. The General Partners have been made available to APF
and the Operating Partnership correct and complete copies of the certificate of
limited partnership and the limited partnership agreement of the Fund (as
amended to date). The minute books (containing the records of meetings of the
stockholders, the board of directors, and any committees of the board of
directors), the stock certificate books, and the stock record books of the
corporate General Partner and any organizational records of the Fund have been
made available to APF and the Operating Partnership and are correct and
complete in all material respects. The Fund is not in default under or in
violation of any provision of its certificate of limited partnership or limited
partnership agreement.
7.2 Capitalization. All of the outstanding ownership interests in the Fund
(the "Fund Interests") consist of (i) one percent in general partnership
interests and (ii) 3,500,000 units of limited partnership interests. All of the
outstanding Fund Interests have been duly authorized, are validly issued, fully
paid, and nonassessable. There are no outstanding or authorized options,
warrants, purchase rights, subscription rights, conversion rights, exchange
rights, or other contracts or commitments that could require the Fund to issue,
sell, or otherwise cause to become outstanding any additional ownership
interests. There are no outstanding or authorized stock appreciation, phantom
stock, profit participation, or similar rights with respect to the Fund.
7.3 Authorization of Transaction. The Fund has full power and authority
(including full limited partnership power and authority) to execute and deliver
this Agreement and, upon the affirmative vote of a majority of the outstanding
limited partnership Fund Interests, will have full power and authority
(including limited partnership power and authority) to perform its obligations
hereunder. This Agreement constitutes the valid and legally binding obligation
of the Fund, enforceable in accordance with its terms and conditions, subject
to bankruptcy, insolvency, moratorium and rights of creditors generally. The
Fund is not required to give any notice to, make any filing with, or obtain any
authorization, consent, or approval of any government or governmental agency in
order to consummate the transactions contemplated by this Agreement, except in
connection with federal securities laws and any applicable "Blue Sky" or state
securities laws.
7.4 Noncontravention. Except as set forth in Section 7.4 of the Disclosure
Schedule, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby,
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will (i) violate any constitution, statute, regulation, rule, injunction,
judgment, order, decree, ruling, charge, or other restriction of any
government, governmental agency, or court to which the Fund is subject or any
provision of the certificate of limited partnership or limited partnership
agreement of the Fund or (ii) result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice or consent
under any agreement, contract, lease, license, instrument, or other arrangement
to which the Fund is a party or by which it is bound or to which any of its
assets is subject (or result in the imposition of any Security Interest upon
any of its assets).
7.5 Title to Assets. The Fund has good title to, or a valid leasehold
interest in, the properties and assets used by it, located on its premises, or
set forth in its most recent quarterly report on Form 10-Q filed with the SEC
(the "Most Recent 10-Q") or acquired after the date thereof, free and clear of
all Security Interests, except for properties and assets disposed of in the
Ordinary Course of Business since the date of the Most Recent 10-Q.
7.6 Subsidiaries. The Fund does not have any Subsidiaries, operating or
otherwise.
7.7 Reports and Financial Statements. The Fund has filed all required
reports, schedules, forms, statements and other documents with the SEC since
January 1, 1996 (along with any such documents filed subsequent to the date
hereof, the "Fund SEC Documents"). All of the Fund SEC Documents (other than
preliminary material), as of their respective filing dates, complied in all
material respects with all applicable requirements of the Securities Act and
the Exchange Act and, in each case, the rules and regulations promulgated
thereunder applicable to such Fund SEC Documents. None of the Fund SEC
Documents at the time of filing contained any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, except to the extent
such statements have been modified or superseded by later filed Fund SEC
Documents. There is no unresolved violation by any governmental entity of which
the Fund has received written notice with respect to such entity or statement
which, if resolved in manner unfavorable to the Fund could have a Material
Adverse Effect on the Fund. The financial statements of the Fund included in
the Fund SEC Documents complied as to form in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC with respect thereto, have been prepared in accordance with GAAP
(except, the case of interim financial statements, as permitted by Forms 10-Q
and 8-K of the SEC) applied on a consistent basis during the periods involved
(except as may be indicated in the notes thereto) and fairly presented, in
accordance with the applicable requirements of GAAP, the financial position of
the Fund as of the dates thereof and the results of operations and cash flows
of the Fund for the periods then ended (subject, in the case of interim
financial statements, to normal year-end adjustments).
7.8 Events Subsequent to the Most Recent 10-Q. Since the date of the Most
Recent 10-Q nothing has had a Material Adverse Effect on the Fund. Without
limiting the generality of the foregoing, since that date, except as set forth
in the appropriately lettered paragraph of Section 7.8 of the Disclosure
Schedule:
(a) the Fund has not sold, leased, transferred, or assigned any of its
assets, tangible or intangible, other than for a fair consideration (as
reasonably determined by the General Partners) in the Ordinary Course of
Business;
(b) the Fund has not entered into any agreement, contract, lease, or license
(or series of related agreements, contracts, leases, and licenses) involving
more than $50,000 except in the Ordinary Course of Business;
(c) no party (including the Fund) has accelerated, terminated, modified, or
canceled any agreement, contract, lease, or license (or series of related
agreements, contracts, leases, and licenses) to which the Fund is a party or by
which it is bound except in the Ordinary Course of Business;
(d) the Fund has not imposed any Security Interest upon any of its assets,
tangible or intangible except in the Ordinary Course of Business;
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<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 $3,299,149 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.
B-27
<PAGE>
ARTICLE XII
Indemnification
12.1 Indemnity Obligations of the General Partners and the Fund. Subject to
Sections 12.5 and 12.6 hereof, each of the General Partners severally, in
accordance with its percentage interest in the Share Consideration and limited
in amount to the value of the APF Common Shares received by it, based upon the
average per share closing price of the APF Common Shares for the first twenty
trading days after the APF Common Shares are listed on NYSE (the "20 Day
Average Price"), agree to indemnify and hold APF, the OP General Partner and
the Surviving Partnership harmless from, and to reimburse APF, the OP General
Partner and the Surviving Partnership for, any APF Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "APF Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, obligation, suit, action, fee, cost, or expense
of any nature whatsoever resulting from (i) any breach of any representation
and warranty of any of the General Partners or the Fund which is contained in
this Agreement or any Schedule, Exhibit, or certificate delivered pursuant
hereto; (ii) any breach or non-fulfillment of, or any failure to perform, any
of the covenants, agreements, or undertakings of any of the General Partners or
the Fund which are contained in or made pursuant to this Agreement; and (iii)
all interest, penalties, costs, and expenses (including, without limitation,
all reasonable fees and disbursements of counsel) arising out of or related to
any indemnification made under this Section 12.1.
12.2 Indemnity Obligations of APF, the OP General Partner and the Operating
Partnership. Subject to Sections 12.5 and 12.6 hereof, APF, the OP General
Partner and the Operating Partnership (including in its capacity as the
Surviving Partnership) hereby jointly and severally agree to indemnify and hold
each of the General Partners and the Fund harmless from, and to reimburse each
of the General Partners and the Fund for, any Fund Indemnity Claims arising
under the terms and conditions of this Agreement. For purposes of this
Agreement, the term "Fund Indemnity Claim" shall mean any loss, damage,
deficiency, claim, liability, suit, action, fee, cost, or expense of any nature
whatsoever incurred by any of the General Partners or the Fund resulting from
(i) any breach of any representation and warranty of APF, the OP General
Partner or the Operating Partnership which is contained in this Agreement or
any Schedule, Exhibit, or certificate delivered pursuant hereto; (ii) any
breach or non-fulfillment of, or failure to perform, any of the covenants,
agreements, or undertakings of APF, the OP General Partner and the Operating
Partnership which are contained in or made pursuant to the terms and conditions
of this Agreement; and (iii) all interest, penalties, costs, and expenses
(including, without limitation, all reasonable fees and disbursements of
counsel) arising out of or related to any indemnification made under this
Section 12.2.
12.3 Appointment of Representative. James M. Seneff, Jr. is hereby appointed
as the exclusive agent of the General Partners and the Fund to act on their
behalf with respect to any and all Fund Indemnity Claims and any and all APF
Indemnity Claims arising under this Agreement or such other representative as
may be hereafter appointed by the General Partners. Such agent is herein
referred to as the "Representative." The Representative shall take, and the
General Partners agree that the Representative shall take, any and all actions
which the Representative believes are necessary or appropriate under this
Agreement for and on behalf of the General Partners and the Fund, as fully as
if such parties were acting on their own behalf, including, without limitation,
asserting Fund Indemnity Claims against APF, the OP General Partner and the
Operating Partnership, defending all APF Indemnity Claims, consenting to,
compromising, or settling all Fund Indemnity Claims and APF Indemnity Claims,
conducting negotiations with APF, the OP General Partner and the Operating
Partnership and their representatives regarding such claims, taking any and all
other actions specified in or contemplated by this Agreement and engaging
counsel, accountants, or other representatives in connection with the foregoing
matters. APF, the OP General Partner and the Operating Partnership shall have
the right to rely upon all actions taken or omitted to be taken by the
Representative pursuant to this Agreement, all of which actions or omissions
shall be legally binding upon each of the General Partners and the Fund. The
Representative, acting pursuant to this Section 12.3, shall not be liable to
any of the General Partners or the Fund for any act or omission, except in
connection with any act or omission that was the result of the Representative's
bad faith or gross negligence.
B-28
<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-29
<PAGE>
ARTICLE XIII
Limitation of Liability
13.1 Threshold. Notwithstanding anything to the contrary stated in this
Agreement, in no event (i) shall the General Partners or any of them have any
liability to APF and/or the OP General Partner and the Surviving Partnership on
account of any APF Indemnity Claim or for any claim for breach of warranty or
for misrepresentation, or any other claim whatsoever arising under this
Agreement or in connection with the transaction contemplated herein
(individually a "Claim" and collectively, "Claims") or for any loss, damage,
deficiency, liability, obligation, suit, action, judgment, fee, cost or expense
of any nature whatsoever directly resulting from Claims (collectively,
"Losses") unless, until and only to the extent that the accumulated amount of
all Losses exceeds the amount of $329,915 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-30
<PAGE>
14.6 Headings. The section headings contained in this Agreement are inserted
for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.7 Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given, as of the
date two business days after mailing, if it is sent by registered or certified
mail, return receipt requested, postage prepaid, and addressed to the intended
recipient as set forth below:
If to the Fund or the General Partners:
c/o James M. Seneff, Jr.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 423-2894
With copy to:
Baker & Hostetler LLP
Sun Trust Center, Suite 2300
200 South Orange Avenue
Orlando, Florida 32801
Attn: Kenneth C. Wright, Esq.
Telecopy: (407) 841-0168
If to APF or the Operating Partnership:
Curtis B. McWilliams
Executive Vice President
CNL American Properties, Inc.
400 East South Street
Suite 500
Orlando, Florida 32801
Telecopy: (407) 650-1000
With copy to:
Shaw Pittman Potts & Trowbridge
2300 N Street, N.W.
Washington, D.C. 20037
Attn: John M. McDonald, Esq.
Telecopy: (202) 663-8007
Any Party may send any notice, request, demand, claim, or other
communication hereunder to the intended recipient at the address set forth
above using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving the other Parties notice in the manner herein set forth.
14.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Florida without giving effect to any
choice or conflict of law provision or rules (whether of the State of Florida
or any other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Florida.
B-31
<PAGE>
14.9 Amendments and Waivers. No amendment of any provision of this Agreement
shall be valid unless the same shall be in writing and signed by APF, the OP
General Partner and the General Partners. No waiver by any Party of any
default, misrepresentation, or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or
subsequent default, misrepresentation, or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
14.10 Severability. Any term or provision of this Agreement that is invalid
or unenforceable in any situation in any jurisdiction shall not affect the
validity or enforceability of the remaining terms and provisions hereof or the
validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
14.11 Expenses. If the Closing occurs, APF will bear all costs and expenses
of the Parties incurred in connection with this Agreement and the transactions
contemplated hereby to the extent not already paid by the Fund or the General
Partners. If the Closing does not occur, APF, the OP General Partner and the
Operating Partnership will bear their own costs and expenses (including legal
fees and expenses) incurred in connection with this Agreement and the
transactions contemplated hereby, and the General Partners and the Fund will
divide their costs and expenses (including legal fees and expenses) as follows:
(i) the Fund shall bear that percentage of the costs and expenses equal to the
percentage obtained by dividing the number of Fund votes in favor of the Merger
by the sum of the total number of votes cast and the total number of
abstentions and (ii) the General Partners shall bear the remainder of the costs
and expenses.
14.12 Construction. The Parties have participated jointly in the negotiation
and drafting of this Agreement. In the event an ambiguity or question of intent
or interpretation arises, this Agreement shall be construed as if drafted
jointly by the Parties and no presumption or burden of proof shall arise
favoring or disfavoring any Party by virtue of the authorship of any of the
provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty, or covenant.
14.13 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
14.14 Specific Performance. Each of the Parties acknowledges and agrees that
the other Parties would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with their
specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Parties shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter (subject to the provisions set
forth in Section 13.15 below), in addition to any other remedy to which they
may be entitled, at law or in equity.
14.15 Submission to Jurisdiction. Each of the Parties submits to the
jurisdiction of any state or federal court sitting in and for Orange County,
Florida, in any action or proceeding arising out of or relating to this
Agreement and agrees that all claims in respect of the action or proceeding may
be heard and determined in any such court.
B-32
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
CNL AMERICAN PROPERTIES FUND, INC.
By: /s/ James M. Seneff, Jr.
Its: Chief Executive Officer
CNL APF PARTNERS, L.P.
By: CNL APF GP Corp., as General
Partner
By: /s/ Robert A. Bourne
Its: President
CNL APF GP Corp.
By: /s/ Robert A. Bourne
Its: President
CNL INCOME FUND XVIII, 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-33
<PAGE>
Appendix C
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF LIMITED PARTNERSHIP
OF
CNL Income Fund XVIII, 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 February 10, 1995, 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 XVIII, 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 XVIII, 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
<PAGE>
herein. 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>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
Section 2-418 of the Maryland General Corporation Law (the "MGCL") provides
that, in general, a corporation may indemnify each director to the corporation
or its stockholders for judgments, penalties, fines, settlements and reasonable
expenses actually incurred by the director in connection with the proceeding,
except for liability (i) where the act or omission of the director was material
to the matter giving rise to the proceeding and was committed in bad faith or
involved active and deliberate dishonesty; (ii) for any transaction from which
the director derived an improper personal benefit; and (iii) in the case of a
criminal proceeding, the director had reasonable cause to believe that the act
or omission was unlawful. The Amended and Restated Articles of Incorporation of
CNL American Properties Fund, Inc. (the "Registrant") provides for the
elimination and limitation of the personal liability of directors of the
Registrant for monetary damages to the fullest extent permitted by the MGCL.
Article VI of the Registrant's Amended and Restated Articles of Incorporation
provides for indemnification of the Registrant's directors, officers, employees
and agents under certain circumstances to the fullest extent permitted by the
MGCL. In addition, the Amended and Restated Articles of Incorporation provide
that if the MGCL is amended to authorized the further elimination or limitation
of liability of a director, then the liability of the directors of the
Registrant shall be eliminated or limited to the fullest extent permitted by
the MGCL, as so amended. These provisions do not limit or eliminate the rights
of the Registrant or any stockholder to seek non-monetary relief such as an
injunction or recission in the event of a breach of a director's duty of care.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act") may be permitted to directors,
officers or persons controlling the Registrant pursuant to the foregoing
provisions, the Registrant has been informed that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<C> <S>
2.1 Agreement and Plan of Merger by and between the Registrant and CNL
Income Fund, Ltd., dated March 11, 1999 (filed as Appendix B to
the Prospectus Supplement for CNL Income Fund, Ltd., constituting
a part of this Registration Statement on Form S-4, File No.
333- )
2.2 Agreement and Plan of Merger by and between the Registrant and CNL
Income Fund II, Ltd., dated March 11, 1999 (filed as Appendix B
to the Prospectus Supplement for CNL Income Fund II, Ltd.,
constituting a part of this Registration Statement on Form S-4,
File No.
333- )
2.3 Agreement and Plan of Merger by and between the Registrant and CNL
Income Fund III, Ltd., dated March 11, 1999 (filed as Appendix B
to the Prospectus Supplement for CNL Income Fund III, Ltd.,
constituting a part of this Registration Statement on Form S-4,
File No.
333- )
2.4 Agreement and Plan of Merger by and between the Registrant and CNL
Income Fund IV, Ltd., dated March 11, 1999 (filed as Appendix B
to the Prospectus Supplement for CNL Income Fund IV, Ltd.,
constituting a part of this Registration Statement on Form S-4,
File No.
333- )
</TABLE>
II-1
<PAGE>
<TABLE>
<C> <S>
2.5 Agreement and Plan of Merger by and between the Registrant and CNL
Income Fund V, Ltd., dated March 11, 1999 (filed as Appendix B to the
Prospectus Supplement for CNL Income Fund V, Ltd., constituting a part
of this Registration Statement on Form S-4, File No.
333- )
2.6 Agreement and Plan of Merger by and between the Registrant and CNL
Income Fund VI, Ltd., dated March 11, 1999 (filed as Appendix B to the
Prospectus Supplement for CNL Income Fund VI, Ltd., constituting a part
of this Registration Statement on Form S-4, File No.
333- )
2.7 Agreement and Plan of Merger by and between the Registrant and CNL
Income Fund VII, Ltd., dated March 11, 1999 (filed as Appendix B to the
Prospectus Supplement for CNL Income Fund VII, Ltd., constituting a
part of this Registration Statement on Form S-4, File No.
333- )
2.8 Agreement and Plan of Merger by and between the Registrant and CNL
Income Fund VIII, Ltd., dated March 11, 1999 (filed as Appendix B to
the Prospectus Supplement for CNL Income Fund VIII, Ltd., constituting
a part of this Registration Statement on Form S-4, File No.
333- )
2.9 Agreement and Plan of Merger by and between the Registrant and CNL
Income Fund IX, Ltd., dated March 11, 1999 (filed as Appendix B to the
Prospectus Supplement for CNL Income Fund IX, Ltd., constituting a part
of this Registration Statement on Form S-4, File No.
333- )
2.10 Agreement and Plan of Merger by and between the Registrant and CNL
Income Fund X, Ltd., dated March 11, 1999 (filed as Appendix B to the
Prospectus Supplement for CNL Income Fund X, Ltd., constituting a part
of this Registration Statement on Form S-4, File No.
333- )
2.11 Agreement and Plan of Merger by and between the Registrant and CNL
Income Fund XI, Ltd., dated March 11, 1999 (filed as Appendix B to the
Prospectus Supplement for CNL Income Fund XI, Ltd., constituting a part
of this Registration Statement on Form S-4, File No.
333- )
2.12 Agreement and Plan of Merger by and between the Registrant and CNL
Income Fund XII, Ltd., dated March 11, 1999 (filed as Appendix B to the
Prospectus Supplement for CNL Income Fund XII, Ltd., constituting a
part of this Registration Statement on Form S-4, File No.
333- )
2.13 Agreement and Plan of Merger by and between the Registrant and CNL
Income Fund XIII, Ltd., dated March 11, 1999 (filed as Appendix B to
the Prospectus Supplement for CNL Income Fund XIII, Ltd., constituting
a part of this Registration Statement on Form S-4, File No.
333- )
2.14 Agreement and Plan of Merger by and between the Registrant and CNL
Income Fund XIV, Ltd., dated March 11, 1999 (filed as Appendix B to the
Prospectus Supplement for CNL Income Fund XIV, Ltd., constituting a
part of this Registration Statement on Form S-4, File No.
333- )
2.15 Agreement and Plan of Merger by and between the Registrant and CNL
Income Fund XV, Ltd., dated March 11, 1999 (filed as Appendix B to the
Prospectus Supplement for CNL Income Fund XV, Ltd., constituting a part
of this Registration Statement on Form S-4, File No.
333- )
2.16 Agreement and Plan of Merger by and between the Registrant and CNL
Income Fund XVI, Ltd., dated March 11, 1999 (filed as Appendix B to the
Prospectus Supplement for CNL Income Fund XVI, Ltd., constituting a
part of this Registration Statement on Form S-4, File No.
333- )
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
2.17 Agreement and Plan of Merger by and between the Registrant and CNL
Income Fund XVII, Ltd., dated March 11, 1999 (filed as Appendix B to
the Prospectus Supplement for CNL Income Fund XVII, Ltd., constituting
a part of this Registration Statement on Form S-4, File No.
333- )
2.18 Agreement and Plan of Merger by and between the Registrant and CNL
Income Fund XVIII, Ltd., dated March 11, 1999 (filed as Appendix B to
the Prospectus Supplement for CNL Income Fund XVIII, Ltd., constituting
a part of this Registration Statement on Form S-4, File No.
333- )
3.1* Amended and Restated Articles of Incorporation of the Registrant
3.2 Bylaws of the Registrant
4.1* Specimen certificate evidencing shares of common stock, par value $.01
(the "Common Stock"), of the Registrant
4.2 Form of Indenture, dated , 1999, between the Registrant and , as
Trustee
4.3 Form of APF % Callable Notes, due 2006 (filed as an exhibit to
Exhibit 4.2)
5.1* Opinion and consent of Shaw Pittman Potts & Trowbridge as to the
legality of the Common Stock
8* Opinion of Shaw Pittman Potts & Trowbridge, special tax counsel, as to
certain federal income tax matters
10.1* 1999 Performance Incentive Plan
10.2 Appraisal prepared by Valuation Associates of CNL Income Fund, Ltd.,
dated January 6, 1999, including Supplement to Appraisal
10.3 Appraisal prepared by Valuation Associates of CNL Income Fund II, Ltd.,
dated January 6, 1999, including Supplement to Appraisal
10.4 Appraisal prepared by Valuation Associates of CNL Income Fund III, Ltd.,
dated January 6, 1999, including Supplement to Appraisal
10.5 Appraisal prepared by Valuation Associates of CNL Income Fund IV, Ltd.,
dated January 6, 1999, including Supplement to Appraisal
10.6 Appraisal prepared by Valuation Associates of CNL Income Fund V, Ltd.,
dated January 6, 1999, including Supplement to Appraisal
10.7 Appraisal prepared by Valuation Associates of CNL Income Fund VI, Ltd.,
dated January 6, 1999, including Supplement to Appraisal
10.8 Appraisal prepared by Valuation Associates of CNL Income Fund VII, Ltd.,
dated January 6, 1999, including Supplement to Appraisal
10.9 Appraisal prepared by Valuation Associates of CNL Income Fund VIII,
Ltd., dated January 6, 1999, including Supplement to Appraisal
10.10 Appraisal prepared by Valuation Associates of CNL Income Fund IX, Ltd.,
dated January 6, 1999, including Supplement to Appraisal
10.11 Appraisal prepared by Valuation Associates of CNL Income Fund X, Ltd.,
dated January 6, 1999, including Supplement to Appraisal
10.12 Appraisal prepared by Valuation Associates of CNL Income Fund XI, Ltd.,
dated January 6, 1999, including Supplement to Appraisal
10.13 Appraisal prepared by Valuation Associates of CNL Income Fund XII, Ltd.,
dated January 6, 1999, including Supplement to Appraisal
10.14 Appraisal prepared by Valuation Associates of CNL Income Fund XIII,
Ltd., dated January 6, 1999, including Supplement to Appraisal
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.15 Appraisal prepared by Valuation Associates of CNL Income Fund XIV, Ltd.,
dated January 6, 1999, including Supplement to Appraisal
10.16 Appraisal prepared by Valuation Associates of CNL Income Fund XV, Ltd.,
dated January 6, 1999, including Supplement to Appraisal
10.17 Appraisal prepared by Valuation Associates of CNL Income Fund XVI, Ltd.,
dated January 6, 1999, including Supplement to Appraisal
10.18 Appraisal prepared by Valuation Associates of CNL Income Fund XVII,
Ltd., dated January 6, 1999, including Supplement to Appraisal
10.19 Appraisal prepared by Valuation Associates of CNL Income Fund XVIII,
Ltd., dated January 6, 1999, including Supplement to Appraisal
10.20 Fairness Opinion prepared by Legg Mason Wood Walker, Incorporated for
CNL Income Fund, Ltd., dated March 10, 1999 (filed as Appendix A to the
Prospectus Supplement for CNL Income Fund, Ltd., constituting a part of
this Registration Statement on Form S-4, File No. 333- )
10.21 Fairness Opinion prepared by Legg Mason Wood Walker, Incorporated for
CNL Income Fund II, Ltd., dated March 10, 1999 (filed as Appendix A to
the Prospectus Supplement for CNL Income Fund II, Ltd., constituting a
part of this Registration Statement on Form S-4, File No. 333- )
10.22 Fairness Opinion prepared by Legg Mason Wood Walker, Incorporated for
CNL Income Fund III, Ltd., dated March 10, 1999 (filed as Appendix A to
the Prospectus Supplement for CNL Income Fund III, Ltd., constituting a
part of this Registration Statement on Form S-4, File No.
333- )
10.23 Fairness Opinion prepared by Legg Mason Wood Walker, Incorporated for
CNL Income Fund IV, Ltd., dated March 10, 1999 (filed as Appendix A to
the Prospectus Supplement for CNL Income Fund IV, Ltd., constituting a
part of this Registration Statement on Form S-4, File No.
333- )
10.24 Fairness Opinion prepared by Legg Mason Wood Walker, Incorporated for
CNL Income Fund V, Ltd., dated March 10, 1999 (filed as Appendix A to
the Prospectus Supplement for CNL Income Fund V, Ltd., constituting a
part of this Registration Statement on Form S-4, File No.
333- )
10.25 Fairness Opinion prepared by Legg Mason Wood Walker, Incorporated for
CNL Income Fund VI, Ltd., dated March 10, 1999 (filed as Appendix A to
the Prospectus Supplement for CNL Income Fund VI, Ltd., constituting a
part of this Registration Statement on Form S-4, File No.
333- )
10.26 Fairness Opinion prepared by Legg Mason Wood Walker, Incorporated for
CNL Income Fund VII, Ltd., dated March 10, 1999 (filed as Appendix A to
the Prospectus Supplement for CNL Income Fund VII, Ltd., constituting a
part of this Registration Statement on Form S-4, File No. 333- )
10.27 Fairness Opinion prepared by Legg Mason Wood Walker, Incorporated for
CNL Income Fund VIII, Ltd., dated March 10, 1999 (filed as Appendix A
to the Prospectus Supplement for CNL Income Fund VIII, Ltd.,
constituting a part of this Registration Statement on Form S-4, File
No. 333- )
10.28 Fairness Opinion prepared by Legg Mason Wood Walker, Incorporated for
CNL Income Fund IX, Ltd., dated March 10, 1999 (filed as Appendix A to
the Prospectus Supplement for CNL Income Fund IX, Ltd., constituting a
part of this Registration Statement on Form S-4, File No.
333- )
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
10.29 Fairness Opinion prepared by Legg Mason Wood Walker, Incorporated for
CNL Income Fund X, Ltd., dated March 10, 1999 (filed as Appendix A to
the Prospectus Supplement for CNL Income Fund X, Ltd., constituting a
part of this Registration Statement on Form S-4, File No.
333- )
10.30 Fairness Opinion prepared by Legg Mason Wood Walker, Incorporated for
CNL Income Fund XI, Ltd., dated March 10, 1999 (filed as Appendix A to
the Prospectus Supplement for CNL Income Fund XI, Ltd., constituting a
part of this Registration Statement on Form S-4, File No.
333- )
10.31 Fairness Opinion prepared by Legg Mason Wood Walker, Incorporated for
CNL Income Fund XII, Ltd., dated March 10, 1999 (filed as Appendix A
to the Prospectus Supplement for CNL Income Fund XII, Ltd.,
constituting a part of this Registration Statement on Form S-4, File
No. 333- )
10.32 Fairness Opinion prepared by Legg Mason Wood Walker, Incorporated for
CNL Income Fund XIII, Ltd., dated March 10, 1999 (filed as Appendix A
to the Prospectus Supplement for CNL Income Fund XIII, Ltd.,
constituting a part of this Registration Statement on Form S-4, File
No. 333- )
10.33 Fairness Opinion prepared by Legg Mason Wood Walker, Incorporated for
CNL Income Fund XIV, Ltd., dated March 10, 1999 (filed as Appendix A
to the Prospectus Supplement for CNL Income Fund XIV, Ltd.,
constituting a part of this Registration Statement on Form S-4, File
No. 333- )
10.34 Fairness Opinion prepared by Legg Mason Wood Walker, Incorporated for
CNL Income Fund XV, Ltd., dated March 10, 1999 (filed as Appendix A to
the Prospectus Supplement for CNL Income Fund XV, Ltd., constituting a
part of this Registration Statement on Form S-4, File No. 333- )
10.35 Fairness Opinion prepared by Legg Mason Wood Walker, Incorporated for
CNL Income Fund XVI, Ltd., dated March 10, 1999 (filed as Appendix A
to the Prospectus Supplement for CNL Income Fund XVI, Ltd.,
constituting a part of this Registration Statement on Form S-4, File
No. 333- )
10.36 Fairness Opinion prepared by Legg Mason Wood Walker, Incorporated for
CNL Income Fund XVII, Ltd., dated March 10, 1999 (filed as Appendix A
to the Prospectus Supplement for CNL Income Fund XVII, Ltd.,
constituting a part of this Registration Statement on Form S-4, File
No. 333- )
10.37 Fairness Opinion prepared by Legg Mason Wood Walker, Incorporated for
CNL Income Fund XVIII, Ltd., dated March 10, 1999 (filed as Appendix A
to the Prospectus Supplement for CNL Income Fund XVIII, Ltd.,
constituting a part of this Registration Statement on Form S-4, File
No. 333- )
10.38 Agreement and Plan of Merger, by and among the Registrant, CFA
Acquisition Corp., CNL Fund Advisors, Inc. and CNL Group, Inc., dated
March 11, 1999
10.39 Agreement and Plan of Merger, by and among the Registrant, CFC
Acquisition Corp., CFS Acquisition Corp., CNL Financial Corp., CNL
Financial Services, Inc., CNL Group, Inc., Five Arrows Realty
Securities L.L.C., Robert A. Bourne, Curtis B. McWilliams and Brian
Fluck, dated March 11, 1999
10.40* Form of Registration Rights Agreement by and among APF, and , ,
and CNL Group, Inc. dated , 1999
10.41* Form of Registration Rights Agreement by and among APF and ,
dated , 1999
10.42* Employment Agreement by and between Curtis B. McWilliams and
Registrant, dated , 1999
</TABLE>
II-5
<PAGE>
<TABLE>
<C> <S>
10.43* Employment Agreement by and between John T. Walker and Registrant,
dated , 1999
10.44* Employment Agreement by and between Steven D. Shackelford and
Registrant, dated , 1999
10.45* Employment Agreement by and between Howard J. Singer and Registrant,
dated , 1999
10.46* Employment Agreement by and between Barry L. Goff and Registrant, dated
, 1999
10.47* Employment Agreement by and between Michael I. Wood and Registrant,
dated , 1999
10.48* Employment Agreement by and between Robert W. Chapin, Jr. and
Registrant, dated , 1999
10.49* Employment Agreement by and between Timothy J. Neville and Registrant,
dated , 1999
10.50* Amended and Restated Agreement of Limited Partnership of CNL APF
Partners, L.P.
11* Statement regarding calculation of net earnings per share
21 Subsidiaries of the Registrant
23.1* Consent of Shaw Pittman Potts & Trowbridge (included as part of Exhibit
5.1)
23.2 Consent of PricewaterhouseCoopers LLP
23.3 Consent of Arthur Andersen LLP
23.4 Consent of McDirmit, Davis, Lauteria, Puckett, Vogel & Company, P.A.
23.5 Consent of Valuation Associates
23.6* Consent of Legg Mason
24 Power of Attorney (included on signature page to the Registration
Statement)
25* Statement of eligibility of the Trustee
99.1 Financial Statement Schedules
99.2 Consent Form with power of attorney and Cash/Notes Option Election
</TABLE>
- --------
* To be filed by amendment.
(b) Financial Statement Schedules
Reference is made to Exhibit 99.1 above.
(c) Reports, Opinions and Appraisals
The opinions of Legg Mason Wood Walker, Incorporated as to the fairness,
from a financial point of view, of (i) the APF Share consideration offered by
APF with respect to each of the individual Funds and their limited partners;
(ii) the aggregate APF Share consideration offered with respect to all of the
Funds; and (iii) the method of allocating the APF share consideration among the
Funds are attached. Supplements of the Funds as Appendix A. The appraisals
prepared by Valuation Associates with respect to the Funds are attached as
Exhibits 10.2 through 10.19. The opinion of Shaw Pittman Potts & Trowbridge as
to the federal income tax consequences of the proposed acquisition of the Funds
by the Registrant is filed hereto as Exhibit 8.
Item 22. Undertakings
The undersigned Registrant hereby undertakes:
(i) that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form;
II-6
<PAGE>
(ii) that every prospectus (a) that is filed pursuant to paragraph (i)
above, or (b) that purports to meet the requirements of Section 10(a)(3) of
the Securities Act of 1933, as amended (the "Securities Act") and is used
in connection with an offering of securities subject to Rule 415, will be
filed as a part of an amendment to the registration statement and will not
be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities Act, each post-effective
amendment shall be deemed to be a new registration relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof;
(iii) for purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective; and
(iv) for the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Orange County, State of Florida, on
this 12th day of March, 1999.
CNL American Properties Fund, Inc.
/s/ James M. Seneff, Jr.
By: _________________________________
James M. Seneff, Jr.
Chief Executive Officer
POWER OF ATTORNEY
Know all Persons by These Presents, that each individual whose signature
appears below constitutes and appoints each of James M. Seneff, Jr. and Robert
A. Bourne his true and lawful attorney-in-fact and agent, with power of
substitution and resubstitution, for him or her and in his or her name, place
and stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorneys-in-
fact and agents, and each of them, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about
the premises, as fully to all intents and purposes as he or she might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents, or any of them, or their, his or her substitutes or substitute, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Position Date
--------- -------- ----
<S> <C> <C>
/s/ James M. Seneff, Jr. Chairman of the Board of March 12, 1999
______________________________________ Directors and Chief
James M. Seneff, Jr. Executive Officer
(principal executive
officer)
/s/ Robert A. Bourne President and Director March 12, 1999
______________________________________
Robert A. Bourne
/s/ Steven D. Shackelford Chief Financial Officer March 12, 1999
______________________________________ (principal financial and
Steven D. Shackelford accounting officer)
/s/ G. Richard Hostetter Director March 12, 1999
______________________________________
G. Richard Hostetter
/s/ J. Joseph Kruse Director March 12, 1999
______________________________________
J. Joseph Kruse
/s/ Richard C. Huseman Director March 12, 1999
______________________________________
Richard C. Huseman
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<C> <S>
2.1 Agreement and Plan of Merger by and between the Registrant and CNL
Income Fund, Ltd., dated March 11, 1999 (filed as Appendix B to
the Prospectus Supplement for CNL Income Fund, Ltd., constituting
a part of this Registration Statement on Form S-4, File No.
333- )
2.2 Agreement and Plan of Merger by and between the Registrant and CNL
Income Fund II, Ltd., dated March 11, 1999 (filed as Appendix B
to the Prospectus Supplement for CNL Income Fund II, Ltd.,
constituting a part of this Registration Statement on Form S-4,
File No.
333- )
2.3 Agreement and Plan of Merger by and between the Registrant and CNL
Income Fund III, Ltd., dated March 11, 1999 (filed as Appendix B
to the Prospectus Supplement for CNL Income Fund III, Ltd.,
constituting a part of this Registration Statement on Form S-4,
File No. 333- )
2.4 Agreement and Plan of Merger by and between the Registrant and CNL
Income Fund IV, Ltd., dated March 11, 1999 (filed as Appendix B
to the Prospectus Supplement for CNL Income Fund IV, Ltd.,
constituting a part of this Registration Statement on Form S-4,
File No. 333- )
2.5 Agreement and Plan of Merger by and between the Registrant and CNL
Income Fund V, Ltd., dated March 11, 1999 (filed as Appendix B to
the Prospectus Supplement for CNL Income Fund V, Ltd.,
constituting a part of this Registration Statement on Form S-4,
File No.
333- )
2.6 Agreement and Plan of Merger by and between the Registrant and CNL
Income Fund VI, Ltd., dated March 11, 1999 (filed as Appendix B
to the Prospectus Supplement for CNL Income Fund VI, Ltd.,
constituting a part of this Registration Statement on Form S-4,
File No. 333- )
2.7 Agreement and Plan of Merger by and between the Registrant and CNL
Income Fund VII, Ltd., dated March 11, 1999 (filed as Appendix B
to the Prospectus Supplement for CNL Income Fund VII, Ltd.,
constituting a part of this Registration Statement on Form S-4,
File No. 333- )
2.8 Agreement and Plan of Merger by and between the Registrant and CNL
Income Fund VIII, Ltd., dated March 11, 1999 (filed as Appendix B
to the Prospectus Supplement for CNL Income Fund VIII, Ltd.,
constituting a part of this Registration Statement on Form S-4,
File No. 333- )
2.9 Agreement and Plan of Merger by and between the Registrant and CNL
Income Fund IX, Ltd., dated March 11, 1999 (filed as Appendix B
to the Prospectus Supplement for CNL Income Fund IX, Ltd.,
constituting a part of this Registration Statement on Form S-4,
File No. 333- )
2.10 Agreement and Plan of Merger by and between the Registrant and CNL
Income Fund X, Ltd., dated March 11, 1999 (filed as Appendix B to
the Prospectus Supplement for CNL Income Fund X, Ltd.,
constituting a part of this Registration Statement on Form S-4,
File No.
333- )
2.11 Agreement and Plan of Merger by and between the Registrant and CNL
Income Fund XI, Ltd., dated March 11, 1999 (filed as Appendix B
to the Prospectus Supplement for CNL Income Fund XI, Ltd.,
constituting a part of this Registration Statement on Form S-4,
File No. 333- )
</TABLE>
<PAGE>
<TABLE>
<C> <S>
2.12 Agreement and Plan of Merger by and between the Registrant and CNL
Income Fund XII, Ltd., dated March 11, 1999 (filed as Appendix B to the
Prospectus Supplement for CNL Income Fund XII, Ltd., constituting a
part of this Registration Statement on Form S-4, File No.
333- )
2.13 Agreement and Plan of Merger by and between the Registrant and CNL
Income Fund XIII, Ltd., dated March 11, 1999 (filed as Appendix B to
the Prospectus Supplement for CNL Income Fund XIII, Ltd., constituting
a part of this Registration Statement on Form S-4, File No.
333- )
2.14 Agreement and Plan of Merger by and between the Registrant and CNL
Income Fund XIV, Ltd., dated March 11, 1999 (filed as Appendix B to the
Prospectus Supplement for CNL Income Fund XIV, Ltd., constituting a
part of this Registration Statement on Form S-4, File No.
333- )
2.15 Agreement and Plan of Merger by and between the Registrant and CNL
Income Fund XV, Ltd., dated March 11, 1999 (filed as Appendix B to the
Prospectus Supplement for CNL Income Fund XV, Ltd., constituting a part
of this Registration Statement on Form S-4, File No.
333- )
2.16 Agreement and Plan of Merger by and between the Registrant and CNL
Income Fund XVI, Ltd., dated March 11, 1999 (filed as Appendix B to the
Prospectus Supplement for CNL Income Fund XVI, Ltd., constituting a
part of this Registration Statement on Form S-4, File No.
333- )
2.17 Agreement and Plan of Merger by and between the Registrant and CNL
Income Fund XVII, Ltd., dated March 11, 1999 (filed as Appendix B to
the Prospectus Supplement for CNL Income Fund XVII, Ltd., constituting
a part of this Registration Statement on Form S-4, File No.
333- )
2.18 Agreement and Plan of Merger by and between the Registrant and CNL
Income Fund XVIII, Ltd., dated March 11, 1999 (filed as Appendix B to
the Prospectus Supplement for CNL Income Fund XVIII, Ltd., constituting
a part of this Registration Statement on Form S-4, File No.
333- )
3.1* Amended and Restated Articles of Incorporation of the Registrant
3.2 Bylaws of the Registrant
4.1* Specimen certificate evidencing shares of common stock, par value $.01
(the "Common Stock"), of the Registrant
4.2 Form of Indenture, dated , 1999, between the Registrant and , as
Trustee
4.3 Form of APF % Callable Notes, due 2006 (filed as an exhibit to
Exhibit 4.2)
5.1* Opinion and consent of Shaw Pittman Potts & Trowbridge as to the
legality of the Common Stock
8* Opinion of Shaw Pittman Potts & Trowbridge, special tax counsel, as to
certain federal income tax matters
10.1* 1999 Performance Incentive Plan
10.2 Appraisal prepared by Valuation Associates of CNL Income Fund, Ltd.,
dated January 6, 1999, including Supplement to Appraisal
10.3 Appraisal prepared by Valuation Associates of CNL Income Fund II, Ltd.,
dated January 6, 1999, including Supplement to Appraisal
10.4 Appraisal prepared by Valuation Associates of CNL Income Fund III, Ltd.,
dated January 6, 1999, including Supplement to Appraisal dated
10.5 Appraisal prepared by Valuation Associates of CNL Income Fund IV, Ltd.,
dated January 6, 1999, including Supplement to Appraisal dated
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.6 Appraisal prepared by Valuation Associates of CNL Income Fund V, Ltd.,
dated January 6, 1999, including Supplement to Appraisal
10.7 Appraisal prepared by Valuation Associates of CNL Income Fund VI, Ltd.,
dated January 6, 1999, including Supplement to Appraisal
10.8 Appraisal prepared by Valuation Associates of CNL Income Fund VII, Ltd.,
dated January 6, 1999, including Supplement to Appraisal
10.9 Appraisal prepared by Valuation Associates of CNL Income Fund VIII,
Ltd., dated January 6, 1999, including Supplement to Appraisal
10.10 Appraisal prepared by Valuation Associates of CNL Income Fund IX, Ltd.,
dated January 6, 1999, including Supplement to Appraisal
10.11 Appraisal prepared by Valuation Associates of CNL Income Fund X, Ltd.,
dated January 6, 1999, including Supplement to Appraisal
10.12 Appraisal prepared by Valuation Associates of CNL Income Fund XI, Ltd.,
dated January 6, 1999, including Supplement to Appraisal
10.13 Appraisal prepared by Valuation Associates of CNL Income Fund XII, Ltd.,
dated January 6, 1999, including Supplement to Appraisal
10.14 Appraisal prepared by Valuation Associates of CNL Income Fund XIII,
Ltd., dated January 6, 1999, including Supplement to Appraisal
10.15 Appraisal prepared by Valuation Associates of CNL Income Fund XIV, Ltd.,
dated January 6, 1999, including Supplement to Appraisal
10.16 Appraisal prepared by Valuation Associates of CNL Income Fund XV, Ltd.,
dated January 6, 1999, including Supplement to Appraisal
10.17 Appraisal prepared by Valuation Associates of CNL Income Fund XVI, Ltd.,
dated January 6, 1999, including Supplement to Appraisal
10.18 Appraisal prepared by Valuation Associates of CNL Income Fund XVII,
Ltd., dated January 6, 1999, including Supplement to Appraisal
10.19 Appraisal prepared by Valuation Associates of CNL Income Fund XVIII,
Ltd., dated January 6, 1999, including Supplement to Appraisal
10.20 Fairness Opinion prepared by Legg Mason Wood Walker, Incorporated for
CNL Income Fund, Ltd., dated March 10, 1999 (filed as Appendix A to the
Prospectus Supplement for CNL Income Fund, Ltd., constituting a part of
this Registration Statement on Form S-4, File No.
333- )
10.21 Fairness Opinion prepared by Legg Mason Wood Walker, Incorporated for
CNL Income Fund II, Ltd., dated March 10, 1999 (filed as Appendix A to
the Prospectus Supplement for CNL Income Fund II, Ltd., constituting a
part of this Registration Statement on Form S-4, File No.
333- )
10.22 Fairness Opinion prepared by Legg Mason Wood Walker, Incorporated for
CNL Income Fund III, Ltd., dated March 10, 1999 (filed as Appendix A to
the Prospectus Supplement for CNL Income Fund III, Ltd., constituting a
part of this Registration Statement on Form S-4, File No.
333- )
10.23 Fairness Opinion prepared by Legg Mason Wood Walker, Incorporated for
CNL Income Fund IV, Ltd., dated March 10, 1999 (filed as Appendix A to
the Prospectus Supplement for CNL Income Fund IV, Ltd., constituting a
part of this Registration Statement on Form S-4, File No.
333- )
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.24 Fairness Opinion prepared by Legg Mason Wood Walker, Incorporated for
CNL Income Fund V, Ltd., dated March 10, 1999 (filed as Appendix A to
the Prospectus Supplement for CNL Income Fund V, Ltd., constituting a
part of this Registration Statement on Form S-4, File No.
333- )
10.25 Fairness Opinion prepared by Legg Mason Wood Walker, Incorporated for
CNL Income Fund VI, Ltd., dated March 10, 1999 (filed as Appendix A to
the Prospectus Supplement for CNL Income Fund VI, Ltd., constituting a
part of this Registration Statement on Form S-4, File No.
333- )
10.26 Fairness Opinion prepared by Legg Mason Wood Walker, Incorporated for
CNL Income Fund VII, Ltd., dated March 10, 1999 (filed as Appendix A to
the Prospectus Supplement for CNL Income Fund VII, Ltd., constituting a
part of this Registration Statement on Form S-4, File No.
333- )
10.27 Fairness Opinion prepared by Legg Mason Wood Walker, Incorporated for
CNL Income Fund VIII, Ltd., dated March 10, 1999 (filed as Appendix A
to the Prospectus Supplement for CNL Income Fund VIII, Ltd.,
constituting a part of this Registration Statement on Form S-4, File
No.
333- )
10.28 Fairness Opinion prepared by Legg Mason Wood Walker, Incorporated for
CNL Income Fund IX, Ltd., dated March 10, 1999 (filed as Appendix A to
the Prospectus Supplement for CNL Income Fund IX, Ltd., constituting a
part of this Registration Statement on Form S-4, File No.
333- )
10.29 Fairness Opinion prepared by Legg Mason Wood Walker, Incorporated for
CNL Income Fund X, Ltd., dated March 10, 1999 (filed as Appendix A to
the Prospectus Supplement for CNL Income Fund X, Ltd., constituting a
part of this Registration Statement on Form S-4, File No.
333- )
10.30 Fairness Opinion prepared by Legg Mason Wood Walker, Incorporated for
CNL Income Fund XI, Ltd., dated March 10, 1999 (filed as Appendix A to
the Prospectus Supplement for CNL Income Fund XI, Ltd., constituting a
part of this Registration Statement on Form S-4, File No.
333- )
10.31 Fairness Opinion prepared by Legg Mason Wood Walker, Incorporated for
CNL Income Fund XII, Ltd., dated March 10, 1999 (filed as Appendix A to
the Prospectus Supplement for CNL Income Fund XII, Ltd., constituting a
part of this Registration Statement on Form S-4, File No.
