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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-15581
CNL AMERICAN PROPERTIES FUND, INC.
(Exact name of registrant as specified in its charter)
Florida 59-3239115
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
450 South Orange Avenue
Orlando, Florida 32801
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (407) 540-2000
Securities registered pursuant to Section 12 (b) of the Act:
Title of each class: Name of exchange on which registered:
None Not Applicable
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $0.01 par value per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
Aggregate market value of the voting stock held by nonaffiliates of the
registrant: The registrant has made three offerings of Shares of common stock
(the "Shares") on Form S-11 under the Securities Act of 1933, as amended. The
number of Shares held by non-affiliates as of March 19, 2000 was 37,335,919.
Since no established market for such Shares exists, there is no market value for
such Shares. Each Share was originally sold at $20 per Share.
The number of Shares of common stock outstanding as of March 29, 2000
was 43,495,919.
DOCUMENTS INCORPORATED BY REFERENCE:
Registrant incorporates by reference portions of the CNL American
Properties Fund, Inc. Definitive Proxy Statement for the 2000 Annual Meeting of
Stockholders (Items 10, 11, 12 and 13 of Part III) to be filed no later than
April 29, 2000.
PART I
Item 1. Business
CNL American Properties Fund, Inc. is a real estate investment trust,
or REIT. The term "Company" includes, unless the context otherwise requires, CNL
American Properties Fund, Inc. and its direct and indirect subsidiaries. These
subsidiaries include CNL APF Partners, LP, a Delaware limited partnership formed
in May 1998, and CNL APF GP Corp. and CNL APF LP Corp., the general and limited
partner, respectively, of CNL APF Partners, LP. As a result of the merger on
September 1, 1999 (see "Mergers"), subsidiaries also include CNL Fund Advisors,
Inc., CNL Financial GP Holding Corp., CNL Financial LP Holding, LP, CNL
Financial Services GP Corp. and CNL Financial Services, LP.
The Company provides a complete range of financial, development and
other real estate services to operators of national and regional restaurant
chains. The Company'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 customers with financing options, such as
triple-net leasing, mortgage loans and secured equipment financing, makes the
Company a preferred provider for all of the real estate related business needs
of operators of national and regional restaurant chains.
The Company was formed in May 1994, at which time it received initial
capital contributions of $200,000 for 10,000 Shares of common stock ("Shares").
Since inception, the Company has completed three separate public offerings of
Shares of common stock. The Company received the final proceeds of $210,736 from
its third public offering of common stock in January 1999, at which point the
Company had received aggregate subscription proceeds from its three offerings of
$747,464,420 (37,373,221 Shares), including $5,572,261 (278,613 Shares) issued
through the Company's reinvestment plan. Net proceeds to the Company from its
three offerings and the initial capital contributions, after deduction of stock
issuance costs, totaled $670,351,200, all of which have been invested in
Properties or Mortgage Loans.
On May 27, 1999, the stockholders approved a one-for-two reverse split
of common stock that was effective on June 3, 1999 with the filing of the
amended Articles of Incorporation with the Maryland Department of Assessments
and Taxation. In connection with the reverse split of common stock, the Company
elected to retire 2,545 fractional Shares ($50,891). All share and per share
amounts have been restated herein to reflect the one-for-two reverse stock
split.
As of December 31, 1999, the Company had total assets of over $1.1
billion and a portfolio consisting of investments in 661 restaurant properties.
Generally, the real estate (the "Properties") owned by the Company consist of
land and buildings subject to long-term (generally, 15 to 20 years, plus renewal
options for an additional 10 to 20 years), triple-net leases. Triple-net leases
generally provide that the tenants bear responsibility for all of the costs and
expenses associated with the ongoing maintenance and operations of the leased
restaurant properties, including utilities, property taxes, insurance and
structural repairs. The Company structures the leases of its Properties to
provide for payment of base annual rent with (i) automatic increases in base
rent and/or (ii) percentage rent based on gross sales above a certain level.
Mortgage financing (the "Mortgage Loans") involves lending money at a specified
interest rate to owners of restaurant properties and securing that loan with a
mortgage lien on the restaurant property. Management believes that the economic
effects of the Mortgage Loans are similar to those of its leases (generally with
full repayment in 15 to 20 years). Securitizing mortgages involves bundling a
group of mortgages into an investment entity, usually a trust, and selling
securities of that entity to the public.
As of March 11, 2000, the Company owned a portfolio of 672 Properties
located across the United States which are leased to operators of certain
national and regional fast food, family-style and casual dining restaurant
chains, as described below in Item 2. Properties.
Currently, the Company's primary investment objectives are to preserve,
protect, and enhance the Company's assets, while (i) providing quarterly
distributions, (ii) providing fixed income through the receipt of base rent, as
well as increase the Company's income (and distributions) and protection against
inflation through automatic increases in base rent and receipt of percentage
rent, and fixed income through the receipt of payments from Mortgage Loans and
secured equipment leases, (iii) qualifying as a REIT for federal income tax
purposes and (iv) providing stockholders of the Company with liquidity of their
investment (although liquidity cannot be assured thereby) through listing the
Shares of the Company on the New York Stock Exchange or other national exchange
or over-the-counter market ("Listing").