333- )
10.32 Fairness Opinion prepared by Legg Mason Wood Walker, Incorporated for
CNL Income Fund XIII, Ltd., dated March 10, 1999 (filed as Appendix A
to the Prospectus Supplement for CNL Income Fund XIII, Ltd.,
constituting a part of this Registration Statement on Form S-4, File
No. 333- )
10.33 Fairness Opinion prepared by Legg Mason Wood Walker, Incorporated for
CNL Income Fund XIV, Ltd., dated March 10, 1999 (filed as Appendix A to
the Prospectus Supplement for CNL Income Fund XIV, Ltd., constituting a
part of this Registration Statement on Form S-4, File No. 333- )
10.34 Fairness Opinion prepared by Legg Mason Wood Walker, Incorporated for
CNL Income Fund XV, Ltd., dated March 10, 1999 (filed as Appendix A to
the Prospectus Supplement for CNL Income Fund XV, Ltd., constituting a
part of this Registration Statement on Form S-4, File No. 333- )
10.35 Fairness Opinion prepared by Legg Mason Wood Walker, Incorporated for
CNL Income Fund XVI, Ltd., dated March 10, 1999 (filed as Appendix A to
the Prospectus Supplement for CNL Income Fund XVI, Ltd., constituting a
part of this Registration Statement on Form S-4, File No. 333- )
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.36 Fairness Opinion prepared by Legg Mason Wood Walker, Incorporated for
CNL Income Fund XVII, Ltd., dated March 10, 1999 (filed as Appendix A
to the Prospectus Supplement for CNL Income Fund XVII, Ltd.,
constituting a part of this Registration Statement on Form S-4, File
No. 333- )
10.37 Fairness Opinion prepared by Legg Mason Wood Walker, Incorporated for
CNL Income Fund XVIII, Ltd., dated March 10, 1999 (filed as Appendix A
to the Prospectus Supplement for CNL Income Fund XVIII, Ltd.,
constituting a part of this Registration Statement on Form S-4, File
No. 333- )
10.38 Agreement and Plan of Merger, by and among the Registrant, CFA
Acquisition Corp., CNL Fund Advisors, Inc. and CNL Group, Inc., dated
March 11, 1999
10.39 Agreement and Plan of Merger, by and among the Registrant, CFC
Acquisition Corp., CFS Acquisition Corp., CNL Financial Corp., CNL
Financial Services, Inc., CNL Group, Inc., Five Arrows Realty
Securities L.L.C., Robert A. Bourne, Curtis B. McWilliams and Brian
Fluck, dated March 11, 1999
10.40* Form of Registration Rights Agreement by and among APF, and , ,
and CNL Group, Inc. dated , 1999
10.41* Form of Registration Rights Agreement by and among APF and ,
dated , 1999
10.42* Employment Agreement by and between Curtis B. McWilliams and
Registrant, dated , 1999
10.43* Employment Agreement by and between John T. Walker and Registrant,
dated , 1999
10.44* Employment Agreement by and between Steven D. Shackelford and
Registrant, dated , 1999
10.45* Employment Agreement by and between Howard J. Singer and Registrant,
dated , 1999
10.46* Employment Agreement by and between Barry L. Goff and Registrant, dated
, 1999
10.47* Employment Agreement by and between Michael I. Wood and Registrant,
dated , 1999
10.48* Employment Agreement by and between Robert W. Chapin, Jr. and
Registrant, dated , 1999
10.49* Employment Agreement by and between Timothy J. Neville and Registrant,
dated , 1999
10.50* Amended and Restated Agreement of Limited Partnership Agreement of CNL
APF Partners, L.P.
11* Statement regarding calculation of net earnings per share
21 Subsidiaries of the Registrant
23.1* Consent of Shaw Pittman Potts & Trowbridge (included as part of Exhibit
5.1)
23.2 Consent of PricewaterhouseCoopers LLP
23.3 Consent of Arthur Andersen LLP
23.4 Consent of McDirmit, Davis, Lauteria, Puckett, Vogel & Company, P.A.
23.5 Consent of Valuation Associates
23.6* Consent of Legg Mason
24 Power of Attorney (included on signature page to the Registration
Statement)
25* Statement of eligibility of the Trustee
99.1 Financial Statement Schedules
99.2 Consent Form with power of attorney and Cash/Notes Option Election
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
Exhibit 3.2
CNL American Properties Fund, Inc. Bylaws
<PAGE>
BYLAWS OF
CNL AMERICAN PROPERTIES FUND, INC.
The Bylaws of CNL AMERICAN PROPERTIES FUND, INC., a corporation organized
under the laws of the State of Maryland (the "Company"), having The Corporation
Trust Incorporated as its resident agent located at 32 South Street, Baltimore,
Maryland 21202, are as follows:
ARTICLE I
OFFICES
SECTION 1. PRINCIPAL OFFICE. The principal office of the Company shall
---------- ----------------
be located at such place or places as the Board of Directors may designate in
the State of Maryland.
SECTION 2. ADDITIONAL OFFICES. The Company may have additional offices
---------- ------------------
at such places as the Board of Directors may from time to time determine or the
business of the Company may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 1. PLACE. All meetings of stockholders shall be held at the
---------- -----
principal office of the Company or at such other place within the United States
as shall be stated in the notice of the meeting.
SECTION 2. ANNUAL MEETING. An annual meeting of the stockholders for the
---------- --------------
election of Directors, as such term is defined below, and the transaction of any
business within the powers of the Company shall be held upon reasonable notice
and not less than 30 days after delivery of the annual report.
SECTION 3. SPECIAL MEETINGS. Subject to the rights of the holders of any
---------- ----------------
series of Preferred Shares (as such term is defined in the Company's Articles of
Incorporation, as amended (the "Articles of Incorporation")) to elect additional
Directors under specified circumstances, special meetings of the stockholders
may be called by (i) the chairman of the Board of Directors; (ii) a majority of
the Board of Directors; (iii) a majority of the Independent Directors (as such
term is defined herein); or (iv) the secretary at the request in writing of
stockholders holding outstanding Voting Shares (as such term is defined in the
Articles of Incorporation) representing at least 10% of all votes entitled to be
cast on any issue proposed to be considered at any such special meeting, not
less than 15 nor more than 60 days after such request is received. Written or
printed notice of any special meeting called pursuant to subsection (iv) will be
provided to all stockholders within ten days after any such request is received,
stating the time and place of the meeting specified in the request, which shall
be a time and place convenient to the stockholders.
SECTION 4. NOTICE. Not less than 15 nor more than 60 days before each
---------- ------
meeting of stockholders, the secretary shall give to each stockholder entitled
to vote at such
<PAGE>
meeting, and to each stockholder not entitled to vote who is entitled to notice
of the meeting, written or printed notice stating the time and place of the
meeting and, in the case of a special meeting or as otherwise may be required by
statute or these Bylaws, the purpose for which the meeting is called, either by
mail to the address of such stockholder as it appears on the records of the
Company, or by presenting it to such stockholder personally or by leaving it at
his residence or usual place of business. If mailed, such notice shall be deemed
to be given when deposited in the United States mail addressed to the
stockholder at his post office address as it appears on the records of the
Company, with postage thereon prepaid.
SECTION 5. SCOPE OF NOTICE. Any business of the Company may be
---------- ---------------
transacted at an annual meeting of stockholders without being specifically
designated in the notice, except such business as is required by statute to be
stated in such notice. No business shall be transacted at a special meeting of
stockholders except as specifically designated in the notice.
SECTION 6. QUORUM. At any meeting of stockholders, the presence in
---------- ------
person or by proxy of stockholders holding 50% of the then outstanding shares
shall constitute a quorum; but this section shall not affect any requirement
under any statute, any other provision of these Bylaws, or the Articles of
Incorporation for the vote necessary for the adoption of any measure. If,
however, such quorum shall not be present at any meeting of the stockholders,
the stockholders entitled to vote at such meeting, present in person or by
proxy, shall have power to adjourn the meeting from time to time to a date not
more than 120 days after the original record date without notice other than
announcement at the meeting. At such adjourned meeting at which a quorum shall
be present, any business may be transacted which might have been transacted at
the meeting as originally notified.
SECTION 7. VOTING. A majority of all the votes cast at a meeting of
---------- ------
stockholders duly called and at which a quorum is present shall be sufficient to
elect a Director, notwithstanding the concurrence of the Board of Directors to
such action. Each share may be voted for as many individuals as there are
Directors to be elected and for whose election the share is entitled to be
voted. A majority of the votes cast at a meeting of stockholders duly called and
at which a quorum is present shall be sufficient to approve any other matter
which may properly come before the meeting, unless more than a majority of the
votes cast is required by statute or by the Articles of Incorporation. Unless
otherwise provided in the Articles of Incorporation, each Common Share owned of
record on the applicable record date shall be entitled to one vote on each
matter submitted to a vote at a meeting of stockholders. The Company's Advisor
(as such term is defined in the Articles of Incorporation), the Directors and
any affiliates are prohibited from voting on or consenting to matters submitted
to the stockholders regarding the removal of the Advisor, Directors or any
affiliate or any transaction between the Company and any of them, nor will such
shares be counted in determining a quorum or a majority in such circumstances.
SECTION 8. PROXIES. A stockholder may vote the shares owned of record by
---------- -------
him, either in person or by proxy executed in writing by the stockholder or by
his duly authorized attorney in fact. Such proxy shall be filed with the
secretary of the Company before
-2-
<PAGE>
or at the time of the meeting. No proxy shall be valid after eleven months from
the date of its execution, unless otherwise provided in the proxy.
SECTION 9. VOTING OF SHARES BY CERTAIN HOLDERS. Shares registered in the
---------- -----------------------------------
name of a corporation, partnership, trust or other entity, if entitled to be
voted, may be voted by the chief executive officer or a vice president, a
general partner, trustee or other fiduciary thereof, as the case may be, or a
proxy appointed by any of the foregoing individuals, unless some other person
who has been appointed to vote such shares pursuant to a bylaw or a resolution
of the board of directors of such corporation or other entity presents a
certified copy of such bylaw or resolution, in which case such person may vote
such shares. Any trustee or other fiduciary may vote shares registered in his
name as such fiduciary, either in person or by proxy.
Shares of the Company directly or indirectly owned by it shall not be
voted at any meeting and shall not be counted in determining the total number of
outstanding shares entitled to be voted at any given time, unless they are held
by it in a fiduciary capacity, in which case they may be voted and shall be
counted in determining the total number of outstanding shares at any given time.
The Directors may adopt by resolution a procedure by which a stockholder
may certify in writing to the Company that any shares registered in the name of
the stockholder are held for the account of a specific person other than the
stockholder. The resolution shall set forth: the class of stockholders who may
make the certification, the purpose for which the certification may be made, the
form of certification and the information to be contained in it; if the
certification is with respect to a record date or closing of the share transfer
books, the time after the record date or closing of the share transfer books
within which the certification must be received by the Company; and any other
provisions with respect to the procedure which the Directors consider necessary
or desirable. On receipt of such certification, the person specified in the
certification shall be regarded as, for the purposes set forth in the
certification, the stockholder of record of the specified shares in place of the
stockholder who makes the certification.
SECTION 10. INSPECTORS. At any meeting of stockholders, the chairman of
----------- ----------
the meeting may, or upon the request of any stockholder shall, appoint one or
more persons as inspectors for such meeting. Such inspectors shall ascertain and
report the number of shares represented at the meeting based upon their
determination of the validity and effect of proxies, count all votes, report the
results and perform such other acts as are proper to conduct the election and
voting with impartiality and fairness to all the stockholders.
Each report of an inspector shall be in writing and signed by him or by
a majority of them if there is more than one inspector acting at such meeting.
If there is more than one inspector, the report of a majority shall be the
report of the inspectors. The report of the inspector or inspectors on the
number of shares represented at the meeting and the results of the voting shall
be prima facie evidence thereof.
-3-
<PAGE>
SECTION 11. REPORTS TO STOCKHOLDERS.
-----------------------
(a) Not later than 120 days after the close of each fiscal year of the
Company, the Directors shall deliver or cause to be delivered a report of the
business and operations of the Company during such fiscal year to the
stockholders, containing (i) financial statements prepared in accordance with
generally accepted accounting principles which are audited and reported on by
independent certified public accountants; (ii) the ratio of the costs of raising
capital during the period to the capital raised; (iii) the aggregate amount of
advisory fees and the aggregate amount of other fees paid to the Company's
Advisor and any affiliate of the Advisor by the Company and including fees or
charges paid to the Advisor and any affiliate of the Advisor by third parties
doing business with the Company; (iv) the Operating Expenses (as such term is
defined in the Articles of Incorporation) of the Company, stated as a percentage
of, for a specified period, the average of the aggregate book value of the
assets of the Company invested, directly or indirectly, in Properties and loans
secured by real estate before reserves for depreciation or bad debts or other
similar non-cash reserves are subtracted, computed by taking the average of such
values at the end of each month during such period as a percentage of the total
revenues applicable to such period, less the total expenses applicable to such
period excluding additions to reserves for depreciation, bad debts or other
similar non-cash reserves, and excluding the gain from the sale of the Company's
assets; (v) a report from the Independent Directors that the policies being
followed by the Company are in the best interests of its stockholders and the
basis for such determination; (vi) separately stated, full disclosure of all
material terms, factors, and circumstances surrounding any and all transactions
involving the Company, Directors, Advisors and any Affiliate thereof occurring
in the year for which the annual report is made; and (vii) Distributions, as
such term is defined in the Company's Articles of Incorporation, to the
stockholders for the period, identifying the source of such Distributions, and
if such information is not available at the time of the distribution, a written
explanation of the relevant circumstances will accompany the Distributions (with
the statement as to the source of Distributions to be sent to stockholders not
later than 60 days after the end of the fiscal year in which the distribution
was made) and such further information as the Board of Directors may determine
is required pursuant to any law or regulation to which the Company is subject. A
signed copy of the annual report and the accountant's certificate shall be filed
by the Directors with the State Department of Assessments and Taxation of
Maryland, and with such other governmental agencies as may be required by law
and as the Directors may deem appropriate. Such report shall be submitted at the
annual meeting of stockholders and, within 20 days after such meeting, placed on
file at the Company's principal office.
(b) Not later than 45 days after the end of each of the first three
quarterly periods of each fiscal year and upon written request by a stockholder,
the Directors shall deliver or cause to be delivered an interim report to such
requesting stockholder containing unaudited financial statements for such
quarter and for the period from the beginning of the fiscal year to the end of
such quarter, and such further information as the Directors may determine is
required pursuant to any law or regulation to which the Company is subject.
-4-
<PAGE>
SECTION 12. NOMINATIONS AND STOCKHOLDER BUSINESS.
------------------------------------
(a) Annual Meetings of Stockholders.
--- -------------------------------
(1) With respect to an annual meeting of stockholders,
nominations of persons for election to the Board of Directors and the proposal
of business to be considered by the stockholders may be made only (i) by or at
the direction of the Board of Directors or (ii) by any stockholder of the
Company who was a stockholder of record at the time of giving of notice, who is
entitled to vote at the meeting and who complied with the notice procedures set
forth in this Section 12(a).
(2) For nominations or other business to be properly brought
before an annual meeting by a stockholder pursuant to clause (ii) of paragraph
(a)(1) of this Section 12, the stockholder must have given timely notice thereof
in writing to the secretary of the Company. To be timely, a stockholder's notice
shall be delivered to the secretary at the principal executive offices of the
Company not less than 60 days nor more than 90 days prior to the first
anniversary of the preceding year's annual meeting; provided, however, that
--------
in the event that the date of the annual meeting is advanced by more than 30
days or delayed by more than 60 days from such anniversary date, notice by the
stockholder to be timely must be so delivered not earlier than the 90th day
prior to such annual meeting and not later than the close of business on the
later of the 60th day prior to such annual meeting or the tenth day following
the day on which public announcement of the date of such meeting is first made.
Such stockholder's notice shall set forth: (i) as to each person whom the
stockholder proposes to nominate for election or re-election as a Director all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of Directors, or is otherwise required, in
each case pursuant to Regulation 14A under the Securities Exchange Act of 1934,
as amended (including such person's written consent to being named in the proxy
statement as a nominee and to serving as a Director if elected); (ii) as to any
other business that the stockholder proposes to bring before the meeting, a
brief description of the business desired to be brought before the meeting, the
reasons for conducting such business at the meeting and any material interest in
such business of such stockholder and of the beneficial owner, if any, on whose
behalf the proposal is made; and (iii) as to the stockholder giving the notice
and the beneficial owner, if any, on whose behalf the nomination or proposal is
made, the name and address of such stockholder, as they appear on the Company's
books, and of such beneficial owner and the class and number of shares of the
Company which are owned beneficially and of record by such stockholder and such
beneficial owner.
(3) Notwithstanding anything in the second sentence of Section
12(a)(2) to the contrary, in the event that the number of Directors to be
elected to the Board of Directors is increased and there is no public
announcement naming all of the nominees for Director or specifying the size of
the increased Board of Directors made by the Company at least 70 days prior to
the first anniversary of the preceding year's annual meeting, a stockholder's
notice required by this Section 12(a) shall also be considered timely, but only
with respect to nominees for any new positions created by such increase, if it
shall be delivered to the secretary at the principal executive offices of the
Company not later than the close of business on the tenth day following the day
on which such public announcement is first made by the Company.
-5-
<PAGE>
(b) Special Meetings of Stockholders. Only such business shall be
--- --------------------------------
conducted at a special meeting of stockholders as shall have been brought before
the meeting pursuant to the Company's notice of meeting. Nominations of persons
for election to the Board of Directors may be made at a special meeting of
stockholders at which Directors are to be elected pursuant to the Company's
notice of meeting (i) by or at the direction of the Board of Directors or (ii)
provided that the Board of Directors has determined that Directors shall be
elected at such special meeting, by any stockholder of the Company who is a
stockholder of record at the time of giving of notice provided for in this
Section 12(b), who is entitled to vote at the meeting and who complied with the
notice procedures set forth in this Section 12(b). In the event the Company
calls a special meeting of stockholders for the purpose of electing one or more
Directors to the Board of Directors, any such stockholder may nominate a person
or persons (as the case may be) for election to such position as specified in
the Company's notice of meeting, if the stockholder's notice complies with the
requirements of Section 12(a)(2) and is delivered to the secretary at the
principal executive offices of the Company not earlier than the 90th day prior
to such special meeting and not later than the close of business on the later of
the 60th day prior to such special meeting or the tenth day following the day on
which public announcement is first made of the date of the special meeting and
of the nominees proposed by the Directors to be elected at such meeting.
(c) General.
--- -------
(1) Only such persons who are nominated in accordance with the
procedures set forth in this Section 12 shall be eligible to serve as Directors
and only such business shall be conducted at a meeting of stockholders as shall
have been brought before the meeting in accordance with the procedures set forth
in this Section 12. The presiding officer of the meeting shall have the power
and duty to determine whether a nomination or any business proposed to be
brought before the meeting was made in accordance with the procedures set forth
in this Section 12 and, if any proposed nomination or business is not in
compliance with this Section 12, to declare that such defective nomination or
proposal be disregarded.
(2) For purposes of this Section 12, "public announcement" shall
mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable news service or in a document publicly filed by
the Company with the Securities and Exchange Commission pursuant to Sections 13,
14 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act").
(3) Notwithstanding the foregoing provisions of this Section 12,
a stockholder also shall comply with all applicable requirements of state law
and of the Exchange Act and the rules and regulations thereunder with respect to
the matters set forth in this Section 12. Nothing in this Section 12 shall be
deemed to affect any rights of stockholders to request inclusion of proposals in
the Company's proxy statement pursuant to Rule 14a-8 under the Exchange Act.
SECTION 13. VOTING BY BALLOT. Voting on any question or in any election
----------- ----------------
may be viva voce unless the presiding officer shall order or any stockholder
shall demand that voting be by ballot.
-6-
<PAGE>
SECTION 14. NO STOCKHOLDER ACTION BY WRITTEN CONSENT. Subject to the
----------- ----------------------------------------
rights of the holders of any series of Preferred Shares to elect additional
Directors under specific circumstances, any action required or permitted to be
taken by the stockholders of the Company must be effected at an annual or
special meeting of stockholders and may not be effected by any consent in
writing by such stockholders.
ARTICLE III
DIRECTORS
SECTION 1. GENERAL POWERS; NUMBER; QUALIFICATIONS. The business and
---------- --------------------------------------
affairs of the Company shall be managed under the direction of its Board of
Directors (also referred to herein as "Director" or "Directors").
Notwithstanding the other requirements set forth herein and in the Articles of
Incorporation, a Director shall be an individual at least 21 years of age who is
not under legal disability. The number of Directors which shall constitute the
whole board shall not be less than three nor more than fifteen. Within such
limits, the actual number of directors which shall constitute the whole board
shall be as fixed from time to time by resolution of the Board of Directors.
SECTION 2. INDEPENDENT DIRECTORS; QUALIFICATIONS. A majority of
---------- -------------------------------------
Directors of the Company shall be Independent Directors. To qualify as an
independent director, an individual must not be and within the last two years
has not been directly or indirectly associated with the Advisor by virtue of (i)
ownership of an interest in the Advisor or its Affiliates, (ii) employment by
the Advisor or its Affiliates, (iii) service as an officer or director of the
Advisor or its Affiliates, (iv) performance of services, other than as a
Director, for the Company, (v) service as a director or trustee of more than
three real estate investment trusts advised by the Advisor, or (vi) maintenance
of a material business or professional relationship with the Advisor or any of
its Affiliates. A business or professional relationship is considered material
if the gross revenue derived by the Director from the Advisor and Affiliates
exceeds five percent (5%) of either the Director's annual gross revenue during
either of the last two years or the Director's net worth on a fair market value
basis. An indirect relationship shall include circumstances in which a
Director's spouse, parents, children, siblings, mothers- or fathers-in-law,
sons-or daughters-in-law, or brothers- or sisters-in-law is or has been
associated with the Advisor, any of its Affiliates, or the Company.
SECTION 3. REGULAR MEETINGS. A meeting of the Directors shall be held
---------- ----------------
quarterly in person or by telephone. The Directors may provide, by resolution,
the time and place, either within or without the State of Maryland, for the
holding of regular meetings of the Directors without other notice than such
resolution.
SECTION 4. SPECIAL MEETINGS. Special meetings of Directors may be called
---------- ----------------
by or at the request of the chief executive officer or by a majority of the
Directors then in office. The person or persons authorized to call special
meetings of the Directors may fix any place, either within or without the State
of Maryland, as the place for holding any special meeting of the Directors
called by them.
-7-
<PAGE>
SECTION 5. NOTICE. Notice of any annual, regular or special meeting
---------- ------
shall be given by written notice delivered personally, transmitted by facsimile,
telegraphed or mailed to each Director at his business or residence address.
Personally delivered, facsimile transmitted or telegraphed notices shall be
given at least two days prior to the meeting. Notice by facsimile or telegraph
shall be promptly followed by mailed notice. Notice by mail shall be given at
least five days prior to the meeting. If mailed, such notice shall be deemed to
be given when deposited in the United States mail properly addressed, with
postage thereon prepaid. If given by telegram, such notice shall be deemed to be
given when the telegram is delivered to the telegraph company. Neither the
business to be transacted at, nor the purpose of, any annual, regular or special
meeting of the Directors need be stated in the notice, unless specifically
required by statute or these Bylaws.
SECTION 6. QUORUM. A whole number of Directors equal to at least a
---------- ------
majority of the whole Board of Directors, including a majority of Independent
Directors, shall constitute a quorum for transaction of business at any meeting
of the Directors; provided, that if less than a quorum are present at said
meeting, a majority of the Directors present may adjourn the meeting from time
to time without further notice; and provided further, that if, pursuant to the
Articles of Incorporation or these Bylaws, the vote of a majority of a
particular group of Directors is required for action, a quorum must also include
a majority of such group.
The Directors present at a meeting which has been duly called and
convened may continue to transact business until adjournment, notwithstanding
the withdrawal of enough Directors to leave less than a quorum.
SECTION 7. VOTING. The action of the majority of the Directors present
---------- ------
at a meeting at which a quorum is present shall be the action of the Directors,
unless the concurrence of a particular group of Directors or of a greater
proportion is required for such action by applicable statute, the Articles of
Incorporation or these Bylaws.
SECTION 8. TELEPHONE MEETINGS. Directors may participate in a meeting by
---------- ------------------
means of a conference telephone or similar communications equipment if all
persons participating in the meeting can hear each other at the same time.
Participation in a meeting by these means shall constitute presence in person at
the meeting.
SECTION 9. INFORMAL ACTION BY DIRECTORS. Any action required or
---------- ----------------------------
permitted to be taken at any meeting of the Directors may be taken without a
meeting, if a consent in writing to such action is signed by each Director and
such written consent is filed with the minutes of proceedings of the Directors.
SECTION 10. VACANCIES. If for any reason any or all the Directors cease
----------- ---------
to be Directors, such event shall not terminate the Company or affect these
Bylaws or the powers of the remaining Directors hereunder (even if fewer than
three Directors remain). Any vacancy created by an increase in the number of
Directors shall be filled, at any regular meeting or at any special meeting
called for that purpose, by a majority of the Directors. Any other vacancy shall
be filled at any annual meeting or at any special meeting of the stockholders
called for that purpose, by a majority of the Common Shares outstanding and
entitled to vote. Any individual
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<PAGE>
so elected as Director shall hold office for the unexpired term of the Director
he is replacing. In the event of a vacancy among the Independent Directors, the
remaining Independent Directors shall nominate replacements for such position.
SECTION 11. COMPENSATION. 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. The Company will not pay any
compensation to the officers and Directors of the Company who also serve as
officers and directors of the Advisor (as such term is defined in the Articles
of Incorporation).
SECTION 12. ELECTION AND REMOVAL OF DIRECTORS; TERM. The stockholders
----------- ---------------------------------------
may, at any time, remove any Director in the manner provided in the Articles of
Incorporation. The term of service for a Director is one year, without limit on
successive terms.
SECTION 13. LOSS OF DEPOSITS. No Director shall be liable for any loss
----------- ----------------
which may occur by reason of the failure of the bank, trust company, savings and
loan association, or other institution with which moneys or shares have been
deposited.
SECTION 14. SURETY BONDS. Unless required by law, no Director shall be
----------- ------------
obligated to give any bond or surety or other security for the performance of
any of his duties.
SECTION 15. RELIANCE. Each Director, officer, employee and agent of the
----------- --------
Company shall, in the performance of his duties with respect to the Company, be
fully justified and protected with regard to any act or failure to act in
reliance in good faith upon the books of account or other records of the
Company, upon an opinion of counsel or upon reports made to the Company by any
of its officers or employees or by the advisers, accountants, appraisers or
other experts or consultants selected by the Directors or officers of the
Company, regardless of whether such counsel or expert may also be a Director.
SECTION 16. CERTAIN RIGHTS OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS.
----------- -----------------------------------------------------------
The Directors shall have no responsibility to devote their full time to the
affairs of the Company. Any Director, officer, employee or agent of the Company,
in his personal capacity or in a capacity as an affiliate, employee, or agent of
any other person, or otherwise, may have business interests and engage in
business activities similar to or in addition to those of or relating to the
Company, subject to the adoption of any policies relating to such interests and
activities adopted by the Directors and applicable law.
ARTICLE IV
COMMITTEES
SECTION 1. NUMBER, TENURE AND QUALIFICATIONS. The Directors may, by
---------- ---------------------------------
resolution or resolutions passed by a majority of the whole Board, appoint from
among its members an Audit Committee and other committees, composed of two or
more Directors to serve at the pleasure of the Directors. At such time, if any,
as the Shares become listed on a national securities exchange or over-the-
counter market, the Company will form a Compensation
-9-
<PAGE>
Committee. At least a majority of the members of each committee of the Company's
Board of Directors, or if a committee numbers two or less, both directors must
be Independent Directors.
SECTION 2. POWERS. The Directors may delegate to committees appointed
---------- ------
under Section 1 of this Article IV any of the powers of the Board of Directors;
provided, however, that the Directors may not delegate to committee the power to
- -------- -------
declare dividends or other Distributions, elect Directors, issue Preferred or
Common Shares (as such terms are defined in the Articles of Incorporation)
(hereinafter "Shares") in the Company other than as provided in the next
sentence, recommend to the stockholders any action which requires stockholder
approval, amend the Bylaws or approve any merger or share exchange which does
not require stockholder approval. If the Board of Directors has given general
authorization for the issuance of Shares in the Company to a committee of the
Board, in accordance with a general formula or method specified by the Board by
resolution or by adoption of an option or other plan, such committee may fix the
terms of the Shares subject to classification or reclassification and the terms
on which the shares may be issued, including all terms and conditions required
or permitted to be established or authorized by the Board of Directors.
SECTION 3. COMMITTEE PROCEDURES. Each committee may fix rules of
---------- --------------------
procedure for its business. A majority of the members of a committee shall
constitute a quorum for the transaction of business and the action of a majority
of those present at a meeting at which a quorum is present shall be action of
the committee. In the absence of any member of any committee, the members
thereof present at any meeting, whether or not they constitute a quorum, may
appoint another Director to act in the place of such absent member, subject to
the requirements of Section 1 of this Article IV. Any action required or
permitted to be taken at a meeting of a committee may be taken without a
meeting, if a unanimous written consent which sets forth the action to be taken
is signed by each member of the committee and filed with the minutes of the
proceedings of such committee. The members of a committee may conduct any
meeting thereof by means of a conference telephone or similar communications
equipment if all persons participating in the meeting can hear each other at the
same time. Participation in a meeting by such means shall constitute presence in
person at the meeting.
ARTICLE V
OFFICERS
SECTION 1. GENERAL PROVISIONS. The officers of the Company may consist
---------- ------------------
of a chairman of the board, a chief executive officer, a president, a chief
operating officer, one or more vice presidents, a chief financial officer and
treasurer, a secretary, and one or more assistant secretaries, as determined by
the Directors. In addition, the Directors may from time to time appoint such
other officers with such powers and duties as they shall deem necessary or
desirable. The officers of the Company shall be elected annually by the
Directors at the first meeting of the Directors held after each annual meeting
of stockholders. If the election of officers shall not be held at such meeting,
such election shall be held as soon thereafter as may be convenient. Each
officer shall hold office until his or her successor is elected and qualifies or
until his or her death, resignation or removal in the manner hereinafter
provided. Any two or more offices except (i) chief executive officer and vice
president, or (ii) president and vice president, may be held by the same person,
although any person holding more than one office in
-10-
<PAGE>
the Company may not act in more than one capacity to execute, acknowledge or
verify an instrument required by law to be executed, acknowledged or verified by
more than one officer. In their discretion, the Directors may leave unfilled any
office except that of the chief executive officer, the president, the treasurer
and the secretary. Election of an officer or agent shall not of itself create
contract rights between the Company and such officer or agent.
SECTION 2. REMOVAL AND RESIGNATION. Any officer or agent of the Company
---------- -----------------------
may be removed by a majority of the members of the whole Board of Directors,
with or without cause, if in their judgment the best interests of the Company
would be served thereby, but such removal shall be without prejudice to the
contract rights, if any, of the person so removed. Any officer of the Company
may resign at any time by giving written notice of his resignation to the
Directors, the chairman of the board, the chief executive officer or the
secretary. Any resignation shall take effect at any time subsequent to the time
specified therein or, if the time when it shall become effective is not
specified therein, immediately upon its receipt. The acceptance of a resignation
shall not be necessary to make it effective unless otherwise stated in the
resignation.
SECTION 3. VACANCIES. A vacancy in any office may be filled by the
---------- ---------
Directors for the balance of the term.
SECTION 4. CHAIRMAN OF THE BOARD. The chairman of the board shall
---------- ---------------------
preside over the meetings of the Directors and of the stockholders at which he
or she shall be present. The chairman of the board shall perform such other
duties as may be assigned to him or her by the Directors. Except where by law
the signature of the chief executive officer or the president is required, the
chairman of the board shall possess the same power as the chief executive
officer or the president to sign deeds, mortgages, bonds, contracts or other
instruments.
SECTION 5. CHIEF EXECUTIVE OFFICER. The Directors may designate a chief
---------- -----------------------
executive officer from among the elected officers. In the absence of such
designation, the chairman of the board shall be the chief executive officer of
the Company. The chief executive officer shall in general supervise the
management of the business affairs of the Company and the implementation of the
policies of the Company, as determined by the Directors. He or she may execute
any deed, mortgage, bond, contract or other instrument, except in cases where
the execution thereof shall be expressly delegated by the Directors or by these
Bylaws to some other officer or agent of the Company or shall be required by law
to be otherwise executed; and in general shall perform all duties incident to
the office of chief executive officer and such other duties as may be prescribed
by the Directors from time to time.
SECTION 6. PRESIDENT. The president, subject to the control of the Board
---------- ---------
of Directors and with the chief executive officer, shall in general supervise
and control all of the business and affairs of the Company. He or she shall,
when present and in the absence of the chairman of the board and the chief
executive officer, preside at all meetings of the stockholders and the Board of
Directors. He or she may sign (i) with the secretary or the chief financial
officer and treasurer, certificates for shares of the Company, and (ii) with the
secretary or any other proper officer of the Company authorized by the Board of
Directors, deeds, mortgages, bonds, contracts, or other instruments which the
Board of Directors has authorized to be
-11-
<PAGE>
executed, except in cases where the signing and execution thereof shall be
expressly delegated by the Board of Directors or by these Bylaws to some other
officer of agent of the Company, or shall be required by law to be otherwise
signed or executed; and in general shall perform all duties incident to the
office of president and such other duties as may be prescribed by the chief
executive officer or the Directors from time to time.
SECTION 7. CHIEF OPERATING OFFICER. The chief operating officer, under
---------- -----------------------
the direction of the chief executive officer, shall have general management
authority and responsibility for the day-to-day implementation of the policies
of the Company. He or she may execute any deed, mortgage, bond, contract or
other instrument, except in cases where the execution thereof shall be expressly
delegated by the Directors or by these Bylaws to some other officer or agent of
the Company or shall be required by law to be otherwise executed; and in general
shall perform all duties incident to the office of chief operating officer and
such other duties as may be prescribed by the Directors from time to time.
SECTION 8. VICE PRESIDENTS. In the absence of the chief executive
---------- ---------------
officer, the president, the chief operating officer or in the event of a vacancy
in all such offices, the vice president (or in the event there be more than one
vice president, the vice presidents in the order designated at the time of their
election or, in the absence of any designation, then in the order of their
election) shall perform the duties of the chief executive officer or the
president and when so acting shall have all the powers of and be subject to all
the restrictions upon the chief executive officer and the president; and shall
perform such other duties as from time to time may be assigned to him by the
chief executive officer, by the president, by the chief operating officer or by
the Directors. The Directors may designate one or more vice presidents as
executive vice president or as vice president for particular areas of
responsibility.
SECTION 9. SECRETARY. The secretary shall: (i) keep the minutes of the
---------- ---------
proceedings of the stockholders, the Directors and committees of the Directors
in one or more books provided for that purpose; (ii) see that all notices are
duly given in accordance with the provisions of the Articles of Incorporation,
these Bylaws or as required by law; (iii) be custodian of the trust records and
of the seal (if any) of the Company; (iv) keep a register of the post office
address of each stockholder which shall be furnished to the secretary by such
stockholder; (v) have general charge of the share transfer books of the Company;
and (vi) in general perform such other duties as from time to time may be
assigned to him or her by the chief executive officer, by the president, by the
chief operating officer or by the Directors.
SECTION 10. CHIEF FINANCIAL OFFICER AND TREASURER. The chief financial
----------- -------------------------------------
officer and treasurer shall have the custody of the funds and securities of the
Company and shall keep full and accurate accounts of receipts and disbursements
in books belonging to the Company and shall deposit all moneys and other
valuable effects in the name and to the credit of the Company in such
depositories as may be designated by the Directors. The chief financial officer
shall disburse the funds of the Company as may be ordered by the Directors,
taking proper vouchers for such disbursements, and shall render to the chief
executive officer and Directors, at their regular meetings of the Directors or
whenever they may require it, an account of all his or her transactions as chief
financial officer and of the financial condition of the Company.
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<PAGE>
If required by the Directors, he or she shall give the Company a bond in
such sum and with such surety or sureties as shall be satisfactory to the
Directors for the faithful performance of the duties of his or her office and
for the restoration to the Company, in case of his or her death, resignation,
retirement or removal from office, all books, papers, vouchers, moneys and other
property of whatever kind in his or her possession or under his or her control
belonging to the Company.
SECTION 11. ASSISTANT SECRETARIES. The assistant secretaries, in
----------- ---------------------
general, shall perform such duties as shall be assigned to them by the
secretary, or by the chief executive officer, the president, or the Directors.
SECTION 12. SALARIES. The salaries of the officers shall be fixed from
----------- --------
time to time by the Directors, and no officer shall be prevented from receiving
such salary by reason of the fact that he or she is also a Director.
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
SECTION 1. CONTRACTS. The Directors may authorize any officer or agent
---------- ---------
to enter into any contract or to execute and deliver any instrument in the name
of and on behalf of the Company and such authority may be general or confined to
specific instances. Any agreement, deed, mortgage, lease or other document
executed by one or more of the Directors or by an authorized person shall be
deemed valid and binding upon the Directors and upon the Company when so
authorized or ratified by action of the Directors.
SECTION 2. CHECKS AND DRAFTS. All checks, drafts or other orders for the
---------- -----------------
payment of money, notes or other evidences of indebtedness issued in the name of
the Company shall be signed by such officer or officers, agent or agents of the
Company and in such manner as shall from time to time be determined by the
Directors.
SECTION 3. DEPOSITS. All funds of the Company not otherwise employed
---------- --------
shall be deposited from time to time to the credit of the Company in such banks,
trust companies or other depositories as the Directors may designate.
ARTICLE VII
SHARES
SECTION 1. CERTIFICATES. The Company will not issue share certificates.
---------- ------------
A stockholder's investment will be recorded on the books of the Company. A
stockholder wishing to transfer his or her Shares will be required to send only
an executed form to the Company, and the Company will provide the required form
upon a stockholder's request. The executed form and any other required
documentation must be received by the Company at least one calendar month prior
to the last date of the current quarter.
SECTION 2. TRANSFERS. Transfers of Shares shall be effective, and the
---------- ---------
transferee of the Shares will be recognized as the holder of such Shares as of
the first day of the
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<PAGE>
following quarter on which the Company receives properly executed documentation.
Stockholders who are residents of New York may not transfer fewer than 250
shares at any time.
The Company shall be entitled to treat the holder of record of any Share
or Shares as the holder in fact thereof and, accordingly, shall not be bound to
recognize any equitable or other claim to or interest in such share on the part
of any other person, whether or not it shall have express or other notice
thereof, except as otherwise provided by the laws of the State of Maryland.
SECTION 3. NOTICE OF ISSUANCE OR TRANSFER. Upon issuance or transfer of
---------- ------------------------------
Shares, the Company shall send the stockholder a written statement that complies
with the requirements of Section 7.6(xii) of Articles of Incorporation and
reflects such investment or transfer. In addition such written statement shall
set forth (i) the name of the Company; (ii) the name of the stockholder or other
person to whom it is issued or transferred; (iii) the class of shares and number
of shares purchased; (iv) the designations and any preferences, conversions and
other rights, voting powers, restrictions, limitations as to distributions,
qualifications and terms and conditions of redemption of the shares of each
class which the Company is authorized to issue; (v) the differences in the
relative rights and preferences between the shares of each series of shares to
the extent they have been set; (vi) the authority of the Board of Directors to
set the relative rights and preferences; (vii) the restrictions on
transferability of the shares sold or transferred (without affecting (S) 8-204
of the Commercial Law Article of the Maryland General Corporation Law (the
"MGCL"); and (viii) any other information required by law. The Company,
alternatively, may furnish notice that a full statement of the information
contained in the foregoing subsections (i) through (viii) and otherwise
complying with Section 7.6(xii) of the Articles of Incorporation will be
provided to any stockholder upon request and without charge.
SECTION 4. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE. The
---------- --------------------------------------------------
Directors may set, in advance, a record date for the purpose of determining
stockholders entitled to notice of or to vote at any meeting of stockholders, or
stockholders entitled to receive payment of any Distribution or the allotment of
any other rights, or in order to make a determination of stockholders for any
other proper purpose. Such date, in any case, shall not be prior to the close of
business on the day the record date is fixed and shall not be more than 90 days
and, in the case of a meeting of stockholders, not less than ten days, before
the date on which the meeting or particular action requiring such determination
of stockholders is to be held or taken.
In the context of fixing a record date, the Directors may provide that
the share transfer books shall be closed for a stated period but not longer than
20 days. If the share transfer books are closed for the purpose of determining
stockholders entitled to notice of or to vote at a meeting of stockholders, such
books shall be closed at least ten days before the date of such meeting.
If no record date is fixed and the share transfer books are not closed
for the determination of stockholders, (i) the record date for the determination
of stockholders entitled to notice of or to vote at a meeting of stockholders
shall be at the close of business on
-14-
<PAGE>
the date on which notice of meeting is mailed or the 30th day before the
meeting, whichever is the closer date to the meeting, and (ii) the record date
for the determination of stockholders entitled to receive payment of a
Distribution or an allotment of any other rights shall be the close of business
on the day on which the resolution of the Directors declaring the Distribution
or allotment of rights is adopted, but the payment or allotment of rights may
not be made more than 60 days after the date on which the resolution is adopted.
When a determination of stockholders entitled to vote at any meeting
of stockholders has been made as provided in this Section 4, such determination
shall apply to any adjournment thereof, except where the determination has been
made through the closing of the transfer books and the stated period of closing
has expired.
SECTION 5. SHARE LEDGER. The Company shall maintain at its principal
---------- ------------
office or at the office of its counsel, accountants or transfer agent, an
original or duplicate share ledger, in written form or in any other form which
can be converted within a reasonable time into written form for visual
inspection, containing the name and address of each stockholder and the number
of shares of each class held by such stockholder.
SECTION 6. FRACTIONAL SHARES; ISSUANCE OF UNITS. Directors may issue
---------- ------------------------------------
fractional shares or provide for the issuance of scrip, all on such terms and
under such conditions as they may determine. Notwithstanding any other
provision of the Articles of Incorporation or these Bylaws, the Directors may
issue units consisting of different securities of the Company. Any security
issued in a unit shall have the same characteristics as any identical securities
issued by the Company, except that the Directors may provide that for a
specified period securities of the Company issued in such unit may be
transferred on the books of the Company only in such unit.
Before issuance of any shares classified or reclassified or otherwise
issued in a unit, the Board of Directors will file articles supplementary with
the Maryland State Department of Assessments and Taxation that describe such
shares, including (a) the preferences, conversion and other rights, voting
powers, restrictions, limitations as to distributions, qualifications, and terms
and conditions of redemption, as set or changed by the Board of Directors; and
(b) a statement that the shares have been classified or reclassified by the
Board of Directors pursuant to its authority under the Company's charter. The
articles supplementary will be executed in the manner provided by Title 7 of the
Maryland General Corporation Law (the "MGCL").
ARTICLE VIII
ACCOUNTING YEAR
The Directors shall have the power, from time to time, to fix the fiscal
year of the Company by a duly adopted resolution.
ARTICLE IX
DISTRIBUTIONS
SECTION 1. DECLARATION. Distributions upon the shares of the Company may
---------- -----------
be declared by the Directors, subject to the provisions of law and the Articles
of
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<PAGE>
Incorporation. Distributions may be paid in cash or other property of the
Company, subject to the provisions of law and the Articles of Incorporation.
SECTION 2. CONTINGENCIES. Before payment of any Distributions, there may
---------- -------------
be set aside out of any funds of the Company available for Distributions such
sum or sums as the Directors may from time to time, in their absolute
discretion, think proper as a reserve fund for the contingencies, for equalizing
Distributions, for repairing or maintaining any property of the Company or for
such other purpose as the Directors shall determine to be in the best interest
of the Company, and the Directors may modify or abolish any such reserve in the
manner in which it was created.
ARTICLE X
INVESTMENT POLICY
Subject to the provisions of the Articles of Incorporation, the
Directors may from time to time adopt, amend, revise or terminate any policy or
policies with respect to investments by the Company as they shall deem
appropriate in their sole discretion. In addition, the Independent Directors
shall review the Company's investment policies at least annually to determine
that the policies are in the best interests of the stockholders.
ARTICLE XI
SEAL
SECTION 1. SEAL. The Directors may authorize the adoption of a seal by
---------- ----
the Company. The seal shall have inscribed thereon the name of the Company and
the year of its organization. The Directors may authorize one or more duplicate
seals and provide for the custody thereof.
SECTION 2. AFFIXING SEAL. Whenever the Company is required to place its
---------- -------------
seal to a document, it shall be sufficient to meet the requirements of any law,
rule or regulation relating to a seal to place the word "(SEAL)" adjacent to the
signature of the person authorized to execute the document on behalf of the
Company.
ARTICLE XII
WAIVER OF NOTICE
Whenever any notice is required to be given pursuant to the Articles of
Incorporation or these Bylaws or pursuant to applicable law, a waiver thereof in
writing, signed by the person or persons entitled to such notice, whether before
or after the time stated therein, shall be deemed equivalent to the giving of
such notice. Neither the business to be transacted at nor the purpose of any
meeting need be set forth in the waiver of notice, unless specifically required
by statute. The attendance of any person at any meeting shall constitute a
waiver of notice of such meeting, except where such person attends a meeting for
the express purpose of objecting to the transaction of any business on the
ground that the meeting is not lawfully called or convened.
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ARTICLE XIII
AMENDMENT OF BYLAWS
SECTION 1. AMENDMENTS. These Bylaws may be amended or repealed by either
---------- ----------
the affirmative vote of a majority of all Equity Shares, as such term is defined
in the Company's Articles of Incorporation, outstanding and entitled to vote
generally in the election of Directors, voting as a single group or by an
affirmative vote of a majority of the Directors (including a majority of the
Independent Directors), provided that such amendments are not inconsistent with
the Articles of Incorporation, and further provided that the Directors may not
amend these Bylaws, without the affirmative vote of a majority of the Equity
Shares, to the extent that such amendments adversely affect the rights,
preferences and privileges of Stockholders.
SECTION 2. LOCATION OF BYLAWS. The original or a certified copy of these
---------- ------------------
Bylaws, including any amendments thereto, shall be kept at the Company's
principal office, as determined pursuant to Article I, Section 1 of these
Bylaws.
The foregoing are certified as the Bylaws of the Company adopted by the
Directors (including a majority of the Independent Directors) as of March 29,
1995.
/s/ Lynn E. Rose
---------------------------
Secretary
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<PAGE>
Exhibit 4.2
CNL AMERICAN PROPERTIES, INC.,
as Issuer
________________________,
as Trustee
INDENTURE
Dated as of ____________, 1999
______% Callable Notes due 2006
<PAGE>
TABLE OF CONTENTS
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<S> <C> <C>
ARTICLE I DEFINITIONS AND INCORPORATION BY REFERENCE...................... 1
Section 1.1 Definitions..................................................... 1
Section 1.2 Other Definitions............................................... 7
Section 1.3 Incorporation by Reference of Trust Indenture Act.............. 7
Section 1.4 Rules of Construction........................................... 7
ARTICLE II. THE SECURITIES.................................................. 8
Section 2.1 Issuable in Series; Form and Dating............................. 8
Section 2.2 Establishment of Terms of Series of Securities.................. 8
Section 2.3 Execution and Authentication.................................... 9
Section 2.4 Registrar and Paying Agent...................................... 9
Section 2.5 Paying Agent to Hold Money in Trust............................. 10
Section 2.6 Securityholder Lists............................................ 10
Section 2.7 Transfer and Exchange........................................... 10
Section 2.8 Mutilated, Destroyed, Lost and Stolen Securities................ 10
Section 2.9 Outstanding Securities.......................................... 11
Section 2.10 Treasury Securities............................................. 11
Section 2.11 Temporary Securities............................................ 11
Section 2.12 Cancellation.................................................... 12
Section 2.13 Defaulted Interest.............................................. 12
Section 2.14 CUSIP Numbers................................................... 12
ARTICLE III REDEMPTION...................................................... 12
Section 3.1 Optional Redemption............................................. 12
Section 3.2 Mandatory Redemption............................................ 12
Section 3.3 Notice to Trustee............................................... 13
Section 3.4 Selection of Securities to be Redeemed.......................... 13
Section 3.5 Notice of Redemption............................................ 13
Section 3.6 Effect of Notice of Redemption.................................. 14
Section 3.7 Deposit of Redemption Price..................................... 14
Section 3.8 Securities Redeemed in Part..................................... 14
ARTICLE IV COVENANTS....................................................... 14
Section 4.1 Payment of Principal and Interest............................... 14
Section 4.2 Reports......................................................... 14
Section 4.3 Compliance Certificate.......................................... 14
Section 4.4 Corporate Existence............................................. 14
Section 4.5 Limitation on Incurrences of Indebtedness....................... 15
Section 4.6 Maintenance of Office or Agency................................. 15
ARTICLE V SUCCESSORS...................................................... 16
Section 5.1 When Company May Merge, Etc..................................... 16
Section 5.2 Successor Person Substituted.................................... 16
ARTICLE VI DEFAULTS AND REMEDIES........................................... 16
Section 6.1 Events of Default............................................... 16
Section 6.2 Acceleration of Maturity; Rescission and Annulment.............. 17
</TABLE>
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<S> <C> <C>
Section 6.3 Collection of Indebtedness and Suits for Enforcement by Trustee. 18
Section 6.4 Trustee May File Proofs of Claim................................ 19
Section 6.5 Trustee May Enforce Claims Without Possession of Securities..... 19
Section 6.6 Application of Money Collected.................................. 19
Section 6.7 Limitation on Suits............................................. 20
Section 6.8 Unconditional Right of Holders to Receive Principal and Interest 20
Section 6.9 Restoration of Rights and Remedies.............................. 20
Section 6.10 Rights and Remedies Cumulative.................................. 21
Section 6.11 Delay or Omission Not Waiver.................................... 21
Section 6.12 Control by Holders.............................................. 21
Section 6.13 Waiver of Past Defaults......................................... 21
Section 6.14 Undertaking for Costs........................................... 22
ARTICLE VII TRUSTEE......................................................... 22
Section 7.1 Duties of Trustee............................................... 22
Section 7.2 Rights of Trustee............................................... 23
Section 7.3 Individual Rights of Trustee.................................... 24
Section 7.4 Trustee's Disclaimer............................................ 24
Section 7.5 Notice of Defaults.............................................. 24
Section 7.6 Reports by Trustee to Holders................................... 24
Section 7.7 Compensation and Indemnity...................................... 24
Section 7.8 Replacement of Trustee.......................................... 25
Section 7.9 Successor Trustee by Merger, Etc................................ 26
Section 7.10 Eligibility; Disqualification................................... 26
Section 7.11 Preferential Collection of Claims Against Company............... 26
ARTICLE VIII SATISFACTION AND DISCHARGE; DEFEASANCE.......................... 26
Section 8.1 Satisfaction and Discharge of Indenture......................... 26
Section 8.2 Application of Trust Funds, Indemnification..................... 27
Section 8.3 Legal Defeasance of Securities of any Series.................... 28
Section 8.4 Covenant Defeasance............................................. 29
Section 8.5 Repayment to Company............................................ 30
Section 8.6 Reinstatement................................................... 30
ARTICLE IX AMENDMENTS AND SUPPLEMENTS...................................... 30
Section 9.1 Without Consent of Holders...................................... 30
Section 9.2 With Consent of Holders......................................... 31
Section 9.3 Limitations..................................................... 31
Section 9.4 Compliance with Trust Indenture Act............................. 31
Section 9.5 Revocation and Effect of Consents............................... 32
Section 9.6 Notation on or Exchange of Securities........................... 32
Section 9.7 Trustee Protected............................................... 32
ARTICLE X MISCELLANEOUS................................................... 32
Section 10.1 Trust Indenture Act Controls.................................... 32
Section 10.2 Notices......................................................... 33
Section 10.3 Communication by Holders with Other Holders..................... 33
Section 10.4 Certificate and Opinion as to Conditions Precedent.............. 33
Section 10.5 Statements Required in Certificate or Opinion................... 34
Section 10.6 Rules by Trustee and Agents..................................... 34
Section 10.7 Legal Holidays.................................................. 34
</TABLE>
-ii-
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Section 10.8 No Recourse Against Others....................................... 34
Section 10.9 Counterparts..................................................... 34
Section 10.10 Governing Laws................................................... 34
Section 10.11 No Adverse Interpretation of Other Agreements.................... 35
Section 10.12 Successors....................................................... 35
Section 10.13 Severability..................................................... 35
Section 10.14 Table of Contents, Headings, Etc................................. 35
</TABLE>
-iii-
<PAGE>
Reconciliation and tie between the Trust Indenture Act of 1939, as amended
and the Indenture, dated as of ____________ ___, 1999.
<TABLE>
<CAPTION>
Trust Indenture Act Section Indenture Section
--------------------------- -----------------
<S> <C>
(S)310(a)(1)................................................ 7.10
(a)(2)................................................. 7.10
(a)(3)................................................. Not Applicable
(a)(4)................................................. Not Applicable
(a)(5)................................................. 7.10
(b).................................................... 7.10
(S)311(a)................................................... 7.11
(b).................................................... 7.11
(c).................................................... Not Applicable
(S)312(a)................................................... 2.6
(b).................................................... 10.3
(c).................................................... 10.3
(S)313(a)................................................... 7.6
(b)(1)................................................. 7.6
(b)(2)................................................. 7.6
(c)(1)................................................. 7.6
(d).................................................... 7.6
(S)314(a)................................................... 10.5
(b).................................................... Not Applicable
(c)(1)................................................. 10.4
(c)(2)................................................. 10.4
(c)(3)................................................. Not Applicable
(d).................................................... Not Applicable
(e).................................................... 10.5
(f).................................................... Not Applicable
(S)315(a)................................................... 7.1
(b).................................................... 7.5
(c).................................................... 7.1
(d).................................................... 7.1
(e).................................................... 6.14
(S)316(a)................................................... 2.10
(a)(1)(A).............................................. 6.12
(a)(1)(B).............................................. 6.13
(b).................................................... 6.8
(S)317(a)(1)................................................ 6.3
(a)(2)................................................. 6.4
(b).................................................... 2.5
(S)318(a)................................................... 10.1
</TABLE>
Note: This reconciliation and tie shall not, for any purposes, be deemed to be
part of this Indenture.
-iv-
<PAGE>
Indenture
Indenture, dated as of ______ ___, 1998 (the "Indenture"), by and between
CNL American Properties Fund, Inc., a Maryland corporation (the "Company"), and
_____________, as Trustee (the "Trustee").
Each party agrees as follows for the benefit of the other party and for the
equal and ratable benefit of the Holders of the Securities issued under this
Indenture.
ARTICLE I
DEFINITIONS AND INCORPORATION BY REFERENCE
Section 1.1 Definitions.
-----------
"Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Subsidiary of the Company, or is merged into or
consolidated with any Person, or which is assumed in connection with an Asset
Acquisition and not incurred in connection with or in contemplation or
anticipation of such event, provided that Indebtedness of such Person which is
redeemed, defeased (including the deposit of funds in a valid trust for the
exclusive benefit of holders and the trustee thereof, sufficient to repay such
Indebtedness in accordance with its terms), retired or otherwise repaid at the
time of or immediately upon consummation of the transactions by which such
Person becomes a Subsidiary or such Asset Acquisition shall not be Acquired
Indebtedness.
"Affiliate" means any Person directly or indirectly controlling or
controlled by or under direct or indirect common control with the Company. For
purposes of this definition, the term "control" means the power to direct the
management and policies of a Person, directly or through one or more
intermediaries, whether through the ownership of voting securities, by contract,
or otherwise; provided that a beneficial owner of 10% or more of the total
Voting Stock of a Person, either directly or indirectly, shall for such purposes
be deemed to constitute control.
"Agent" means any Registrar, Paying Agent or Service Agent.
"Asset Acquisition" means (i) an investment by the Company or any of its
Subsidiaries in any other Person pursuant to which such Person shall become a
Subsidiary or shall be merged or consolidated into or with the Company or any of
its Subsidiaries or (ii) an acquisition by the Company or any of its
Subsidiaries from any other Person that constitutes all or substantially all of
a division or line of business, or one or more real estate properties, of such
Person.
"Bankruptcy Law" means title 11 of the U.S. Code or any similar Federal or
State law for the relief of debtors.
"Board" means (i) with respect to any corporation, the board of directors
of such corporation or any committee of the board of directors of such
corporation authorized, with respect to any particular matter, to exercise the
power of the board of directors of such corporation, (ii) with respect to any
partnership, any partner (including, without limitation, in the case of any
partner that is a corporation, the board of directors of such corporation or any
authorized committee thereof) with the authority to cause the partnership to act
with respect to the matter at issue, (iii) in the case of a trust, any trustee
or board of trustees with the authority to cause the trust to act with respect
to the matter at issue, (iv) in the case of a limited liability company (an
"LLC"), the managing member, management committee or other Person or group with
the authority to cause the LLC to act with respect to the matter at issue, and
(v) with respect to any other entity, the Person or group exercising functions
similar to a board of directors of a corporation.
-1-
<PAGE>
"Board Resolution" means a copy of a resolution certified by the Secretary
or an Assistant Secretary or equivalent authorized person of the Company to have
been duly adopted by the Board or pursuant to authorization by the Board and to
be in full force and effect on the date of the certificate (and delivered to the
Trustee, if appropriate).
"Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday
which is not a day on which banking institutions in New York, New York are
authorized or obligated by law or executive order to close.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations, or other equivalents (however designated, whether
voting or non-voting), including partnership interests, whether general or
limited, in the equity of such Person, whether outstanding on the Closing Date
or issued thereafter, including, without limitation, all Common Stock, Preferred
Stock and Units.
"Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present value
of the rental obligations of such Person as lessee, in conformity with GAAP, is
required to be capitalized on the balance sheet of such Person.
"Capitalized Lease Obligations" means, with respect to any Person, the
discounted present value of the rental obligations under a Capitalized Lease as
reflected on the balance sheet of such Person in accordance with GAAP.
"Closing Date" means _______, 1999.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting), which have no preference on liquidation or with respect
to distributions over any other class of Capital Stock, including partnership
interests, whether general or limited, of such Person's equity, whether
outstanding on the Closing Date or issued thereafter, including, without
limitation, all series and classes of common stock.
"Company" means CNL American Properties Fund, Inc., a Maryland corporation,
until a successor shall have become such pursuant to the applicable provisions
of this Indenture, and thereafter means such successor.
"Company Order" means a written order signed in the name of the Company by
two Officers, one of whom must be the Company's principal executive officer,
principal financial officer or principal accounting officer, and delivered to
the Trustee.
"Company Request" means a written request signed in the name of the Company
by its Chairman of the Board, a President or a Vice President, and by its
Treasurer, an Assistant Treasurer, its Secretary or an Assistant Secretary, and
delivered to the Trustee.
"Consolidated" or "consolidated" means, with respect to any Person, the
consolidation of the accounts of the Subsidiaries of such Person with those of
such Person; provided that (i) "consolidation" will not include consolidation of
the accounts of any other Person other than a Subsidiary of such Person with
such Person and (ii) "consolidation" will include consolidation of the accounts
of any Subsidiary, whether or not such consolidation would be required or
permitted under GAAP (it being understood that the accounts of such Person's
Subsidiaries shall be consolidated only to the extent of such Person's
-2-
<PAGE>
proportionate interest therein). The terms "consolidated" and "consolidating"
have correlative meanings to the foregoing.
"Corporate Trust Office" means the office of the Trustee at which any
particular time its corporate trust business shall be principally administered,
which office at the date of this Indenture is located at ____________.
"Custodian" means any receiver, trustee, assignee, liquidator or similar
official under any Bankruptcy Law.
"Default" means any condition or event that is or after notice or passage
of time (other than with respect to payment or performance not due at the time
of determination) or both would be an Event of Default.
"Exchange Act" means the Securities Exchange Act of 1934, as amended from
time to time.
"FF&E" means furniture, fixtures and equipment, and other tangible personal
property.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Closing Date, including, without limitation,
those set forth in the opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and statements
and pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as approved by a significant segment of the
accounting profession in the United States of America.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and,
without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such Person (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness of
such other Person (whether arising by virtue of partnership arrangements, or by
agreements to keep-well, to purchase assets, goods, securities or services
(unless such purchase arrangements are on arm's-length terms and are entered
into in the ordinary course of business), to take-or-pay, or to maintain
financial statement conditions or otherwise) or (ii) entered into for purposes
of assuring in any other manner the obligee of such Indebtedness of the payment
thereof or to protect such obligee against loss in respect thereof (in whole or
in part); provided that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"Holder" or "Securityholder" means a Person in whose name a Security is
registered.
"Income Fund Mergers" means the merger of one or more of the Income Funds
into the Company or one or more of its Subsidiaries.
"Income Funds" mean, collectively, CNL Income Fund, Ltd., CNL Income Fund
II, Ltd., CNL Income Fund III, Ltd., CNL Income Fund IV, Ltd., CNL Income Fund
V, Ltd., CNL Income Fund VI, Ltd. CNL Income Fund VII, Ltd., CNL Income Fund
VIII, Ltd., CNL Income Fund IX, Ltd., CNL Income Fund X, Ltd., CNL Income Fund
XI, Ltd., CNL Income Fund XII, Ltd., CNL Income Fund XIII, Ltd., CNL Income Fund
XIV, Ltd., CNL Income Fund XV, Ltd., CNL Income Fund XVI, Ltd., CNL Income Fund
XVII, Ltd. and CNL Income Fund XVIII, Ltd.
"Incur" means, with respect to any Indebtedness, to incur (by conversion,
exchange or otherwise), create, issue, assume, Guarantee or otherwise become
liable for or with respect to (including as
-3-
<PAGE>
a result of an acquisition), or become responsible for, the payment of,
contingently or otherwise, such Indebtedness (including Acquired Indebtedness);
provided that neither the accrual of interest nor the accretion of original
issue discount shall be considered an Incurrence of Indebtedness.
"Indebtedness" of any Person means, without duplication, (i) all
liabilities and obligations, secured or unsecured, contingent or otherwise, of
such Person, (a) in respect of borrowed money (whether or not the recourse of
the lender is to the whole of the assets of such Person or only to a portion
thereof), (b) evidenced by bonds, notes, debentures or similar instruments, (c)
representing the balance deferred and unpaid of the purchase price of any
property or services, except those incurred in the ordinary course of its
business that would constitute ordinarily a trade payable to trade creditors,
(d) evidenced by bankers' acceptances, (e) for the payment of money relating to
a Capitalized Lease Obligation, or (f) evidenced by a letter of credit or a
reimbursement obligation of such Person with respect to any letter of credit;
(ii) all net obligations of such Person under Interest Swap and Hedging
Obligations; and (iii) all liabilities and obligations of others of the kind
described in the preceding clause (i) or (ii) that such Person has guaranteed or
that is otherwise its legal liability or which are secured by any assets or
property of such Person.
"Indenture" means this Indenture as amended or supplemented from time to
time and shall include the form and terms of particular Series of Securities
established as contemplated hereunder.
"Indenture Obligations" means all obligations arising under this Indenture,
from time to time, with respect to the payment of principal of or interest, if
any, on the Securities of any Series.
"Interest Payment Date" means, with respect to Securities of any Series,
the stated due date of an installment of interest on the Securities of that
Series.
"Interest Swap and Hedging Obligation" means any obligation of any Person
pursuant to any interest rate swaps, caps, collars and similar arrangements
providing protection against fluctuations in interest rates. For purposes of
this Indenture, the amount of such obligations shall be the amount determined in
respect thereof as of the end of the then most recently ended fiscal quarter of
such Person, based on the assumption that such obligation had terminated at the
end of such fiscal quarter, and in making such determination, if any agreement
relating to such obligation provides for the netting of amounts payable by and
to such Person thereunder or if any such agreement provides for the simultaneous
payment of amounts by and to such Person, then in each such case, the amount of
such obligations shall be the net amount so determined, plus any premium due
upon default by such Person.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien,
privilege, hypothecation, other encumbrance or charge of any kind (including,
without limitation, any conditional sale or other title retention agreement or
lease in the nature thereof or any agreement to give any security interest) upon
or with respect to any property of any kind now owned or hereinafter acquired.
"Maturity" when used with respect to any Security or installment of
principal thereof, means the date on which the principal of such Security or
such installment of principal becomes due and payable as therein or herein
provided, whether at the Stated Maturity or by declaration of acceleration, call
for redemption, notice of option to elect repayment or otherwise.
"Offering" means the offering of the Securities for sale by the Company.
"Officer" means the President, any Vice President, the Treasurer, the
Secretary, any Assistant Treasurer or any Assistant Secretary of the Company.
-4-
<PAGE>
"Officers' Certificate" means a certificate signed on behalf of the Company
by any two Officers of the Company who must be the principal executive officer,
the principal financial officer, the treasurer or the principal accounting
officer of the Company.
"Operating Partnership" means CNL APF Partners, L.P., an indirect wholly-
owned limited partnership of the Company
"Opinion of Counsel" means a written opinion, in form and substance
reasonably satisfactory to the Trustee, of legal counsel who is acceptable to
the Trustee. The counsel may be an employee of or counsel to the Company.
"Parent" of any Person means a Person which at the date of determination
owns, directly or indirectly, a majority of the Voting Stock of such Person or
of a Parent of such Person.
"Person" means 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.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participation or other equivalents (however designated, whether
voting or non-voting), which have a preference on liquidation or with respect to
distributions over any other class of Capital Stock, including preferred
partnership interests, whether general or limited and whether outstanding on the
Closing Date or issued thereafter, including, without limitation, all series and
classes of such Preferred Stock.
"real estate assets" means real property and all FF&E associated or used in
connection therewith.
"Record Date" means, with respect to Securities of any Series, the Record
Date specified in the Securities of that Series, whether or not such Record Date
is a Business Day.
"Redemption Date" when used with respect to any Security to be redeemed,
means the date fixed for such redemption pursuant to Article III of this
Indenture.
"Registration Statement" means the Company's registration statement on Form
S-4 (No. 333-_________), as amended, relating to the registration of, among
other securities, the Securities under the Securities Act, together with the
exhibits thereto and all subsequent amendments.
"REIT" means a real estate investment trust as defined in Section 856 of
the Code.
"Responsible Officer" means any officer of the Trustee in its Corporate
Trust Office with direct responsibility for the administration of this Indenture
and also means, with respect to a particular corporate trust matter, any other
officer to whom any corporate trust matter is referred because of his or her
knowledge of and familiarity with a particular subject.
"Restaurant Property" means a restaurant property owned by an Income Fund
prior to the Company's acquisition of such Income Fund.
"SEC" means the Securities and Exchange Commission.
"Securities" means the notes of the Company of any Series authenticated and
delivered under this Indenture.
-5-
<PAGE>
"Securities Act" means the Securities Act of 1933, as amended from time to
time.
"Series" or "Series of Securities" means each series of notes of the
Company created pursuant to Section 2.1 and 2.2 hereof.
"Significant Subsidiary" means any Subsidiary which is a "significant
subsidiary" of the Company within the meaning of Rule 1-02(w) of Regulation S-X
promulgated by the SEC as in effect as of the Closing Date.
"Stated Maturity" means (i) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final installment
of principal of such debt security is due and payable and (ii) with respect to
any scheduled installment of principal of or interest on any debt security, the
date specified in such debt security as the fixed date on which such installment
is due and payable.
"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 the
Company or by one or more Subsidiaries of the Company, (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 the Company or a Subsidiary of
the Company, or (iii) one or more corporations which, either individually or in
the aggregate, would be Significant Subsidiaries (as defined above, 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 the Company or by one or more Subsidiaries.
"Tax" or "Taxes" means all Federal, state, local, and foreign taxes, and
other assessments of a similar nature (whether imposed directly or through
withholding), including any interest, additions to tax, or penalties applicable
thereto, imposed by any domestic or foreign governmental authority responsible
for the administration of any such taxes.
"TIA" means the Trust Indenture Act of 1939 (15 U.S. Code (S)(S) 77aaa-
77bbbb), as amended from time to time, and as in effect on the date of this
Indenture; provided, however, that in the event the Trust Indenture Act of 1939
is amended after such date, "TIA" means, to the extent required by any such
amendment, the Trust Indenture Act as so amended.
"Total Assets" means the sum of (i) Undepreciated Real Estate Assets and
(ii) all other assets (excluding intangibles) of the Company and its
Subsidiaries determined on a consolidated basis.
"Trustee" means the Person named as the "Trustee" in the first paragraph of
this instrument until a successor Trustee shall have become such pursuant to the
applicable provisions of this Indenture, and thereafter "Trustee" shall mean or
include each Person who is then a Trustee hereunder, and if at any time there is
more than one such Person, "Trustee" as used with respect to the Securities of
any Series shall mean the Trustee with respect to Securities of that Series.
"Undepreciated Real Estate Assets" means, as of any date, the cost (being
the original cost to the Company or any of its Subsidiaries plus capital
improvements) of real estate assets of the Company and its Subsidiaries on such
date, before depreciation and amortization of such real estate assets,
determined on a consolidated basis.
"Units" means the limited partnership units of the Operating Partnership.
-6-
<PAGE>
"U.S. Government Obligations" means securities which are (i) direct
obligations of The United States of America for the payment of which its full
faith and credit is pledged or (ii) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of The United States of
America and the payment of which is unconditionally guaranteed as a full faith
and credit obligation by The United States of America, and which in the case of
(i) and (ii) are not callable or redeemable at the option of the issuer thereof,
and shall also include a depository receipt issued by a bank or trust company as
custodian with respect to any such U.S. Government Obligation or a specific
payment of interest on or principal of any such U.S. Government Obligation held
by such custodian for the account of the holder of a depository receipt,
provided that (except as required by law) such custodian is not authorized to
make any deduction from the amount payable to the holder of such depository
receipt from any amount received by the custodian in respect of the U.S.
Government Obligation evidenced by such depository receipt.
"Voting Stock" means, with respect to any Person, Capital Stock of any
class or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
"Wholly Owned" means, with respect to any subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such subsidiary (other than
any director's qualifying shares or investments by individuals mandated by
applicable law) by such Person and/or one or more subsidiaries of such Person
which are Wholly Owned by such Person.
Section 1.2 Other Definitions.
------------------
<TABLE>
<CAPTION>
DEFINED IN
TERM SECTION
<S> <C>
"Acceleration Notice"................................. 6.2
"Bankruptcy Law"...................................... 6.1
"Custodian"........................................... 6.1
"Event of Default".................................... 6.1
"Legal Holiday"....................................... 10.7
"Net Cash Proceeds"................................... 3.2
"Paying Agent"........................................ 2.4
"Redemption Price".................................... 3.1
"Registrar"........................................... 2.4
"Service Agent"....................................... 2.4
</TABLE>
Section 1.3 Incorporation by Reference of Trust Indenture Act.
--------------------------------------------------
Whenever this Indenture refers to a provision of the TIA, the provision is
incorporated by reference in and made a part of this Indenture. The following
TIA term used in this Indenture has the following meaning:
"obligor" on the Securities means the Company and any successor obligor
upon the Securities.
All other terms used in this Indenture that are defined by the TIA, defined
by TIA reference to another statute or defined by SEC rule under the TIA and not
otherwise defined herein are used herein as so defined.
-7-
<PAGE>
Section 1.4 Rules of Construction.
----------------------
Unless the context otherwise requires:
(a) a term has the meaning assigned to it;
(b) an accounting term not otherwise defined has the meaning assigned to
it in accordance with GAAP;
(c) references to "GAAP" shall mean GAAP in effect as of the time when
and for the period as to which such accounting principles are to be
applied;
(d) "or" is not exclusive;
(e) words in the singular include the plural, and in the plural include
the singular; and
(f) provisions apply to successive events and transactions.
ARTICLE II
THE SECURITIES
Section 2.1 Issuable in Series; Form and Dating.
------------------------------------
The Securities may be issued in one or more Series, not to exceed 18
Series. All Securities within a Series and among Series shall be identical
except as may be set forth in a Board Resolution, a supplemental indenture or an
Officers' Certificate detailing the adoption of the terms thereof pursuant to
the authority granted under a Board Resolution.
The Securities, and the Trustee's certificate of authentication in respect
thereof, shall be substantially in the form of Exhibit A hereto, which Exhibit
is part of this Indenture. The Securities may have notations, legends or
endorsements required by law, stock exchange rule or usage. The Company shall
approve the form of the Securities and any notation, legend or endorsement on
them. Any such notations, legends or endorsements not contained in the form of
Security attached as Exhibit A hereto shall be delivered in writing to the
Trustee. Each Security shall be dated the date of its authentication.
The terms and provisions contained in the form of Securities shall
constitute, and are hereby expressly made, a part of this Indenture and, to the
extent applicable, the Company and the Trustee, by their execution and delivery
of this Indenture, expressly agree to such terms and provisions and to be bound
thereby. The Securities may be presented for registration of transfer and
exchange at the offices of the Registrar.
Section 2.2 Establishment of Terms of Series of Securities.
------------------------------------------------
At or prior to the issuance of any Securities within a Series, the
following shall be established by a Board Resolution, a supplemental indenture
or an Officers' Certificate pursuant to authority granted under a Board
Resolution:
(a) the title of the Series (which shall distinguish the Securities of
that particular Series from the Securities of any other Series); and
(b) the limit upon the aggregate principal amount of the Securities of
the Series which may be authenticated
-8-
<PAGE>
and delivered under this Indenture (except for Securities authenticated and
delivered upon registration of transfer of, or in exchange for, or in lieu
of, other Securities of the Series pursuant to Section 2.7, 2.8, 2.11, 3.8
or 9.6).
Section 2.3 Execution and Authentication.
-----------------------------
Two Officers, each of which shall have been duly authorized by all
requisite corporate actions, shall sign, or one Officer shall sign and one
Officer shall attest to, the Securities for the Company by manual or facsimile
signature.
If an Officer whose signature is on a Security no longer holds that office
at the time the Security is authenticated, the Security shall nevertheless be
valid.
A Security shall not be valid until authenticated by the manual signature
of the Trustee or an authenticating agent appointed by the Trustee. The
signature shall be conclusive evidence that the Security has been authenticated
under this Indenture.
The Trustee shall at any time, and from time to time, authenticate
Securities for original issue in the principal amount provided in the related
Board Resolution, supplemental indenture hereto or Officers' Certificate, upon
receipt by the Trustee of a Company Order. Such Company Order may authorize
authentication and delivery pursuant to oral or electronic instructions from the
Company or its duly authorized agent or agents, which oral instructions shall be
promptly confirmed in writing. Each Security shall be dated the date of its
authentication unless otherwise provided by a Board Resolution, a supplemental
indenture hereto or an Officers' Certificate.
The Trustee may appoint an authenticating agent acceptable to the Company
to authenticate Securities. Such an authenticating agent may authenticate
Securities whenever the Trustee may do so. Each reference in this Indenture to
authentication by the Trustee includes authentication by such agent. An
authenticating agent has the same rights as an Agent to deal with the Company or
an Affiliate.
Section 2.4 Registrar and Paying Agent.
----------------------------
The Company shall maintain, with respect to each Series of Securities, an
office or agency in the Borough of Manhattan, The City of New York, where
Securities of a Series may be presented or surrendered for payment ("Paying
Agent"), where Securities of such Series may be surrendered for registration of
transfer or exchange ("Registrar"), and where notices and demands to or upon the
Company in respect of the Securities of such Series and this Indenture may be
served ("Service Agent"). The Registrar shall keep a register with respect to
each Series of Securities and to their transfer and exchange. The Company will
give prompt written notice to the Trustee of the name and address, and any
change in the name or address, of each Registrar, Paying Agent or Service Agent.
If at any time the Company shall fail to maintain any such required Registrar,
Paying Agent or Service Agent or shall fail to furnish the Trustee with the name
and address thereof, such presentations, surrenders, notices and demands may be
made or served at the Corporate Trust Office of the Trustee, and the Company
hereby appoints the Trustee as its agent to receive all such presentations,
surrenders, notices and demands.
The Company may also from time to time designate one or more co-registrars,
additional paying agents or additional service agents and may from time to time
rescind such designations; provided, however, that no such designation or
rescission shall in any manner relieve the Company of its obligations to
maintain a Registrar, Paying Agent and Service Agent as specified in this
Section 2.4. The Company will give prompt written notice to the Trustee of any
such designation or rescission and of any change in the name or address of any
such co-registrar, additional paying agent or additional service agent. The term
"Registrar" includes any co-registrar; the term "Paying Agent" includes any
additional paying agent; and the term "Service Agent" includes any additional
service agent.
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<PAGE>
The Company hereby appoints the Trustee the initial Registrar, Paying Agent
and Service Agent for each Series unless another Registrar, Paying Agent or
Service Agent, as the case may be, is appointed prior to the time Securities of
that Series are first issued.
Section 2.5 Paying Agent to Hold Money in Trust.
-------------------------------------
The Company shall require each Paying Agent for any Series of Securities
other than the Trustee to agree in writing that the Paying Agent will hold in
trust, for the benefit of Securityholders of such Series of Securities, or the
Trustee, all money held by the Paying Agent for the payment of principal of or
interest on such Series of Securities, and will notify the Trustee of any
Default by the Company in making any such payment as specified in Section
6.1(a), (b) or (c). While any such Default continues and subsequent to the
occurrence of any Event of Default, the Trustee may require a Paying Agent to
pay all money held by it to the Trustee. The Company at any time may require a
Paying Agent to pay all money held by it to the Trustee. Upon payment over to
the Trustee, the Paying Agent (if other than the Company or a Subsidiary) shall
have no further liability for the money. If the Company or its Subsidiary acts
as Paying Agent, it shall segregate and hold in a separate trust fund for the
benefit of Securityholders of any Series of Securities all money, securities and
investments held by it as Paying Agent.
Section 2.6 Securityholder Lists.
----------------------
The Trustee shall preserve in as current a form as is reasonably
practicable the most recent list available to it of the names and addresses of
Securityholders of each Series of Securities and shall otherwise comply with TIA
(S) 312(a). If the Trustee is not the Registrar, the Company shall furnish to
the Trustee at least ten days before each interest payment date and at such
other times as the Trustee may request in writing a list, in such form and as of
such date as the Trustee may reasonably require, of the names and addresses of
Securityholders of each Series of Securities.
Section 2.7 Transfer and Exchange.
-----------------------
Where Securities of a Series are presented to the Registrar or a co-
registrar with a request to register a transfer or to exchange them for an equal
principal amount of Securities of the same Series, the Registrar shall register
the transfer or make the exchange if its requirements for such transactions are
met. To permit registrations of transfers and exchanges, the Trustee shall
authenticate Securities at the Registrar's request. No service charge shall be
made for any registration of transfer or exchange (except as otherwise expressly
permitted herein), but the Company may require payment of a sum sufficient to
cover any transfer tax or similar governmental charge payable by the Holder in
connection therewith (other than any such transfer tax or similar governmental
charge payable upon exchanges pursuant to Sections 2.11, 3.8 or 9.6).
Neither the Company nor the Registrar shall be required for the period
beginning at the opening of business fifteen Business Days immediately preceding
the mailing of a notice of redemption of Securities of that Series selected for
redemption and ending at the close of business on the day of such mailing (a) to
issue, register the transfer of, or exchange Securities of any Series, or (b) to
register the transfer of or exchange Securities of any Series selected, called
or being called for redemption as a whole or the portion being redeemed of any
such Securities selected, called or being called for redemption in part.
Section 2.8 Mutilated, Destroyed, Lost and Stolen Securities.
--------------------------------------------------
If any mutilated Security is surrendered to the Registrar or the Trustee,
the Company shall execute and issue and the Trustee shall authenticate and
deliver in exchange therefor a new Security of the same Series and of like tenor
and principal amount and bearing a number not contemporaneously outstanding.
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If there shall be delivered to the Company and the Trustee (i) evidence to
their reasonable satisfaction of the destruction, loss or theft of any Security
and (ii) such security or indemnity as may be required by them to save each of
them and any agent of either of them harmless, then, in the absence of notice to
the Company or the Trustee that such Security has been acquired by a bona fide
purchaser, the Company shall issue and execute and upon its request the Trustee
shall authenticate and make available for delivery, in lieu of any such
destroyed, lost or stolen Security, a new Security of the same Series and of
like tenor and principal amount and bearing a number not contemporaneously
outstanding.
In case any such mutilated, destroyed, lost or stolen Security has become
or is about to become due and payable, the Company in its discretion may,
instead of issuing a new Security, pay to the related Holder the Principal and
interest and any other obligations with respect to such Security.
Upon the issuance of any new Security under this Section, the Company may
require the payment of a sum sufficient to cover any tax or other governmental
charge that may be imposed in relation thereto and any other expenses (including
the fees and expenses of the Trustee) connected therewith.
Every new Security of any Series issued pursuant to this Section in lieu of
any destroyed, lost or stolen Security shall constitute an original additional
contractual obligation of the Company, whether or not the destroyed, lost or
stolen Security shall be at any time enforceable by anyone, and shall be
entitled to all the benefits of this Indenture equally and proportionately with
any and all other Securities of that Series duly issued hereunder.
The provisions of this Section are exclusive and shall preclude (to the
extent lawful) all other rights and remedies with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Securities.
Section 2.9 Outstanding Securities.
------------------------
The Securities outstanding at any time are all the Securities authenticated
by the Trustee except for those canceled by it, those delivered to it for
cancellation and those described in this Section as not outstanding.
If a Security is replaced pursuant to Section 2.8, it ceases to be
outstanding unless the Trustee receives proof satisfactory to it that the
replaced Security is held by a bona fide purchaser.
If the Paying Agent (other than the Company, a Subsidiary or an Affiliate
of any thereof) holds, for the benefit of Holders, on the Maturity of Securities
of a Series, money or other sufficient investments sufficient to pay in full
such Securities payable on that date, then on and after that date such
Securities of the Series cease to be outstanding and interest on them ceases to
accrue.
A Security does not cease to be outstanding because the Company or an
Affiliate holds the Security.
Section 2.10 Treasury Securities.
---------------------
In determining whether the Holders of the required principal amount of
Securities of a Series have concurred in any request, demand, authorization,
direction, notice, consent or waiver, Securities of a Series owned by the
Company or an Affiliate shall be disregarded, except that for the purposes of
determining whether the Trustee shall be protected in relying on any such
request, demand, authorization, direction, notice, consent or waiver, only
Securities of a Series that a Responsible Officer of the Trustee knows are so
owned shall be so disregarded.
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<PAGE>
Section 2.11 Temporary Securities.
---------------------
Until definitive Securities are ready for delivery, the Company may prepare
and the Trustee shall authenticate temporary Securities upon a Company Order.
Temporary Securities shall be substantially in the form of definitive Securities
but may have variations that the Company considers appropriate for temporary
Securities. Without unreasonable delay, the Company shall prepare and the
Trustee upon request shall authenticate definitive Securities of the same Series
and date of maturity in exchange for temporary Securities. Until so exchanged,
temporary Securities shall have the same rights under this Indenture as the
definitive Securities.
Section 2.12 Cancellation.
--------------
The Company at any time may deliver Securities to the Trustee for
cancellation. The Registrar and the Paying Agent shall forward to the Trustee
any Securities surrendered to them for registration of transfer, exchange or
payment. The Trustee shall cancel all Securities surrendered for registration
of transfer, exchange, payment, replacement or cancellation and shall dispose of
such canceled Securities (subject to the record retention requirement of the
Exchange Act) in accordance with its customary practices, unless the Company
otherwise directs. The Company may not issue new Securities to replace
Securities that it has paid or delivered to the Trustee for cancellation.
Section 2.13 Defaulted Interest.
--------------------
If the Company defaults in a payment of principal of or interest on a
Series of Securities, it shall pay interest on overdue principal and overdue
installments on interest, plus (to the extent permitted by law) any interest
payable on the defaulted interest, pursuant to Section 4.1 hereof, to the
Persons who are Securityholders of the Series on a subsequent special record
date, which date shall be at least five days prior to the last payment date. The
Company shall fix the record date and payment date. At least 30 days before the
record date, the Company shall mail to the Trustee and to each Securityholder of
the Series a notice that states the record date, the payment date and the amount
of interest to be paid. The Company may pay defaulted interest in any other
lawful manner.
Section 2.14 CUSIP Numbers.
---------------
The Company in issuing the Securities may use "CUSIP" numbers (if then
generally in use), and, if so, the Trustee shall use "CUSIP" numbers in notices
of redemption as a convenience to Holders; provided that any such notice may
state that no representation is made as to the correctness of such numbers
either as printed on the Securities or as contained in any notice of a
redemption and that reliance may be placed only on the other elements of
identification printed on the Securities, and any such redemption shall not be
affected by any defect in or omission of such numbers.
ARTICLE III
REDEMPTION
Section 3.1 Optional Redemption.
-------------------
The Securities of any Series may be redeemed at any time at the option of
the Company, in whole or from time to time in part, at a redemption price equal
to the sum of the principal amount of the Securities being redeemed plus accrued
interest thereon (including, if applicable, default interest) to the Redemption
Date (the "Redemption Price").
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<PAGE>
Section 3.2 Mandatory Redemption.
--------------------
In the event that the Company or any Subsidiary (a) sells or otherwise
disposes of any Restaurant Property and realizes net cash proceeds in excess of
(i) the amount required to repay mortgage Indebtedness (outstanding immediately
prior to the Income Fund Mergers) secured by such Restaurant Property or
otherwise required to be applied to the reduction of Indebtedness of the Company
or any of its Subsidiaries and (ii) the direct, out-of-pocket costs incurred by
the Company or any Subsidiary in connection with such sale or other disposition
computed without duplication or (b) refinances (whether at maturity or
otherwise) any Indebtedness secured by any Restaurant Property and realizes net
cash proceeds in excess of (i) the amount of Indebtedness secured by such
Restaurant Property at the time of the Income Fund Mergers, calculated prior to
any repayment or other reduction in the amount of such Indebtedness in the
Income Fund Mergers, and (ii) the direct, out-of-pocket costs incurred by the
Company or its subsidiary in connection with such refinancing computed without
duplication (in either case, the "Net Cash Proceeds"), the Company shall 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 (including accrued
interest) of the particular Series of the Securities which were issued to the
Persons who were partners of such Income Funds immediately prior to the Income
Fund Mergers equal to 80% of such Net Cash Proceeds.
Section 3.3 Notice to Trustee.
-----------------
If the Company elects to redeem Securities pursuant to Section 3.1 or is
required to redeem Securities or any part thereof pursuant to Section 3.2, it
shall notify the Trustee of the Redemption Date and the principal amount of the
Series of Securities to be redeemed. The Company shall give the notice at least
45 days before the Redemption Date (or such shorter notice as may be acceptable
to the Trustee). Any such notice may be canceled at any time prior to notice of
such redemption being mailed to any Holder and shall thereby be void and of no
effect.
Section 3.4 Selection of Securities to be Redeemed.
--------------------------------------
If less than all of the Securities in a Series are to be redeemed, the
Trustee shall select the Securities of the Series to be redeemed in any manner
that the Trustee deems fair and appropriate. The Trustee shall make the
selection from Securities of the Series outstanding not previously called for
redemption.
Section 3.5 Notice of Redemption.
--------------------
At least 30 days but not more than 60 days before a Redemption Date, the
Company shall mail a notice of redemption by first-class mail to each Holder
whose Securities are to be redeemed.
The notice shall identify the Securities of the Series to be redeemed and
shall state:
(a) the Redemption Date;
(b) the Redemption Price;
(c) the name and address of the Paying Agent;
(d) that Securities of the Series called for redemption must be
surrendered to the Paying Agent to collect the Redemption Price;
(e) the principal amount of Securities of a Series to be redeemed;
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<PAGE>
(f) that the notice is being sent pursuant to this Section 3.5 and
pursuant to either the optional or the mandatory redemption provisions of
Section 3.1 or 3.2, as the case may be;
(g) that, unless the Company defaults in making the redemption payments,
interest on Securities of the Series called for redemption ceases to accrue
on and after the Redemption Date;
(h) that, if any Security is being redeemed in part, the portion of the
principal amount of such Security to be redeemed and that, on and after the
Redemption Date, upon surrender of such Security, a new Security or
Securities in principal amount equal to the unredeemed portion thereof will
be issued upon cancellation of the original Security;
(i) that, if any Security contains a CUSIP number as provided in Section
2.14, no representation is being made as to the correctness of the CUSIP
number either as printed on the Security or as contained in the notice of
redemption and that reliance may be placed only on the other identification
numbers printed on the Security; and
(j) any other information as may be required by the terms of the
particular Series or the Securities of a Series being redeemed.
(k) At the Company's request, the Trustee shall give the notice of
redemption in the Company's name and at its expense.
Section 3.6 Effect of Notice of Redemption.
------------------------------
Once notice of redemption is mailed or published as provided in Section
3.5, Securities of a Series or the applicable part of such Securities, called
for redemption become due and payable on the Redemption Date and at the
Redemption Price. A notice of redemption may not be conditional. Upon
surrender to the Paying Agent, such Securities shall be paid at the Redemption
Price plus accrued interest to the Redemption Date.
Section 3.7 Deposit of Redemption Price.
---------------------------
On or before 10:00 a.m., New York City time, on the Redemption Date, the
Company shall deposit with the Paying Agent money sufficient to pay the
Redemption Price of and accrued interest, if any, on all Securities to be
redeemed on that date. The Paying Agent shall promptly return to the Company any
money so deposited which is in excess of the amounts required therefor after
payment to the Holders of the Securities to be redeemed.
Section 3.8 Securities Redeemed in Part.
---------------------------
Upon surrender of a Security that is redeemed in part, the Company shall
issue and the Trustee shall authenticate for the Holder a new Security of the
same Series and the same maturity equal in principal amount to the unredeemed
portion of the Security surrendered.
ARTICLE IV
COVENANTS
The following covenants shall be applicable with respect to Securities of
any Series. For the purpose of Securities of any Series issued hereunder, when
used in this Article IV, the term "Securities" shall mean Securities of that
Series.
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<PAGE>
Section 4.1 Payment of Principal and Interest.
---------------------------------
The Company covenants and agrees for the benefit of the Holders of each
Series of Securities that it will duly and punctually pay the principal of and
interest on the Securities of that Series in accordance with the terms of such
Securities and this Indenture.
The Company shall pay interest on overdue principal and overdue interest on
the Securities of any Series, to the extent permitted by law, at the rate
specified in such Securities.
Section 4.2 Reports.
-------
The Company shall at all times comply with TIA (S) 3.14(a).
Section 4.3 Compliance Certificate.
----------------------
The Company shall deliver to the Trustee, within 120 days after the end of
its fiscal year, an Officers' Certificate complying with TIA (S) 314(a)(4).
Section 4.4 Corporate Existence.
-------------------
Subject to Article V, the Company will do or cause to be done all things
necessary to preserve and keep in full force and effect its existence in
accordance with its organizational documents (as the same may be amended from
time to time) and the rights (charter and statutory) and franchises of the
Company; provided, however, that the Company shall not be required to preserve
any such right, franchise or existence if the Board shall determine that the
preservation thereof is no longer desirable in the conduct of the business of
the Company and its Subsidiaries taken as a whole.
Section 4.5 Limitation on Incurrences of Indebtedness.
-----------------------------------------
(a) The Company will not, and will not permit any of its Subsidiaries
to, Incur any Indebtedness (including Acquired Indebtedness) other than
intercompany Indebtedness (representing Indebtedness to which the only
parties are the Company, the Operating Partnership and/or any of their
Subsidiaries, but only so long as such Indebtedness is held solely by any
of such parties) that is subordinate in right of payment to the Securities,
if immediately after giving effect to the Incurrence of such Indebtedness,
the aggregate principal amount of all outstanding Indebtedness of the
Company and its Subsidiaries on a consolidated basis, determined in
accordance with GAAP, is greater than 75% of the Company's Total Assets.
(b) For purposes of determining any particular amount of Indebtedness
under this Section 4.5, Guarantees, Liens or obligations with respect to
letters of credit supporting Indebtedness otherwise included in the
determination of such particular amount shall not be included as additional
Indebtedness.
(c) Indebtedness of any Person that is not a Subsidiary of the Company,
which Indebtedness is outstanding at the time such Person becomes a
Subsidiary of the Company or is merged with or into or consolidated with
the Company or a Subsidiary of the Company, shall be deemed to have been
Incurred at the time such Person becomes a Subsidiary of the Company or is
merged with or into or consolidated with the Company, or a Subsidiary of
the Company, and Indebtedness which is assumed at the time of the
acquisition of any asset shall be deemed to have been Incurred at the time
of such acquisition.
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<PAGE>
Section 4.6 Maintenance of Office or Agency.
-------------------------------
The Company shall maintain in the Borough of Manhattan, The City of New
York, an office or agency where Securities may be presented or surrendered for
payment, where Securities may be surrendered for registration of transfer or
exchange and where notices and demands to or upon the Company in respect of the
Securities and this Indenture may be served. The Company shall give prompt
written notice to the Trustee and the Paying Agent of the location, and any
change in the location, of such office or agency. If at any time the Company
shall fail to maintain any such required office or agency or shall fail to
furnish the Trustee and the Paying Agent, if different, with the address
thereof, such presentations, surrenders, notices and demands may be made or
served at the address of the Trustee set forth in Section 10.2.
The Company may also from time to time designate one or more other offices
or agencies where the Securities may be presented or surrendered for any or all
such purposes and may from time to time rescind such designations; provided,
however, that no such designation or rescission shall in any manner relieve the
Company of its obligation to maintain an office or agency in the Borough of
Manhattan, The City of New York, for such purposes. The Company shall give
prompt written notice to the Trustee and the Paying Agent, if different, of any
such designation or rescission and of any change in the location of any such
other office or agency. The Company hereby initially designates the corporate
trust office of the Paying Agent as such office.
ARTICLE V
SUCCESSORS
Section 5.1 When Company May Merge, Etc.
-----------------------------
The Company 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 Person or permit any
Person to merge or consolidate with or into the Company, unless:
(a) either the Company shall be the continuing Person or the Person (if
other than the Company) formed by such consolidation or into which the
Company is merged or that acquired such property and assets of the Company
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 Trustee, all of the obligations of the Company, on the Securities and
under this Indenture;
(b) immediately after giving effect, on a pro forma basis, to such
transaction, no Default or Event of Default shall have occurred and be
continuing; and
(c) the Company will have delivered to the 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 this provision and that all conditions precedent provided for herein
relating to such transaction have been complied with.
Section 5.2 Successor Person Substituted.
----------------------------
Upon any consolidation or merger or any transfer of all or substantially
all of the assets of the Company, in accordance with Section 5.1, the successor
Person formed by such consolidation or into which the Company is merged or to
which such transfer is made, shall succeed to, be substituted for, and may
exercise every right and power of the Company under this Indenture with the same
effect as if such
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<PAGE>
successor Person had been named therein as the Company and the Company shall be
released from the obligations under the Securities and this Indenture.
ARTICLE VI
DEFAULTS AND REMEDIES
Section 6.1 Events of Default.
-----------------
"Event of Default," wherever used herein with respect to Securities of any
Series, means any one of the following events:
(a) the failure by the Company to pay any installment of interest on the
Securities of that Series as and when the same becomes due and payable and
the continuance of any such failure for 15 days;
(b) the failure by the Company to pay all or any part of the principal
of the Securities of that Series when and as the same becomes due and
payable at maturity, redemption, by acceleration or otherwise;
(c) the failure by the Company to make any mandatory redemption pursuant
to the terms of and within the period specified in Section 3.2;
(d) the failure by the Company to observe or perform any other covenant
or agreement contained in the Securities of that series or this Indenture
with respect to that Series of Securities and the continuance of such
failure for a period of 30 days after written notice is given to the
Company by the Trustee or to the Company and the Trustee by the Holders of
at least 25% in aggregate principal amount of the Securities of that Series
outstanding;
(e) the Company or any of its Significant Subsidiaries pursuant to or
within the meaning of any Bankruptcy Law:
(i) commences a voluntary case,
(ii) consents to the entry of an order for relief against it
in an involuntary case,
(iii) consents to the appointment of a Custodian or receiver
of it or for all or substantially all of its property, or
(iv) makes a general assignment for the benefit of its
creditors;
(f) a court of competent jurisdiction enters an order or decree under any
Bankruptcy Law that:
(i) is for relief against the Company or any of its Significant
Subsidiaries in an involuntary case;
(ii) appoints a Custodian of the Company or any of its
Significant Subsidiaries or for all or substantially all of its
property; or
(iii) orders the liquidation of the Company or any of its
Significant Subsidiaries and the order or decree remains unstayed
and in effect for 60 days.
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Section 6.2 Acceleration of Maturity; Rescission and Annulment.
--------------------------------------------------
If an Event of Default with respect to the Securities of any Series at the
time outstanding occurs and is continuing (other than an Event of Default
specified in Section 6.1(e) or (f), above), then either the Trustee or the
Holders of 25% in aggregate principal amount of the Securities of that Series
then outstanding, by notice in writing to the Company (and to the Trustee if
given by Holders) (an "Acceleration Notice"), may declare all principal and
accrued interest thereon to be due and payable immediately.
If an Event of Default specified in Section 6.1(e) or (f) shall occur, the
principal amount (or specified amount) of and accrued and unpaid interest, if
any, on all outstanding Securities of that Series shall ipso facto become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any Holder.
At any time after such a declaration of acceleration with respect to any
Series has been made and before a judgment or decree for payment of the money
due has been obtained by the Trustee as hereinafter provided in this Article VI,
the Holders of a majority (or such greater amount if the Event of Default
resulting in such acceleration related to a Default in a provision of this
Indenture that may not be amended without the consent of a greater amount) in
principal amount of the outstanding Securities of that Series, by written notice
to the Company and the Trustee, may rescind and annul such declaration and its
consequences if:
(a) the Company has paid or deposited with the Trustee a sum sufficient
to pay:
(i) all overdue interest, if any (including default interest), on
all Securities of that Series;
(ii) the principal of any Securities of that Series which have
become due (otherwise than by such declaration of acceleration) and
interest thereon at the rate or rates prescribed therefor in such
Securities; and
(iii) all sums paid or advanced by the Trustee hereunder and the
reasonable compensation, expenses, disbursements and advances of
the Trustee, its agents and counsel and any other amounts due the
Trustee under Section 7.7; and
(b) all Events of Default with respect to Securities of that Series,
other than the non-payment of the principal of and interest on Securities
of that Series which have become due solely by such declaration of
acceleration, have been cured or waived as provided in Section 6.13.
No such rescission shall effect any subsequent Default or impair any right
consequent thereon.
Section 6.3 Collection of Indebtedness and Suits for Enforcement by
------------------------------------------------------
Trustee.
--------
The Company covenants that if:
(a) default is made in the payment of any interest on any Security when
such interest becomes due and payable and such default continues for a
period of 30 days; or
(b) default is made in the payment of principal of any Security at the
Maturity thereof;
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<PAGE>
then, the Company will, upon demand of the Trustee, pay to it, for the benefit
of the Holders of such Securities, the whole amount then due and payable on such
Securities for principal and interest at the rate or rates prescribed therefor
in such Securities, and, in addition thereto, such further amount as shall be
sufficient to cover the costs and expenses of collection, including the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and counsel and any other amounts due the Trustee under Section 7.7.
If the Company fails to pay such amounts forthwith upon such demand, the
Trustee, in its own name and as trustee of an express trust, may institute a
judicial proceeding for the collection of the sums so due and unpaid, may
prosecute such proceeding to judgment or final decree and may enforce the same
against the Company or any other obligor upon such Securities and collect the
moneys adjudged or deemed to be payable in the manner provided by law out of the
property of the Company or any other obligor upon such Securities, wherever
situated.
If an Event of Default with respect to any Securities of any Series occurs
and is continuing or if an acceleration has occurred, the Trustee may in its
discretion proceed to protect and enforce its rights and the rights of the
Holders of Securities of such Series by such appropriate judicial proceedings as
the Trustee shall deem most effective to protect and enforce any such rights,
whether for the specific enforcement of any covenant or agreement in this
Indenture or in aid of the exercise of any power granted herein, or to enforce
any other proper remedy.
Section 6.4 Trustee May File Proofs of Claim.
--------------------------------
In case of the pendency of any receivership, insolvency, liquidation,
bankruptcy, reorganization, arrangement, adjustment, composition or other
judicial proceeding relative to the Company or any other obligor upon the
Securities or the property of the Company or of such other obligor or their
creditors, the Trustee (irrespective of whether the principal of the Securities
shall then be due and payable as therein expressed or by declaration or
otherwise and irrespective of whether the Trustee shall have made any demand on
the Company for the payment of overdue principal or interest) shall be entitled
and empowered, by intervention in such proceeding or otherwise:
(a) to file and prove a claim for the whole amount of principal and
interest owing and unpaid in respect of the Securities and to file such
other papers or documents as may be necessary or advisable in order to have
the claims of the Trustee (including any claim for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its
agents and counsel and any other amounts due the Trustee under Section 7.7)
and of the Holders allowed in such judicial proceeding; and
(b) to collect and receive any moneys or other property payable or
deliverable on any such claims and to distribute the same,
and any custodian, receiver, assignee, trustee, liquidator, sequestrator or
other similar official in any such judicial proceeding is hereby authorized by
each Holder to make such payments to the Trustee and, in the event that the
Trustee shall consent to the making of such payments directly to the Holders, to
pay to the Trustee any amount due it for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel and any other
amounts due the Trustee under Section 7.7.
Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement, adjustment or composition affecting the Securities
or the rights of any Holder thereof or to authorize the Trustee to vote in
respect of the claim of any Holder in any such proceeding.
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<PAGE>
Section 6.5 Trustee May Enforce Claims Without Possession of Securities.
-----------------------------------------------------------
All rights of action and claims under this Indenture or the Securities may
be prosecuted and enforced by the Trustee without the possession of any of the
Securities or the production thereof in any proceeding relating thereto, and any
such proceeding instituted by the Trustee shall be brought in its own name as
trustee of an express trust, and any recovery of judgment shall, after provision
for the payment of the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel, be for the ratable benefit of
the Holders of the Securities in respect of which such judgment has been
recovered.
Section 6.6 Application of Money Collected.
------------------------------
Any money collected by the Trustee pursuant to this Article VI shall be
applied in the following order, at the date or dates fixed by the Trustee and,
in case of the distribution of such money on account of principal or interest,
upon presentation of the Securities and the notation thereon of the payment if
only partially paid and upon surrender thereof if fully paid:
First: To the Trustee, the payment of all amounts due the Trustee
under Section 7.7; and
Second: To the Securityholders, the payment of the amounts then due
and unpaid for principal of and interest (including default
interest) on the Securities in respect of which or for the
benefit of which such money has been collected, ratably,
without preference or priority of any kind, according to the
amounts due and payable on such Securities for principal and
interest, respectively; and
Third: To the Company.
Section 6.7 Limitation on Suits.
--------------------
Subject to Section 6.8 below, no Holder of any Security of any Series shall
have any right to institute any proceeding, judicial or otherwise, with respect
to this Indenture, or for the appointment of a receiver or trustee, or for any
other remedy hereunder, unless:
(a) such Holder has previously given written notice to the Trustee of a
continuing Event of Default with respect to the Securities of that Series;
(b) the Holders of not less than 25% in principal amount of the
outstanding Securities of that Series shall have made written request to
the Trustee to institute proceedings in respect of such Event of Default in
its own name as Trustee hereunder;
(c) such Holder or Holders have offered to the Trustee reasonable
indemnity against the costs, expenses and liabilities to be incurred in
compliance with such request;
(d) the Trustee for 60 days after its receipt of such notice, request
and offer of indemnity has failed to institute any such proceeding; and
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(e) no direction inconsistent with such written request has been given
to the Trustee during such 60-day period by the Holders of a majority in
principal amount of the outstanding Securities of that Series;
it being understood and intended that no one or more of such Holders shall have
any right in any manner whatever by virtue of, or by availing of, any provision
of this Indenture to affect, disturb or prejudice the rights of any other of
such Holders, or to obtain or to seek to obtain priority or preference over any
other of such Holders or to enforce any right under this Indenture, except in
the manner herein provided and for the equal and ratable benefit of all such
Holders.
Section 6.8 Unconditional Right of Holders to Receive Principal and
-------------------------------------------------------
Interest.
---------
Notwithstanding any other provision in this Indenture, the Holder of any
Security shall have the right, which is absolute and unconditional, to receive
payment of the principal of and interest, if any, on such Security on the Stated
Maturity or Stated Maturities expressed in such Security (or, in the case of
redemption, on the Redemption Date) and to institute suit for the enforcement of
any such payment, and such rights shall not be impaired without the consent of
such Holder.
Section 6.9 Restoration of Rights and Remedies.
----------------------------------
If the Trustee or any Holder has instituted any proceeding to enforce any
right or remedy under this Indenture and such proceeding has been discontinued
or abandoned for any reason, or has been determined adversely to the Trustee or
to such Holder, then and in every such case, subject to any determination in
such proceeding, the Company, the Trustee and the Holders shall be restored
severally and respectively to their former positions hereunder and thereafter
all rights and remedies of the Trustee and the Holders shall continue as though
no such proceeding had been instituted.
Section 6.10 Rights and Remedies Cumulative.
------------------------------
Except as otherwise provided with respect to the replacement or payment of
mutilated, destroyed, lost or stolen Securities in Section 2.8, no right or
remedy herein conferred upon or reserved to the Trustee or to the Holders is
intended to be exclusive of any other right or remedy, and every right and
remedy shall, to the extent permitted by law, be cumulative and in addition to
every other right and remedy given hereunder or now or hereafter existing at law
or in equity or otherwise. The assertion or employment of any right or remedy
hereunder, or otherwise, shall not prevent the concurrent assertion or
employment of any other appropriate right or remedy.
Section 6.11 Delay or Omission Not Waiver.
----------------------------
No delay or omission of the Trustee or of any Holder of any Securities to
exercise any right or remedy accruing upon any Default or Event of Default shall
impair any such right or remedy or constitute a waiver of any such Default or
Event of Default or an acquiescence therein. Every right and remedy given by
this Article VI or by law to the Trustee or to the Holders may be exercised from
time to time, and as often as may be deemed expedient, by the Trustee or by the
Holders, as the case may be.
Section 6.12 Control by Holders.
------------------
The Holders of a majority in principal amount of the outstanding Securities
of any Series shall have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or exercising
any trust or power conferred on the Trustee, with respect to the Securities of
such Series, provided that:
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(a) such direction shall not be in conflict with any rule of law or with
this Indenture;
(b) the Trustee may take any other action deemed proper by the Trustee
which is not inconsistent with such direction; and
(c) subject to the provisions of Section 6.1, the Trustee shall have the
right to decline to follow any such direction if the Trustee in good faith
shall, by a Responsible Officer of the Trustee, determine that the
proceeding so directed would involve the Trustee in personal liability or
be unduly prejudicial to Holders of Securities of such Series not joining
therein.
Section 6.13 Waiver of Past Defaults.
-----------------------
The Holders of a majority in aggregate principal amount of the outstanding
Securities of a Series may waive on behalf of all the Holders any Default with
respect to such Series and its consequences, except a Default with respect to
any provision requiring supermajority approval to amend, which Default may only
be waived by such a supermajority with respect to such Series, and except a
Default in the payment of principal of or interest on any Security of that
Series not yet cured or a Default with respect to any covenant or provision
which cannot be modified or amended without the consent of the Holder of each
outstanding Security of that Series affected, provided, however, that Holders of
a majority or a supermajority (as the case may be) in aggregate principal amount
of the Securities of any Series may rescind an acceleration and its consequences
including any payment default that resulted from such acceleration only pursuant
to Section 6.2 hereof. Upon any such waiver, such Default shall cease to exist,
and any Event of Default arising therefrom shall be deemed to have been cured,
for every purpose of this Indenture; but no such waiver shall extend to any
subsequent or other Default or impair any right consequent thereon.
Section 6.14 Undertaking for Costs.
---------------------
All parties to this Indenture agree, and each Holder of any Security by his
acceptance thereof shall be deemed to have agreed, that any court may in its
discretion require, in any suit for the enforcement of any right or remedy under
this Indenture, or in any suit against the Trustee for any action taken,
suffered or omitted by it as Trustee, the filing by any party litigant in such
suit of an undertaking to pay the costs of such suit, and that such court may in
its discretion assess reasonable costs, including reasonable attorneys' fees,
against any party litigant in such suit, having due regard to the merits and
good faith of the claims or defenses made by such party litigant; but the
provisions of this Section shall not apply to any suit instituted by the
Company, to any suit instituted by the Trustee, to any suit instituted by any
Holder, or group of Holders, holding in the aggregate more than 10% in principal
amount of the outstanding Securities of any Series, or to any suit instituted by
any Holder for the enforcement of the payment of the principal of or interest on
any Security on or after the Stated Maturity or Stated Maturities expressed in
such Security (or, in the case of redemption, on the Redemption Date).
ARTICLE VII
TRUSTEE
Section 7.1 Duties of Trustee.
-----------------
(a) If a Default has occurred and is continuing or an Event of Default
or acceleration has occurred and has not been properly waived or rescinded,
the Trustee shall exercise the rights and powers vested in it by this
Indenture and use the same degree of care and skill in their exercise as a
prudent man would exercise or use under the circumstances in the conduct of
his own affairs.
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(b) Except during the continuance of a Default and subsequent to an
Event of Default or acceleration that has occurred and that has not been
properly waived or rescinded:
(i) the Trustee need perform only those duties that are
specifically set forth in this Indenture and no others;
(ii) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon Officers'
Certificates or Opinions of Counsel furnished to the Trustee and
conforming to the requirements of this Indenture; however, in the
case of any such Officers' Certificates or Opinions of Counsel
which by any provisions hereof are specifically required to be
furnished to the Trustee, the Trustee shall examine such Officers'
Certificates and Opinions of Counsel to determine whether or not
they conform to the requirements of this Indenture.
(c) The Trustee may not be relieved from liability for its own negligent
action, its own negligent failure to act or its own willful misconduct,
except that:
(i) this paragraph does not limit the effect of paragraph (b) of
this Section 7.1;
(ii) the Trustee shall not be liable for any error of judgment
made in good faith by a Responsible Officer, unless it is proved
that the Trustee was negligent in ascertaining the pertinent facts;
(iii) the Trustee shall not be liable with respect to any action
taken, suffered or omitted to be taken by it with respect to
Securities of any Series in good faith in accordance with the
direction of the Holders of a majority in principal amount of the
outstanding Securities of such Series relating to the time, method
and place of conducting any proceeding for any remedy available to
the Trustee, or exercising any trust or power conferred upon the
Trustee, under this Indenture with respect to the Securities of
such Series.
(d) Every provision of this Indenture that in any way relates to the
Trustee is subject to paragraph (a), (b) and (c) of this Section.
(e) Subject to the provisions of this Article and the rest of this
Indenture relating to the duties of the Trustee, the Trustee will be under
no obligation to exercise any of its rights or powers under this Indenture
at the request, order or direction of any of the Holders, unless such
Holders have offered to the Trustee reasonable security or indemnity
against the cost, expenses and liabilities which might be incurred by it in
compliance with such request, order or direction.
(f) The Trustee shall not be liable for interest on any money received
by it except as the Trustee may agree in writing with the Company. Money
held in trust by the Trustee need not be segregated from other funds except
to the extent required by law.
(g) No provision of this Indenture shall require the Trustee to risk its
own funds or otherwise incur any financial liability in the performance of
any of its duties, or in the exercise of any of its rights or powers, if it
shall have reasonable grounds for believing that repayment of such funds or
adequate indemnity against such risk is not reasonably assured to it.
(h) Unless an affiliate of the Company, the Paying Agent, the Registrar
and any authenticating agent shall be entitled to the protections,
immunities and standard of care as are set forth in paragraphs (a), (b) and
(c) of this Section and Section 7.2 with respect to the Trustee.
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(i) Whenever in the administration of this Indenture the Trustee shall
deem it desirable that a matter be proved or established prior to taking,
suffering or omitting any action hereunder, the Trustee (unless other
evidence be herein specifically prescribed) may, in the absence of bad
faith on its part, rely upon an Officer's Certificate.
Section 7.2 Rights of Trustee.
-------------------
(a) The Trustee may rely on and shall be protected in acting or
refraining from acting upon any document reasonably believed by it to be
genuine and to have been signed or presented by the proper Person. The
Trustee need not investigate any fact or matter stated in the document.
(b) Before the Trustee acts or refrains from acting, it may require an
Officers' Certificate or an Opinion of Counsel. The Trustee shall not be
liable for any action it takes or omits to take in good faith in reliance
on such Officers' Certificate or Opinion of Counsel.
(c) The Trustee may act through agents and shall not be responsible for
the misconduct or negligence of any agent appointed with due care.
(d) The Trustee shall not be liable for any action it takes or omits to
take in good faith which action or inaction it believes to be authorized or
within its rights or powers.
(e) The Trustee may consult with counsel and the advice of such counsel
or any Opinion of Counsel shall be full and complete authorization and
protection in respect of any action taken, suffered or omitted by it
hereunder in good faith and in reliance thereon.
(f) The Trustee shall not be bound to make any investigation into the
facts or matters stated in any resolution, certificate, statement,
instrument, opinion, notice, request, direction, consent, order, bond,
debenture, or other paper or document, but the Trustee, in its discretion,
may make such further inquiry or investigation into such facts or matters
as it may see fit .
(g) The Trustee shall not be required to give any bond or surety in
respect of the performance of its powers and duties hereunder.
(h) The permissive rights of the Trustee to do things enumerated in this
Indenture shall not be construed as duties.
(i) The Trustee shall not be charged with knowledge of any Default or
Event of Default or of the identity of any Subsidiary unless either (i) a
Responsible Officer shall have actual knowledge thereof or (ii) the Trustee
shall have received written notice thereof from the Company or any Holder.
Section 7.3 Individual Rights of Trustee.
----------------------------
The Trustee in its individual or any other capacity may become the owner or
pledgee of Securities and may otherwise deal with the Company or an Affiliate
with the same rights it would have if it were not Trustee. Any Agent may do the
same with like rights. The Trustee is also subject to Sections 7.10 and 7.11.
Section 7.4 Trustee's Disclaimer.
--------------------
The Trustee shall not be responsible for and makes no representation as to
the validity or adequacy of this Indenture or the Securities, it shall not be
accountable for the Company's use of the proceeds from the Securities, and it
shall not be responsible for any statement of the Company in this Indenture or
the Securities other than its certificate of authentication.
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Section 7.5 Notice of Defaults.
------------------
If a Default or Event of Default occurs and is continuing with respect to
the Securities of any Series and if it is known to a Responsible Officer of the
Trustee, the Trustee shall mail to each Securityholder of the Securities of that
Series notice of a Default or Event of Default within 60 days after it occurs
or, if later than the end of such 60-day period, after a Responsible Officer of
the Trustee has knowledge of such Default or Event of Default. Except in the
case of a Default or Event of Default in payment of principal of or interest on
any Security of any Series or a default in the observance or performance of any
of the obligations of the Company under Article V hereof, the Trustee may
withhold the notice if and so long as its corporate trust committee or a
committee of its Responsible Officers in good faith determines that withholding
the notice is in the interests of Securityholders of that Series.
Section 7.6 Reports by Trustee to Holders.
-----------------------------
Within 60 days after May 15 in each year, the Trustee shall transmit by
mail to all Securityholders, as their names and addresses appear on the register
kept by the Registrar, a brief report dated as of such May 15, in accordance
with, and to the extent required under, TIA (S) 313.
A copy of each report at the time of its mailing to Securityholders of any
Series shall be filed with the SEC and each stock exchange, if any, on which the
Securities of that Series are listed in accordance with TIA (S) 313(d). The
Company shall promptly notify the Trustee when Securities of any Series are
listed on any stock exchange.
Section 7.7 Compensation and Indemnity.
--------------------------
The Company shall pay to the Trustee from time to time reasonable
compensation for its services. The Trustee's compensation shall not be limited
by any law on compensation of a trustee of an express trust. The Company shall
reimburse the Trustee upon request for all reasonable out-of-pocket expenses
incurred by it. Such expenses shall include the reasonable compensation and
expenses of the Trustee's agents and counsel.
The Company shall indemnify the Trustee (including the cost of defending
itself) against any loss, liability or expense incurred by it (including in the
enforcement of this Section 7.7), except as set forth in the next paragraph,
arising out of or in connection with the acceptance or administration of this
trust or in the performance of its duties under this Indenture as Trustee or
Agent. The Trustee shall notify the Company promptly of any claim for which it
may seek indemnity. The Company shall defend the claim and the Trustee shall
cooperate in the defense. The Trustee may have separate counsel and the Company
shall pay the reasonable fees and expenses of such counsel. The Company need not
pay for any settlement made without its consent, which consent shall not be
unreasonably withheld. This indemnification shall apply to officers, directors,
employees, shareholders and agents of the Trustee.
Notwithstanding the foregoing, the Company need not reimburse any expense
or indemnify against any loss or liability incurred by the Trustee or by any
officer, director, employee, shareholder or agent of the Trustee through
negligence or bad faith.
To secure the Company's payment obligations in this Section, the Trustee
shall have a lien prior to the Securities of any Series on all money or property
held or collected by the Trustee, except that which is held in trust to pay
principal and interest on particular Securities of that Series.
When the Trustee incurs expenses or renders services after an Event of
Default specified in Section 6.1(e) or (f) occurs, the expenses and the
compensation for the services are intended to constitute expenses of
administration under any Bankruptcy Law.
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The provisions of this Section 7.7 shall survive the resignation or removal
of the Trustee and the termination of this Indenture.
Section 7.8 Replacement of Trustee.
----------------------
A resignation or removal of the Trustee and appointment of a successor
Trustee shall become effective only upon the successor Trustee's acceptance of
appointment as provided in this Section 7.8.
The Trustee may resign with respect to the Securities of one or more Series
by so notifying the Company. The Holders of a majority in principal amount of
the Securities of any Series may remove the Trustee with respect to that Series
by so notifying the Trustee and the Company. The Company may remove the Trustee
with respect to Securities of one or more Series if:
(a) the Trustee fails to comply with Section 7.10;
(b) the Trustee is adjudged a bankrupt or an insolvent or an order for
relief is entered with respect to the Trustee under any Bankruptcy Law;
(c) a Custodian or public officer takes charge of the Trustee or its
property; or
(d) the Trustee becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in the office
of Trustee for any reason, the Company shall promptly appoint a successor
Trustee. Within one year after the successor Trustee takes office, the Holders
of a majority in principal amount of the then outstanding Securities may appoint
a successor Trustee to replace the successor Trustee appointed by the Company.
If a successor Trustee with respect to the Securities of any one or more
Series does not take office within 60 days after the retiring Trustee resigns or
is removed, the retiring Trustee, the Company or the Holders of at least 10% in
principal amount of the Securities of the applicable Series may petition any
court of competent jurisdiction for the appointment of a successor Trustee.
If the Trustee with respect to the Securities of any one or more Series
fails to comply with Section 7.10, any Securityholder of the applicable Series
may petition any court of competent jurisdiction for the removal of the Trustee
and the appointment of a successor Trustee.
A successor Trustee shall deliver a written acceptance of its appointment
to the retiring Trustee and to the Company. Immediately after that, the
retiring Trustee shall transfer all property held by it as Trustee to the
successor Trustee subject to the lien provided for in Section 7.7, the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and duties of the Trustee
with respect to each Series of Securities for which it is acting as Trustee
under this Indenture. A successor Trustee shall mail a notice of its succession
to each Securityholder of each such Series. Notwithstanding replacement of the
Trustee pursuant to this Section 7.8, the Company's obligations under Section
7.7 hereof shall continue for the benefit of the retiring trustee with respect
to expenses and liabilities incurred by it prior to such replacement.
Section 7.9 Successor Trustee by Merger, etc.
----------------------------------
If the Trustee consolidates with, merges or converts into, or transfers all
or substantially all of its corporate trust business to, another corporation,
subject to Section 7.10 hereof, the successor corporation without any further
act shall be the successor Trustee; provided such entity shall otherwise be
eligible under this Article VII.
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Section 7.10 Eligibility; Disqualification.
-----------------------------
This Indenture shall always have a Trustee who satisfies the requirements
of TIA (S) 310(a)(1), (2) and (5). The Trustee shall always have a combined
capital and surplus of at least $100,000,000 as set forth in its most recent
published annual report of condition. The Trustee shall comply with TIA (S)
310(b).
Section 7.11 Preferential Collection of Claims Against Company.
-------------------------------------------------
The Trustee is subject to TIA (S) 311(a), excluding any creditor
relationship listed in TIA (S) 311(b). A Trustee who has resigned or been
removed shall be subject to TIA (S) 311(a) to the extent indicated.
Section 7.12 Paying Agents.
-------------
The Company shall cause each Paying Agent other than the Trustee to execute
and deliver to it and the Trustee an instrument in which such agent shall agree
with the Trustee, subject to the provisions of this Section 7.12:
(a) that it will hold all sums held by it as agent for the payment of
principal of or interest on the Securities in trust for the benefit of the
Securityholders or the Trustee;
(b) that it will at any time during the continuance of an Event of
Default, upon written request of the Trustee, deliver to the Trustee all
sums held by it in trust together with a full accounting thereof; and
(c) that it will give the Trustee written notice within three (3)
Business Days of any failure by the Company to pay any installment of
Principal of or interest on the Securities when the same shall be due and
payable.
ARTICLE VIII
SATISFACTION AND DISCHARGE; DEFEASANCE
Section 8.1 Satisfaction and Discharge of Indenture.
---------------------------------------
This Indenture shall upon Company Order cease to be of further effect
(except as hereinafter provided in this Section 8.1) with respect to any Series
of Securities, and the Trustee, at the expense of the Company, shall execute
proper instruments acknowledging such satisfaction and discharge of this
Indenture with respect to such Series, when:
(a) either:
(i) all Securities of such Series theretofore authenticated and
delivered (other than Securities of such Series that have been
destroyed, lost or stolen and that have been replaced or paid) have
been delivered to the Trustee for cancellation; or
(ii) all such Securities not theretofore delivered to the Trustee
for cancellation:
(1) have become due and payable; or
(2) will become due and payable at their Stated Maturity
within one year; or
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(3) are to be called for redemption within one year under
arrangements satisfactory to the Trustee for the giving of
notice of redemption by the Trustee in the name, and at the
expense, of the Company; or
(4) are deemed paid and discharged pursuant to Section 8.3,
as applicable;
and the Company, in the case of (1), (2) or (3) above, has deposited or caused
to be deposited (in U.S. legal tender or U.S. Government Obligations or a
combination thereof) with the Trustee as trust funds in trust an amount
sufficient for the purpose of paying and discharging the entire Indebtedness on
such Securities not theretofore delivered to the Trustee for cancellation, for
principal and interest to the date of such deposit (in the case of Securities
which have become due and payable on or prior to the date of such deposit) or to
the Stated Maturity or Redemption Date, as the case may be;
(b) the Company has paid or caused to be paid all other sums payable
hereunder by the Company; and
(c) the Company has delivered to the Trustee an Officers' Certificate
and an Opinion of Counsel, each stating that all conditions precedent
herein provided for relating to the satisfaction and discharge of this
Indenture have been complied with.
Notwithstanding the satisfaction and discharge of this Indenture, the
obligations of the Company to the Trustee under Section 7.7, and, if money shall
have been deposited with the Trustee pursuant to clause (a) of this Section, the
provisions of Sections 2.4, 2.7, 2.8, 2.11, 7.1, 8.1 8.2 and 8.5 shall survive.
Section 8.2 Application of Trust Funds; Indemnification.
-------------------------------------------
(a) Subject to the provisions of Section 8.5, all money and U.S.
Government Obligations deposited with the Trustee pursuant to Sections 8.1,
8.3 or 8.4 and all money received by the Trustee in respect of U.S.
Government Obligations deposited with the Trustee pursuant to Sections 8.1,
8.3 or 8.4, shall be held in trust and applied by it, in accordance with
the provisions of the Securities and this Indenture, to the payment, either
directly or through any Paying Agent (including the Company acting as its
own Paying Agent) as the Trustee may determine, to the Persons entitled
thereto, of the principal and interest for whose payment such money has
been deposited with or received by the Trustee or to make analogous
payments as contemplated by Sections 8.3 or 8.4.
(b) The Company shall pay and shall indemnify the Trustee against any
tax, fee or other charge imposed on or assessed against U.S. Government
Obligations deposited pursuant to Sections 8.1, 8.3 or 8.4 or the interest
and principal received in respect of such obligations other than any tax,
fee or other charge payable by or on behalf of Holders.
(c) The Trustee shall deliver or pay to the Company from time to time
upon Company Request any U.S. Government Obligations or money held by it as
provided in Sections 8.1, 8.3 or 8.4 which, in the opinion of a nationally
recognized firm of independent certified public accountants expressed in a
written certification thereof delivered to the Trustee, are then in excess
of the amount thereof which then would have been required to be deposited
for the purpose for which such U.S. Government Obligations or money were
deposited or received. This provision shall not authorize the sale by the
Trustee of any U.S. Government Obligations held under this Indenture.
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Section 8.3 Legal Defeasance of Securities of any Series.
--------------------------------------------
The Company shall be deemed to have paid and discharged the entire
Indebtedness on all the outstanding Securities of such Series on the 91st day
after the date of the deposit referred to below, and the provisions of this
Indenture, as it relates to such outstanding Securities of such Series, shall no
longer be in effect (and the Trustee, at the expense of the Company, shall, at
Company Request, execute proper instruments acknowledging the same), except as
to:
(a) the rights of Holders of Securities of such Series to receive, from
the trust funds described below, payment of the principal of and each
installment of principal of and interest on the outstanding Securities of
such Series on the Stated Maturity of such principal or installment of
principal or interest on the day on which such payments are due and payable
in accordance with the terms of this Indenture and the Securities of such
Series;
(b) the provisions of Sections 2.5, 2.7, 2.8, 2.11, 4.6 and this Article
VIII; and
(c) the rights, powers, trust and immunities of the Trustee hereunder;
provided that, the following conditions shall have been satisfied:
(i) the Company must irrevocably deposit with the Trustee, in
trust, specifically pledged as security for, and dedicated solely
to, the benefit of the Holders of the Securities of such Series,
(A) U.S. legal tender or U.S. Government Obligations, or any
combination thereof, in such amounts as will be sufficient, in the
opinion of a nationally recognized firm of independent public
accountants expressed in a written certification thereof delivered
to the Trustee, to pay the entire principal of and interest
(including default interest) on such Securities on the Maturity and
each payment date or on the Redemption Date of such principal or
installment of principal of or interest on Securities of such
Series in accordance with the terms of this Indenture and the
Securities;
(ii) the Company shall have delivered to the Trustee an Opinion of
Counsel in the United States reasonably acceptable to Trustee
confirming that (A) the Company has received from, or there has
been published by the Internal Revenue Service, a ruling or (B)
since the date of this Indenture, there has been a change in the
applicable Federal income tax law, in either case to the effect
that, and based thereon such opinion of counsel shall confirm that,
the Holders of the Securities of such Series will not recognize
income, gain or loss for Federal income tax purposes as a result of
such Legal Defeasance and will be subject to Federal income tax on
the same amounts, in the same manner and at the same times as would
have been the case if such Legal Defeasance had not occurred;
(iii) no Default or Event of Default shall have occurred with
respect to such Series and be continuing on the date of such
deposit or insofar as Events of Default from bankruptcy or
insolvency events are concerned, at any time in the period ending
on the 91st day after the date of deposit;
(iv) such defeasance shall not result in a breach or violation of,
or constitute a default under this Indenture or any other material
agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound;
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(v) the Company shall have delivered to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company
with the intent of preferring the Holders of such Securities over
any other creditors of the Company or with the intent of defeating,
hindering, delaying or defrauding any other creditors of the
Company or others; and
(vi) the Company shall have delivered to the Trustee an Officers'
Certificate stating that the conditions precedent provided for have
been complied with.
Section 8.4 Covenant Defeasance.
-------------------
On and after the 91st day after the date of the deposit referred to in
subparagraph (a) hereof, the Company may omit to comply with any term, provision
or condition set forth under Sections 4.2, 4.3, 4.4 and 4.5 and Article V (and
the failure to comply with any such covenants shall not constitute a Default or
Event of Default under Section 6.1) with respect to the Securities of such
Series, provided that the following conditions shall have been satisfied:
(a) the Company must irrevocably deposit with the Trustee, in trust, for
the benefit of the Holders of the Securities of such Series, (A) U.S. legal
tender or U.S. Government Obligations, or any combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized
firm of independent public accountants expressed in a written certification
thereof delivered to the Trustee, to pay the principal of and interest on
such Securities on the Maturity and each payment date or on the Redemption
Date of such principal or installment of principal of or interest on
Securities of such Series in accordance with the terms of this Indenture
and the Securities;
(b) the Company shall have delivered to the Trustee an Opinion of
Counsel in the United States reasonably acceptable to such Trustee
confirming that the Holders of the Securities of such Series will not
recognize income, gain or loss for Federal income tax purposes as a result
of the defeasance contemplated by this Section 8.4 and will be subject to
Federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such defeasance had not occurred;
(c) no Default or Event of Default shall have occurred with respect to
such Series and be continuing on the date of such deposit or insofar as
Events of Default from bankruptcy or insolvency events are concerned, at
any time in the period ending on the 91st day after the date of deposit;
(d) such defeasance shall not result in a breach or violation of, or
constitute a default under this Indenture or any other material agreement
or instrument to which the Company or any of its Subsidiaries is a party or
by which the Company or any of its Subsidiaries is bound;
(e) the Company shall have delivered to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the
intent of preferring the Holders of the Securities of such Series over any
other creditors of the Company or with the intent of defeating, hindering,
delaying or defrauding any other creditors of the Company or others; and
(f) the Company shall have delivered to the Trustee an Officers'
Certificate stating that the conditions precedent provided for have been
complied with.
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<PAGE>
Section 8.5 Repayment to Company.
--------------------
The Trustee and the Paying Agent shall pay to the Company upon request any
money held by them for the payment of principal and interest that remains
unclaimed for two years. After that, Securityholders entitled to the money must
look to the Company for payment as general creditors unless an applicable
abandoned property law designates another Person.
Section 8.6 Reinstatement.
-------------
If the Trustee or Paying Agent is unable to apply any money or U.S.
Government Obligations in accordance with this Article VIII by reason of any
legal proceeding or by reason of any order or judgment of any court or
governmental authority enjoining, restraining or otherwise prohibiting such
application, the Company's obligations under this Indenture and the Securities
shall be revived and reinstated as though no deposit had occurred pursuant to
this Article VIII until such time as the Trustee or Paying Agent is permitted to
apply all such money or U.S. Government Obligations in accordance with this
Article VIII; provided that if the Company has made any payment of interest on
or principal of any Securities because of the reinstatement of its obligations,
the Company shall be subrogated to the rights of the Holders of such Securities
to receive such payment from the money or U.S. Government Obligations held by
the Trustee or Paying Agent.
ARTICLE IX
AMENDMENTS AND SUPPLEMENTS
Section 9.1 Without Consent of Holders.
--------------------------
The Company, when authorized by Board resolution, and the Trustee may amend
or supplement this Indenture or the Securities of one or more Series without the
consent of any Securityholder:
(a) to cure any ambiguity, defect or inconsistency;
(b) to comply with Article V;
(c) to provide for uncertificated Securities in addition to or in place
of certificated Securities;
(d) in reliance upon opinion of counsel, to make any change that does
not adversely affect the rights of any Securityholder;
(e) to provide for the issuance of and establish the form and terms and
conditions of Securities of any Series as permitted by this Indenture;
(f) to add to the covenants of the Company or to add Events of Default
for the benefit of Securityholders or to surrender any right or power
conferred upon the Company in this Indenture;
(g) to evidence and provide for the acceptance of appointment hereunder
by a successor Trustee with respect to the Securities of one or more Series
and to add to or change any of the provisions of this Indenture as shall be
necessary to provide for or facilitate the administration of the trusts
hereunder by more than one Trustee;
(h) to provide for guarantors or collateral for the Securities of any
Series; or
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<PAGE>
(i) to comply with requirements of the SEC in order to effect or
maintain the qualification of this Indenture under the TIA.
Section 9.2 With Consent of Holders.
-----------------------
Except as provided elsewhere in this Article IX, the Company, when
authorized by Board resolution, and the Trustee may enter into a supplemental
indenture with the written consent of the Holders of not less than a majority in
aggregate principal amount of the outstanding Securities of each Series affected
by such supplemental indenture (including consents obtained in connection with a
tender offer or exchange offer for the Securities of such Series) for the
purpose of adding any provisions to or changing in any manner or eliminating any
of the provisions of this Indenture or of any supplemental indenture or of
modifying in any manner the rights of the Securityholders of each such Series.
Except as provided in Section 6.13, the Holders of at least a majority in
principal amount of the outstanding Securities of each Series affected by such
waiver by notice to the Trustee (including consents obtained in connection with
a tender offer or exchange offer for the Securities of such Series) may waive
compliance by the Company with any provision of this Indenture or the Securities
with respect to such Series.
It shall not be necessary for the consent of the Holders of Securities
under this Section 9.2 to approve the particular form of any proposed
supplemental indenture or waiver, but it shall be sufficient if such consent
approves the substance thereof. After a supplemental indenture or waiver under
this Section 9.2 becomes effective, the Company shall mail to the Holders of
Securities affected thereby a notice briefly describing the supplemental
indenture or waiver. Any failure by the Company to mail or publish such notice,
or any defect therein, shall not, however, in any way impair or affect the
validity of any such supplemental indenture or waiver.
Section 9.3 Limitations.
-----------
Without the consent of each Securityholder affected, an amendment or waiver
may not:
(a) change the Stated Maturity of the principal of, or any installment
of interest on, any Security;
(b) reduce the principal amount of or interest (including any default
interest) on any Security;
(c) change the place of payment, or the coin or currency, for the
payment of principal of or interest on any Security;
(d) impair the right to institute suit for the enforcement of any
payment on or after the Stated Maturity (or, in the case of a redemption,
on or after the Redemption Date) of any Security;
(e) reduce the percentages of outstanding Securities the consent of
whose Holders is necessary to modify or amend this Indenture;
(f) waive a default in the payment of principal of or interest on the
Securities (except a recession of acceleration of the Securities of any
Series and a waiver of the payment default that resulted from such
acceleration pursuant to Section 6.2 hereof); or
(g) reduce the percentage or aggregate principal amount of outstanding
Securities of a Series the consent of whose Holders is necessary for waiver
of certain defaults in Section 6.8, 6.13 or this 9.3.
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<PAGE>
Section 9.4 Compliance with Trust Indenture Act.
-----------------------------------
Every amendment to this Indenture or the Securities of one or more Series
shall be set forth in a supplemental indenture hereto that complies with the TIA
as then in effect.
Section 9.5 Revocation and Effect of Consents.
---------------------------------
Until an amendment, supplement or waiver becomes effective, a consent to it
by a Holder of a Security is a continuing consent by the Holder and every
subsequent Holder of a Security or portion of a Security that evidences the same
debt as the consenting Holder's Security, even if notation of the consent is not
made on any Security. However, any such Holder or subsequent Holder may revoke
the consent as to his Security or portion of a Security if the Trustee receives
the notice of revocation before the date on which the Trustee receives an
Officers' Certificate certifying that the Holders of the requisite principal
amount of Securities of the applicable Series have consented (and not
theretofore revoked such consent) to the amendment, supplement or waiver.
The Company may, but shall not be obligated to, fix a record date for the
purpose of determining the Holders entitled to consent to any amendment,
supplement or waiver, which record date shall be the date so fixed by the
Company, notwithstanding the provisions of the TIA. If a record date is fixed,
then notwithstanding the last sentence of the immediately preceding paragraph,
those Persons who were Holders at such record date, and only those Persons (or
their duly designated proxies), shall be entitled to revoke any consent
previously given (up to the time such consent becomes non-revocable in
accordance with such sentence), whether or not such Persons continue to be
Holders after such record date. No such consent shall be valid or effective for
more than 90 days after such record date unless the consent of the requisite
number of Holders has been obtained.
Any amendment or waiver once effective shall bind every Securityholder of
each Series affected by such amendment or waiver unless it is of the type
described in Section 9.3. In that case, the amendment or waiver shall bind each
Holder of a Security who has consented to it and every subsequent Holder of a
Security or portion of a Security that evidences the same debt as the consenting
Holder's Security.
Section 9.6 Notation on or Exchange of Securities.
-------------------------------------
The Trustee shall place an appropriate notation about an amendment or
waiver on any Security of any Series thereafter authenticated, upon the request
by the Trustee that the Holder of such Security of such Series deliver such
Security to the Trustee therefor. The Company in exchange for Securities of that
Series may issue and the Trustee shall authenticate upon request new Securities
of that Series that reflect the amendment or waiver. Any failure to make any
appropriate notation or to issue a new Security of that Series shall not affect
the validity of such amendment or waiver.
Section 9.7 Trustee Protected.
-----------------
In executing, or accepting the additional trusts created by, any
supplemental indenture permitted by this Article IX or the modifications thereby
of the trusts created by this Indenture, the Trustee shall be entitled to
receive, and (subject to Section 7.1) shall be fully protected in relying upon,
an Opinion of Counsel complying with Section 10.4(b) and stating that the
execution of such supplemental indenture is authorized or permitted by this
Indenture. The Trustee shall sign all supplemental indentures, except that the
Trustee need not sign any supplemental indenture that adversely affects its
rights.
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<PAGE>
ARTICLE X
MISCELLANEOUS
Section 10.1 Trust Indenture Act Controls.
----------------------------
If any provision of this Indenture limits, qualifies, or conflicts with
another provision which is required or deemed to be included in this Indenture
by the TIA, such required or deemed provision shall control.
Section 10.2 Notices.
-------
Any notice or communication by the Company or the Trustee to the other is
duly given if in writing and delivered in person or mailed by first-class mail:
if to the Company:
CNL American Properties Fund, Inc.
400 East South Street
Suite 500
Orlando, Florida 32801
Attention: Steven D. Shackelford
if to the Trustee:
_______________
_______________
_______________
Attention: Corporate Trust Department
The Company or the Trustee by notice to the other may designate additional or
different addresses for subsequent notices or communications.
Any notice or communication to a Securityholder shall be mailed by first-
class mail to his address shown on the register kept by the Registrar. Failure
to mail a notice or communication to a Securityholder of any Series or any
defect in it shall not affect its sufficiency with respect to other
Securityholders of that or any other Series.
If a notice or communication is mailed or published in the manner provided
above, within the time prescribed, it shall be deemed duly given, whether or not
the Securityholder receives it, on the third day after the record date.
If the Company mails a notice or communication to Securityholders, it shall
mail a copy to the Trustee and each Agent at the same time.
Section 10.3 Communication by Holders with Other Holders.
-------------------------------------------
Securityholders of any Series may communicate pursuant to TIA (S) 312(b)
with other Securityholders of that Series or any other Series with respect to
their rights under this Indenture or the Securities of that Series or all
Series. The Company, the Trustee, the Registrar and anyone else shall have the
protection of TIA (S) 312(c).
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<PAGE>
Section 10.4 Certificate and Opinion as to Conditions Precedent.
--------------------------------------------------
Upon any request or application by the Company to the Trustee to take any action
under this Indenture, the Company shall furnish to the Trustee:
(a) an Officers' Certificate stating that, in the opinion of the
signers, all conditions precedent, if any, provided for in this Indenture
relating to the proposed action have been complied with; and
(b) an Opinion of Counsel stating that, in the opinion of such counsel,
all such conditions precedent have been complied with.
Section 10.5 Statements Required in Certificate or Opinion.
---------------------------------------------
Each certificate or opinion with respect to compliance with a condition or
covenant provided for in this Indenture (other than a certificate provided
pursuant to TIA314 (S) (a)(4)) shall comply with the provisions of TIA (S)
314(e) and shall include:
(a) a statement that the person making such certificate or opinion has
read such covenant or condition;
(b) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(c) a statement that, in the opinion of such person, he has made such
examination or investigation as is necessary to enable him to express an
informed opinion as to whether or not such covenant or condition has been
complied with; and
(d) a statement as to whether or not, in the opinion of such person,
such condition or covenant has been complied with.
Section 10.6 Rules by Trustee and Agents.
---------------------------
The Trustee may make reasonable rules for action by or a meeting of
Securityholders of one or more Series. Any Agent may make reasonable rules and
set reasonable requirements for its functions.
Section 10.7 Legal Holidays.
--------------
Unless otherwise provided by Board Resolution, Officers' Certificate or
supplemental indenture for a particular Series, a "Legal Holiday" is any day
that is not a Business Day. If a payment date is a Legal Holiday at a place of
payment, payment may be made at that place on the next succeeding day that is
not a Legal Holiday, and no interest shall accrue with respect to such payment
for the intervening period.
Section 10.8 No Recourse Against Others.
--------------------------
No recourse for the payment of the principal of or interest on the
Securities or for any claim based thereon or otherwise in respect thereof, and
no recourse under or upon any obligation, covenant or agreement of the Company
in this Indenture, or in the Securities or because of the creation of any
Indebtedness represented thereby, shall be had against any incorporator,
partner, stockholder, officer, director, employee or controlling Person of the
Company or any successor Person thereof, except as an obligor of the Securities
pursuant to this Indenture. Each Holder, by accepting the Securities, waives and
releases all such liability.
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<PAGE>
Section 10.9 Counterparts.
------------
This Indenture may be executed in any number of counterparts and by the
parties hereto in separate counterparts, each of which when so executed shall be
deemed to be an original and all of which taken together shall constitute one
and the same agreement.
Section 10.10 Governing Laws.
---------------
THIS INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, INCLUDING, WITHOUT
LIMITATION, SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW
AND NEW YORK CIVIL PRACTICE LAWS AND RULES 327(B). THE COMPANY HEREBY
IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY NEW YORK STATE COURT SITTING IN
THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK OR ANY FEDERAL COURT SITTING IN
THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK IN RESPECT OF ANY SUIT, ACTION
OR PROCEEDING ARISING OUT OF OR RELATING TO THIS INDENTURE AND THE SECURITIES,
AND IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND
UNCONDITIONALLY, JURISDICTION OF THE AFORESAID COURTS. THE COMPANY IRREVOCABLY
WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO UNDER APPLICABLE LAW, ANY
OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY
SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT AND ANY CLAIM THAT ANY
SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN
INCONVENIENT FORUM. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE TRUSTEE OR ANY
SECURITYHOLDER TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO
COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE COMPANY IN ANY OTHER
JURISDICTION.
Section 10.11 No Adverse Interpretation of Other Agreements.
----------------------------------------------
This Indenture may not be used to interpret another indenture, loan or debt
agreement of the Company or a Subsidiary. Any such indenture, loan or debt
agreement may not be used to interpret this Indenture.
Section 10.12 Successors.
-----------
All agreements of the Company in this Indenture and the Securities shall
bind its successor. All agreements of the Trustee in this Indenture shall bind
its successor.
Section 10.13 Severability.
-------------
In case any provision in this Indenture or in the Securities shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
Section 10.14 Table of Contents, Headings, Etc.
---------------------------------
The Table of Contents, Reconciliation between the TIA, and headings of the
Articles and Sections of this Indenture have been inserted for convenience of
reference only, are not to be considered a part hereof, and shall in no way
modify or restrict any of the terms or provisions hereof.
-36-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly executed as of the day and year first above written.
COMPANY
CNL AMERICAN PROPERTIES FUND, INC.
By: ______________________________
Name: ____________________________
Title: ___________________________
TRUSTEE
__________________________________
By: ______________________________
Name: ____________________________
Title: ___________________________
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<PAGE>
EXHIBIT A
______% SERIES ___ CALLABLE NOTE DUE 2006
CUSIP No. ___________
No. ___ [$_________]
CNL American Properties Fund, Inc., a Maryland corporation (hereinafter
called the "Company," which term includes any successors under the Indenture
hereinafter referred to), for value received, hereby promises to pay to
_____________________, or registered assigns, the principal sum of [$________],
on December 15, 2006. This Security is one of the ______% Series ___ Callable
Notes due 2006 referred to in such Indenture (hereinafter referred to
collectively as the "Securities.")
Interest Payment Dates: June 15 and December 15
Record Dates: June 1 and December 1
Reference is made to the further provisions of this Security on the reverse
side, which will, for all purposes, have the same effect as if set forth at this
place.
IN WITNESS WHEREOF, the Company has caused this Instrument to be duly
executed.
Dated: ______ __, 1999
CNL AMERICAN PROPERTIES FUND, INC.
By: ______________________________
Name: ____________________________
Title: ___________________________
Attest:
- -------
By: ______________________________
Name: ____________________________
Title: _____________________________
<PAGE>
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the Series designated therein referred to
in the within-mentioned Indenture.
____________________________,
as Trustee
By: _________________________
Authorized Signatory
<PAGE>
CNL AMERICAN PROPERTIES FUND, INC.
______% Series ___ Callable Note due 2006
Section 1 Interest.
--------
CNL American Properties Fund, Inc., a Maryland corporation (hereinafter
called the "Company," which term includes any successors under the Indenture
hereinafter referred to), promises to pay interest on the principal amount of
this Security at the rate of ______% per annum from _________ __, 1999 until
maturity.
The Company will pay interest semi-annually on June 15 and December 15 of
each year (each, an "Interest Payment Date"), commencing June 15, 1999. Interest
on the Securities will accrue from the most recent date to which interest has
been paid or, if no interest has been paid on the Securities, from ___________
__, 1999. Interest will be computed on the basis of a 360-day year consisting of
twelve 30-day months.
Interest on overdue principal and, to the extent permitted by law, on
overdue installments of interest will accrue, until such principal and overdue
interest are paid or duly provided for, at the rate of ___% per annum.
Section 2 Method of Payment.
-----------------
The Company shall pay interest on the Securities to the Persons who are the
registered Holders at the close of business on the Record Date immediately
preceding the Interest Payment Date. Holders must surrender Securities to a
Paying Agent to collect principal payments. Principal of and interest on the
Securities will be payable in United States dollars at the office or agency of
the Company maintained for such purpose, in the Borough of Manhattan, The City
of New York or at the option of the Company, payment of interest may be made by
check mailed to the Holders of the Securities at the addresses set forth upon
the registry books of the Company.
Section 3 Paying Agent and Registrar.
--------------------------
Initially, ___________ will act as Paying Agent and Registrar. The Company
may change any Paying Agent, Registrar or co-Registrar without notice to the
Holders. The Company or any of its Subsidiaries may, subject to certain
exceptions, act as Paying Agent, Registrar or co-Registrar.
Section 4 Indenture.
---------
The Company issued the Securities under an Indenture, dated as of _______
__, 1999 (the "Indenture"), between the Company and the Trustee. Capitalized
terms herein are used as defined in the Indenture unless otherwise defined
herein. The Indenture is available for inspection at ____________ and copy may
obtained upon the written request of any Holder, at such holders sole cost and
expense, to such address and to the attention of ____________. The Securities
are limited in aggregate principal amount to $_______. The terms of the
Securities include those stated in the Indenture and those made part of the
Indenture by reference to the TIA, as in effect on the date of the Indenture.
The Securities are subject to all such terms, and Holders of Securities are
referred to the Indenture and said Act for a statement of them. The Securities
are senior, general and unsecured obligations of the Company. Each Holder of
this Security, by accepting the same, (a) agrees to and shall be bound by the
provisions of the Indenture and (b) authorizes and directs the Trustee on his
behalf to take such action as may be provided in the Indenture.
-1-
<PAGE>
Section 5 Redemption.
----------
The Securities may be redeemed in whole or from time to time in part at any
time at the option of the Company, at a redemption price equal to the sum of the
principal amount of the Securities being redeemed plus accrued interest thereon
to the Redemption Date (the "Redemption Price").
In the event that the Company or any Subsidiary (a) sells or otherwise
disposes of any Restaurant Property or (b) refinances (whether at maturity or
otherwise) any Indebtedness secured by any Restaurant Property and, in either
case, realizes Net Cash Proceeds therefrom, the Company shall be required within
90 days of the receipt of the total of such Net Cash Proceeds to redeem at the
Redemption Price an aggregate amount of principal of the particular Series of
the Securities which were issued to the Persons who were partners of such Income
Fund prior to the Income Fund Mergers equal to 80% of such Net Cash Proceeds.
Any such redemption will comply with Article 3 of the Indenture.
Section 6 Notice of Redemption.
--------------------
Notice of redemption will be sent by first class mail, at least 30 days and
not more than 60 days prior to the Redemption Date to the Holder of each
Security to be redeemed at such Holder's last address as then shown upon the
registry books of the Registrar.
Except as set forth in the Indenture, from and after any Redemption Date,
if monies for the redemption of the Securities called for redemption shall have
been deposited with the Paying Agent on such Redemption Date, the Securities
called for redemption will cease to bear interest and the only right of the
Holders of such Securities will be to receive payment of the Redemption Price.
Section 7 Transfer and Exchange.
---------------------
A Holder may register the transfer of, or exchange Securities in accordance
with, the Indenture. The Registrar may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and to pay any taxes and
fees required by law or permitted by the Indenture. The Registrar need not
register the transfer of or exchange any Securities (a) selected for redemption
except the unredeemed portion of any Security being redeemed in part or (b) for
a period beginning 15 Business Days before the mailing of a notice of an offer
to repurchase or redemption and ending at the close of business on the day of
such mailing.
Section 8 Persons Deemed Owners.
---------------------
The registered Holder of a Security may be treated as the owner of it for
all purposes.
Section 9 Unclaimed Money.
---------------
If money for the payment of principal or interest remains unclaimed for two
years, the Trustee and the Paying Agent(s) will pay the money back to the
Company at its request. After that, all liability of the Trustee and such
Paying Agent(s) with respect to such money shall cease, and Holders entitled to
the money must look to the Company for payment as general creditors unless an
applicable abandoned property law designates another Person.
-2-
<PAGE>
Section 10 Discharge Prior to Redemption or Maturity.
-----------------------------------------
As set forth in the Indenture, if the Company irrevocably deposits with the
Trustee, in trust, for the benefit of the Holders, U.S. legal tender, U.S.
Government Obligations or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of and interest on such Securities on the
stated date for payment thereof or on the Redemption Date of such principal or
installment of principal of or interest on such Securities, the Company will be
discharged from certain provisions of the Indenture and the Securities
(including the covenant described in paragraph 12 below, but excluding its
obligation to pay the principal of and interest on the Securities). Upon
satisfaction of certain additional conditions set forth in the Indenture, the
Company may elect to have its obligations discharged with respect to outstanding
Securities.
Section 11 Amendment; Supplement; Waiver.
-----------------------------
The Company and the Trustee may amend the Indenture or enter into a
supplemental indenture without the consent of the Holders for certain limited
purposes including, among other things, to cure any ambiguity, defect or
inconsistency, or to make any other change that does not adversely affect the
rights of any Holder of a Security. Subject to certain exceptions, the
Indenture or the Securities may be amended or supplemented with the written
consent of the Holders of at least a majority in aggregate principal amount of
the outstanding Securities of each Series affected by such amendment or
supplement, and any existing Default or Event of Default with respect to a
Series or compliance with any provision with respect to a Series may be waived
with the consent of the Holders of a majority in aggregate principal amount of
the outstanding Securities of such Series.
Section 12 Limitation on Incurrence of Indebtedness.
----------------------------------------
The Indenture imposes a limitation on the ability of the Company and any of
its Subsidiaries to incur additional Indebtedness. The limitation is subject to
certain qualifications and exceptions.
Section 13 Successor.
---------
When a successor assumes all the obligations of its predecessor under the
Securities and the Indenture, the predecessor will be released from those
obligations.
Section 14 Defaults and Remedies.
---------------------
If an Event of Default with respect to the Securities occurs and is
continuing (other than an Event of Default relating to bankruptcy, insolvency or
reorganization of the Company), then either the Trustee or the Holders of 25% in
aggregate principal amount of the Securities then outstanding may declare all
Securities to be due and payable immediately in the manner and with the effect
provided in the Indenture. Holders of Securities may not enforce the Indenture
or the Securities, except as provided in the Indenture. The Trustee may require
indemnity satisfactory to it before it enforces the Indenture or the Securities.
Subject to certain limitations, Holders of a majority in principal amount of the
then outstanding Securities may direct the Trustee in its exercise of any trust
or power with respect to such Securities. The Trustee may withhold from Holders
of Securities notice of any continuing Default or Event of Default (except a
Default in payment of principal or interest) if it determines that withholding
notice is in their interest.
Section 15 Trustee and Agent Dealings with Company.
---------------------------------------
The Trustee and each Agent under the Indenture, in its individual or any
other capacity, may make loans to, accept deposits from, and perform services
for the Company, any of its Subsidiaries or any of their respective Affiliates,
and may otherwise deal with such Persons as if it were not the Trustee or such
Agent.
-3-
<PAGE>
Section 16 No Recourse Against Others.
--------------------------
No recourse for the payment of the principal of or interest on the
Securities or for any claim based thereon or otherwise in respect thereof, and
no recourse under or upon any obligation, covenant or agreement of the Company
in the Indenture, or in the Securities or because of the creation of any
Indebtedness represented thereby, shall be had against any incorporator,
partner, stockholder, officer, director, employee or controlling Person of the
Company or of any successor Person thereof, except as an obligor of the
Securities pursuant to the Indenture. Each Holder, by accepting the Securities,
waives and releases all such liability.
Section 17 Authentication.
--------------
This Security shall not be valid until the Trustee or authenticating agent
signs the certificate of authentication on the other side of this Security.
Section 18 Abbreviations and Defined Terms.
-------------------------------
Customary abbreviations may be used in the name of a Holder of a Security
or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by
the entireties), JT TEN (= joint tenants with right of survivorship and not as
tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors
Act).
Section 19 CUSIP Numbers.
-------------
Pursuant to a recommendation promulgated by the Committee on Uniform
Security Identification Procedures, the Company will cause CUSIP numbers to be
printed on the Securities as a convenience to the Holders of the Securities. No
representation is made as to the accuracy of such numbers as printed on the
Securities and reliance may be placed only on the other identification numbers
printed hereon.
Section 20 Governing Law.
-------------
THE INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, INCLUDING, WITHOUT
LIMITATION, SECTIONS 5-1401 AND 5-1402 OF THE NEW YORK GENERAL OBLIGATIONS LAW
AND NEW YORK CIVIL PRACTICE LAWS AND RULES 327(B).
CNL AMERICAN PROPERTIES FUND, INC.
By: ______________________________
Name: ____________________________
Title: ___________________________
-4-
<PAGE>
[FORM OF ASSIGNMENT]
I or we assign this Security to
(Print or type name, address and zip code of assignee)
Please insert Social Security or other identifying number of assignee
and irrevocably appoint ________________ agent to transfer this Security on the
books of the Company. The agent may substitute another to act for him.
Dated: _________________ Signed:
__________________________________________
(Sign exactly as name appears on
the other side of this Security)
Signature Guarantee*
--------------------
* NOTICE: The Signature must be guaranteed by an Institution which is a
member of one of the following recognized signature Guarantee Programs: (i) The
Securities Transfer Agent Medallion Program (STAMP); (ii) The New York Stock
Exchange Medallion Program (MNSP); (iii) The Stock Exchange Medallion Program
(SEMP); or (iv) in such other guarantee program acceptable to the Trustee.
-5-
<PAGE>
Exhibit 10.2
[LETTERHEAD OF VALUATION ASSOCIATES]
COMPLETE APPRAISAL - RESTRICTED REPORT
OF
THE AGGREGATE VALUE OF
THE LEASED FEE AND FEE SIMPLE INTERESTS
OF PROPERTIES WITHIN THE
PROPERTY PORTFOLIO OF
CNL INCOME FUND, LTD.
CALENDAR YEAR ENDING DECEMBER 31, 1998
FOR
CNL INCOME FUND, LTD., AND ITS GENERAL PARTNERS,
MR. JAMES SENEFF, MR. ROBERT BOURNE,
AND CNL REALTY CORPORATION
400 EAST SOUTH STREET
ORLANDO, FLORIDA 32801
BY
VALUATION ASSOCIATES REAL ESTATE GROUP, INC.
732 NORTH THORNTON AVENUE
ORLANDO, FLORIDA 32803
EFFECTIVE DATE OF APPRAISAL
DECEMBER 31, 1998
DATE OF REPORT
JANUARY 6, 1999
VAI8-1301
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
TABLE OF CONTENTS
Introduction/Letter of Transmittal
Tab A Summary Discussion of Valuation Methodology
& Cash Flows
Tab B Liquidation Value
Addendum
Additional General Assumptions, Special
Assumptions and Limiting Conditions
Brief Concept Overviews
Industry Trends/Charts
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
[LETTERHEAD OF VALUATION ASSOCIATES]
January 6, 1999
CNL Income Fund, Ltd., and its General Partners
Mr. James Seneff, Mr. Robert Bourne, and CNL Realty Corporation
400 East South Street
Orlando, Florida 32801
RE: Aggregate market value of the leased fee and fee simple interests of the
properties within the property portfolio of CNL Income Fund, Ltd.
Dear Sirs:
In response to your request, we have developed an estimate of the aggregate
market value of the specific interests in the properties included in the above
referenced portfolio. This portfolio contains 17 properties in 11 states. We
have prepared this complete appraisal in a restricted format. The basis of the
valuation was data which included rental rates, current lease data, certified to
us to our satisfaction by the client described herein and affiliates, and other
related market information available to us which we deemed reliable and relevant
or material in our professional judgement. Property rights appraised in this
assignment are the market values of the leased fee and fee simple interests and
the effective date of valuation is December 31, 1998.
This is a Restricted Appraisal Report which complies with the reporting
requirements set forth under Standard Rule 2-2(c) of the Uniform Standards of
Professional Appraisal Practice for a Restricted Appraisal Report. As such, it
presents minimal discussion of the data, reasoning, and analyses that were used
in the appraisal process to develop the appraiser's opinion of value. Supporting
documentation concerning the data, reasoning and analyses is retained in the
appraiser's file. The depth of discussion contained in this report is specific
to the needs of the client and for the intended use stated below. The report
cannot be understood properly without additional information in the workfile of
the appraiser. The appraiser is not responsible for unauthorized use of this
report.
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
It should be noted that the restricted report format has a use restriction that
limits reliance on the report to the client and its agents, advisors, and
representatives, and/or for the intended uses as described herein, and considers
anyone else using the report as an unintended user.
The market data obtained during our research and analysis includes the rental
rates and terms, expense information, and other property specific data on the
parcels within the portfolio and in their respective markets. In addition, we
have utilized appropriate data gleaned from other reliable sources in developing
our value conclusions. All important data is hereby incorporated by reference
and will be maintained in our permanent files.
The estimate of value was developed in conformance with the Uniform Standards of
Professional Appraisal Practice (USPAP), as promulgated by the Appraisal
Foundation, as well as the Uniform Standards of Professional Appraisal Practice
and the Code of Ethics of the Appraisal Institute.
We have found it necessary to make certain uniform and standardized economic
forecasts, which were based upon present and past economic conditions. We have
no control over future legislation or economic changes which may affect the
value of the individual properties which, taken as a whole, comprise the
portfolio.
To the best of our knowledge and belief, the statements contained in this
appraisal, as well as the opinions upon which they are based, are correct,
subject to the assumptions and limiting conditions set forth in this document.
We have no interest, either present or contemplated, in the properties
appraised, and neither our employment nor our compensation is contingent upon
the reporting of a predetermined value, or direction in value that favors the
cause of the client, the amount of the value estimate, the attainment of a
stipulated result, or the occurrence of a subsequent event.
The appraisal value is based upon certain underlying Special Assumptions which
are set forth in the following section. These are in addition to our standard
General Assumptions and Limiting Conditions which are located in the addendum.
The reader is referred to the appropriate section of the report regarding these
matters.
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
After thorough consideration of all factors involved in this assignment, it is
our judgement that the Market Value of the Leased Fee and Fee Simple Interests
in the properties within the portfolio of CNL Income Fund, Ltd., as of the
effective date of valuation, December 31, 1998, is:
$11,740,000.00
We appreciate the opportunity to prepare this appraisal for you. If you have any
questions, we would welcome your call.
Respectfully Submitted,
VALUATION ASSOCIATES REAL ESTATE GROUP, INC.
/s/ Edward P. Karabedian /s/ Laurence R. Goldenberg
Edward P. Karabedian, MBA Laurence R. Goldenberg, MBA, MURP
Principal Vice President
General Associate Member of the Appraisal State Certified General Appraiser
Institute #RZ0001980
State Certified General Appraiser
#RZ0000782
/s/ Vincent Maldonado /s/ James R. White
Vincent Maldonado James R. White, MAI, SRA
Principal Managing Director/Real Estate Group
General Associate Member of the Appraisal State Certified General Appraiser
Institute #RZ0001875
State Certified General Appraiser
#RZ0001249
/s/ Ben Abdallah
Ben Abdallah, MA
Associate
:dmh
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
Fund I
Page 1
CERTIFICATE OF VALUE
We certify that, to the best of our knowledge and belief:
- - The statements of fact contained in this report are true and correct.
- - The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and are our personal,
unbiased professional analyses, opinions, and conclusions.
- - We have no present or prospective interest in the property that is the
subject of this report, and we have no personal interest or bias with
respect to the parties involved.
- - Our compensation is not contingent upon the reporting of a predetermined
value or direction in value that favors the cause of the client, the
amount of the value estimate, the attainment of a stipulated result, or
the occurrence of a subsequent event, nor a specific loan amount or value.
- - Our analyses, opinions, and conclusions were developed, and this report
has been prepared, in conformity with the Uniform Standards of
Professional Appraisal Practice and the requirements of the Code of
Professional Ethics and Standards of Professional Practice of the
Appraisal Institute.
- - We have not made a personal inspection of the property that is the subject
of this report.
- - No one provided significant professional assistance to the persons signing
this report.
- - The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
Fund I
Page 2
In the final analysis, after thorough consideration given to all important
factors in this valuation, including the specified Assumptions and Limiting
Conditions, it is our judgement that the Aggregate Market Value of the Leased
Fee and Fee Simple Interest of CNL Income Fund, Ltd., subject to the general
assumptions and limiting conditions set forth herein as of the effective date of
analysis, December 31, 1998, is:
$11,740,000.00
Respectfully Submitted,
VALUATION ASSOCIATES REAL ESTATE GROUP, INC.
/s/ Edward P. Karabedian /s/ Vincent Maldonado
Edward P. Karabedian, MBA Vincent Maldonado
Principal Principal
General Associate Member of the General Associate Member of the Appraisal
Appraisal Institute Institute
State Certified General Appraiser State Certified General Appraiser
#RZ0000782 #RZ0001249
/s/ Laurence R. Goldenberg /s/ James R. White
Laurence R. Goldenberg, MBA, MURP James R. White, MAI, SRA
Vice President Managing Director/Real Estate Group
State Certified General Appraiser State Certified General Appraiser
#RZ0001980 #RZ0001875
Technical Desk Review Only
/s/ Ben Abdallah
Ben Abdallah, MA
Associate
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
Fund I
Page 3
DEFINITIONS
In addition to estimating the Market Value of the Fund as requested by the
client, we have also estimated the Liquidation Value. Moreover, and for
clarification, we have explored the concept of Disposition Value which relates
closely to the other concepts. The definitions of these classifications of value
are as follows:
*Market Value: the most probable price which a specified interest in real
property is likely to bring under all the following conditions:
I. Consummation of a sale as of a specified date.
II. Open and competitive market for the property interest appraised.
III. Buyer and seller each acting prudently and knowledgeably.
IV. Price not affected by undue stimulus.
V. Buyer and seller typically motivated.
VI. Both parties acting in what they consider their best interest.
VII. Adequate marketing efforts made and a reasonable time allowed for
exposure in the open market.
VIII. Payment made in cash in U.S. dollars or in terms of financial
arrangements comparable thereto.
IX. Price represents the normal consideration for the property sold,
unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.
*Disposition Value: the most probable price which a specified interest in real
property is likely to bring under all of the following conditions:
I. Consummation of a sale within a limited future marketing period
specified by the client.
II. Current actual market conditions for the property interest
appraised.
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<PAGE>
Fund I
Page 4
III. The buyer and seller are each acting prudently and knowledgeably.
IV. The seller is under compulsion to sell.
V. The buyer is typically motivated.
VI. Both parties are acting in what they consider their best interests.
VII. Adequate marketing effort will be made in the limited time allowed
for completion of a sale.
VIII. Payment will be made in cash in U.S. dollars or in terms of
financial arrangements comparable thereto.
IX. The price represents the normal consideration for the property sold,
unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.
*Liquidation Value: the most probable price which a specified interest in real
property is likely to bring under all of the following conditions:
I. Consummation of a sale within a severely limited future marketing
period specified by the client.
II. Current actual market conditions for the property interest
appraised.
III. The buyer is acting prudently and knowledgeably.
IV. The seller is under extreme compulsion to sell.
V. The buyer is typically motivated.
VI. The buyer is acting in what he or she considers his or her best
interests.
VII. A limited marketing effort made and limited time allowed for the
completion of sale.
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
Fund I
Page 5
VIII. Payments will be made in cash in U.S. dollars or in terms of
financial arrangements comparable thereto.
IX. The price represents the normal consideration for the property sold,
unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.
Discount Rate: A rate of return commensurate with perceived risk used to convert
future payments or receipts to present value.
Leased Fee Estate: An ownership interest held by a landlord with the right of
use and occupancy conveyed by lease to others; the rights of lessor or the
leased fee owner and leased fee are specified by contract terms contained within
the lease.
Fee Simple Estate: Absolute ownership unencumbered by any other interest or
estate subject only to the four powers of government.
Reversion: A lump sum benefit that an investor receives or expect to receive at
the termination of an investment.
Reversionary Right: The right to repossess and resume full and sole use and
ownership of real property that has been temporarily alienated by a lease, an
easement, etc.; may become effective at a stated time or under certain
conditions, e.g., the termination of a leasehold, the abandonment of a
right-of-way, the end of the estimated economic life of the improvements.
Overall Rate of Capitalization: An annual percentage rate that expresses the
relationship between Net Operating Income and present worth or value for the
entire investment or property. In mortgage-equity analysis (especially the
Ellwood formulation), this is also termed the Composite Rate or Composite
Overall Rate. This label reflects the fact that it incorporates pro rated
capital appreciation or depreciation along with Net Operating Income.
Highest and Best Use: The reasonably probable and legal use of vacant land or an
improved property which is physically possible, appropriately supported,
financially feasible, and that results in the highest and best use.
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
Fund I
Page 6
Underlying Special Assumptions of the Valuation
- -----------------------------------------------
In order to accurately and effectively complete the valuation process, the
appraised value is predicated upon certain conditions. These are set forth as
follows.
1. The client has furnished us with summarized data pertaining to such
elements as, but not limited to, sales volumes, lease data, property
specific data, etcetera, which it and its general partners have certified
to us is true, correct, and complete in all material respects. For
purposes of this analysis, it is assumed that the data are accurate, true
and complete. It is recognized that it would not be possible to
individually verify each physical lease and/or portion of the property
data furnished to us. However, based upon our familiarity with these
properties and the geographic markets in which they are located, nothing
has come to our attention which would lead us to conclude that any of the
information provided to us is inaccurate in any material respect. In
instances where summarized data with respect to a particular property was
not available, we have utilized projections for certain elements such as
renewal option periods, rental rates and other data, which we have
determined based upon our knowledge of the properties, and in some cases,
our prior experience with the operators, and our knowledge of the
geographic markets in which such properties are located.
2. We have completed the valuation of the subject portfolio without
conducting personal inspections of each of the properties immediately
prior to estimating their value. It is recognized that Valuation
Associates Real Estate Group, Inc., or its related companies and/or
representatives, has at various times in the past, inspected and appraised
a majority of the properties in this portfolio and we are familiar with
the various geographic market areas involved. Consequently, we have
assumed, unless otherwise specified, based upon certificates provided to
us by the client and its general partners, that each 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 or retail brand.
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
Fund I
Page 7
3. It is assumed, based upon certificates provided to us by the client and
its general partners, that each of the properties is free from any pending
or proposed litigation, civil engineering improvements, or eminent domain
proceedings which could affect the respective property's value unless so
indicated.
4. Certain properties within the portfolio are presently under conversion
construction. The client may have certified data to us relative to
construction cost, lease information, building specifications, etc. We
assume that this information, if provided, is complete, true and correct.
5. In our professional judgement and based upon our prior experience with the
properties and our testing of selected data based on market information
and databases available to us and which we deem reliable, it is reasonable
for us to rely upon the certificates described herein.
6. For purposes of this assignment, unless otherwise specified, we believe
that the existing building improvements represent the Highest and Best Use
of the respective properties.
7. There are 3 properties within the portfolio which are under joint venture
agreement; some of which appear in more than one Fund. As a result, we
have allocated the respective proportionate value share to each respective
fund separately.
8. The value estimate does not include furniture, fixtures and equipment in
the respective stores, as these items are assumed to belong to the tenant
and the valuation is based upon land and building only. As used herein,
"furniture, fixtures and equipment" means those removable items which are
necessary for the operation of the business, including items such as all
kitchen equipment, seating, tables, smallwares, display cases, cash
registers, intercom/music systems, window treatments, signage, and so
forth. Other items such as heating and cooling systems, electrical
service, restroom fixtures, water heaters, floor coverings, and
landscaping, etc., are considered to be part of the real estate.
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
Fund I
Page 8
9. It has been our experience in the appraisal of restaurants that the total
rent as a percentage of sales volume generally falls within a market
derived range. For purposes of this assignment, we have not made an
analysis of any lease renewals which may occur during the holding period
in order to ascertain whether the future sales will fall within these
parameters unless specified herein. Operators of stores currently
performing at or above the average unit volume of the respective concept
are assumed to exercise the options at the terms and conditions of the
last lease term or as specified in the lease renewal option detail.
10. It is recognized that, generally, varied amounts of risk are inherent with
the type of restaurant operator, whether corporate or private; single or
multi-unit. Our judgement with respect to these risks is reflected in our
valuation methodology described below.
11. As of this writing, Long John Silver's and Boston Market are protected by
bankruptcy laws. Because of the uncertainty of the future of these
companies, we have used market level rents as well as capitalization rates
in the analysis of any vacated locations with respect to such tenants.
12. Additional General Assumptions and Limiting Conditions relied upon in the
analysis may be found in the Addenda section of this report.
Purpose of the Appraisal
- ------------------------
The purpose of the appraisal was to estimate the aggregate market value and
liquidation value of the leased fee and fee simple interests of properties
within the referenced portfolio. The appraisal will be used for financial
analysis and decision making in connection with the possible merger or
acquisition of CNL Income Fund, Ltd. with and into CNL American Properties Fund,
Inc. or its subsidiaries or affiliates, and evaluation by the limited partners
of CNL Income Fund, Ltd., the financial advisers of CNL Income Fund, Ltd., and
the general partners of CNL Income Fund, Ltd. regarding the acceptance and
fairness of the types and amounts of consideration to be deliverable to the
limited partners of CNL Income Fund, Ltd. in connection with such merger or
acquisition.
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
Fund I
Page 9
Effective Date of Valuation
- ---------------------------
The effective date of valuation is December 31, 1998.
Highest and Best Use
- --------------------
In this analysis, the highest and best use of a particular property which is
currently operating and encumbered by a long term lease is assumed to be
represented by the existing building improvements. The highest and best use of a
property which has been closed is assumed to be commercial with contributory
value attributable to the building improvements.
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
Fund I
Page 10
Valuation Methodology/Scope of Work
- -----------------------------------
The portfolio consists of CNL IncomeFund , Ltd., which comprises a total of 17
individual properties located in 11 states, of which 3 are joint ventures within
various affiliated funds. There are 11 different operating restaurant concepts.
The properties were initially segregated by region since it has been observed
that certain areas of the country tend to have value and demand characteristics
that differ from others. The three defined regional areas are California, the
western US (comprising Nevada, Arizona, Oregon, and Washington), and the
remaining states within the Continental US which form the third region. There
are no properties within the fund situated in Alaska or Hawaii or the US
Territorial possessions.
Within each geographical region, the properties are further classified relative
to their operational characteristics. These categories are either corporate
multi-unit operators or private/single unit operator types. These differing
operational structures tend to exhibit variable risk characteristics and cash
flows.
The above categories are further delineated by their operational status. The
sub-categories are identified as follows:
1. Store Operating normally with rent being paid
2. Closed store - corporate paying rent
3. Closed store - franchisee paying rent
4. Closed store - corporate in bankruptcy/no rent
5. Closed store - private operator paying partial rent
6. Closed store - franchisee paying no rent
7. Closed store - private operator paying no rent
8. Store under construction.
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
Fund I
Page 11
The appraisal of the market value in the leased fee and fee simple interests in
the properties in the portfolio primarily involved the use of the Cost Approach
and the Income Approach to Value as necessary. The Cost Approach was used only
in instances where a reversionary value was required and the use of direct
capitalization would not have been the method of choice. The Sales Comparison
Approach was used if the valuation of the underlying land of a particular
property were required and for select closed locations with no current contract
rent. No truly comparable sales of large portfolios of comparable properties
were found during our research phase; thereby rendering the Sales Comparison
Approach for entire portfolios to be not applicable. Since the assignment
principally involves the estimation of the aggregate market value of the leased
fee and fee simple interests of the properties in the portfolio, the most
applicable avenue to value is, in our professional judgement, the Income
Approach utilizing the Discounted Cash Flow Analysis. However, we have compared
the market value figures arrived at herein against comparative sale databases
available to us and which we deem reliable, and have concluded that the market
value herein stated is, with respect to individual properties, in the range of
comparative individual property sales occurring in the general markets for such
properties. As noted above, all data, reasoning, and analyses of the appraiser
not specifically set forth herein is maintained in the appraiser's files.
Most of the properties within the portfolio are encumbered by long term leases.
The remaining terms for fully owned properties range from 1 to 19 years
exclusive of renewal options which may exist. The remaining terms for the joint
venture properties range from 8 to 14 years exclusive of renewal options which
may exist.
The value of the properties under the Income Approach is developed by the
capitalization of the lease payments into present value utilizing a Discounted
Cash Flow analysis. The annual lease payments were discounted based upon
payments made monthly in advance. Income and expenses were on a calendar basis.
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
Fund I
Page 12
In addition to the value of the property's income stream, there will be a
property reversion consisting of land, building improvements, or both. The value
of the reversion at the end of the holding period was estimated and a discount
factor applied for its conversion to present value. The 11th year's scheduled
income was utilized in the calculation of the future value of the reversion as
the estimate of future value of the reversion considers an investor's analysis
of future income expectation. When viewed from the tenth year of the holding
period, the eleventh or next year of the holding period thereby represents such
expectation.
General Cash Flow Assumptions
- -----------------------------
Certain other assumptions relative to the cash flow analysis were made. These
include a ten year holding period, a 1% annual allowance for management fee and
a flat amount of $200 per property per year for miscellaneous expenses such as
bookkeeping, legal fees, and other pro-rata charges. Unless specified, no
vacancy or collection loss was taken due to the non-cancellable long term
leases. Where lease renewal options are available, we have assumed that they
would be exercised, providing that the store was currently operating at or above
the average unit volume for that particular concept, or anticipated future
contract lease payments are at or below 15% of reported gross sales volume. The
income stream of vacant stores with creditworthy corporate operators paying rent
were discounted at the same rate as those same operators of operating stores.
In the valuation of those stores for which no sales volume data were available
and with leases expiring during the holding period, we assume that the lease
payments are no more than 15% of the store's current sales volume. Based upon
our experience and professional judgement, we believe this to be a reasonable
assumption because of the market data available to us as of the valuation date.
Where client certified data indicates either no percentage rent or a negative
amount with respect to a particular store, we assume that this store's sales
will not exceed the breakpoint (i.e., the level of sales at which percentage
rent will become payable) during the holding period.
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
Fund I
Page 13
Percentage rent was computed based upon stabilized sales volume and lease terms.
The payment of percentage rent, if any, is assumed to take place following the
end of the applicable lease year.
The percentage rent portion of lease cash flows was discounted to present value
at a rate approximately 400+/- basis points greater than that selected for the
contract rent to reflect the increased risk involved with this type of income
stream. A commensurate terminal capitalization rate spread on the percentage
rent for this portion of the projected income was also utilized.
Any Checkers restaurant properties which may be found in the fund are reported
to be ground leases only. Therefore, the reversion value indicates land value
only. The value of the underlying land was projected to increase 2+/-% per annum
during the holding period to account for inflationary demand pressure over the
remaining lease term for these sites only.
Relative to properties that are currently vacant with no rent being paid, the
estimate of market rent was based upon such factors as the property's listing
information as provided by the client, our previous appraisal of the property
(if performed), our appraisal of similar properties within that region or
sub-market, limited discussions with specific market participants, and other
relevant economic rental information within our proprietary database.
At the end of the ten year holding period, we have assumed that the properties
would be sold in an orderly manner. We have utilized a 2.0% sales expense which
encompasses any fees for brokerage or attorneys, applicable closing costs, and
miscellaneous charges, which may be incurred by the fund upon disposition of the
real estate assets exclusive of any buyer paid transaction costs associated with
such disposition.
The contractual base rent portion of the lease cash flow was discounted to
present value using discount rates chosen on a property by property basis, as
specified below. The selection of the adopted property specific discount rate
was based upon our site and tenant specific analysis of the risk involved. The
segments of risk include those applicable to the market both general and
specific, lessee/borrower risk and property risk. The final selection of the
rates is the culmination of the analysis and interpretation of attitudes and
expectation of market participants relative to a comparison with a variety of
alternative investment vehicles and transactions. These include
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
Fund I
Page 14
stocks, bonds, other real estate investments, or various equity participations.
Also considered in our analysis were the individual franchisor's company profile
and strength gathered from sources such as stock reports, investor publications,
trade journals, discussions with market participants, and other sources which we
deem reliable in our professional judgement.
During the course of our analysis of CNL Income Fund , we have considered a
variety of important factors including those noted above, we have utilized
discount rates applicable to the income streams between 8.50% and 11.00%,
whereas terminal capitalization rates applicable to the calculation of the
reversions range between 9.25% and 11.75%, depending upon the property.
Although the assumptions set forth herein have served as an overall guide during
the valuation process, and such assumptions are reasonable in our professional
judgement, and based upon our experience in the relevant market, each individual
property and its related information, data, and client-sourced documentation has
been examined as necessary to derive the final value conclusion.
The following sections set forth the cash flows, operator and concept overviews,
and certain other important statistical data referenced and relied upon during
the course of our analysis.
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
Fully Owned Properties
<TABLE>
<CAPTION>
Income Fund Fund 1 Fund 1 Fund 1 Fund 1
Property # 1 2 3 4
% owned 100.0% 100.0% 100.0% 100.0%
Unit Ref# 101-361003 101-361004 101-361005 101-361006
Status Occupied/Sublease Occupied/Sublease Occupied Occupied
Concept DC Grill Brangus Steakhouse GC GC
Operator Golden Corral Corporation Golden Corral Corporation Golden Corral Corporation Corral Northeast, Inc.
City Eunice, LA Jasper, AL Kent Island, MD Salibury, MD
Date Acquired 12/23/86 12/23/86 11/20/86 12/04/86
<S> <C> <C> <C> <C>
Building SF 5,180 5,186 5,540 5,540
Investment Type L&B L&B L&B L&B
Lease Expiration 01/31/02 12/31/01 12/31/01 11/30/01
% rent 1996 $0 $0 $0 $0
% rent 1997 $0 $0 $0 $0
Sales Vol 1993 ($K) n/a n/a $988 $1,312
Sales Vol 1994 n/a n/a $908 $1,205
Sales Vol 1995 n/a n/a $884 $1,214
Sales Vol 1996 n/a n/a $950 $1,133
Sales Vol 1997 n/a n/a $675 $1,100
Annualized 1998 n/a n/a n/a $1,175
% Rent Breakpoint $1,310,020 $1,292,500 $1,544,025 $1,576,537
Avge. Chain Unit Vol. N/A N/A $1,738,000 $1,738,000
Stab. Annual % Rent $0 $0 $0 $0
DISCOUNT RATE 10.50% 10.50% 9.00% 9.00%
TERMINAL CAP. RATE 11.25% 11.25% 9.75% 9.75%
ESTIMATED VALUES $718,528 $716,519 $966,821 $987,216
Gross Rental Income
Year 1 $78,601 $77,550 $92,642 $94,592
Year 2 $78,601 $77,550 $92,642 $94,592
Year 3 $78,601 $77,550 $92,642 $94,592
Year 4 $77,775 $77,790 $92,642 $94,592
Year 5 $77,700 $77,790 $92,642 $94,592
Year 6 $77,700 $77,790 $92,642 $94,592
Year 7 $77,700 $77,790 $92,642 $94,592
Year 8 $77,700 $77,790 $92,642 $94,592
Year 9 $81,261 $81,680 $92,642 $94,592
Year 10 $81,585 $81,680 $92,642 $94,592
Year 11 $81,585 $81,680 $92,642 $94,592
<CAPTION>
Income Fund Fund 1 Fund 1 Fund 1
Property # 5 6 7
% owned 100.0% 100.0% 100.0%
Unit Ref# 101-361007 101-581008 101-641011
Status Occupied/Sublease Occupied Occupied
Concept Hot Buffet Pizza Hut Popeye's
Operator Golden Corral Corporation NPC Restaurants, L.P. Restaurant Management Services, Inc.
City Va. Beach, VA Bowie, TX Merritt Island, FL
Date Acquired 10/16/86 12/17/87 12/31/86
<S> <C> <C> <C>
Building SF 5,540 1,860 2,325
Investment Type L&B L&B L&B
Lease Expiration 10/31/01 12/16/07 11/29/04
% rent 1996 $0 $12,352 $0
% rent 1997 $0 $10,477 $0
Sales Vol 1993 ($K) n/a $408 $889
Sales Vol 1994 n/a $442 $1,022
Sales Vol 1995 n/a $491 $970
Sales Vol 1996 n/a $542 $1,001
Sales Vol 1997 n/a $512 $1,068
Annualized 1998 n/a $581 $1,112
% Rent Breakpoint $1,821,125 $240,639 $1,081,600
Avge. Chain Unit Vol. N/A $630,000 $826,000
Stab. Annual % Rent $0 $12,500 $1,500
DISCOUNT RATE 10.50% 8.75% 9.75%
TERMINAL CAP. RATE 11.25% 9.50% 10.50%
ESTIMATED VALUES $1,021,983 $270,491 $639,457
Gross Rental Income
Year 1 $109,268 $15,960 $64,896
Year 2 $109,268 $15,960 $64,896
Year 3 $110,800 $15,960 $64,896
Year 4 $110,800 $15,960 $64,896
Year 5 $110,800 $15,960 $64,896
Year 6 $110,800 $15,960 $64,896
Year 7 $110,800 $15,960 $64,896
Year 8 $116,340 $15,960 $64,896
Year 9 $116,340 $15,960 $64,896
Year 10 $116,340 $15,960 $64,896
Year 11 $116,340 $15,960 $64,896
</TABLE>
<PAGE>
Fully Owned Properties
<TABLE>
<CAPTION>
Income Fund Fund 1 Fund 1 Fund 1
Property # 8 9 10
% owned 100.0% 100.0% 100.0%
Unit Ref# 101-991012 101-931015 101-931016
Status Occupied Occupied Occupied
Concept Jade Hunan Wendy's Wendy's
Operator Son Quang Lam Wendy's Old Fashioned Hamburgers of New York, Inc. Rocar Enterprises, Inc.
City Angleton, TX Mesa, AZ Mesquite, TX
Date Acquired 09/11/86 08/13/86 09/29/86
<S> <C> <C> <C>
Building SF 2,591 2,500 2,614
Investment Type L&B L&B L&B
Lease Expiration 01/31/99 08/12/06 02/29/16
% rent 1996 $0 $0 $27,837
% rent 1997 $0 $0 $3,171
Sales Vol 1993 ($K) n/a $774 $845
Sales Vol 1994 n/a $737 $936
Sales Vol 1995 n/a $769 $972
Sales Vol 1996 n/a $888 $1,029
Sales Vol 1997 $188 $984 $1,131
Annualized 1998 $217 $955 $1,212
% Rent Breakpoint N/A $1,200,000 $971,143
Avge. Chain Unit Vol N/A $1,042,000 $1,042,000
Stab. Annual % Rent $0 $0 $6,500
DISCOUNT RATE 11.00% 8.50% 8.75%
TERMINAL CAP. RATE 11.75% 9.25% 9.50%
ESTIMATED VALUES $290,823 $991,523 $999,357
Gross Rental Income
Year 1 $32,189 $82,112 $71,770
Year 2 $32,388 $82,112 $73,923
Year 3 $32,388 $82,112 $76,141
Year 4 $32,388 $82,112 $78,425
Year 5 $32,388 $82,112 $80,778
Year 6 $33,872 $82,112 $85,697
Year 7 $34,007 $82,112 $88,268
Year 8 $34,007 $88,317 $90,916
Year 9 $34,007 $98,280 $93,643
Year 10 $34,007 $98,280 $96,453
Year 11 $35,566 $98,280 $99,346
<CAPTION>
Income Fund Fund 1 Fund 1 Fund 1 Fund 1
Property # 11 12 13 14
% owned 100.0% 100.0% 100.0% 100.0%
Unit Ref# 101-931018 101-931019 101-931020 101-982729
Status Occupied Occupied Occupied Occupied
Concept Wendy's Wendy's Wendy's G Round
Operator Coupran, Inc. Wendpayson Corporation Wen-Atlanta, Inc. The Ground Round, Inc.
City Oklahoma City, OK Payson, AZ Stockbridge, GA Camp Hill, PA
Date Acquired 08/20/86 12/31/86 08/01/86 10/20/97
<S> <C> <C> <C> <C>
Building SF 2,624 2,489 2,700 5,279
Investment Type L&B L&B L&B L&B
Lease Expiration 02/28/10 07/11/10 07/31/06 10/19/17
% rent 1996 $258 $7,396 $0 $0
% rent 1997 $297 $4,640 $0 $0
Sales Vol 1993 ($K) $628 $757 $1,384 n/a
Sales Vol 1994 $606 $802 $1,427 n/a
Sales Vol 1995 $603 $826 $1,376 n/a
Sales Vol 1996 $603 $855 $1,337 n/a
Sales Vol 1997 $599 $895 $1,285 $1,064
Annualized 1998 $619 $713 $1,202 $1,037
% Rent Breakpoint $660,000 $800,000 $1,342,232 $0
Avge. Chain Unit Vol $1,042,000 $1,042,000 $1,042,000 $1,512,500
Stab. Annual % Rent $0 $2,000 $0 $0
DISCOUNT RATE 8.75% 8.50% 8.75% 10.00%
TERMINAL CAP. RATE 9.50% 9.25% 9.50% 10.75%
ESTIMATED VALUES $625,336 $543,611 $900,158 $837,422
Gross Rental Income
Year 1 $52,700 $48,000 $80,534 $88,523
Year 2 $52,700 $48,000 $80,534 $88,523
Year 3 $52,700 $48,000 $80,534 $88,523
Year 4 $57,311 $48,000 $80,534 $88,523
Year 5 $60,605 $48,000 $80,534 $88,523
Year 6 $60,605 $48,000 $80,534 $88,523
Year 7 $60,605 $48,000 $80,534 $88,523
Year 8 $60,605 $48,000 $83,541 $88,523
Year 9 $60,605 $48,000 $87,750 $88,523
Year 10 $60,605 $48,000 $87,750 $88,523
Year 11 $60,605 $48,000 $87,750 $88,523
</TABLE>
<PAGE>
Joint Venture Properties
(Income Fund 1)
<TABLE>
<CAPTION>
Income Fund JV Fund 1,xt JV Fund 1,xt JV Funds 1,2,5,6
Property # 1 2 56
% owned 50.0% 50.0% 12.2%
Unit Ref# 301-121001 302-581009 346-192800
Status Occupied Sublease Occupied
Concept Burger King Bauran Stube Chevy's
Operator Burger King Corporation Semoran Management Corporation Chevys, Inc.
City Orlando, FL Orlando, FL Vancouver, WA
Date Acquired 11/12/86 06/17/86 12/31/97
<S> <C> <C> <C>
Building SF 4,392 2,435 7,390
Investment Type L&B L&B L&B
Lease Expiration 11/12/06 06/17/06 12/31/12
% rent 1996 $0 $0 $0
% rent 1997 $0 $0 $0
Sales Vol 1993 ($K) $1,086 n/a n/a
Sales Vol 1994 $1,149 n/a n/a
Sales Vol 1995 $1,176 n/a n/a
Sales Vol 1996 $1,224 n/a n/a
Sales Vol 1997 $1,181 n/a n/a
Annualized 1998 $1,134 n/a $2,220
Avge. Chain Unit Vol. $1,100,000 N/A $2,265,000
Stab. Annual % Rent $0 $0 $0
DISCOUNT RATE 8.75% 8.75% 9.00%
TERMINAL CAP. RATE 9.50% 9.50% 9.75%
ESTIMATED INTEREST VALUES $626,958 $282,683 $316,367
VALUES AFTER PARTIAL INTEREST DISCOUNT $626,958 $282,683 $316,367
Gross Rental Income
Year 1 $117,000 $56,846 $222,849
Year 2 $117,000 $56,846 $222,849
Year 3 $117,000 $56,846 $222,849
Year 4 $117,000 $56,846 $222,849
Year 5 $117,000 $56,846 $245,133
Year 6 $117,000 $56,846 $245,133
Year 7 $117,000 $56,846 $245,133
Year 8 $117,000 $53,113 $245,133
Year 9 $117,000 $48,700 $245,133
Year 10 $117,000 $48,700 $269,647
Year 11 $117,000 $48,700 $269,647
Total Value of Joint Venture Properties: $1,226,009
Add Total Value of Fully Owned Properties: $10,509,247
---------------
Total Value of Income Fund 1: $11,735,256
$11,740,000 (R)
</TABLE>
<PAGE>
Fund I
Page 16
LIQUIDATION VALUE
In addition to estimating the Market Value of the income fund as requested by
the client we have also estimated the Liquidation Value. Moreover, and for
clarification, we have explored the concept of Disposition Value which relates
closely to the other concepts. The definitions of these classifications of value
are as follows:
1. Market Value: the most probable price which a specified interest in real
property is likely to bring under all the following conditions:
- Consummation of a sale as of a specified date.
- Open and competitive market for the property interest appraised.
- Buyer and seller each acting prudently and knowledgeably.
- Price not affected by undue stimulus.
- Buyer and seller typically motivated.
- Both parties acting in what they consider their best interest.
- Adequate marketing efforts made and a reasonable time allowed for
exposure in the open market.
- Payment made in cash in U.S. dollars or in terms of financial
arrangements comparable thereto.
- Price represents the normal consideration for the property sold,
unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.
2. Disposition Value: the most probable price which a specified interest in
real property is likely to bring under all of the following conditions:
- Consummation of a sale within a limited future marketing period
specified by the client.
- Current actual market conditions for the property interest
appraised.
- The buyer and seller are each acting prudently and knowledgeably.
- The seller is under compulsion to sell.
- The buyer is typically motivated.
- Both parties are acting in what they consider their best interests.
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
Fund I
Page 17
- Adequate marketing effort will be made in the limited time allowed
for completion of a sale.
- Payment will be made in cash in U.S. dollars or in terms of
financial arrangements comparable thereto.
- The price represents the normal consideration for the property sold,
unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.
3. Liquidation Value: the most probable price which a specified interest in
real property is likely to bring under all of the following conditions:
- Consummation of a sale within a severely limited future marketing
period specified by the client.
- Current actual market conditions for the property interest
appraised.
- The buyer is acting prudently and knowledgeably.
- The seller is under extreme compulsion to sell.
- The buyer is typically motivated.
- The buyer is acting in what he or she considers his or her best
interests.
- A limited marketing effort made and limited time allowed for the
completion of sale.
- Payments will be made in cash in U.S. dollars or in terms of
financial arrangements comparable thereto.
- The price represents the normal consideration for the property sold,
unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.
As noted above, Market Value implies "the most probable price which a property
should bring in a competitive and open market under all conditions requisite to
a fair sale, the buyer and seller each acting prudently, knowledgeably, and
assuming the price is not affected by undue stimulus." Under this definition,
both parties are typically motivated. Each party is well advised and well
informed and each is acting in what they consider their own best interests. A
reasonable time is allowed for exposure in the open market.
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
Fund I
Page 18
Several of the portions of this definition vary considerably from that of
Disposition Value and Liquidation Value. The first item is the marketing period.
Market Value implies a reasonable marketing time in the open market. Disposition
Value implies a limited marketing period specified by the client. Liquidation
Value is based upon a severely limited marketing period as client specified.
The second prime difference is in the area of stimulus. Market Value implies
that the sale is not affected by undue stimulus. Disposition Value assumes that
the seller is under compulsion to sell, whereas Liquidation Value is based upon
the seller being under extreme compulsion to sell.
The next issue deals with motivation, which relates closely to the preceding.
Market Value implies typical motivation by both buyer and seller. Disposition
Value and Liquidation Value are based upon only the buyer being typically
motivated.
The fourth major difference pertains to both of the parties acting in their own
best interests. Market Value and Disposition Value are based upon this concept.
Liquidation Value on the other hand, implies that only the buyers are acting in
what they consider their best interests.
In order to complete a sale of the entire fund, we have assumed that the sale of
each property in the fund will be implemented on a property-by-property basis
rather than in bulk. This allows for maximizing the prices to be received within
the limitations of the definition of Liquidation Value. Moreover, we have also
assumed that each property in the fund will be marketed and sold individually
throughout the investment community. The small investor interested in just one
property will vie in this market with an investor such as a pension fund who may
be interested in all of the properties within the fund. No discounts for bulk
sales were considered in this analysis.
The last principal difference between the definitions lies in the area of the
degree of marketing effort. Market Value and Disposition Value are based upon an
"adequate" marketing effort, in contrast to that of Liquidation Value which
states that there will be only a limited effort.
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
Fund I
Page 19
The sale of the properties based upon Liquidation Value as considered in this
assignment requires a modification of the definition for this class of value. In
order to comply with the underlying conditions of the appraisal assignment, we
have found it necessary to make the assumption that an aggressive marketing
effort will be made rather than a limited effort as noted in the definition.
This will require additional expense for printing, mailings, telephone, travel
and general allocated overhead on behalf of the seller. Also considered was an
amount for contingency. This relates to unforseen expenses which can affect any
and/or all of the expense categories. We have allowed one half of one percent of
the appraised present value of each property as a reasonable amount for the
increased marketing effort and contingency.
It is also our judgement that the seller will incur brokerage commissions on the
sales. Since the client has requested that we consider time to be of the essence
in light of Liquidation Value, we are of the opinion that to enlist the aid of
the brokerage community would be a prudent decision. Based upon our analysis we
have selected a 2% commission structure to be applied to the present values
developed. This percentage is well supported in the market.
Another expense which must be considered are those involved with the
transaction. Attorneys fees, consultants and appraisal fees, transfer taxes,
surveys, title insurance, and other related expenses were considered. This
expense allowance amounts to an estimated of 2% of the present value which is
also well supported in our analysis.
Relative to a normal marketing time frame, we have analyzed such factors as the
state of the general economy, restaurant industry trends and forecasts, supply
and demand, competing investments, the mortgage lending climate, consumer
confidence, and other elements of critical importance to this issue. Based upon
our analysis, it is our judgement that a normal marketing period to effect a
sale of properties within the fund would be twelve to eighteen months.
In light of the Liquidation Value estimate, the client has requested that we
reflect a marketing period estimated to not exceed twelve months. In effect,
this shortens the normal marketing period estimate by as much as 50%. In order
to achieve a sale within this time frame, we are of
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
Fund I
Page 20
the opinion that a discount of 5% from the appraised discounted present values
is in order. A reasonable discount of this amount would not only increase the
potential investor's yield, but should draw additional investors into the demand
pool.
Another factor which we believe to be of prime importance with the concept of
Liquidation Value is the specter of bankruptcy issues as of this writing facing
Long John Silver's and Boston Chicken. Under a Liquidation Value premise,
investors will take a more conservative posture relative to yield requirements.
As a result, these two concepts were reviewed and their discount rates and
capitalization rates warranted positive adjustments for increased yield to
reflect the increased risk, as well as the increased urgency to sell, which
resulted from the accelerated marketing period typical in a liquidation
scenario.
In consideration of the above discussion, each of the expenses estimated were
deducted from the present value of respective properties. As a result, the
Liquidation Value of CNL Income Fund, Ltd., subject to the assumptions and
limiting conditions noted, as of the effective date of value, December 31, 1998,
is:
$10,620,000.00
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
Fund I
Page 21
CERTIFICATE OF VALUE
We certify that, to the best of our knowledge and belief:
- - The statements of fact contained in this report are true and correct.
- - The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and are our personal,
unbiased professional analyses, opinions, and conclusions.
- - We have no present or prospective interest in the property that is the
subject of this report, and we have no personal interest or bias with
respect to the parties involved.
- - Our compensation is not contingent upon the reporting of a predetermined
value or direction in value that favors the cause of the client, the
amount of the value estimate, the attainment of a stipulated result, or
the occurrence of a subsequent event, nor a specific loan amount or value.
- - Our analyses, opinions, and conclusions were developed, and this report
has been prepared, in conformity with the Uniform Standards of
Professional Appraisal Practice and the requirements of the Code of
Professional Ethics and Standards of Professional Practice of the
Appraisal Institute.
- - We have not made a personal inspection of the property that is the subject
of this report.
- - No one provided significant professional assistance to the persons signing
this report.
- - The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
Fund I
Page 22
In the final analysis, after thorough consideration given to all important
factors in this valuation, including the specified Assumptions and Limiting
Conditions, it is our judgement that the Liquidation Value of CNL Income Fund,
Ltd., subject to the general assumptions and limiting conditions set forth
herein as of the effective date of analysis, December 31, 1998, is:
$10,620,000.00
Respectfully Submitted,
VALUATION ASSOCIATES REAL ESTATE GROUP, INC.
/s/ Edward P. Karabedian /s/ Vincent Maldonado
Edward P. Karabedian, MBA Vincent Maldonado
Principal Principal
General Associate Member of the General Associate Member of the Appraisal
Appraisal Institute Institute
State Certified General Appraiser State Certified General Appraiser
#RZ0000782 #RZ0001249
/s/ Laurence R. Goldenberg /s/ James R. White
Laurence R. Goldenberg, MBA, MURP James R. White, MAI, SRA
Vice President Managing Director/Real Estate Group
State Certified General Appraiser State Certified General Appraiser
#RZ0001980 #RZ0001875
/s/ Ben Abdallah
Ben Abdallah, MA
Associate
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
ADDENDUM
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
GENERAL ASSUMPTIONS AND LIMITING CONDITIONS
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
GENERAL ASSUMPTIONS AND LIMITING CONDITIONS
This is a Restricted Report-Complete Appraisal which is intended to comply with
the reporting requirements set forth under Standard Rule 2-2 (b) of the Uniform
Standards of Professional Appraisal Practice for a Restricted Report. As such,
it does not include full discussions of the data, reasoning, and analyses that
were used in the appraisal process to develop the appraiser's opinion of value.
Supporting documentation concerning the data, reasoning, and analyses is
retained in the appraiser's file. The information contained in this report is
specific to the needs of the client and for the intended use stated in this
report. The appraiser is not responsible for unauthorized or unintended use of
this report. We have not conducted contemporaneous physical inspection of the
properties which comprise the fund because such inspection is not necessary in
our professional judgement given the client's certificate that each property is
in good condition and is functional for its intended use and our general
familiarity with this portfolio. We have complied in full with the competency
provision of USPAP when conducting the analysis.
FOR THE PURPOSE OF THIS APPRAISAL IT IS ASSUMED:
1. That the legal descriptions furnished are correct.
2. That the title to the property is clear and merchantable, individually and
collectively.
3. That the properties are free and clear of all liens.
4. That there are no encumbrances or defects of title.
5. The portfolio and real estate described herein which are the subject of
this report are part of a portfolio operated or managed by the client.
6. As of the date of appraisal, no property-specific certified building
specifications or building plans, except for certified surveys of the
subject property sites and building improvements have been provided by the
current owner or client unless shown in the applicable addenda exhibit.
All physical dimensions used in the analysis have been supplied by the
client or its agents in the form of an electronic spreadsheet database
file, or other descriptive item. Building size data and specifications
have been provided by the client unless otherwise noted herein. The
report, descriptions, conclusions and analysis contained herein are
predicated on the validity of such client-sourced descriptive information.
All of the foregoing have been certified to us by the client and
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
its general partners. Nothing came to our attention in the course of this
assignment or in our experience with the properties which would lead us to
question whether any of the foregoing information or assumptions is
inaccurate, incorrect, in appropriate, or unreasonable in any material
respect.
THE APPRAISAL IS MADE SUBJECT TO THE FOLLOWING LIMITING CONDITIONS:
(These conditions apply to each property within the fund individually, and to
each fund collectively applicable to this assignment.)
1. No responsibility is assumed for information gathered by others and
believed to be reliable, except that nothing has come to our attention
during the course of this assignment which would lead us to believe that
any of such information is incorrect or inaccurate in any material
respect.
2. This appraisal was made for the purpose stated and should not be used for
any other purpose.
3. The values assigned to the land and improvements, if any, are their value
in relation to each other and should not be used separately.
4. The appraiser is prepared to give testimony or attendance in Court,
subject to the terms of the engagement letter applicable to this
assignment.
5. Disclosure of the contents of this appraisal report is limited to
employees, contractors, personnel, investors, and other pertinent
representatives of the client, and otherwise as provided herein or in the
engagement letter applicable to this assignment.
6. ENVIRONMENTAL DISCLAIMER: The value estimated in this report is based on
the assumption that the properties are not negatively affected by the
existence of hazardous substances or detrimental environmental conditions
unless otherwise specified in this report. The appraiser is not an expert
in the identification of hazardous substances or detrimental environmental
conditions. It is possible that tests and inspections made by a qualified
hazardous substance and environmental expert would reveal the existence of
hazardous materials and environmental conditions on or around the
properties that would negatively affect their value.
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
7. That the date of value in this report apply as set forth in the letter of
transmittal and body of report. The appraiser assumes no responsibility
for economic or physical factors occurring at some later or interim date
which may affect the opinions herein stated.
8. That no opinion is intended to be expressed for legal matters or for
matters that would require specialized investigation or knowledge beyond
that ordinarily employed by real estate appraisers, although such matters
may be discussed in the report.
9. That no opinion as to title is rendered. Data on ownership and the legal
description were obtained from sources which we consider reliable. Title
is assumed to be marketable and free and clear of all liens and
encumbrances, easements, and restrictions except those specifically
discussed in the report. The property is appraised assuming it to be under
responsible ownership and competent management and available for its
highest and best use.
10. That no engineering, property or building survey has been made by the
appraiser but has been provided to the appraiser by the client. The
appraiser has utilized information obtained from the public records and
the client provided site plan or survey and believes that this information
is valid and accurate for purposes of the analysis. Except as specifically
stated, data relative to property size and area were taken from sources
which we consider reliable, and no encroachment of real property
improvements is assumed to exist.
11. That maps, plats, and exhibits included herein are for illustration only,
as an aid in visualizing matters discussed within the report. They are not
to scale, and should not be considered as surveys or relied upon for any
other purpose.
12. That no opinion is expressed as to the value of subsurface oil, gas, or
mineral rights and that the property is not subject to surface entry for
the exploration or removal of such materials except as is expressly
stated.
13. That the projections included in this report are utilized to assist in the
valuation process and are based on current market conditions, anticipated
short term supply and demand factors, and a continued stable economy, and
are believed by us to be reasonable. However, the projections are subject
to changes in future conditions that cannot be accurately predicted by the
appraiser and could affect the future income or value in use projections.
14. That no detailed soil studies covering the subject property were available
to the appraiser. Therefore, premises as to soil qualities employed in
this report are not conclusive but have been considered consistent with
information available to the appraiser.
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
15. The Americans with Disabilities Act ("ADA") became effective January 26,
1992. The appraiser has not made a specific compliance survey and analysis
of this property to determine whether or not it is in conformity with the
various detailed requirements of the ADA. It is possible that a compliance
survey of the property, together with a detailed analysis of the
requirements of the ADA, could reveal that the property is not in
compliance with one or more of the requirements of the Act. If so, this
fact could have a negative effect upon the value or value in use of the
property. Since there was no direct evidence relating to this issue, and
since the appraiser is not qualified nor has been engaged to evaluate such
compliance, the appraiser did not consider possible non-compliance with
the requirements of ADA in estimating the value of the property.
16. The appraiser is not an insurer of the value of the property. The fees
collected by the appraiser is based solely on the value of the service
performed, and are unrelated to the value of the property. The appraiser
makes no guaranty or warranty that sale or exchange of the property will
result in receipt of the value expressed in the appraisal. In the event
appraiser is found liable for losses on account of any act or omission in
making the appraisal, the appraiser's liability shall be limited to the
fee collected, as liquidated damages and not as penalty and this liability
shall be exclusive. If this report is placed in the hands of anyone other
than the client, the client shall make such party aware of all limiting
conditions and assumptions of the assignment and related discussion. The
appraiser assumes no responsibility for any costs incurred to discover or
correct any deficiencies present in the property.
17. Conditions of heating, cooling, ventilating, electrical and plumbing
equipment is considered to be commensurate with the condition of the
balance of the improvements, unless otherwise stated. No judgement is made
as to adequacy of insulation, type of insulation, or energy efficiency of
the improvements or equipment.
18. If the appraiser has not been supplied with a termite inspection, survey
or occupancy permit, no responsibility or representation is assumed or
made for any costs associated with obtaining same or for any deficiencies
discovered before or after they are obtained. No representation or
warranty is made concerning obtaining these items.
19. The appraiser assumes no responsibility for any costs or consequences
arising due to the need or the lack of need for flood hazard insurance. An
agent for the Federal Flood Insurance Program should be contacted to
determine the actual need for flood hazard insurance.
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
20. The appraisal is based on the premises that there is full compliance with
all applicable federal, state, and local environmental regulations and
laws unless otherwise stated in the report; further, that all applicable
zoning, building and use regulations and restrictions of all types have
been complied with unless otherwise stated in the report; further it is
assumed that all required licenses, consents, permits or other legislative
or administrative authority, local, state, federal and/or private entity
or organization have been or can be obtained or renewed for any use
considered in the value estimate.
21. Improvements proposed, if any, on or off-site, as well as any repairs
required are considered, for purposes of this appraisal to be completed in
a good and workmanlike manner according to information submitted and/or
considered by the appraisers. In cases of proposed construction, the
appraisal is subject to change upon inspection of property after
construction is completed. This estimate of market value is as of the date
shown, as proposed, as if completed and operating at levels shown and
projected.
22. a. The estimated market value and/or value in use is subject to change
with market changes over time. Value is highly related to exposure,
time, promotional effort, terms, motivation, and conditions
surrounding the offering. The value estimate considers the
productivity and relative attractiveness of the property physically
and economically in the marketplace.
b. In cases of appraisal involving the capitalization of income
benefits, the estimate of market value or investment value or value
in use is a reflection of such benefits and appraiser's
interpretation of income and yields and other factors derived from
general and specific client and market information. Such estimates
are as of the date of the estimate of value; they are, thus, subject
to change as the market and value are naturally dynamic.
c. The "Estimate of Market Value" or "Value in Use" in the appraisal
report is not based in whole or in part upon the race, color, or
national origin of the present owners or occupants of the properties
in the vicinity of the property appraised.
d. The appraiser reserves the right to alter the opinion of value on
the basis of any information withheld or not discovered in the
original normal course of a diligent investigation.
23. Acceptance of, and/or use of, this appraisal report constitutes
understanding and acceptance of all of the General Assumptions, Specific
Assumptions, Extraordinary Assumptions and Limiting Conditions set forth
herein.
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
CONCEPT OVERVIEWS
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
5&Diner Restaurants
1140 East Greenway Street
Mesa, Arizona 85203
The first 5 & Diner opened in Phoenix, Arizona in 1989. It has become a landmark
and appears in many commercials around the world. It is open around the clock
and is frequented by movie stars, celebrities, and guests. The first two diners
were modular buildings, but they now build all their buildings on site. There
will be eight diners in the Phoenix area by the end of 1998, with at least seven
new restaurants located around the country by the end of 1999.
The restaurant exteriors consist of stainless steel, to give the "diner" look.
Inside there are booths and a lunch counter with stainless steel tops and
plastic trim. Walls are decorated with 1950's movie posters and a miniature
jukebox on each table.
The 5 & Diner method of operation focuses on good service, friendliness and
efficiency, with a classic diner menu.
Franchisees interested in operating a 5&Diner receive a turnkey operation,
complete with all the necessary equipment, complete training in standards and
restaurant operations, and exclusive territory protection.
<PAGE>
ARBY'S
1000 Corporate Drive
Fort Lauderdale, Florida 33334
In 1993, the Arby's Roast Beef Chain was reborn under a new leadership of Triarc
Companies. Triarc, formerly known as DWG Corporation, emerged from a major
reorganization in April of 1993. The new management believed that the best
course of action was to decentralize its operations and allow each business to
operate as a separate entity. The restaurants were then separated into their own
division, known as Triarc Restaurant Group to reflect Triarc's commitment to
change from a restaurant operator to that of a franchiser and manager of branded
concepts. The remaining company-owned restaurants were sold in 1997, becoming
100% franchised.
According to Triarc, Arby's is one of the world's largest franchise restaurant
system specializing in slow-roasted meat sandwiches. In addition to its various
sandwiches, Arby's offers chicken, submarine sandwiches, side dishes and salads.
<PAGE>
Bennigan's
S&A Restaurant Corporation
6500 International Parkway
Plano, Texas 75093
Metromedia Restaurant Group (MRG), a subsidiary of Metromedia Company, is one of
the largest full service restaurant companies in the world, with four very
stable restaurant brands: Bennigan's, Steak and Ale, Ponderosa Steakhouse, and
Bonanza. As of the end of fiscal 1997, MRG had over 1,000 restaurants, $1.4
billion in sales and 35,000 employees.
Bennigan's has a circa 1930s Irish pub theme, with brass and glass decorations,
in addition to various sports memorabilia. The menu contains approximately 75
items, ranging from appetizers, to sandwiches, to steaks, and a small but
memorable dessert menu. In addition to its large menu and its full service bar,
one of the draws into Bennigan's is its large variety of beers from all over the
world.
Bennigan's was founded in 1976, and is one of the leading brands in the casual
dining segment, with 190 company owned stores and 46 franchised stores located
in 32 states in the US and Korea. Stores average 6,500+/- square feet and seat
220. Checks average $11.00+/- per person. Startup costs range from $1,144,000 to
$2,304,000, which covers advertising, training, and acquisition of location.
<PAGE>
Bertucci's, Inc.
14 Audubon Road
Wakefield, Massachusetts 01880
Bertucci's, Inc. operates full-service, casual dining pizza restaurants in
Massachusetts, Connecticut, and Illinois. The pizzerias feature gourmet
pizzas cooked in a brick oven, as well as pastas, soups, salads, and
appetizers. The average price for dinner is about $10.00
As of December 1997, the end of the fiscal year, sales for Bertucci's were
$136.7+/- million, an increase of 6.8% over 1996. The chain reportedly
consists of 85 stores and 4,685 employees.
<PAGE>
Big Boy Restaurants
Elias Brothers Restaurants
4199 Marcy Street
Warren, Michigan 48091
Big Boy Restaurants were founded in Glendale, California by Bob Wian. At that
time, they were called "Bob's Pantry", until 1936 when the name was changed to
Big Boy when a fat little boy in red suspenders walked into the restaurant. The
image became so popular that Big Boy Restaurants have been franchised under
several different names including Elias, JB's, Frisch's, and Shoney's.
In 1975, Marriott acquired the Big Boy chain, and then sold it in the late 80s
to Elias Brothers. In October 1998, Shoney's agreed to sell its 34 company-owned
Shoney's to Elias Brothers as well, and all the Big Boy restaurants will now
operate under the same name. Currently, there are about 700 restaurants in 24
states, and 120 in Japan.
<PAGE>
BLACK-EYED PEA RESTAURANTS
DENAMERICA
7373 North Scottsdale
Scottsdale, Arizona
DenAmerica (formerly American Family Restaurants) owns and operates
approximately 105 Black-eyed Pea restaurants, which it acquired in 1996.
Black-eyed Pea's menu features home-style meals with pot roast, chicken fried
steak, and roast turkey.
As of December 1997, the end of the fiscal year, sales were reported as $300.6
million, which constitutes a growth of 24.5% over a one year period.
<PAGE>
BOSTON MARKET
14123 Denver West Parkway
Golden, Colorado 80401
Boston Chicken, Inc. was founded in Massachusetts in 1985, but is now
headquartered in Golden, Colorado. It franchises and operates food service
stores under the Boston Market brand-name. The stores specialize in fresh,
convenient meals associates with traditional home cooking, including entrees of
chicken, turkey, ham and meat loaf. Sandwiches and a variety of freshly prepared
vegetables, salads, and other side items are also offered.
In 1991, there were only 33 stores operating under the Boston Chicken name in
the northeast. In early 1995, the concept evolved with the addition of turkey,
ham, and meat loaf dinner entrees; expansion of the line of sandwiches, salads,
and soups; and entry into the holiday home replacement business. To reflect the
menu changes, the chain's name was changed to Boston Market.
As of the end of 1997, the Boston Market system included 1,166 stores in 38
states and the District of Columbia, of which 307 were owned by the company. The
remaining stores were owned by area developers, partially financed by Boston
Chicken, and other franchisees.
The company is in the preliminary stage of taking the Boston Market concept into
foreign markets. In January 1997, Boston Market International, Inc. made an
agreement with a developer in Southeast Asia that would give the developer the
right to develop up to 600 Boston Market stores in Taiwan and the People's
Republic of China.
Boston Chicken's total revenues As of December 28, 1997, were reported as $462.4
million, an increase of 75% during fiscal 1997. This increase was reportedly
attributable to the company's move to a structure in which Boston Market stores
are owned by the company instead of area developers.
As of this writing, Boston Chicken, Inc. has filed for bankruptcy protection
effective October 5, 1998, and has closed approximately 178 company operated
Boston Market stores.
<PAGE>
BURGER KING
P.O. Box 020783
Miami, Florida 33102
Burger King, a unit of Grand Metropolitan PLC, is the world's second largest
fast food hamburger chain with over 9,600 locations around the world and 20% of
the U.S. fast food market. For the fiscal year ending October 31,1997, Burger
King reported systemwide sales of $1.4 billion, a growth of 4%.
The company is a subsidiary of Diageo, which was formed when Grand Metropolitan
and Guinness merged in 1997. Diageo's portfolio of international food and drinks
brands include Guinness, Pillsbury, Green Giant, Haagen-Dazs, Old El Paso,
Progresso, Burger King, Smirnoff Vodka, Bailey's Original Irish Cream, and J&B
Rare Scotch Whisky. In fiscal year 1998, Diageo reported sales at $29.5 billion,
with net profits at $2.2 billion.
Burger King offers traditional fast food fare in addition to its special Whopper
and BK Broiler Sandwiches. More than 1.6 billion Whoppers are sold each year,
along with french fries, Croissan'wiches, Big King sandwiches and onion rings.
<PAGE>
CAPTAIN D'S RESTAURANTS
1717 Elm Hill Pike #A10
Nashville, Tennessee 37210
Captain D's is a chain of quick-service seafood restaurants which began
operation in 1969 when the first store was opened in Nashville, Tennessee. The
chain is now operated and franchised by Shoney's, Inc., which also has two other
restaurant divisions--Shoney's and the Casual Dining Group. There were 591
Captain D's restaurants in 22 states, including 378 company-owned and 213
franchised units as of October 26, 1997.
During 1996, the chain introduced the Coastal Classics menu in selected units.
The menu features a variety of upscale seafood entrees which are offered at
price points higher than the average guest check. These entrees include salad,
bread, baked potato and vegetable, and are priced from $4.99 to $9.99, well
above the average $4.41 guest check. The company intends to offer the Coastal
Classic menu in approximately 100 company-owned Captain D's by the end of 1998.
Systemwide sales for fiscal 1997 were estimated at $460 million, with average
unit sales of $780 thousand.
<PAGE>
CHECKERS DRIVE-IN RESTAURANTS
600 Cleveland Street
Clearwater, Florida 33755
Checkers commenced operations in 1987 to operate and franchise double drive-thru
restaurants. Checkers restaurants are intended to provide America's
on-the-go-crowd with fast and efficient automobile-oriented service at everyday
low priced.
The company's restaurants are fashioned around a 1950s diner and art deco theme,
and employ a double drive-thru concept. The restaurants consist of modular
restaurant packages produced and installed by the company. Restaurants are
approximately 760 to 980+/- square feet, and the sites range from 18,000 to
25,000+/- square feet.
As of December 1997, there were 230 restaurants owned and operated by the
company in 11 states and the District of Columbia. There were an additional 249
units operated by franchisees in 24 states, the District of Columbia, Puerto
Rico and Israel. The company's long term strategy is for 60 to 65% of its
restaurants to be operated by franchisees.
Following a period of rapid growth in the early 1990s, fiscal 1997 revenues
declined by 13%, from $165.0 million to $143.9 million, following similar rates
of decline in each of the two previous years. Declining restaurant sales, along
with disappointing results from certain marketing programs, gave rise to the
company's third consecutive loss. Systemwide sales reportedly declined to $310.3
million, or 5% in 1997 following an 11% decrease in 1996.
<PAGE>
CHEVY'S RESTAURANTS, INC.
San Francisco, California
Chevy's is a Tex-Mex restaurant based primarily on the west coast which
specializes in "Fresh Mex(R) foods and advertises that everything is made fresh
daily.
Chevy's was started in San Francisco and was sold to PepsiCo in 1993. PepsiCo
spun off all its restaurant chains in 1997 into either Tricon Global
Restaurants, Inc., or as individual entities. Chevy's was bought out by its
management as an independent chain, and is currently expanding across the
country.
Despite extensive research, no financial data for Chevy's was found.
<PAGE>
CHURCHS CHICKEN
6 Concourse Parkway, Suite 1700
Atlanta, Georgia 30328
Churchs Chicken is a 45 year old chain specializing in southern style chicken,
and is the nation's second largest chicken chain in terms of units, with
restaurants in 28 states and nine countries. Currently, Churchs has more that
1,300 units worldwide.
Churchs is a division of AFC Enterprises in Atlanta, Georgia, which is one of
the world's largest operators and franchisors of restaurants, with more that
3,200 restaurants in 25 countries worldwide. Since being formed in 1992, the
company has opened more than 1,200 restaurants worldwide and has doubled its
presence.
Churchs was founded in 1952 in San Antonio, Texas by George W. Church, Sr., and
at first sold only fried chicken. In 1955, french fries and jalapeno (C) were
added to the menu. The Churchs concept is based on a limited menu and an
emphasis on take-out.
As of December 1997, the end of AFC's fiscal year, sales were at $483.3 million,
an increase of 3.6% over the previous year. Net profits were $11 million, which
was a 40.1% net increase over the previous year.
<PAGE>
DARRYL'S WOOD-FIRED GRILL
2 Brush Creek Boulevard
Kansas City, Missouri 64112
Darryl's Wood-Fired Grill specializes in contemporary American cooking and a
something-for-everyone menu. A wood-fired grill distinguishes house specialties
such as slow-cooked Barbecue pork ribs, Black Angus steaks, and Tennessee "Black
Jack" chicken.
Darryl's is owned and operated by Houlihan's Restaurant Group, which operates
more than 100 casual dining restaurants in 28 states under a variety of names,
including Houlihans, Bristol, Braxton, and Chequers. Houlihan's was purchased in
1998 by a private investment group related to MEI Holdings, the majority
shareholder of Malibu Entertainment Worldwide. Malibu has reportedly agreed to
be merged with Houlihan's to form a holding company yet to be named.
As of December 1997, the end of the fiscal year, sales for Houlihan's Restaurant
Group were estimated at $280 million, an increase of 1.9% over the previous
year. Despite extensive research, no financial information specific to Darryl's
could be found.
<PAGE>
DENNY'S, INC.
Advantica Restaurant Group, Inc.
203 East Main Street
Spartanburg, South Carolina 29319
Denny's, a subsidiary of Advantica Restaurant Group, Inc. (formerly Flagstar
Companies), is the largest full-service family restaurant chain in the United
States. Denny's is the nation's largest chain of family-style, full-service
restaurants, with 1,652 restaurants in 49 states, two U.S. Territories and two
foreign countries, with system wide sales of $1.15 billion.
For the quarter ending December 31, 1997, Denny's reported a 4% decrease in
revenues, while operating income improved by 5% to $120 million.
Denny's restaurants are designed to provide a casual dining atmosphere, and are
generally open 24 hours a day, 7 days a week. The chains sales are fairly evenly
divided throughout the day, with breakfast and lunch representing 60% of total
traffic.
Denny's opened a new concept in 1997 called "Denny's Classic Diners", which
features a 1950s-60s atmosphere with stainless steel, neon lighting, jukebox
music, new uniforms, and a "diner" menu. Development of this concept is to be
accelerated in 1998.
<PAGE>
DUNKIN DONUTS/HOLSUM BREAD
1479 Regency Court
Calumet City, Illinois 60409
According to our research, 1997 sales for Dunkin Donuts were $48.3 million, a
one-year increase of 2.3%.
Despite extensive research, no other information was available.
<PAGE>
EAST SIDE MARIO'S
1100 Town & Country Road
Orange, California 92668
East Side Mario's is described as an "American Italian Eatery" inspired by
Manhattan's "Little Italy". The decor is reminiscent of an Italian warehouse,
with barrels of potatoes and vegetables in a street scene. The menu consists of
pasta, pizza and hamburgers as well as steak, chicken and ribs.
East Side Mario's was started in Miami by Prime Restaurants, Inc., a
Toronto-based company, and was then re-imported into Canada. By 1993, Prime
Restaurants had expanded the East Side Mario's into the United States through an
American subsidiary. It succeeded so well that Pizza Hut, Inc., negotiated to
acquire the chain. In early 1997, as part of PepsiCo's spinoff of its restaurant
chains, East Side Mario's was sold to Marie Callender Pie Shops.
Marie Callender Pie Shops began in the early 1940s as a wholesale bakery and now
operates more than 160 restaurants in the United States and Mexico. As of
December 1997, sales were estimated at $300 million, a one year growth of 11.1%.
Despite extensive research, no chain-specific financial data for East Side
Mario's could be found.
<PAGE>
FAZOLI'S RESTAURANTS
Seed Restaurant Group, Inc.
2470 Palumbo Drive
Lexington, Kentucky 40555
Fazoli's combined Italian food (pasta, pizza, soup, salad and dessert) with fast
service and low prices. Like other quick-service concepts, Fazoli's offers
carryout and drive-thru service. As an alternative, customer can dine in the
restaurants, which are decorated with Italian murals, jars of dried pasta,
bottles of oil and baskets of red and green peppers.
Sales for 1996 were reported at $219.7 million, an increase of 135% from the
previous year. Since 1990, when Seed Restaurant Group bought the concept,
Fazoli's has grown to 266 units in 26 states, and it was ranked 105 in the
Restaurants and Institutions Top 400 Restaurant Concepts. Aggressive growth
- --------------------------------------------------------
plans include 500 locations by 1999.
<PAGE>
GOLDEN CORRAL FAMILY STEAKHOUSES
5151 Glenwood Avenue
Raleigh, North Carolina 27612
Golden Corral is a chain of family style restaurants with strong consumer
loyalty throughout the southern and south central regions. Founded in North
Carolina in 1973, they focus on good service, value, and fresh food.
Golden Corral has, within the last few years, expanded their menu by adding
their Golden Choice Buffet(R), which contains meat, pasta, and fresh vegetables;
and The Brass Bell Bakery(R), which offers fresh baked rolls, muffins, cookies
and brownies, in addition to steak, chicken and seafood.
Currently, they reportedly have 440 restaurants in 38 states, primarily in
the Southeast, of which approximately 275 are franchised. Expansion is
planned, focusing on the Northeast and West Coast.
<PAGE>
GREAT CLIPS, INC.
3800 West 80th Street, Suite 400
Minneapolis, Minnesota 55431
Great Clips is North America's fastest growing salon chain. They opened over 200
hair salons in 1997, bringing the number of salons to over 1,000. Their stated
goal is to have 3,000 salons by the turn of the century.
Despite extensive research, we were able to find no publically available
financial information for Great Clips.
<PAGE>
GROUND ROUND RESTAURANTS
35 Braintree Hill Office Park
Braintree, Massachusetts 02184
Ground Round restaurants offer a broad selection of moderately priced food
items, as well as full liquor service. The restaurants are open seven days a
week for breakfast and lunch, typically from 11:30 to midnight. Most restaurants
are located in freestanding buildings near a major shopping mall or retail area.
Building size averages 5,600 square feet and 210 seats.
Currently, Ground Round is owned by Boston Ventures Management, who acquired it
in August 1997.
As of September 1997, Sales for the chain were reported at $180.0 million, a
decrease of 17.7% over one year.
<PAGE>
HARDEE'S FOOD SYSTEMS
1233 Hardee's Boulevard
Rocky Mount, North Carolina 27804-2815
Hardee's Food Systems is a wholly owned subsidiary of CKE Restaurants, Inc., who
acquired it from Canadian-based Imasco Limited in the fall of 1997. With this
purchase, CKE acquired approximately 3,100 Hardee's stores, located primarily in
the Southeast and Midwest.
Early in 1998, Advantica Restaurant Group, the largest franchisee in the
Hardee's chain, reported that it would sell its' 557 units to CKE restaurants
Inc. This purchase gave CKE direct control of 1,424 Hardee's restaurants, or
nearly half the entire chain. The other 1,624 units are owned and operated by
franchisees.
Most of the CKE-owned units are being converted into a new Carl's Jr prototype
that will be incorporating the Hardee's biscuit breakfast. It has been widely
speculated that this may be an interim move before all company-owned units are
converted to Carl's Jr stores.
As of December 1997, systemwide sales totaled $2.65 billion, 13% below 1996
levels.
<PAGE>
IHOP CORPORATION
525 N. Brand Boulevard
Glendale, California 91203-1903
The International House of Pancakes, also known as IHOP, is a family dining
restaurant offering a range of affordable sitdown meals. Incorporated in 1976,
IHOP has expanded into 36 states, Canada and Japan.
IHOP has as its menu what is probably the world's largest variety of pancakes,
serving everything from the "Rooty Tooty Fresh n Fruity" breakfast to chocolate
chip pancakes to plain silver dollar size hotcakes. In addition to their
signature breakfast items, they serve sandwiches, soups and dinners which are
similar in type to Denny's or Perkins.
IHOP Corporation owns 787+/- restaurants, of which, as of December 31, 1997,
90%+/- were operated by franchisees. IHOP intends to expand by building new
restaurants in areas where there is a core customer base.
IHOP Corporation is, in general, a very solid company. While it is neither a
fast riser or a loser, as defined by Leading Edge Publications, it is expected
to maintain steady growth and should continue to do so for the foreseeable
future.
<PAGE>
JACK'S HAMBURGERS
Despite extensive research, no information could be found on this concept.
<PAGE>
JACK IN THE BOX/FOODMAKER, INC.
9330 Balboa Avenue
San Diego, California
Jack In The Box, a fast food chain operated and franchised by Foodmaker, Inc. is
one of the largest quick-service hamburger chains in the United States. There
are currently a total of 1,323, located primarily in the West and Southwest. In
addition to the United States, there are restaurants located in Mexico and Hong
Kong. Jack In the Box was the first chain to develop and expand the concept of
drive-through only restaurants, and today drive-through sales currently account
for up to 64% of sales at company stores.
Jack In The Box's menu and marketing strategies are principally directed toward
adult fast food customers. The company offers a wider menu selection than most
fast food outlets, and includes foods not commonly offered by hamburger fast
food outlets, as well as more traditional hamburgers and french fries.
The 1993 E. coli outbreak has had a profound effect on the way Foodmaker does
business. They have forced almost all of their international stores to close
because owner/operators failed to consistently meet operational guidelines,
Also, their clown mascot, Jack, was brought back, and appeals to potential
customers by promising quality and value.
Foodmaker's fiscal 1997 revenues increased by less than 1% to $1.07 billion
despite a substantial decline in distribution sales. Sales at company operated
stores have increased by 11% and systemwide, sales grew by 9% in each of the
last two fiscal years. Earnings in fiscal 1997 improved to $34 million.
<PAGE>
JADE HUNAN
We could find no information on this local concept.
<PAGE>
KFC
TRICON GLOBAL RESTAURANTS, INC.
1441 Gardiner Lane
Louisville, Kentucky
KFC was founded in Corbin, Kentucky by Colonel Harland D. Sanders in 1939, with
its first franchised operation dating back to 1952. By the time KFC was acquired
by PepsiCo in 1986, it had grown to approximately 6,600 units in 55 countries
and territories.
In September 1997, PepsiCo spun off its major restaurant chains, KFC, Pizza Hut,
and Taco Bell to a newly formed company called TRICON Global Restaurants. In
early October, PepsiCo distributed TRICON shares to PepsiCo shareholders. As of
that time, PepsiCo had no interest in TRICON and TRICON became an independent
company. KFC now operates more than 10,200 units in 79 countries and territories
and all 50 states under the name Kentucky Fried Chicken or KFC. Approximately
36% of the U.S. units and 31% of the international units are operated by the
company or joint ventures in which the company participates.
KFC restaurants offer fried and nonfried chicken products. Entree items include
Chunky Chicken Pot Pies, Colonel's Crispy Strips, chicken sandwiches, and
buffalo wings, in addition to traditional fried chicken.
As of December 31, 1997, U.S. systemwide sales were reported at $4.0 billion
dollars, an increase over the previous year of approximately 2%. The average
sales per traditional unit in the U.S. were reportedly $786,000.
<PAGE>
LOCO LUPES RESTAURANT & CANTINA
#4 Industrial Park Drive
Hendersonville, Tennessee 37075
Loco Lupe's Mexican Restaurants began business in Nashville, Tennessee in 1993,
serving fresh Mexican food. The chain now includes 3 restaurants in Middle
Tennessee.
Menu items include traditional items such as tacos, enchiladas, and fajitas made
with beef, chicken and pork.
Despite our research, we were unable to find any financial information for this
concept.
<PAGE>
LONE STAR STEAKHOUSE & SALOON, INC.
224 East Douglas, Suite 700
Wichita, Kansas 67202
Lone Star Steakhouse & Saloon cultivates a Texas roadhouse image (country &
western music, neon beer signs, and peanut shells on the floors) at its more
than 300 restaurants. The restaurants offer casual, full service dining to
patrons looking for mesquite grilled steaks, ribs, chicken, and fish.
The majority of Lone Star's restaurants are located in the U.S., but it has also
entered Australia and Guam. Although there are plans to trim the expansion of
Lone Star Steakhouses by two-thirds, the company has added Del Frisco's Double
Eagle Steak House and Sullivan's Steakhouse concepts as expansion vehicles for
the upscale market.
As of December 1997, sales for Lone Star were reported at $585.4 million; an
increase of 19% over last year. Net profits were calculated at $68.8 million, a
net growth of 14.5%.
<PAGE>
Long John Silver's Inc.
315 South Broadway
Lexington, Kentucky 40508
For over 20 years, Long John Silver's operated as a subsidiary of the public
company Jerrico Inc. However, in September of 1989, Jerrico was reportedly
acquired in a leveraged buyout by C.S. First Boston Corporation in 1989 for $620
million. The new privately held company divested itself of three restaurant
concepts in 1990, devoting its full resources to the operation of Long John
Silver's. At last report (1997), there are 1,309 Long John Silver's stores, of
which 814 are company owned, and 495 are franchised. The restaurants are located
in 36 states, Canada, Singapore, and Thailand.
In the fall of 1997, Long John Silver's announced it would focus its expansion
for the next five years on opening small units co-branded with other restaurant
chains and convenience stores, including Arby's, Baskin Robbins, Green Burrito,
and Texaco Star Mart. Of 45 openings during the year, only about 10 were to be
standard restaurants.
As of fiscal year 1997, Long John Silver's reported systemwide sales of $843
million. Long John Silver's is currently in bankruptcy, and additional financial
information of a more current date was not readily available.
<PAGE>
On The Border Restaurants
Brinker International, Inc.
6820 LBJ Freeway
Dallas, Texas 75240
Brinker International, Inc. is principally engaged in the operation, development
and franchising of the Chili's Grill and Bar, Romano's Macaroni Grill, On the
Border Mexican Cafe, Cozymel's Coastal Mexican Grill, Maggiano's Little Italy,
and the Corner Bakery restaurant concepts In addition, the addition, the company
is involved in the operation and development of the Eatzi's Market and Bakery,
Big Bowl, and Wildfire Concepts. The company was organized under the laws of the
State of Delaware in September 1983 to succeed to the business operated by
Chili's, Inc., a Texas corporation, organized in August 1977. The company
completed the acquisitions of Macaroni Grill, On the Border. Cozymel's,
Maggiano's, and Corner Bakery in November 1989, May 1994, July 1995, August 1995
and August 1995, respectively.
On the Border restaurants are full-service, casual Tex-Mex theme restaurants
featuring mesquite-grilled specialties and traditional Tex-Mex entrees and
appetizers served in generous portions at modest prices. On the Border
restaurants feature an outdoor patio, a full-service bar, booth and table
seating, and brick and wood walls with a Southwest decor. On the Border
restaurants also offer enthusiastic table service intended to minimize customer
waiting time and facilitate table turnover, while simultaneously providing
customers with a satisfying casual dining experience.
Entree selections range in menu price from $5.55 to $12.99 with the average
revenue per meal, including alcoholic beverages, approximating $11.36 per
person. During the year ended June 24, 1998, food and non-alcoholic beverage
sales constituted approximately 78.3% of the concept's total restaurant
revenues, with alcoholic beverage sales accounting for the remaining 21.7%.
As of June 1998, the company's system of company-operated, joint venture and
franchised
<PAGE>
units included 806 restaurants located in 46 states, Washington DC, Australia,
Canada, China, Egypt, Great Britain, France, Indonesia, Kuwait, Malaysia,
Mexico, Peru, Philippines, Puerto Rico, Singapore, South Korea, and the United
Arab Emirates. On the Border restaurants are located in 23 states at present.
Twenty-four new restaurants opened in 1998 and twenty-six are projected for
1999, most of which are corporate owned. The average development cost of each
new property is expected to be $2,790,000.00. The stores range in size from
7,175+/- square feet to 8,034+/- square feet, and will seat 222-262 patrons. No
breakdown of the economies for On the Border restaurant was available as of this
writing. Overall, the company's sales increased during fiscal 1998 by 18% over
fiscal 1997.
<PAGE>
PERKINS FAMILY RESTAURANTS
6075 Poplar Avenue, Suite 800
Memphis, Tennessee 38119
Perkins owns and franchises family-style restaurants which serve a wide variety
of moderately priced breakfast, lunch, and dinner entrees. Perkins restaurants
provide table service, and many are open 24 hours a day.
The company has grown and changed over the past 39 years from a single "pancake
house" to a full-service, mid-scale restaurant chain. On December 31,1997, there
were 483 restaurants in the Perkins system. Of that total, 346 were franchised
and 137 were company operated. Restaurants are located in 33 states and five
Canadian provinces, with the largest number in Minnesota, Ohio, New York,
Pennsylvania, and Florida.
At the end of 1997, the company merged with The Restaurant Company (TRC). TRC
acquired all of the roughly 52% of the outstanding units of limited partnership
then owned by public investors, converting Perkins into a private company.
Revenues for fiscal 1997 totaled $269.5 million, an increase of almost 7%, while
net income was reported at $8.2 million, a decrease of almost 40%.
<PAGE>
PIZZA HUT RESTAURANTS
TRICON GLOBAL RESTAURANTS, INC.
14841 Dallas Parkway
Dallas, Texas 75420
Pizza Hut, until recently a division of PepsiCo and now an operating division of
the newly created TRICON Global Restaurants, Inc., is engaged in the operation,
development, franchising, and licensing of a system of casual, full-service
restaurants and both traditional and nontraditional quick-service restaurants.
Nontraditional units include express units and kiosks with a limited menu which
operate in locations such as airports, gas and convenience stores, stadiums,
amusement parks, and colleges.
In September 1997, PepsiCo spun off its major restaurant chains, KFC, Pizza Hut,
and Taco Bell to a newly formed company called TRICON Global Restaurants, Inc.
Each chain will focus on its own marketing strategy, but they will combine to
buy into major sponsorships and will combine selected operating systems.
At the end of 1997, there were more than 12,400 Pizza Hut restaurants in
operation--more than 8,600 in the U.S. and another 3,800 international units in
88 countries and territories throughout the world. Principal international
markets include Canada, Japan, South Korea, Mexico, New Zealand, Spain, and the
United Kingdom. As of year-end 1997, about 44% of Pizza Hut's worldwide units
were operated by the company and joint ventures in which the company
participated.
Worldwide system sales at Pizza Hut exceeded $7.3 billion in 1997, down about 8%
from the previous year's level. This reflected a notable decline in the number
of outlets along with a 1% decrease in same-store sales. However, same-store
sales were showing signs of improving, increasing by 5% in the fourth quarter of
1997. As of December 31, 1997, average sales for a traditional unit in the U.S.
was reported at $630,000.
<PAGE>
BONANZA RESTAURANTS
PONDEROSA STEAKHOUSE
6500 International Parkway
Plano, Texas 75093
Metromedia Restaurant Group (MRG), a subsidiary of Metromedia Company, is one of
the largest full service restaurant companies in the world, with four very
stable restaurant brands: Bennigan's, Steak and Ale, Ponderosa Steakhouse, and
Bonanza. As of the end of fiscal 1997, MRG had over 1,000 restaurants, $1.4
billion in sales and 35,000 employees.
The idea for Bonanza Family Steakhouses was born in 1962 at the height of
"Bonanza" the television program. In less than a year, the first restaurant was
operational in Westport, Connecticut.
In 1965, Bonanza Restaurants moved their headquarters to Dallas, Texas, began
franchising in 1966, and in 1989 joined the Metromedia Restaurant Group. In
1997, Ponderosa and Bonanza joined forces, becoming one large concept marketed
under either name.
Both of these restaurants have "value" as an important part of their mission
statement, offering grilled steaks, chicken, ribs, seafood entrees, a huge
buffet for lunch and dinner, and some offer breakfast on the weekends.
<PAGE>
POPEYE'S CHICKEN & BISCUITS
6 Concourse Parkway, Suite 1700
Atlanta, Georgia 30328
Popeye's Chicken and Biscuits is a 26 year old chain specializing in New Orleans
style chicken, and is the nation's second largest chicken chain in terms of
sales, with restaurants in 40 states and 19 countries. Currently, Popeye's has
approximately 1,200 units worldwide.
Popeye's is a division of AFC Enterprises in Atlanta, Georgia, which is one of
the world's largest operators and franchisors of restaurants, with more than
3,200 restaurants in 25 countries worldwide. Since being formed in 1992, the
company has opened more than 1,200 restaurants worldwide and has doubled its
presence.
Popeye's was founded in 1972 in New Orleans, Louisiana, by Al Copeland as
"Chicken on the Run". After six months, Mr. Copeland changed the name and
recipe, and Popeye's signature spicy chicken was introduced to the public.
Currently, Popeye's has partnered with restaurant developer Rich Melman to form
the "Cajun Kitchen" concept. This concept, which will debut in 1999, will mark
Popeye's entrance into the "fast-casual" marketplace.
As of December 1997, the end of AFC's fiscal year, sales were at $483.3 million,
an increase of 3.6% over the previous year. Net profits were reportedly $11
million, which was a 40.1% net increase over the previous year.
<PAGE>
QUINCY'S FAMILY STEAKHOUSES
Atlanta, Georgia
Quincy's Family Steakhouse was started in 1973 in Greenville, South Carolina as
Western Family Steakhouse. It was renamed Quincy's in 1976 and today is one of
the leading family restaurant chains in the Southeast with nearly 200 locations
in eight Southeastern states and Ohio.
The chain is best known for its wide variety of charbroiled steaks -- from New
York strips and T-bones to ribeyes and sirloins -- and its "No Mistake Steak
Guarantee," which says that if a customer isn't totally satisfied with his or
her meal, Quincy's will make it right or pick up the check. In an average day,
21,000 pounds of steak are served throughout the chain. And each day Quincy's
bakers make a total of 240,000 yeast rolls, a popular fresh-baked, made from
scratch item that was introduced system wide in 1987.
Quincy's is currently owned by Buckley Acquisition Corporation, who acquired it
from Advantica Restaurant Group, Inc., in June of this year. No financial
records were available as of this writing.
<PAGE>
RALLY'S HAMBURGERS, INC.
10002 Shelbyville Road
Louisville, Kentucky 40223
Rally's Hamburgers is one of the nation's largest chains of double drive-thru
restaurants. As of December 28, 1997, the Rally's system included 477 outlets in
18 states, primarily the Midwest and the Sunbelt. The system comprises 229
company owned and operated restaurants, 248 franchised, and 27 company owned
stores which are operated as Rally's restaurants by CKE Restaurants, Inc.
In March 1997, Rally's and Checkers agreed on a merger that would make Rally's a
wholly owned subsidiary of Checkers. This particular merger was never completed,
but in December 1997, Rally's acquired 19.1 million shares of common stock of
Checkers Drive-In Restaurants, Inc., becoming Checkers largest shareholder. As a
result, CKE Restaurants, Inc. and Fidelity National Financial own approximately
44% of the outstanding shares of Rally's common stock. This transaction
effectively combines Checkers and Rally's, giving them the capability to share
operational functions and become more efficient.
Company revenues and systemwide sales declined substantially in 1997, due to
fewer restaurants in operation, as well as a decline in same-store sales. As of
December 28, 1997, revenues were reportedly $144.9 million, a decrease of 4.5%
from the previous year.
<PAGE>
RUBY TUESDAY, INC.
150 West Church Avenue
Maryville, Tennessee 37801
In the early 70's, Sandy Beall saw a need for a restaurant that offered a
contemporary, lively atmosphere and quality food at a moderate price. He leased
property on the corner of 20th Street and Cumberland Avenue in Knoxville,
Tennessee, and the first Ruby Tuesday restaurant opened in 1972. From this
modest beginning, Ruby Tuesday has emerged as one of the fastest growing
concepts in the food service industry.
In April 1982, Ruby Tuesday restaurants became part of the Specialty Restaurant
Division of Morrison, Inc. The merger was mutually advantageous and provided
Morrisons with a wider customer base and Ruby Tuesday with additional financial
support to provide for its dramatic growth. In 1996, the Ruby Tuesday Group
became Ruby Tuesday, Inc., a publicly held company whose shares trade on the New
York Stock Exchange.
Currently, Ruby Tuesday Inc. owns and operates 325 Ruby Tuesdays, and are
planning to expand into Chile. Sales as of May 31, 1998, the end of the fiscal
year, totaled $711.4 million, an increase of 8.54% over last year.
<PAGE>
SHELLS SEAFOOD RESTAURANTS
16313 North Dale Mabry Highway #100
Tampa, Florida 33618
Shells is a chain of full-service, mid-priced, casual dining seafood
restaurants. The 35 units can now be found in Florida, Kentucky, and Ohio, but
most are in Florida.
Each unit has a distinctly different look, largely because the company tends to
renovate restaurants as opposed to building their own. Units range from 5,000 to
7,000 square feet, seating 150 to 200.
Shells' sales are estimated to have totaled almost $29 million in 1996, with
average annual sales per unit of about $2.2 million. The company went public in
April 1996. At that time, it raised 7 million. As of December 31, 1997, sales
were reported to be $65.3 million, a one-year increase of 64.07%.
<PAGE>
SHONEY'S RESTAURANTS
1727 Elm Hill Pike
P.O. Box 1260
Nashville, Tennessee 37202
Shoney's restaurants, in operation since 1952, are full-service, family dining
restaurant that are generally open 18 hours per day to serve breakfast, lunch
and dinner. The menu is diversified and includes hamburgers, sandwiches,
chicken, seafood, pasta, stir-fry dishes, steaks, vegetables, and desserts. The
chain also offers its signature soup, salad, and fruit bar and its all you can
eat breakfast bar.
In late fall 1997, J. Michael Bodnar was named president was named president and
CEO, succeeding C. Stephen Lynn. Bodnar was championed by Raymond Schoenbaum,
son of the late founder, who waged a proxy fight to take control of the company.
Initial changes following the management shakeup will include the reformation of
Shoney's signature food bar. In 1997, a new breakfast bar was tested, offering
higher quality items at a slightly higher price point. Sales from the breakfast
bar amounted to 36% of restaurant sales in 1997. Management is also considering
focusing on soup and salad during lunch and dinner so the food bar will not be
competing with the regular menu. The company is also planning to simplify the
menu by eliminating items that represent less than 2% of sales.
Sales at Shoney's restaurants were up by almost 22% to $705.8 million as of the
end of fiscal year 1997, despite a decline in comparable-restaurant sales, and
the closure of 74 units.
<PAGE>
TACO BELL
17901 Von Karmon
Irvine, California 92614
The first Taco Bell was opened in 1962 by Glen Bell in Downey, California, and
the first franchise was sold in 1964. By 1978, when it was acquired by PepsiCo,
the Taco Bell system had grown to approximately 1,000 units. By the end of 1997,
there were more than 6,700 Taco Bell units within the U.S. and more than 170
outside the country.
Taco Bell, until recently a division of PepsiCo and now an operating division of
the newly created TRICON Global Restaurants, Inc., is engaged in the operation,
development, franchising, and licensing of a system of casual, full-service
restaurants and both traditional and nontraditional quick-service restaurants.
Nontraditional units include express units and kiosks with a limited menu which
operate in locations such as airports, gas and convenience stores, and stadiums.
In September 1997, PepsiCo spun off its major restaurant chains, KFC, Pizza Hut,
and Taco Bell to a newly formed company called TRICON Global Restaurants, Inc.
Each chain will focus on its own marketing strategy, but they will combine to
buy into major sponsorships and will combine selected operating systems.
Taco Bell's systemwide sales in the U.S. totaled approximately $4.8 billion in
1997 Same store sales increased by 2%, reflecting some strong promotions and
favorable changes in product mix and pricing.
<PAGE>
TONY ROMA'S RESTAURANT
NPC International, Inc.
720 West 20th Street
Pittsburg, Kansas 66762
When Tony Roma opened Tony Roma's Place in Miami, Florida back in 1972, the menu
was limited, but people would travel miles to sample his famous baby back ribs.
Now 25 years later, with 195 Tony Roma's restaurants worldwide, people don't
have to travel as far to cure their rib cravings. That first Tony Roma's concept
in Miami became so successful that after sampling the ribs, Clint Murchison,
Jr., Texas financier and owner of the Dallas Cowboys in 1976, purchased the
majority of the U.S. franchise rights and established a jointly-owned company.
Under Murchison's leadership, Tony Roma's A Place For Ribs launched an
aggressive five-year expansion plan and opened Tony Roma's restaurants
strategically throughout the United States. As part of that expansion, the first
international Tony Roma's restaurant opened in Tokyo in 1979. After four years
of successful growth, Mr. Roma relinquished his rights to the restaurant
operations in 1983. The following year Murchison sold his interest in the
company to his children. The Murchison family embarked on national and
international expansion, and in 1993 the company and franchisees were operating
137 restaurants on four continents.
Today the Tony Roma's Famous For Ribs concept is owned and operated by
Dallas-based Romacorp, Inc., a subsidiary of NPC International, Inc., which
operates over 685 Pizza Hut franchised locations. Romacorp, Inc. oversees 47
company owned and operated restaurants and 146 international and domestic
franchised Tony Roma's locations.
As of the end of fiscal 1998, Sales for NPC International, Inc. were reported at
$455.3 million, an increase of 54.2% over the previous year, and a 42.1%
increase in net profits. No financial data specifically for Romacorp, Inc.
was available.
<PAGE>
WAFFLE HOUSE RESTAURANTS
5986 Financial Drive
Norcross, Georgia 30071
Waffle House began as the dream of two neighbors who envisioned a company
dedicated to people - both customers and employees. On Labor Day 1955, the dream
became reality as the first Waffle House opened for business in Avondale
Estates, Georgia, a suburb of Atlanta. Soon after, the business grew throughout
Georgia and to neighboring states. These early restaurants established the
famous Waffle House reputation of serving "Good Food Fast" in a friendly
atmosphere. Currently, Waffle House is the world's leading server of waffles,
t-bone steaks, omelets, and grits.
As of this writing, no financial information was available to us.
<PAGE>
INDUSTRY TRENDS/CHARTS
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
MULTI-UNIT SEGMENT SALES: 1997
[PIE CHART APPEARS HERE]
This chart reflects in percentages the breakdown of sales in the restaurant
food industry by food segment for 1997, showing the largest segment to be the
hamburger segment at 38.1% of sales. The pizza, chicken, Mexican, sandwich,
seafood, and other segments captured 12.7%, 8.4%, 6.2%, 4.2%, 3.1%, and 27.3% of
total sales, respectively.
<PAGE>
MARKET SHARES: HAMBURGER SEGMENT-1997
[PIE CHART APPEARS HERE]
This chart presents the market shares by restaurant chain in the hamburger
segment of the restaurant industry for 1997. The chart shows that McDonald's
had the largest market share at 36.5%, and Burger King, Wendy's, Hardee's,
Arby's, JIB, Sonic, Carl Jr. and others had 16.8%, 9.7%, 5.6%, 4.2%, 2.8%, 2.4%,
1.4%, and 20.6% of the market, respectively.
<PAGE>
MARKET SHARES: PIZZA SEGMENT-1997
[PIE CHART APPEARS HERE]
This chart presents the market shares by restaurant chain in the pizza
segment of the restaurant industry for 1997, including Pizza Hut, Papa John,
Godfathers, Domino's, SBarro, Pizzeria Uno, Little Caesar, RT Pizza, Olive
Garden, CE Cheese and others.
<PAGE>
MARKET SHARES: CHICKEN SEGMENT-1997
[PIE CHART APPEARS HERE]
This chart presents the market shares by restaurant chain in the chicken
segment of the restaurant industry for 1997. The chart shows that KFC had 38.5%
market share, while Boston Market, Popeyes, Chick-Fil-A, Church's, and others
had 12.7%, 7.0%, 6.2%, 5.5% and 30.1% market share, respectively.
<PAGE>
MARKET SHARES: MEXICAN SEGMENT-1997
[PIE CHART APPEARS HERE]
This chart presents the market shares by restaurant chain in the Mexican
segment of the restaurant industry for 1997. The chart shows that Taco Bell had
38.5% market share, while Chi Chi's, Del Taco, Taco Cabana, El Chico and others
had 12.7%, 7.0%, 6.2%, 5.5% and 30.1% market share, respectively.
<PAGE>
MARKET SHARES: SANDWICH SEGMENT-1997
[PIE CHART APPEARS HERE]
This chart presents the market shares by restaurant chain in the sandwich
segment of the restaurant industry for 1997. The chart shows that Subway had
48.3 % market share, while Blimpie, Schlotzky's, Miami Subs, Wall Street Deli,
and others had 22.2%, 12.8%, 7.4%, 5.6% and 3.7% market share, respectively.
<PAGE>
OTHER MULTI-UNIT CONCEPTS: 1997
[PIE CHART APPEARS HERE]
This chart presents the market shares in the other multi-units restaurants
for different restaurant chains for 1997, including Denny's, Applebee's,
Chili's, Outback, Shoney's, T.G.I. Friday's, IHOP, Cracker Barrel, Big Boy,
Golden Corral, Perkins and others.
<PAGE>
MARKET SHARES: SEAFOOD SEGMENT-1997
[PIE CHART APPEARS HERE]
This chart presents the market shares by restaurant chain in the seafood
segment of the restaurant industry for 1997. The chart shows that Red Lobster
had 59.8% market share, while LJS, Capt D's, and others had 19.7%, 10.9% and
9.6% market share, respectively.
<PAGE>
FRANCHISED RESTAURANT RENT SURVEY
[PIE CHART APPEARS HERE]
This chart presents rent, as a percentage of the gross sales, paid by
different franchised restaurants grouped by 1) the type of the franchised
restaurants, including fast food, family or all, and 2) the region in which such
restaurants operate, including east, north/central, south/central and west.
<PAGE>
TOP 10 RESTAURANT MARKET SHARES: 1997
[PIE CHART APPEARS HERE]
This chart provides the market shares of the top 10 restaurant chains in
terms of market share for 1997. The chart shows that McDonald's had 32.0%
market share, while Burger King, Pizza Hut, Taco Bell, Wendys's, KFC, Hardees,
Subway, Dominos, and Arby's had 14.3%, 9.7%, 8.5%, 8.5%, 7.6%, 6.0%, 5.3%, 4.6%
and 3.7% market share, respectively.
<PAGE>
-----------------------------------------------
ALL RESTAURANT CATEGORIES
OVERALL CAPITALIZATION RATE NORMAL DISTRIBUTION
-----------------------------------------------
[GRAPH APPEARS HERE]
This bell curve presents the normal distribution of the overall
capitalization rates for all restaurant categories based on a sample of 506
restaurants. The curve shows that the lowest capitalization rate was 5.48%, the
highest 16.17%, and the mean 10.01% with a standard deviation of 0.96%.
<PAGE>
-----------------------------------------------
FAST FOOD RESTAURANTS
OVERALL CAPITALIZATION RATE NORMAL DISTRIBUTION
-----------------------------------------------
[GRAPH APPEARS HERE]
This bell curve presents the normal distribution of the overall
capitalization rates for the fast food restaurant category based on a sample of
299 restaurants. The curve shows that the lowest capitalization rate was 7.03%,
the highest 13.2%, and the mean 9.96% with a standard deviation of 0.82%.
<PAGE>
-----------------------------------------------
FAMILY RESTAURANTS
OVERALL CAPITALIZATION RATE NORMAL DISTRIBUTION
-----------------------------------------------
[GRAPH APPEARS HERE]
This bell curve presents the normal distribution of the overall
capitalization rates for the family restaurant category based on a sample of 207
restaurants. The curve shows that the lowest capitalization rate was 5.48%, the
highest 16.7%, and the mean 10.09% with a standard deviation of 1.12%.
<PAGE>
-----------------------------------------------
ALL RESTAURANT CATEGORIES
RENT AS % OF SALES NORMAL DISTRIBUTION
-----------------------------------------------
[GRAPH APPEARS HERE]
This bell curve presents the normal distribution of rent as a percentage of
sales for all restaurant categories based on a sample of 425 restaurants. The
curve shows that the lowest percentage was 2.47%, the highest 23.46%, and the
mean 8.94% with a standard deviation of 3.36%.
<PAGE>
-----------------------------------------------
FAST FOOD RESTAURANTS
RENT AS % OF SALES NORMAL DISTRIBUTION
-----------------------------------------------
[GRAPH APPEARS HERE]
This bell curve presents the normal distribution of rent as a percentage of
sales for the fast food restaurant category based on a sample of 266
restaurants. The curve shows that the lowest percentage was 2.9%, the highest
23.46%, and the mean 9.10% with a standard deviation of 3.43%.
<PAGE>
-----------------------------------------------
FAMILY RESTAURANTS
RENT AS % OF SALES NORMAL DISTRIBUTION
-----------------------------------------------
[GRAPH APPEARS HERE]
This bell curve presents the normal distribution of rent as a percentage of
sales for the family restaurant category based on a sample of 159 restaurants.
The curve shows that the lowest percentage was 2.47%, the highest 19.57%, and
the mean 8.68% with a standard deviation of 3.22%.
<PAGE>
-----------------------------------------------
ALL RESTAURANT CATEGORIES
RENT/SF NORMAL DISTRIBUTION
-----------------------------------------------
[GRAPH APPEARS HERE]
This bell curve presents the normal distribution of rent per square foot
for all restaurant categories based on a sample of 805 restaurants. The curve
shows that the lowest rent per square foot was $5, the highest $81, and the mean
$28 with a standard deviation of $12.
<PAGE>
-----------------------------------------------
FAST FOOD RESTAURANTS
RENT/SF NORMAL DISTRIBUTION
-----------------------------------------------
[GRAPH APPEARS HERE]
This bell curve presents the normal distribution of rent per square foot
for the fast food restaurant category based on a sample of 533 restaurants. The
curve shows that the lowest rent per square foot was $6, the highest $81, and
the mean $31 with a standard deviation of $12.
<PAGE>
-----------------------------------------------
FAMILY RESTAURANTS
RENT/SF NORMAL DISTRIBUTION
-----------------------------------------------
[GRAPH APPEARS HERE]
This bell curve presents the normal distribution of rent per square foot
for the family restaurant category based on a sample of 272 restaurants. The
curve shows that the lowest rent per square foot was $5, the highest $60, and
the mean $22 with a standard deviation of $9.
<PAGE>
-----------------------------------------------
ALL RESTAURANT CATEGORIES
SALE PRICE/SF NORMAL DISTRIBUTION
-----------------------------------------------
[GRAPH APPEARS HERE]
This bell curve presents the normal distribution of sale price per square
foot for all restaurant categories based on a sample of 709 restaurants. The
curve shows that the lowest sale price per square foot was $29, the highest
$904, and the mean $252 with a standard deviation of $124.
<PAGE>
-----------------------------------------------
FAST FOOD RESTAURANTS
SALE PRICE/SF NORMAL DISTRIBUTION
-----------------------------------------------
[GRAPH APPEARS HERE]
This bell curve presents the normal distribution of sale price per square
foot for the fast food restaurant category based on a sample of 408 restaurants.
The curve shows that the lowest sale price per square foot was $35, the highest
$904, and the mean $285 with a standard deviation of $131.
<PAGE>
-----------------------------------------------
FAMILY RESTAURANTS
SALE PRICE/SF NORMAL DISTRIBUTION
-----------------------------------------------
[GRAPH APPEARS HERE]
This bell curve presents the normal distribution of sale price per square
foot for the family restaurant category based on a sample of 301 restaurants.
The curve shows that the lowest sale price per square foot was $29, the highest
$550, and the mean $208 with a standard deviation of $96.
<PAGE>
-------------------------------------------------
ALL RESTAURANT CATEGORIES
GROSS INCOME MULTIPLIER (GIM) NORMAL DISTRIBUTION
-------------------------------------------------
[GRAPH APPEARS HERE]
This bell curve presents the normal distribution of the gross income
multiplier for all restaurant categories based on a sample of 506 restaurants.
The curve shows that the lowest gross income multiplier was 6.18, the highest
18.23, and the mean 10.08 with a standard of deviation of 1.01.
<PAGE>
-------------------------------------------------
FAST FOOD RESTAURANTS
GROSS INCOME MULTIPLIER (GIM) NORMAL DISTRIBUTION
-------------------------------------------------
[GRAPH APPEARS HERE]
This bell curve presents the normal distribution of the gross income
multiplier for the fast food restaurant category based on a sample of 299
restaurants. The curve shows that the lowest gross income multiplier was 7.58,
the highest 14.22, and the mean 10.11 with a standard deviation of 0.83.
<PAGE>
-------------------------------------------------
FAMILY RESTAURANTS
GROSS INCOME MULTIPLIER (GIM) NORMAL DISTRIBUTION
-------------------------------------------------
[GRAPH APPEARS HERE]
This bell curve presents the normal distribution of the gross income
multiplier for the family restaurant category based on a sample of 207
restaurants. The curve shows that the lowest gross income multiplier was 6.18,
the highest 18.23, and the mean 10.04 with a standard deviation of 1.23.
<PAGE>
QUALIFICATIONS
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
APPRAISAL QUALIFICATIONS OF
ADNAN BEN ABDALLAH, MA
EDUCATION: - Master of Arts in Real Estate and Urban Analysis
- ---------
(Appraisal Institute Sponsored Program), with a
minor in Building Construction, University of
Florida, December, 1993.
- Bachelor in Accounting, IHEC, University of Tunis
- Tunisia, June, 1988.
PROFESSIONAL
- ------------
EDUCATION: - Courses/Examinations completed under the direction
- ---------
of the Appraisal Institute sponsored Master's
Program
- Real Estate Appraisal Principles (Examination 1A1)
- Basic Valuation Procedures (Examination 1A2)
- Capitalization Theory and Techniques, Part A
(Examination 1BA)
- Capitalization Theory and Techniques, Part B
(Examination 1BB)
- Case Studies in Real Estate Valuation (Examination
2-1)
- Report Writing and Valuation Analysis (Examination
2-1)
- Project Program Seminar
APPRAISAL INSTITUTE
- -------------------
COURSES: - Standards of Professional Practice, Part A
- -------
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
QUALIFICATIONS OF
LAURENCE R. GOLDENBERG, MURP, MBA
EDUCATION: - University of Central Florida, Master of Business
- ---------
Administration (MBA)
- University of Pittsburgh, Master of Urban and
Regional Planning, (MURP)
- Dickinson College, B.A. Degree
PROFESSIONAL
CERTIFICATION: - Florida State Certified General Appraiser
- -------------
#RZ0001980
PROFESSIONAL
AFFILIATIONS: - State of Florida, Licensed Real Estate Salesperson
- ------------
APPRAISAL
EDUCATION: - Appraisal Board Course I (ABI)
- ---------
- Appraisal Board Course III (ABIII)
- Capitalization Rates and Income Valuation
- Standards of Professional Practice SPP-A (AI)
- Standards of Professional Practice SPP-B (AI)
- USPAP/Law Update (A92)
- Appraisal Methods and Applications (A141)
RELATED
EDUCATION: - Real Estate Finance I
- ---------
- Managerial Finance I and II
- Financial and Managerial Accounting
- Macroeconomic & Microeconomic Theory I and II
- Investment Management
- Urban Development Systems
Has prepared Appraisals, Feasibility Studies and Analysis for various clients, a
partial listing of which follows:
- - CNL Investment Company
- - Commercial Net Lease Realty, Inc.
- - United American Bank
- - Bank of Winter Park
- - Community First Bank
- - Frisch's Restaurants, Inc.
- - Southern Bank of Central Florida
- - Commercial State Bank
- - Cushman, Inc.
- - CNL Realty Investors, Inc.
- - Orange Bank
- - Florida Hospital
- - In addition, Mr. Goldenberg has several years of land planning experience with
the Orange County, (Florida) Planning Department. Projects Mr. Goldenberg was
involved with at Orange County include, but are not limited to the Growth
Management Plan Update, Amendments to the Growth Management Plan and Activity
Center Studies. Mr. Goldenberg also has experience with the Chester County
(Pennsylvania) Planning Department.
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
QUALIFICATIONS OF EDWARD P. KARABEDIAN, MBA
EDUCATION: - Hofstra University Graduate School of Business:
- ---------
Master of Business Administration in Finance
Degree (MBA) 1985
- SUNY at Stonybrook: B.A. Degree. 1982
PROFESSIONAL - Candidate for the MAI designation of the Appraisal
AFFILIATIONS Institute
- ------------
- General Associate Member of the Appraisal
Institute IIN #: 077588507/Candidate No. M930794
PROFESSIONAL - Florida Association of Realtors
ASSOCIATIONS - National Association of Realtors
- ------------
- Orlando Area Board of Realtors
- Orlando Area Chamber of Commerce
- Member International Council of Shopping Centers
(ICSC)
PROFESSIONAL
CERTIFICATION: - Florida State Certified General Appraiser
- -------------
#RZ0000782
PROFESSIONAL
LICENSES: - State of Florida, Licensed Real Estate Broker
- --------
APPRAISAL - Real Estate Appraisal Principles (AIREA) 1987
EDUCATION: - Basic Valuation Procedures (AIREA) 1987
- ---------
- Income Capitalization, Part A (AIREA) 1987
- Income Capitalization, Part B (AIREA) 1987
- Case Studies and Analysis (AIREA) 1988
- Florida Certified Appraiser Course (CA II) 1992
- Standards of Professional Practice SPP-A (AI) 1992
- Standards of Professional Practice SPP-B (AI) 1992
- Standards of Professional Practice Update (RES)
1994
- USPAP/Law Update (A92) 1996
- Appraisal Methods and Applications (A141) 1996
RELATED - Securitization of Real Estate
EDUCATION: - Real Estate Finance I & II
- ---------
- Managerial Finance
- Financial and Managerial Accounting
- Macroeconomic & Microeconomic Theory I & II
- Investment Banking I & II
- Securities and Capital Markets Finance
- Money and Banking Principles
- International Real Estate Investment & Analysis
(FIABCI)
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
QUALIFICATIONS OF EDWARD P. KARABEDIAN
Page Two
Has prepared Business Valuation, Appraisals, Feasibility Studies and Investment
Analyses for various public and private sector clients, a partial listing of
which follows:
- - CNL Institutional Advisors, Inc. - AmSouth Bank
- - CNL Investment Company - Burger King Corporation
- - CNL Group - Grand Metropolitan, Plc
- - United American Bank - TRR Enterprises
- - Franchise Service Options - South Trust Bank
- - American Heritage Life Insurance Co. - Brauvin Real Estate Funds
- - Florida Hospital - Security Mutual Life Insurance Co.
- - Daniel Realty - Bank of Winter Park
- - Citibank, N.A. - Centrust Savings & Loan
- - Resources Pension Shares - Southeast Bank
- - National Property Investors - Barnett Bank
- - The Travelers - Orange County
- - Kimco Group - O.O.C.E.A. (Expressway
- - Integrated Resources Authority)
- - Chase Manhattan, N.A. - Lake Nona Development
- - Prudential Capital - Southeast Investment Properties
- - Fleet Bank - First Union Bank
- - Cornerstone Properties - CNL Investment Company
- - The Meredith Organization - Benderson Development
- - Breslin Realty Development Corp. - Southeast Bank
- - Rockefeller Center Development Group - Florida National Bank
- - National Park Service - Freedom Savings & Loan
- - Environmental Protection Agency - Regional Construction
- - On-Site Group, Inc. - RIC Properties
- - Paragon Properties - Commercial State Bank
- - Resolution Trust Corporation - Chase Manhattan Bank
- - Network Appraisal Group - Bayco Development Company
- - The Bank of Winter Park - Resolution Trust Corporation (RTC)
(J.E. Roberts SAMDA)
Have performed and assisted on the following condemnation and/or eminent domain
appraisal projects:
O.O.C.E.A. - Woodbury Lane R.O.W. Project
O.O.C.E.A. - Paradi Lane Project
O.O.C.E.A. - Valencia College Lane Project
O.O.C.E.A. - Chickasaw Trail Project
Florida D.O.T. - Whisper Lakes Drainage Easement Areas
Orange County R.O.W. - Lancelot Avenue Water Retention Areas
New York State D.O.T. - Long Island Expressway R.O.W. Takings - Huntington
Township
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
APPRAISAL QUALIFICATIONS OF
VINCENT MALDONADO
EDUCATION: - Bernard M. Baruch College, Bachelor of Business
- ---------
Administration in Real Estate Degree (BBA)
AFFILIATIONS: - General Associate Member of the Appraisal
- ------------
Institute
- National Association of Realtors
- Orlando Area Board of Realtors
PROFESSIONAL
CERTIFICATION: - Florida State Certified General Appraiser
- -------------
#RZ0001249
PROFESSIONAL
AFFILIATIONS: - State of Florida, Licensed Real Estate Broker
- ------------
APPRAISAL EDUCATION - Single Family Residential 101 (SREA)
- -------------------
- R-2 Single Family Case Study (SREA)
- Income Property Analysis 201 (SREA)
- HP12C Seminar (AIREA)
- Florida Certified Appraisers Course (CAII)
- Standards of Professional Practice SPP-A (AI)
- Standards of Professional Practice SPP-B (AI)
- Standards of Professional Practice Update (RES)
- USPAP/Law Update (A92)
- Appraisal Methods and Applications (A141)
RELATED EDUCATION: - Managerial Finance
- -----------------
- Micro and Macro Economics
- International Real Estate Investment & Analysis
(FIABCI)
- Real Estate Appraisal and Analysis
Has performed and assisted on the following condemnation and/or eminent domain
appraisal projects:
Orange County R.O.W.
O.O.C.E.A.
Osceola County R.O.W. Parcel 107
Has prepared Appraisals, Feasibility Studies and Investment Analysis for various
public and private sector clients, a partial listing of which follows:
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
QUALIFICATIONS OF VINCENT MALDONADO (Continued)
Page Two
PREPARED AND PARTICIPATED IN APPRAISALS FOR:
- - Alliance Funding Ltd.
- - Anchor Savings Bank
- - Anderson Dental Lab, Inc.
- - Atico Savings Bank
- - Azalea Manor
- - Baker and Hostetler
- - Barrett and Sons Sailing Center
- - Bellows
- - Beneficial Finance Corp.
- - Brokers Mortgage Service, Inc.
- - Brooklyn Federal Savings & Loan Association
- - CNL Income Funds
- - Central Florida Title Insurance Company
- - Child Life, Inc.
- - Chemical Bank
- - Citibank, N.A.
- - Citizens & Southern Bank of Fla.
- - Commercial State Bank
- - Comprehensive Marketing Systems, Inc.
- - Crossland Savings Bank
- - Danis Properties
- - Dime Savings Bank of New York
- - Dime Savings Bank of Williamsburg
- - Empbanque Capitol Corp.
- - Empire of America Realty Credit Corp.
- - Florida National Bank
- - Frisch's Restaurants, Inc.
- - Goldome F.S.B.
- - Goldome Realty Credit Corp.
- - H.W.D. Funding Limited
- - Hartford Funding Ltd.
- - Household Finance Corp.
- - Karst, Inc.
- - Roderick T. Hunt Associates
- - Kadilac Funding
- - Kasa Lithuanian Credit Union
- - Maritec Industries
- - Master Halco, Inc.
- - Money Store
- - Mortgage Clearing House
- - National Health Care Affiliates, Inc.
- - O.O.C.E.A (Expressway Authority)
- - Orange Bank
- - Orlando Medical Associates
- - Osceola County R.O.W.
- - Paragon Group
- - Regional Construction Corp.
- - S.M.A. Funding
- - Security Mutual Life Insurance Company of New York
- - Shee Con, Inc.
- - Shubert Construction Co., Inc.
- - South Trust Bank
- - Sutton Industries, Inc.
- - United American Bank
- - Whitaker, Dorough, Whitaker and Wren
- - Wood X-Ray and Supply, Inc.
- - Zom Companies
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
QUALIFICATIONS OF JAMES R. WHITE MAI, SRA
MANAGING DIRECTOR/REAL ESTATE GROUP
-----------------------------------
Business Address
- ----------------
732 North Thornton Avenue
Orlando, Florida 32803
Educational Background
- ----------------------
He has been active in the appraisal profession since 1967. His formal
educational background includes studies at Northern Illinois University, as well
as completion of a variety of courses sponsored by the Appraisal Institute.
Moreover, he has attended seminars on environmental issues, finance, eminent
domain, feasibility analysis, construction, computer applications, and other
real estate related topics sponsored by the Appraisal Institute and other
independent organizations.
Professional Affiliations
- -------------------------
Appraisal Institute - MAI No. 5158 (1974)
Appraisal Institute - RM No. 372 (1972)
State Certified General Appraiser #RZ0001875
Licensed Florida Real Estate Broker
Professional Experience
- -----------------------
Currently, he is the Managing Director for Valuation Associates Real Estate
Group, Inc. During 1991-92, he held the position as Senior Review Appraiser for
American Pioneer Savings Bank/RTC and was responsible for appraiser's compliance
with the Resolution Trust Corporation's guidelines and the Uniform Standards of
Professional Appraisal Practice. From 1980 to 1986, he was vice president of
Associated Real Estate Analysts, Inc. Previously, from 1972 to 1979, he was
president of Midwest Appraisal and Research Corporation in the Chicago area.
His real estate experience highlights a wide variety of assignments including
timeshare resorts, economic studies, mobile home parks, subdivisions, railroad
right-of-way, churches, single family dwellings, restaurants, and leased fee
interests. Additionally, he has been qualified as an expert appraisal witness
and has testified in court in eminent domain and zoning matters.
Clients Served
- --------------
During his many years in the real estate community, he has had the opportunity
to serve a wide variety of clients, including those with national, as well as
international interests. These clients include developers and lenders such as
Barnett Bank, National Bank of Commerce, United American Bank, various
municipalities and insurance companies, as well as law firms and individuals. A
detailed list of clientele is available upon request.
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
[LOGO OF VALUATION ASSOCIATES APPEARS HERE]
SUPPLEMENTAL ADDENDA (VAI8-1301A):
ESTIMATION OF THE GOING CONCERN VALUE OF THE SUBJECT FUND
ADDENDA TO THE FOLLOWING REPORT:
COMPLETE APPRAISAL - RESTRICTED REPORT
OF:
THE AGGREGATE VALUE OF
THE LEASED FEE AND FEE SIMPLE INTERESTS
OF PROPERTIES WITHIN THE
PROPERTY PORTFOLIO OF
CNL INCOME FUND, LTD.
CALENDAR YEAR ENDING DECEMBER 31, 1998
PREPARED FOR:
CNL INCOME FUND, LTD., AND ITS GENERAL PARTNERS,
MR. JAMES SENEFF, MR. ROBERT BOURNE,
AND CNL REALTY CORPORATION
400 EAST SOUTH STREET
ORLANDO, FLORIDA 32801
PREPARED BY:
VALUATION ASSOCIATES REAL ESTATE GROUP, INC.
732 NORTH THORNTON AVENUE
ORLANDO, FLORIDA 32803
EFFECTIVE DATE OF APPRAISAL
DECEMBER 31, 1998
VAI8-1301
[LETTERHEAD OF VALUATION ASSOCIATES APPEARS HERE]
<PAGE>
SUPPLEMENTAL ADDENDA (VAI8-1301A):
ESTIMATION OF THE GOING CONCERN VALUE OF THE SUBJECT FUND
As an adjunct to this assignment (our file #VAI8-1301A), the client has
requested that we estimate the aggregate value of the funds as a going concern
exclusive of cash, securities held and other cash equivalent assets which may be
held in partnership accounts. The concept of going concern value in respect to
this assignment varies from the definition commonly used in the valuation of
real property. The definition of the term as it applies to real property is as
follows:
The value created by a proven property operation; considered as a separate
entity to be valued with a specific business establishment. . . . The Dictionary
--------------
of Real Estate Appraisal 3rd ed. Appraisal Institute.
- --------------------------------
This definition was developed to be utilized in the valuation of a specific real
property operation such as a hotel, restaurant or other such enterprise where
ideally, the combination of real property, furniture, fixtures, and equipment,
business operational skills and certain intangibles provide a synergistic
result.
As the term "going concern" value applies in the context of the subject
assignment, the emphasis is also heavily upon the management of the fund itself.
The real properties within the fund intrinsically form the first value tier
along with the individual property operations themselves. The second tier of
management responsibilities is directly related to the operation of the fund as
a distinct entity yet integrated to a degree with the overall effort. As a
result, the property specific definition above is modified conceptually to
reflect a more intensive effort pertaining to the management of the entity as a
whole, comprised of numerous individual properties.
In order to competently accomplish the fund management function, certain
efforts are required in order to ensure and maintain the optimum aggregate
value. These administrative efforts include not only the normal duties
associated with the day to day property level fund operations, but include
additional functions relating to fund management such as complying with
Securities and Exchange Commission reporting requirements as they relate to
publicly traded limited partnerships, investor relations and communications, and
management issues not specifically related to basic property level activities.
Since the operation of the fund will result in additional expenses, it is
necessary to deduct an amount attributable to these items from the gross
property revenue generated. Based upon our analysis of these factors which are
outlined above, it is our judgement that an annual amount equal to four percent
of the revenue is a realistic and well supported estimate.
During the course of our estimation of going concern value, we have herein
incorporated by reference all descriptive and empirical data and information
contained within our file #VA8-1301A.
After careful consideration and analysis, we have estimated the going concern
value of the subject fund, as of the effective date of valuation, to be as
follows:
It is the opinion of the appraisers that the going concern value of the subject
fund, assuming its continued operation as CNL Income Fund, Ltd. as described
herein, exclusive of furniture, fixtures and equipment (FF&E), cash, securities
or cash equivalents held in fund accounts, or business value (if any), of the
individually operated real properties which comprise the fund, as of the
effective date of this report, was:
$11,440,000.00
<PAGE>
CERTIFICATE OF VALUE
--------------------
We certify that, to the best of our knowledge and belief:
- - The statements of fact contained in this report are true and correct.
- - The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and are our personal, unbiased
professional analyses, opinions, and conclusions.
- - We have no present or prospective interest in the property that is the
subject of this report, and we have no personal interest or bias with respect
to the parties involved.
- - Our compensation is not contingent upon the reporting of a predetermined
value or direction in value that favors the cause of the client, the amount
of the value estimate, the attainment of a stipulated result, or the
occurrence of a subsequent event, nor a specific loan amount or value.
- - Our analyses, opinions, and conclusions were developed, and this report has
been prepared, in conformity with the Uniform Standards of Professional
Appraisal Practice and the requirements of the Code of Professional Ethics
and Standards of Professional Practice of the Appraisal Institute.
- - We have not made a personal inspection of the property that is the subject of
this report.
- - No one provided significant professional assistance to the persons signing
this report.
- - The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
It is the opinion of the appraisers that the going concern value of the subject
fund, assuming its continued operation as CNL Income Fund, Ltd. as described
herein, exclusive of furniture, fixtures and equipment (FF&E), cash, securities
or cash equivalents held in fund accounts, or business value (if any), of the
individually operated real properties which comprise the fund, as of the
effective date of this report, was:
$11,440,000.00
Respectfully Submitted,
VALUATION ASSOCIATES REAL ESTATE GROUP, INC.
Edward P. Karabedian, MBA Vincent Maldonado
Principal Principal
General Associate Member of the General Associate Member of the
Appraisal Institute Appraisal Institute
State Certified General Appraiser State Certified General Appraiser
#RZ0000782 #RZ0001249
Laurence R. Goldenberg, MBA, MURP James R. White, MAI, SRA
Vice President Managing Director/Real Estate Group
State Certified General Appraiser State Certified General Appraiser
#RZ0001980 #RZ0001875
Technical Desk Review Only
Ben Abdallah, MA
Associate
<PAGE>
EXHIBIT 10.3
[LETTERHEAD OF VALUATION ASSOCIATES]
COMPLETE APPRAISAL - RESTRICTED REPORT
OF
THE AGGREGATE VALUE OF
THE LEASED FEE AND FEE SIMPLE INTERESTS
OF PROPERTIES WITHIN THE
PROPERTY PORTFOLIO OF
CNL INCOME FUND II, LTD.
CALENDAR YEAR ENDING DECEMBER 31, 1998
FOR
CNL INCOME FUND II, LTD., AND ITS GENERAL PARTNERS,
MR. JAMES SENEFF, MR. ROBERT BOURNE,
AND CNL REALTY CORPORATION
400 EAST SOUTH STREET
ORLANDO, FLORIDA 32801
BY
VALUATION ASSOCIATES REAL ESTATE GROUP, INC.
732 NORTH THORNTON AVENUE
ORLANDO, FLORIDA 32803
EFFECTIVE DATE OF APPRAISAL
DECEMBER 31, 1998
DATE OF REPORT
JANUARY 6, 1999
VAI8-1302
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
TABLE OF CONTENTS
Introduction/Letter of Transmittal
Tab A Summary Discussion of Valuation Methodology
& Cash Flows
Tab B Liquidation Value
Addendum
Additional General Assumptions, Special
Assumptions and Limiting Conditions
Brief Concept Overviews
Industry Trends/Charts
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
[LETTERHEAD OF VALUATION ASSOCIATES]
January 6, 1999
CNL Income Fund II, Ltd., and its General Partners
Mr. James Seneff, Mr. Robert Bourne, and CNL Realty Corporation
400 East South Street
Orlando, Florida 32801
RE: Aggregate market value of the leased fee and fee simple interests of the
properties within the property portfolio of CNL Income Fund II, Ltd.
Dear Sirs:
In response to your request, we have developed an estimate of the aggregate
market value of the specific interests in the properties included in the above
referenced portfolio. This portfolio contains 38 properties in 18 states. We
have prepared this complete appraisal in a restricted format. The basis of the
valuation was data which included rental rates, current lease data, certified to
us to our satisfaction by the client described herein and affiliates, and other
related market information available to us which we deemed reliable and relevant
or material in our professional judgement. Property rights appraised in this
assignment are the market values of the leased fee and fee simple interests and
the effective date of valuation is December 31, 1998.
This is a Restricted Appraisal Report which complies with the reporting
requirements set forth under Standard Rule 2-2(c) of the Uniform Standards of
Professional Appraisal Practice for a Restricted Appraisal Report. As such, it
presents minimal discussion of the data, reasoning, and analyses that were used
in the appraisal process to develop the appraiser's opinion of value. Supporting
documentation concerning the data, reasoning and analyses is retained in the
appraiser's file. The depth of discussion contained in this report is specific
to the needs of the client and for the intended use stated below. The report
cannot be understood properly without additional information in the workfile of
the appraiser. The appraiser is not responsible for unauthorized use of this
report.
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
It should be noted that the restricted report format has a use restriction that
limits reliance on the report to the client and its agents, advisors, and
representatives, and/or for the intended uses as described herein, and considers
anyone else using the report as an unintended user.
The market data obtained during our research and analysis includes the rental
rates and terms, expense information, and other property specific data on the
parcels within the portfolio and in their respective markets. In addition, we
have utilized appropriate data gleaned from other reliable sources in developing
our value conclusions. All important data is hereby incorporated by reference
and will be maintained in our permanent files.
The estimate of value was developed in conformance with the Uniform Standards of
Professional Appraisal Practice (USPAP), as promulgated by the Appraisal
Foundation, as well as the Uniform Standards of Professional Appraisal Practice
and the Code of Ethics of the Appraisal Institute.
We have found it necessary to make certain uniform and standardized economic
forecasts, which were based upon present and past economic conditions. We have
no control over future legislation or economic changes which may affect the
value of the individual properties which, taken as a whole, comprise the
portfolio.
To the best of our knowledge and belief, the statements contained in this
appraisal, as well as the opinions upon which they are based, are correct,
subject to the assumptions and limiting conditions set forth in this document.
We have no interest, either present or contemplated, in the properties
appraised, and neither our employment nor our compensation is contingent upon
the reporting of a predetermined value, or direction in value that favors the
cause of the client, the amount of the value estimate, the attainment of a
stipulated result, or the occurrence of a subsequent event.
The appraisal value is based upon certain underlying Special Assumptions which
are set forth in the following section. These are in addition to our standard
General Assumptions and Limiting Conditions which are located in the addendum.
The reader is referred to the appropriate section of the report regarding these
matters.
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
After thorough consideration of all factors involved in this assignment, it is
our judgement that the Market Value of the Leased Fee and Fee Simple Interests
in the properties within the portfolio of CNL Income Fund II, Ltd., as of the
effective date of valuation, December 31, 1998, is:
$23,820,000.00
We appreciate the opportunity to prepare this appraisal for you. If you have any
questions, we would welcome your call.
Respectfully Submitted,
VALUATION ASSOCIATES REAL ESTATE GROUP, INC.
/s/ Edward P. Karabedian /s/ Laurence R. Goldenberg
Edward P. Karabedian, MBA Laurence R. Goldenberg, MBA, MURP
Principal Vice President
General Associate Member of the Appraisal State Certified General Appraiser
Institute #RZ0001980
State Certified General Appraiser
#RZ0000782
/s/ Vincent Maldonado /s/ James R. White
Vincent Maldonado James R. White, MAI, SRA
Principal Managing Director/Real Estate Group
General Associate Member of the Appraisal State Certified General Appraiser
Institute #RZ0001875
State Certified General Appraiser
#RZ0001249
/s/ Ben Abdallah
Ben Abdallah, MA
Associate
:dmh
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
Fund II
Page 1
CERTIFICATE OF VALUE
--------------------
We certify that, to the best of our knowledge and belief:
- - The statements of fact contained in this report are true and correct.
- - The reported analyses, opinions, and conclusions are limited only by the
reported assumptions and limiting conditions, and are our personal,
unbiased professional analyses, opinions, and conclusions.
- - We have no present or prospective interest in the property that is the
subject of this report, and we have no personal interest or bias with
respect to the parties involved.
- - Our compensation is not contingent upon the reporting of a predetermined
value or direction in value that favors the cause of the client, the
amount of the value estimate, the attainment of a stipulated result, or
the occurrence of a subsequent event, nor a specific loan amount or value.
- - Our analyses, opinions, and conclusions were developed, and this report
has been prepared, in conformity with the Uniform Standards of
Professional Appraisal Practice and the requirements of the Code of
Professional Ethics and Standards of Professional Practice of the
Appraisal Institute.
- - We have not made a personal inspection of the property that is the subject
of this report.
- - No one provided significant professional assistance to the persons signing
this report.
- - The use of this report is subject to the requirements of the Appraisal
Institute relating to review by its duly authorized representatives.
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
Fund II
Page 2
In the final analysis, after thorough consideration given to all important
factors in this valuation, including the specified Assumptions and Limiting
Conditions, it is our judgement that the Aggregate Market Value of the Leased
Fee and Fee Simple Interest of CNL Income Fund II, Ltd., subject to the general
assumptions and limiting conditions set forth herein as of the effective date of
analysis, December 31, 1998, is:
$23,820,000.00
Respectfully Submitted,
VALUATION ASSOCIATES REAL ESTATE GROUP, INC.
/s/ Edward P. Karabedian /s/ Vincent Maldonado
Edward P. Karabedian, MBA Vincent Maldonado
Principal Principal
General Associate Member of the Appraisal General Associate Member of the
Institute Appraisal Institute
State Certified General Appraiser State Certified General Appraiser
#RZ0000782 #RZ0001249
/s/ Laurence R. Goldenberg /s/ James R. White
Laurence R. Goldenberg, MBA, MURP James R. White, MAI, SRA
Vice President Managing Director/Real Estate Group
State Certified General Appraiser State Certified General Appraiser
#RZ0001980 #RZ0001875
Technical Desk Review Only
/s/ Ben Abdallah
Ben Abdallah, MA
Associate
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
Fund II
Page 3
DEFINITIONS
- -----------
In addition to estimating the Market Value of the Fund as requested by the
client, we have also estimated the Liquidation Value. Moreover, and for
clarification, we have explored the concept of Disposition Value which relates
closely to the other concepts. The definitions of these classifications of value
are as follows:
*Market Value: the most probable price which a specified interest in real
property is likely to bring under all the following conditions:
I. Consummation of a sale as of a specified date.
II. Open and competitive market for the property interest appraised.
III. Buyer and seller each acting prudently and knowledgeably.
IV. Price not affected by undue stimulus.
V. Buyer and seller typically motivated.
VI. Both parties acting in what they consider their best interest.
VII. Adequate marketing efforts made and a reasonable time allowed for
exposure in the open market.
VIII. Payment made in cash in U.S. dollars or in terms of financial
arrangements comparable thereto.
IX. Price represents the normal consideration for the property sold,
unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.
*Disposition Value: the most probable price which a specified interest in real
property is likely to bring under all of the following conditions:
I. Consummation of a sale within a limited future marketing period
specified by the client.
II. Current actual market conditions for the property interest
appraised.
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
Fund II
Page 4
III. The buyer and seller are each acting prudently and knowledgeably.
IV. The seller is under compulsion to sell.
V. The buyer is typically motivated.
VI. Both parties are acting in what they consider their best interests.
VII. Adequate marketing effort will be made in the limited time allowed
for completion of a sale.
VIII. Payment will be made in cash in U.S. dollars or in terms of
financial arrangements comparable thereto.
IX. The price represents the normal consideration for the property sold,
unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.
*Liquidation Value: the most probable price which a specified interest in real
property is likely to bring under all of the following conditions:
I. Consummation of a sale within a severely limited future marketing
period specified by the client.
II. Current actual market conditions for the property interest
appraised.
III. The buyer is acting prudently and knowledgeably.
IV. The seller is under extreme compulsion to sell.
V. The buyer is typically motivated.
VI. The buyer is acting in what he or she considers his or her best
interests.
VII. A limited marketing effort made and limited time allowed for the
completion of sale.
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
Fund II
Page 5
VIII. Payments will be made in cash in U.S. dollars or in terms of
financial arrangements comparable thereto.
IX. The price represents the normal consideration for the property sold,
unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.
Discount Rate: A rate of return commensurate with perceived risk used to convert
future payments or receipts to present value.
Leased Fee Estate: An ownership interest held by a landlord with the right of
use and occupancy conveyed by lease to others; the rights of lessor or the
leased fee owner and leased fee are specified by contract terms contained within
the lease.
Fee Simple Estate: Absolute ownership unencumbered by any other interest or
estate subject only to the four powers of government.
Reversion: A lump sum benefit that an investor receives or expect to receive at
the termination of an investment.
Reversionary Right: The right to repossess and resume full and sole use and
ownership of real property that has been temporarily alienated by a lease, an
easement, etc.; may become effective at a stated time or under certain
conditions, e.g., the termination of a leasehold, the abandonment of a
right-of-way, the end of the estimated economic life of the improvements.
Overall Rate of Capitalization: An annual percentage rate that expresses the
relationship between Net Operating Income and present worth or value for the
entire investment or property. In mortgage-equity analysis (especially the
Ellwood formulation), this is also termed the Composite Rate or Composite
Overall Rate. This label reflects the fact that it incorporates pro rated
capital appreciation or depreciation along with Net Operating Income.
Highest and Best Use: The reasonably probable and legal use of vacant land or an
improved property which is physically possible, appropriately supported,
financially feasible, and that results in the highest and best use.
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
Fund II
Page 6
Underlying Special Assumptions of the Valuation
- -----------------------------------------------
In order to accurately and effectively complete the valuation process, the
appraised value is predicated upon certain conditions. These are set forth as
follows.
1. The client has furnished us with summarized data pertaining to such
elements as, but not limited to, sales volumes, lease data, property
specific data, etcetera, which it and its general partners have certified
to us is true, correct, and complete in all material respects. For
purposes of this analysis, it is assumed that the data are accurate, true
and complete. It is recognized that it would not be possible to
individually verify each physical lease and/or portion of the property
data furnished to us. However, based upon our familiarity with these
properties and the geographic markets in which they are located, nothing
has come to our attention which would lead us to conclude that any of the
information provided to us is inaccurate in any material respect. In
instances where summarized data with respect to a particular property was
not available, we have utilized projections for certain elements such as
renewal option periods, rental rates and other data, which we have
determined based upon our knowledge of the properties, and in some cases,
our prior experience with the operators, and our knowledge of the
geographic markets in which such properties are located.
2. We have completed the valuation of the subject portfolio without
conducting personal inspections of each of the properties immediately
prior to estimating their value. It is recognized that Valuation
Associates Real Estate Group, Inc., or its related companies and/or
representatives, has at various times in the past, inspected and appraised
a majority of the properties in this portfolio and we are familiar with
the various geographic market areas involved. Consequently, we have
assumed, unless otherwise specified, based upon certificates provided to
us by the client and its general partners, that each 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 or retail brand.
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
Fund II
Page 7
3. It is assumed, based upon certificates provided to us by the client and
its general partners, that each of the properties is free from any pending
or proposed litigation, civil engineering improvements, or eminent domain
proceedings which could affect the respective property's value unless so
indicated.
4. Certain properties within the portfolio are presently under conversion
construction. The client may have certified data to us relative to
construction cost, lease information, building specifications, etc. We
assume that this information, if provided, is complete, true and correct.
5. In our professional judgement and based upon our prior experience with the
properties and our testing of selected data based on market information
and databases available to us and which we deem reliable, it is reasonable
for us to rely upon the certificates described herein.
6. For purposes of this assignment, unless otherwise specified, we believe
that the existing building improvements represent the Highest and Best Use
of the respective properties.
7. There are 9 properties within the portfolio which are under joint venture
agreement; some of which appear in more than one Fund. As a result, we
have allocated the respective proportionate value share to each respective
fund separately.
8. The value estimate does not include furniture, fixtures and equipment in
the respective stores, as these items are assumed to belong to the tenant
and the valuation is based upon land and building only. As used herein,
"furniture, fixtures and equipment" means those removable items which are
necessary for the operation of the business, including items such as all
kitchen equipment, seating, tables, smallwares, display cases, cash
registers, intercom/music systems, window treatments, signage, and so
forth. Other items such as heating and cooling systems, electrical
service, restroom fixtures, water heaters, floor coverings, and
landscaping, etc., are considered to be part of the real estate.
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
Fund II
Page 8
9. It has been our experience in the appraisal of restaurants that the total
rent as a percentage of sales volume generally falls within a market
derived range. For purposes of this assignment, we have not made an
analysis of any lease renewals which may occur during the holding period
in order to ascertain whether the future sales will fall within these
parameters unless specified herein. Operators of stores currently
performing at or above the average unit volume of the respective concept
are assumed to exercise the options at the terms and conditions of the
last lease term or as specified in the lease renewal option detail.
10. It is recognized that, generally, varied amounts of risk are inherent with
the type of restaurant operator, whether corporate or private; single or
multi-unit. Our judgement with respect to these risks is reflected in our
valuation methodology described below.
11. As of this writing, Long John Silver's and Boston Market are protected by
bankruptcy laws. Because of the uncertainty of the future of these
companies, we have used market level rents as well as capitalization rates
in the analysis of any vacated locations with respect to such tenants.
12. Additional General Assumptions and Limiting Conditions relied upon in the
analysis may be found in the Addenda section of this report.
Purpose of the Appraisal
- ------------------------
The purpose of the appraisal was to estimate the aggregate market value and
liquidation value of the leased fee and fee simple interests of properties
within the referenced portfolio. The appraisal will be used for financial
analysis and decision making in connection with the possible merger or
acquisition of CNL Income Fund II, Ltd. with and into CNL American Properties
Fund, Inc. or its subsidiaries or affiliates, and evaluation by the limited
partners of CNL Income Fund II, Ltd., the financial advisers of CNL Income Fund
II, Ltd., and the general partners of CNL Income Fund II, Ltd. regarding the
acceptance and fairness of the types and amounts of consideration to be
deliverable to the limited partners of CNL Income Fund II, Ltd. in connection
with such merger or acquisition.
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
Fund II
Page 9
Effective Date of Valuation
- ---------------------------
The effective date of valuation is December 31, 1998.
Highest and Best Use
- --------------------
In this analysis, the highest and best use of a particular property which is
currently operating and encumbered by a long term lease is assumed to be
represented by the existing building improvements. The highest and best use of a
property which has been closed is assumed to be commercial with contributory
value attributable to the building improvements.
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
Fund II
Page 10
Valuation Methodology/Scope of Work
- -----------------------------------
The portfolio consists of CNL Income Fund II, Ltd., which comprises a total of
38 individual properties located in 18 states, of which 9 are joint ventures
within various affiliated funds. There are 19 different operating restaurant
concepts (excluding Great Clips and Fads & Frames).
The properties were initially segregated by region since it has been observed
that certain areas of the country tend to have value and demand characteristics
that differ from others. The three defined regional areas are California, the
western US (comprising Nevada, Arizona, Oregon, and Washington), and the
remaining states within the Continental US which form the third region. There
are no properties within the fund situated in Alaska or Hawaii or the US
Territorial possessions.
Within each geographical region, the properties are further classified relative
to their operational characteristics. These categories are either corporate
multi-unit operators or private/single unit operator types. These differing
operational structures tend to exhibit variable risk characteristics and cash
flows.
The above categories are further delineated by their operational status. The
sub-categories are identified as follows:
1. Store Operating normally with rent being paid
2. Closed store - corporate paying rent
3. Closed store - franchisee paying rent
4. Closed store - corporate in bankruptcy/no rent
5. Closed store - private operator paying partial rent
6. Closed store - franchisee paying no rent
7. Closed store - private operator paying no rent
8. Store under construction.
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
Fund II
Page 11
The appraisal of the market value in the leased fee and fee simple interests in
the properties in the portfolio primarily involved the use of the Cost Approach
and the Income Approach to Value as necessary. The Cost Approach was used only
in instances where a reversionary value was required and the use of direct
capitalization would not have been the method of choice. The Sales Comparison
Approach was used if the valuation of the underlying land of a particular
property were required and for select closed locations with no current contract
rent. No truly comparable sales of large portfolios of comparable properties
were found during our research phase; thereby rendering the Sales Comparison
Approach for entire portfolios to be not applicable. Since the assignment
principally involves the estimation of the aggregate market value of the leased
fee and fee simple interests of the properties in the portfolio, the most
applicable avenue to value is, in our professional judgement, the Income
Approach utilizing the Discounted Cash Flow Analysis. However, we have compared
the market value figures arrived at herein against comparative sale databases
available to us and which we deem reliable, and have concluded that the market
value herein stated is, with respect to individual properties, in the range of
comparative individual property sales occurring in the general markets for such
properties. As noted above, all data, reasoning, and analyses of the appraiser
not specifically set forth herein is maintained in the appraiser's files.
Most of the properties within the portfolio are encumbered by long term leases.
The remaining terms for fully owned properties range from 1 to 10 years
exclusive of renewal options which may exist. The remaining terms for the joint
venture properties range from 9 to 20 years exclusive of renewal options which
may exist.
The value of the properties under the Income Approach is developed by the
capitalization of the lease payments into present value utilizing a Discounted
Cash Flow analysis. The annual lease payments were discounted based upon
payments made monthly in advance. Income and expenses were on a calendar basis.
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
Fund II
Page 12
In addition to the value of the property's income stream, there will be a
property reversion consisting of land, building improvements, or both. The value
of the reversion at the end of the holding period was estimated and a discount
factor applied for its conversion to present value. The 11/th/ year's scheduled
income was utilized in the calculation of the future value of the reversion as
the estimate of future value of the reversion considers an investor's analysis
of future income expectation. When viewed from the tenth year of the holding
------
period, the eleventh or next year of the holding period thereby represents such
expectation.
General Cash Flow Assumptions
- -----------------------------
Certain other assumptions relative to the cash flow analysis were made. These
include a ten year holding period, a 1% annual allowance for management fee and
a flat amount of $200 per property per year for miscellaneous expenses such as
bookkeeping, legal fees, and other pro-rata charges. Unless specified, no
vacancy or collection loss was taken due to the non-cancellable long term
leases. Where lease renewal options are available, we have assumed that they
would be exercised, providing that the store was currently operating at or above
the average unit volume for that particular concept, or anticipated future
contract lease payments are at or below 15% of reported gross sales volume. The
income stream of vacant stores with creditworthy corporate operators paying rent
were discounted at the same rate as those same operators of operating stores.
In the valuation of those stores for which no sales volume data were available
and with leases expiring during the holding period, we assume that the lease
payments are no more than 15% of the store's current sales volume. Based upon
our experience and professional judgement, we believe this to be a reasonable
assumption because of the market data available to us as of the valuation date.
Where client certified data indicates either no percentage rent or a negative
amount with respect to a particular store, we assume that this store's sales
will not exceed the breakpoint (i.e., the level of sales at which percentage
rent will become payable) during the holding period.
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
Fund II
Page 13
Percentage rent was computed based upon stabilized sales volume and lease terms.
The payment of percentage rent, if any, is assumed to take place following the
end of the applicable lease year.
The percentage rent portion of lease cash flows was discounted to present value
at a rate approximately 400+/- basis points greater than that selected for the
contract rent to reflect the increased risk involved with this type of income
stream. A commensurate terminal capitalization rate spread on the percentage
rent for this portion of the projected income was also utilized.
Any Checkers restaurant properties which may be found in the fund are reported
to be ground leases only. Therefore, the reversion value indicates land value
only. The value of the underlying land was projected to increase 2+/-% per annum
during the holding period to account for inflationary demand pressure over the
remaining lease term for these sites only.
Relative to properties that are currently vacant with no rent being paid, the
estimate of market rent was based upon such factors as the property's listing
information as provided by the client, our previous appraisal of the property
(if performed), our appraisal of similar properties within that region or
sub-market, limited discussions with specific market participants, and other
relevant economic rental information within our proprietary database.
At the end of the ten year holding period, we have assumed that the properties
would be sold in an orderly manner. We have utilized a 2.0% sales expense which
encompasses any fees for brokerage or attorneys, applicable closing costs, and
miscellaneous charges, which may be incurred by the fund upon disposition of the
real estate assets exclusive of any buyer paid transaction costs associated with
such disposition.
The contractual base rent portion of the lease cash flow was discounted to
present value using discount rates chosen on a property by property basis, as
specified below. The selection of the adopted property specific discount rate
was based upon our site and tenant specific analysis of the risk involved. The
segments of risk include those applicable to the market both general and
specific, lessee/borrower risk and property risk. The final selection of the
rates is the culmination of the analysis and interpretation of attitudes and
expectation of market participants relative to a comparison with a variety of
alternative investment vehicles and transactions. These include
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
Fund II
Page 14
stocks, bonds, other real estate investments, or various equity participations.
Also considered in our analysis were the individual franchisor's company profile
and strength gathered from sources such as stock reports, investor publications,
trade journals, discussions with market participants, and other sources which we
deem reliable in our professional judgement.
During the course of our analysis of CNL Income Fund II, we have considered a
variety of important factors including those noted above, we have utilized
discount rates applicable to the income streams between 8.75% and 11.50%,
whereas terminal capitalization rates applicable to the calculation of the
reversions range between 9.50% and 12.25%, depending upon the property.
Although the assumptions set forth herein have served as an overall guide during
the valuation process, and such assumptions are reasonable in our professional
judgement, and based upon our experience in the relevant market, each individual
property and its related information, data, and client-sourced documentation has
been examined as necessary to derive the final value conclusion.
The following sections set forth the cash flows, operator and concept overviews,
and certain other important statistical data referenced and relied upon during
the course of our analysis.
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
Fully Owned Properties
- ----------------------
<TABLE>
<CAPTION>
Income Fund Fund 2 Fund 2 Fund 2 Fund 2
<S> <C> <C> <C> <C>
Property # 1 2 3 4
% owned 100.0% 100.0% 100.0% 100.0%
Unit Ref# 102-121021 102-251022 102-251025 102-361026
Status Occupied Occupied Occupied Occupied
Concept Burger King Denny's Denny's GC
Operator Burger King Corporation DenAmerica Corp. DenAmerica Corp. Golden Corral Corporation
City San Antonio, TX Casper, WY Rock Spr., WY Columbia, MO
Date Acquired 05/15/87 09/15/87 09/18/87 11/17/87
Building SF 2,876 4,331 5,749 6,040
Investment Type L&B L&B L&B L&B
Lease Expiration 05/14/07 09/14/07 09/17/07 11/30/02
% rent 1996 $0 $0 $0 $6,945
% rent 1997 $0 $0 $0 $3,453
Sales Vol 1993 ($K) $715 $605 $713 $1,554
Sales Vol 1994 $875 $568 $663 $1,281
Sales Vol 1995 $896 $575 $663 $1,177
Sales Vol 1996 $920 $599 $587 $1,141
Sales Vol 1997 $910 $508 $528 $1,074
Annualized 1998 $869 $535 $578 $1,198
% Rent Breakpoint 7% Less Rent $638,113 $700,514 $937,200
Avge. Chain Unit Vol. $1,100,000 $1,193,000 $1,193,000 $1,738,000
Stab. Annual % Rent $0 $0 $0 $11,000
DISCOUNT RATE 8.75% 10.00% 10.00% 9.00%
TERMINAL CAP. RATE 9.50% 10.75% 10.75% 9.75%
ESTIMATED VALUES $941,916 $642,772 $758,018 $673,672
Gross Rental Income
Year 1 $87,938 $67,993 $80,148 $56,232
Year 2 $87,938 $67,993 $80,148 $56,232
Year 3 $87,938 $67,993 $80,148 $56,232
Year 4 $87,938 $67,993 $80,148 $56,232
Year 5 $87,938 $67,993 $80,148 $56,232
Year 6 $87,938 $67,993 $80,148 $56,232
Year 7 $87,938 $67,993 $80,148 $56,232
Year 8 $87,938 $67,993 $80,148 $56,232
Year 9 $87,938 $67,993 $80,148 $56,232
Year 10 $87,938 $67,993 $80,148 $56,232
Year 11 $87,938 $67,993 $80,148 $56,232
<CAPTION>
Income Fund Fund 2 Fund 2
<S> <C> <C>
Property # 5 6
% owned 100.0% 100.0%
Unit Ref# 102-361027 102-361029
Status Occupied Occupied
Concept GC GC
Operator Golden Corral Corporation Golden Corral Corporation
City Hueytown, AL Nederland, TX
Date Acquired 06/29/87 08/06/87
Building SF 6,948 5,728
Investment Type L&B L&B
Lease Expiration 06/30/02 08/31/02
% rent 1996 $0 ($915)
% rent 1997 $0 $5,265
Sales Vol 1993 ($K) $1,249 $1,582
Sales Vol 1994 $1,220 $1,549
Sales Vol 1995 $1,115 $1,463
Sales Vol 1996 $446 $1,452
Sales Vol 1997 $1,049 $1,546
Annualized 1998 $1,100 $1,718
% Rent Breakpoint $1,327,883 $1,459,700
Avge. Chain Unit Vol. $1,738,000 $1,738,000
Stab. Annual % Rent $0 $5,000
DISCOUNT RATE 9.00% 9.00%
TERMINAL CAP. RATE 9.75% 9.75%
ESTIMATED VALUES $831,183 $953,742
Gross Rental Income
Year 1 $79,673 $87,582
Year 2 $79,673 $87,582
Year 3 $79,673 $87,582
Year 4 $79,673 $87,582
Year 5 $79,673 $87,582
Year 6 $79,673 $87,582
Year 7 $79,673 $87,582
Year 8 $79,673 $87,582
Year 9 $79,673 $87,582
Year 10 $79,673 $87,582
Year 11 $79,673 $87,582
</TABLE>
<PAGE>
Fully Owned Properties
- ----------------------
<TABLE>
<CAPTION>
Income Fund Fund 2 Fund 2 Fund 2 Fund 2
<S> <C> <C> <C> <C>
Property # 7 8 9 10
% owned 100.0% 100.0% 100.0% 100.0%
Unit Ref# 102-361030 102-361032 102-441035 102-441036
Status Occupied/Sublease Occupied Occupied Occupied
Concept Fads & Frames Store GC KFC KFC
Operator Golden Corral Corporation Golden Corral Corporation KFC of California, Inc. KFC of California, Inc.
City Pineville, LA Tomball, TX Jax, FL (Univ) Eagan, MN
Date Acquired 06/18/87 05/13/87 09/01/87 09/09/87
Building SF 5,728 6,040 2,471 2,705
Investment Type L&B L&B L&B L&B
Lease Expiration 06/30/02 05/31/02 08/31/07 10/22/07
% rent 1996 $0 $0 $0 $0
% rent 1997 $0 $0 $0 $0
Sales Vol 1993 ($K) n/a $1,177 $466 $514
Sales Vol 1994 n/a $1,061 $448 $503
Sales Vol 1995 n/a $1,047 $487 $477
Sales Vol 1996 n/a $125 $596 $535
Sales Vol 1997 n/a n/a $631 $606
Annualized 1998 n/a n/a $620 $685
% Rent Breakpoint n/a $1,571,166 $686,200 6% Less Rent
Avge. Chain Unit Vol. N/A $1,738,000 $786,000 $786,000
Stab. Annual % Rent $0 $0 $0 $0
DISCOUNT RATE 11.25% 9.00% 9.00% 9.00%
TERMINAL CAP. RATE 12.00% 9.75% 9.75% 9.75%
ESTIMATED VALUES $720,322 $1,005,183 $729,300 $701,382
Gross Rental Income
Year 1 $77,448 $96,910 $62,581 $67,262
Year 2 $77,448 $96,910 $62,581 $67,262
Year 3 $77,448 $96,910 $62,581 $67,262
Year 4 $85,920 $96,110 $64,667 $67,262
Year 5 $85,920 $96,110 $68,839 $67,262
Year 6 $85,920 $96,110 $68,839 $67,262
Year 7 $85,920 $96,110 $68,839 $67,262
Year 8 $85,920 $96,110 $68,839 $67,262
Year 9 $90,216 $96,110 $71,134 $67,262
Year 10 $90,216 $96,110 $75,723 $67,262
Year 11 $90,216 $96,110 $75,723 $67,262
<CAPTION>
Income Fund Fund 2 Fund 2
<S> <C> <C>
Property # 11 12
% owned 100.0% 100.0%
Unit Ref# 102-441038 102-391039
Status Occupied Occupied
Concept KFC Jack's H
Operator Fields Fast Foods, Inc. Manna Enterprises, Inc.
City Bay City, TX Oxford, AL
Date Acquired 10/09/87 02/18/88
Building SF 2,510 3,062
Investment Type L&B L&B
Lease Expiration 10/08/07 05/18/98
% rent 1996 $0 $2,797
% rent 1997 $0 $362
Sales Vol 1993 ($K) $647 $507
Sales Vol 1994 $615 $768
Sales Vol 1995 $608 $831
Sales Vol 1996 $598 $800
Sales Vol 1997 $583 $763
Annualized 1998 $591 $770
% Rent Breakpoint $647,534 $750,000
Avge. Chain Unit Vol. $786,000 N/A
Stab. Annual % Rent $0 $1,500
DISCOUNT RATE 9.00% 11.00%
TERMINAL CAP. RATE 9.75% 11.75%
ESTIMATED VALUES $570,375 $458,067
Gross Rental Income
Year 1 $54,736 $43,200
Year 2 $54,736 $43,200
Year 3 $54,736 $43,200
Year 4 $54,736 $43,200
Year 5 $54,736 $48,534
Year 6 $54,736 $51,840
Year 7 $54,736 $51,840
Year 8 $54,736 $51,840
Year 9 $54,736 $51,840
Year 10 $54,736 $58,241
Year 11 $54,736 $62,208
</TABLE>
<PAGE>
Fully Owned Properties
- ----------------------
<TABLE>
<CAPTION>
Income Fund Fund 2 Fund 2 Fund 2 Fund 2
<S> <C> <C> <C> <C>
Property # 13 14 15 16
% owned 100.0% 100.0% 100.0% 100.0%
Unit Ref# 102-581040 102-581041 102-581042 102-581046
Status Occupied Occupied Occupied Occupied
Concept Pizza Hut Pizza Hut Pizza Hut Pizza Hut
Operator La Raza Pizza, Inc. La Raza Pizza, Inc. Progressive Pizza Partners, L.P. La Raza Pizza, Inc.
City Childress, TX Clayton, NM Coleman, TX Santa Rosa, NM
Date Acquired 08/17/87 08/13/87 12/30/87 08/14/87
Building SF 2,164 2,906 1,860 2,624
Investment Type L&B L&B L&B L&B
Lease Expiration 08/16/07 08/12/07 12/29/07 08/13/07
% rent 1996 $5,579 $2,716 $6,319 $1,769
% rent 1997 $5,864 $1,772 $3,560 $1,075
Sales Vol 1993 ($K) $399 $337 $433 $260
Sales Vol 1994 $381 $328 $455 $281
Sales Vol 1995 $412 $363 $481 $308
Sales Vol 1996 $439 $319 $441 $300
Sales Vol 1997 $420 $338 $387 $291
Annualized 1998 $377 $386 $345 $306
% Rent Breakpoint $292,819 $269,712 $289,181 $258,698
Avge. Chain Unit Vol. $630,000 $630,000 $630,000 $630,000
Stab. Annual % Rent $5,000 $4,000 $4,500 $2,000
DISCOUNT RATE 8.75% 8.75% 8.75% 8.75%
TERMINAL CAP. RATE 9.50% 9.50% 9.50% 9.50%
ESTIMATED VALUES $303,112 $340,097 $289,398 $311,039
Gross Rental Income
Year 1 $24,660 $28,860 $23,760 $27,663
Year 2 $24,660 $28,860 $23,760 $27,663
Year 3 $24,660 $28,860 $23,760 $27,663
Year 4 $24,660 $28,860 $23,760 $27,663
Year 5 $24,660 $28,860 $23,760 $27,663
Year 6 $24,660 $28,860 $23,760 $27,663
Year 7 $24,660 $28,860 $23,760 $27,663
Year 8 $24,660 $28,860 $23,760 $27,663
Year 9 $24,660 $28,860 $23,760 $27,663
Year 10 $24,660 $28,860 $23,760 $27,663
Year 11 $24,660 $28,860 $23,760 $27,663
<CAPTION>
Income Fund Fund 2 Fund 2
<S> <C> <C>
Property # 17 18
% owned 100.0% 100.0%
Unit Ref# 102-621047 102-471048
Status Occupied Occupied
Concept Ponderosa Lone Star
Operator Scott County Restaurants, Inc. Lone Star Steakhouse & Saloon of Michigan
City Scottsburg, IN Sterling Heights, MI
Date Acquired 10/29/87 08/07/87
Building SF 5,954 6,159
Investment Type L&B L&B
Lease Expiration 02/28/08 10/31/99
% rent 1996 $0 $0
% rent 1997 $0 $0
Sales Vol 1993 ($K) $1,125 n/a
Sales Vol 1994 $1,071 $513
Sales Vol 1995 $1,008 $2,481
Sales Vol 1996 $1,004 $2,302
Sales Vol 1997 $1,025 $2,204
Annualized 1998 $1,133 $1,935
% Rent Breakpoint $1,145,561 N/A
Avge. Chain Unit Vol. $1,250,000 $2,270,000
Stab. Annual % Rent $0 $0
DISCOUNT RATE 10.00% 9.75%
TERMINAL CAP. RATE 10.75% 10.50%
ESTIMATED VALUES 827,725 $1,054,611
Gross Rental Income
Year 1 $87,500 $86,100
Year 2 $87,500 $96,600
Year 3 $87,500 $96,600
Year 4 $87,500 $96,600
Year 5 $87,500 $96,600
Year 6 $87,500 $108,675
Year 7 $87,500 $111,090
Year 8 $87,500 $111,090
Year 9 $87,500 $111,090
Year 10 $87,500 $111,090
Year 11 $87,500 $124,976
</TABLE>
<PAGE>
Fully Owned Properties
- ----------------------
<TABLE>
<CAPTION>
Income Fund Fund 2 Fund 2 Fund 2 Fund 2
<S> <C> <C> <C> <C>
Property # 19 20 21 22
% owned 100.0% 100.0% 100.0% 100.0%
Unit Ref# 102-641049 102-641050 102-641051 102-641052
Status Occupied Occupied Occupied Occupied
Concept Popeye's Popeye's Popeye's Popeye's
Operator Restaurant Management Restaurant Management Restaurant Management Restaurant Management
Services, Inc. Services, Inc. Services, Inc. Services, Inc.
City Altamonte Spr, FL Apopka, FL Ocala, FL Sanford, FL
Date Acquired 02/11/87 09/30/87 02/11/87 06/28/87
Building SF 2,361 2,864 3,008 2,842
Investment Type L&B L&B L&B L&B
Lease Expiration 07/31/03 01/18/08 10/23/00 06/28/07
% rent 1996 $0 $0 $14,831 $0
% rent 1997 $0 $0 $23,041 $0
Sales Vol 1993 ($K) $857 $714 $1,222 $620
Sales Vol 1994 $819 $688 $1,260 $653
Sales Vol 1995 $779 $683 $1,318 $685
Sales Vol 1996 $796 $709 $1,330 $645
Sales Vol 1997 $757 $716 $1,507 $661
Annualized 1998 $771 $783 $1,489 $660
% Rent Breakpoint 5.5% Less Rent 6% Less Rent 5% Less Rent $1,200,000
Avge. Chain Unit Vol. $826,000 $826,000 $826,000 $826,000
Stab. Annual % Rent $0 $0 $22,000 $0
DISCOUNT RATE 9.75% 9.75% 9.75% 9.75%
TERMINAL CAP. RATE 10.50% 10.50% 10.50% 10.50%
ESTIMATED VALUES $487,344 $607,131 $659,174 $623,256
Gross Rental Income
Year 1 $50,400 $62,739 $50,899 $64,400
Year 2 $50,400 $62,739 $50,899 $64,400
Year 3 $50,400 $62,739 $50,899 $64,400
Year 4 $50,400 $62,739 $50,899 $64,400
Year 5 $50,400 $62,739 $50,899 $64,400
Year 6 $50,400 $62,739 $50,899 $64,400
Year 7 $50,400 $62,739 $50,899 $64,400
Year 8 $50,400 $62,739 $50,899 $64,400
Year 9 $50,400 $62,739 $50,899 $64,400
Year 10 $50,400 $62,739 $50,899 $64,400
Year 11 $50,400 $62,739 $50,899 $64,400
<CAPTION>
Income Fund Fund 2 Fund 2
<S> <C> <C>
Property # 23 24
% owned 100.0% 100.0%
Unit Ref# 102-991053 102-991054
Status Occupied Occupied
Concept Little House Great Clips
Operator Hoa Thai Nguyen Michael J. &
Pamela J. Broad
City Littleton, CO Lombard, IL
Date Acquired 10/07/87 09/30/87
Building SF 1,417 1,288
Investment Type L&B L&B
Lease Expiration 01/02/00 02/28/07
% rent 1996 $0 $0
% rent 1997 $0 $0
Sales Vol 1993 ($K) n/a n/a
Sales Vol 1994 n/a n/a
Sales Vol 1995 n/a n/a
Sales Vol 1996 n/a n/a
Sales Vol 1997 n/a n/a
Annualized 1998 n/a n/a
% Rent Breakpoint N/A N/A
Avge. Chain Unit Vol. N/A N/A
Stab. Annual % Rent $0 $0
DISCOUNT RATE 11.50% 11.00%
TERMINAL CAP. RATE 12.25% 11.75%
ESTIMATED VALUES $145,884 $143,290
Gross Rental Income
Year 1 $14,170 $8,640
Year 2 $17,713 $9,935
Year 3 $17,713 $18,566
Year 4 $17,713 $18,672
Year 5 $17,713 $18,672
Year 6 $17,713 $18,672
Year 7 $18,598 $18,672
Year 8 $18,598 $18,672
Year 9 $18,598 $18,672
Year 10 $18,598 $18,672
Year 11 $18,598 $18,672
</TABLE>
<PAGE>
Fully Owned Properties
- ----------------------
<TABLE>
<CAPTION>
Income Fund Fund 2 Fund 2 Fund 2
<S> <C> <C> <C>
Property # 25 26 27
% owned 100.0% 100.0% 100.0%
Unit Ref# 102-931057 102-931058 102-421600
Status Occupied Occupied Occupied/Sublease
Concept Wendy's Wendy's Whataburger
Operator WenOne, Inc. Wend Vail Partnership, Ltd. Foodmaker, Inc.
City Gainesville, TX Vail, CO Lubbock, TX
Date Acquired 03/15/89 04/01/87 07/27/93
Building SF 2,680 3,989 2,811
Investment Type L&B L&B L&B
Lease Expiration 10/19/06 03/31/07 06/25/12
% rent 1996 $0 $0 $0
% rent 1997 $0 $0 $0
Sales Vol 1993 ($K) $783 $1,164 n/a
Sales Vol 1994 $862 $1,232 n/a
Sales Vol 1995 $838 $1,244 n/a
Sales Vol 1996 $789 $1,205 n/a
Sales Vol 1997 $724 $987 n/a
Annualized 1998 $762 $1,076 n/a
% Rent Breakpoint $700,000 $1,500,000 n/a
Avge. Chain Unit Vol. $1,042,000 $1,042,000 $886,000
Stab. Annual % Rent $5,000 $0 $0
DISCOUNT RATE 8.75% 9.75% 9.00%
TERMINAL CAP. RATE 9.50% 9.75% 9.75%
ESTIMATED VALUES $745,088 $1,492,844 $795,038
Gross Rental Income
Year 1 $57,600 $150,000 $68,837
Year 2 $59,040 $150,000 $68,837
Year 3 $66,240 $150,000 $68,837
Year 4 $66,240 $150,000 $68,837
Year 5 $66,240 $150,000 $71,705
Year 6 $66,240 $150,000 $75,721
Year 7 $67,896 $150,000 $75,721
Year 8 $67,896 $150,000 $75,721
Year 9 $67,896 $150,000 $75,721
Year 10 $67,896 $150,000 $78,876
Year 11 $67,896 $150,000 $83,293
<CAPTION>
Income Fund Fund 2 Fund 2
<S> <C> <C>
Property # 28 29
% owned 100.0% 100.0%
Unit Ref# 102-181823 102-181824
Status Occupied Occupied
Concept Checkers Checkers
Operator Checkers Drive-In Restaurants, Inc. Checkers Drive-In Restaurants, Inc.
City Atlanta, GA Fayetteville, GA
Date Acquired 12/08/94 12/08/94
Building SF 700 700
Investment Type Land Land
Lease Expiration 12/07/14 12/07/14
% rent 1996 $0 $0
% rent 1997 $0 $0
Sales Vol 1993 ($K) n/a n/a
Sales Vol 1994 n/a n/a
Sales Vol 1995 $671 $716
Sales Vol 1996 $475 $579
Sales Vol 1997 $416 $468
Annualized 1998 $463 $471
% Rent Breakpoint $1,300,000 $1,300,000
Avge. Chain Unit Vol. $661,000 $661,000
Stab. Annual % Rent $0 $0
DISCOUNT RATE 10.00% 10.00%
TERMINAL CAP. RATE N/A N/A
ESTIMATED VALUES $393,189 $407,475
Gross Rental Income
Year 1 $33,067 $35,416
Year 2 $37,035 $39,666
Year 3 $37,035 $39,666
Year 4 $37,035 $39,666
Year 5 $37,035 $39,666
Year 6 $37,035 $39,666
Year 7 $41,480 $44,425
Year 8 $41,480 $44,425
Year 9 $41,480 $44,425
Year 10 $41,480 $44,425
Year 11 $371,793 $365,698
</TABLE>
<PAGE>
Joint Venture Properties
- ------------------------
(Income Fund 2)
<TABLE>
<CAPTION>
Income Fund JV Fund 2,xt JV Funds 2,4 JV Funds 2,6
<S> <C> <C> <C>
Property # 3 4 5
% owned 50.0% 49.0% 64.0%
Unit Ref# 304-581044 305-251059 306-262510
Status Occupied Occupied Occupied
Concept Pizza Hut Denny's Darryl's
Operator Semoran Management Corporation Denny's, Inc. Houlihan's Restaurants, Inc.
City Orlando, FL Holland, MI Greensboro, NC
Date Acquired 10/15/87 10/30/87 06/11/97
Building SF 2,466 5,837 7,632
Investment Type L&B L&B L&B
Lease Expiration 10/14/07 08/31/13 06/10/17
% rent 1996 $0 $0 $0
% rent 1997 $0 $0 $0
Sales Vol 1993 ($K) $1,049 $1,083 n/a
Sales Vol 1994 $868 $1,205 n/a
Sales Vol 1995 $823 $1,203 n/a
Sales Vol 1996 $773 $1,315 n/a
Sales Vol 1997 $705 $1,437 $569
Annualized 1998 $766 $1,401 $1,221
Avge. Chain Unit Vol. $630,000 $1,193,000 N/A
Stab. Annual % Rent $0 $0 $0
DISCOUNT RATE 8.75% 10.00% 9.50%
TERMINAL CAP. RATE 9.50% 10.75% 10.25%
ESTIMATED VALUES $378,729 $582,331 $583,620
VALUE AFTER PARTIAL INTEREST DISCOUNT $378,729 $582,331 $583,620
Gross Rental Income
Year 1 $70,756 $119,000 $82,323
Year 2 $70,756 $119,000 $82,323
Year 3 $70,756 $119,000 $82,323
Year 4 $70,756 $119,000 $86,439
Year 5 $70,756 $120,667 $90,555
Year 6 $70,756 $124,000 $90,555
Year 7 $70,756 $124,000 $90,555
Year 8 $70,756 $124,000 $90,555
Year 9 $70,756 $124,000 $95,083
Year 10 $70,756 $127,333 $99,611
Year 11 $70,756 $134,000 $99,611
<CAPTION>
Income Fund JV Funds 2,13 JV Funds 2,5 JV Funds 2,7
<S> <C> <C> <C>
Property # 42 53 54
% owned 33.9% 57.8% 47.0%
Unit Ref# 331-741784 343-112749 344-362782
Status Occupied Occupied Occupied
Concept Arby's BM GC
Operator The Bailey Company Boston Chicken, Inc. Golden Corral Corporation
City Arvada, CO Mesa, AZ Smithfield, NC
Date Acquired 09/22/94 10/23/97 12/23/97
Building SF 3,477 2,878 9,856
Investment Type L&B L&B L&B
Lease Expiration 09/17/16 06/10/12 12/31/12
% rent 1996 $0 $0 $0
% rent 1997 $0 $0 $0
Sales Vol 1993 ($K) n/a n/a n/a
Sales Vol 1994 n/a n/a n/a
Sales Vol 1995 n/a n/a n/a
Sales Vol 1996 n/a n/a n/a
Sales Vol 1997 $914 $818 $593
Annualized 1998 $913 $856 $2,731
Avge. Chain Unit Vol. $690,000 $1,030,000 $1,738,000
Stab. Annual % Rent $0 $0 $7,500
DISCOUNT RATE 9.00% 11.50% 9.00%
TERMINAL CAP. RATE 9.75% 12.25% 9.75%
ESTIMATED VALUES $377,265 $602,796 $787,850
VALUE AFTER PARTIAL INTEREST DISCOUNT $377,265 $602,796 $787,850
Gross Rental Income
Year 1 $89,992 $113,837 $152,673
Year 2 $94,961 $113,837 $152,673
Year 3 $94,961 $113,837 $152,673
Year 4 $96,742 $118,581 $152,673
Year 5 $102,083 $125,221 $152,673
Year 6 $102,083 $125,221 $152,673
Year 7 $103,997 $125,221 $152,673
Year 8 $109,739 $125,221 $152,673
Year 9 $109,739 $130,439 $152,673
Year 10 $111,797 $137,743 $152,673
Year 11 $117,970 $137,743 $152,673
<CAPTION>
Income Fund JV Funds 1,2,5,6 JV Funds 2,3,6 JV Funds 2,6,16
<S> <C> <C> <C>
Property # 56 57 58
% owned 37.0% 39.4% 13.4%
Unit Ref# 346-192800 347-412803 348-412809
Status Occupied Occupied Occupied
Concept Chevy's IHOP IHOP
Operator Chevys, Inc. IHOP Properties, Inc. IHOP Properties, Inc.
City Vancouver, WA Overland Park, KS Memphis, TN
Date Acquired 12/31/97 01/05/98 01/13/98
Building SF 7,390 3,444 4,688
Investment Type L&B L&B L&B
Lease Expiration 12/31/12 01/04/18 01/12/18
% rent 1996 $0 $0 $0
% rent 1997 $0 $0 $0
Sales Vol 1993 ($K) n/a n/a n/a
Sales Vol 1994 n/a n/a n/a
Sales Vol 1995 n/a n/a n/a
Sales Vol 1996 n/a n/a n/a
Sales Vol 1997 n/a n/a n/a
Annualized 1998 $2,220 $990 $2,252
Avge. Chain Unit Vol. $2,265,000 $1,248,000 $1,248,000
Stab. Annual % Rent $0 $0 $0
DISCOUNT RATE 9.00% 9.50% 9.50%
TERMINAL CAP. RATE 9.75% 10.25% 10.25%
ESTIMATED VALUES $959,475 $708,590 $225,727
VALUE AFTER PARTIAL INTEREST DISCOUNT $959,475 $708,590 $225,727
Gross Rental Income
Year 1 $222,849 $163,201 $152,874
Year 2 $222,849 $163,201 $152,874
Year 3 $222,849 $163,201 $152,874
Year 4 $222,849 $163,201 $152,874
Year 5 $245,133 $178,161 $166,888
Year 6 $245,133 $179,521 $168,162
Year 7 $245,133 $179,521 $168,162
Year 8 $245,133 $179,521 $168,162
Year 9 $245,133 $179,521 $168,162
Year 10 $269,647 $195,977 $183,577
Year 11 $269,647 $197,473 $184,978
</TABLE>
<PAGE>
Fund II
Page 16
LIQUIDATION VALUE
In addition to estimating the Market Value of the income fund as requested by
the client we have also estimated the Liquidation Value. Moreover, and for
clarification, we have explored the concept of Disposition Value which relates
closely to the other concepts. The definitions of these classifications of value
are as follows:
1. Market Value: the most probable price which a specified interest in real
property is likely to bring under all the following conditions:
- Consummation of a sale as of a specified date.
- Open and competitive market for the property interest appraised.
- Buyer and seller each acting prudently and knowledgeably.
- Price not affected by undue stimulus.
- Buyer and seller typically motivated.
- Both parties acting in what they consider their best interest.
- Adequate marketing efforts made and a reasonable time allowed for
exposure in the open market.
- Payment made in cash in U.S. dollars or in terms of financial
arrangements comparable thereto.
- Price represents the normal consideration for the property sold,
unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.
2. Disposition Value: the most probable price which a specified interest in
real property is likely to bring under all of the following conditions:
- Consummation of a sale within a limited future marketing period
specified by the client.
- Current actual market conditions for the property interest
appraised.
- The buyer and seller are each acting prudently and knowledgeably.
- The seller is under compulsion to sell.
- The buyer is typically motivated.
- Both parties are acting in what they consider their best interests.
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE>
Fund II
Page 17
- Adequate marketing effort will be made in the limited time allowed
for completion of a sale.
- Payment will be made in cash in U.S. dollars or in terms of
financial arrangements comparable thereto.
- The price represents the normal consideration for the property sold,
unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.
3. Liquidation Value: the most probable price which a specified interest in
real property is likely to bring under all of the following conditions:
- Consummation of a sale within a severely limited future marketing
period specified by the client.
- Current actual market conditions for the property interest
appraised.
- The buyer is acting prudently and knowledgeably.
- The seller is under extreme compulsion to sell.
- The buyer is typically motivated.
- The buyer is acting in what he or she considers his or her best
interests.
- A limited marketing effort made and limited time allowed for the
completion of sale.
- Payments will be made in cash in U.S. dollars or in terms of
financial arrangements comparable thereto.
- The price represents the normal consideration for the property sold,
unaffected by special or creative financing or sales concessions
granted by anyone associated with the sale.
As noted above, Market Value implies "the most probable price which a property
should bring in a competitive and open market under all conditions requisite to
a fair sale, the buyer and seller each acting prudently, knowledgeably, and
assuming the price is not affected by undue stimulus." Under this definition,
both parties are typically motivated. Each party is well advised and well
informed and each is acting in what they consider their own best interests. A
reasonable time is allowed for exposure in the open market.
COMPLETE APPRAISAL - RESTRICTED REPORT
<PAGE> 