The Company intends, to the extent consistent with the Company's
objective of qualifying as a REIT, to reinvest in additional Properties or
Mortgage Loans any proceeds of the sale of a Property or a Mortgage Loan that
are not required to be distributed to stockholders in order to preserve the
Company's REIT status for federal income tax purposes. Similarly, and to the
extent consistent with REIT qualification, the Company plans to use the proceeds
of the sale of a Secured Equipment Lease to fund additional Secured Equipment
Leases, or to reduce its outstanding indebtedness. The Company intends to
provide stockholders of the Company with liquidity of their investment, either
in whole or in part, through Listing of the Shares of the Company. If Listing
occurs, the Company intends to reinvest in additional Properties, Mortgage Loans
and Secured Equipment Leases any net sales proceeds not required to be
distributed to stockholders in order to preserve the Company's status as a REIT.
If Listing does not occur by December 31, 2005, the Company will undertake the
orderly liquidation of the Company and the sale of the Company's assets and will
distribute any net sales proceeds to stockholders. In addition, the Company will
not sell any assets if such sale would not be consistent with the Company's
objective of qualifying as a REIT.
In deciding the precise timing and terms of Property sales, the
Company, subject to the approval of the Board of Directors, will consider
factors such as national and local market conditions, potential capital
appreciation, cash flows, and federal income tax considerations. The terms of
certain leases, however, may require the Company to sell a Property at an
earlier time if the tenant exercises its option to purchase a Property after a
specified portion of the lease term has elapsed. The Company will have no
obligation to sell all or any portion of a Property at any particular time,
except as may be required under property or joint venture purchase options
granted to certain tenants. In connection with sales of Properties by the
Company, purchase money obligations may be taken by the Company as part payment
of the sales price. The terms of payment will be affected by custom in the area
in which the Property is located and prevailing economic conditions. When a
purchase money obligation is accepted in lieu of cash upon the sale of a
Property, the Company will continue to have a mortgage on the Property and the
proceeds of the sale will be realized over a period of years rather than at
closing of the sale.
The Company does not anticipate selling the Secured Equipment Leases
prior to expiration of the lease term, except in the event that the Company
undertakes orderly liquidation of its assets.
Mergers
The Company's goal is to be a leading provider of financial,
development, advisory and other real estate services to operators of national
restaurant chains. In furtherance of this goal, on September 1, 1999, the
Company became internally advised and gained complete acquisition, development
and in-house management functions by acquiring its external advisor, CNL Fund
Advisors, Inc. (the "Advisor"), through the exchange of 100% of the outstanding
Shares of common stock of the Advisor for 3.8 million Shares ($76,000,000) of
the Company's common stock. Because prior to September 1, 1999, the Company has
had no employees since its inception, the Advisor provided these functions on
behalf of the Company and was responsible for the day-to-day operations of the
Company, including raising capital, investment analysis, acquisitions, due
diligence, asset management and accounting services. The acquisition of the
Advisor also provides the Company with restaurant development capabilities
including site selection, construction management and build-to-suit development.
In addition, to increase its financing capabilities and expand its
mortgage loan portfolio, the Company acquired CNL Financial Corporation and CNL
Financial Services, Inc. which are referred to, together, as the CNL Restaurant
Financial Services Group, at the same time that it acquired the Advisor. The CNL
Restaurant Financial Services Group makes and services mortgage loans, and
securitizes a portion of such loans, to operators of national and regional
restaurant chains comparable to the restaurant chain operators that currently
are tenants of the Company. The Company acquired CNL Restaurant Financial
Services Group through the exchange of 100% of the outstanding Shares of common
stock of these entities for 2.35 million Shares ($47,000,000) of the Company's
common stock.
Upon consummation of the mergers on September 1, 1999, all employees of
the acquired entities became employees of the Company, and any obligations for
the Company to pay fees to the Advisor (such as acquisition fees and asset
management fees) under the advisory agreement between the Company and the
Advisor terminated.
Leases
As of December 31, 1999, the Company had acquired, either directly or
indirectly through joint venture arrangements, 661 Properties, which are
generally subject to long-term, triple-net leases. Although there are variations
in the specific terms of the leases, the following is a summarized description
of the general structure of the Company's leases. The leases of the Properties
owned by the Company and the joint ventures in which the Company is a
co-venturer, generally provide for initial terms ranging from 15 to 20 years and
expire between 2005 and 2024. The leases are on a triple-net basis which means
the lessee is responsible for all repairs and maintenance, property taxes,
insurance and utilities. The leases of the Properties provide for minimum base
annual rental payments (payable in monthly installments) ranging from
approximately $41,000 to $328,000. In addition, certain 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.
Generally, the leases of the Properties provide for two to five
five-year or ten-year renewal options subject to the same terms and conditions
as the initial lease. Lessees of 569 of the Company's 661 Properties also have
been granted options to purchase the Property at the Property's then fair market
value after a specified portion of the lease term has elapsed. Fair market value
will be determined through an appraisal by an independent appraisal firm. The
option purchase price may equal the Company's original cost to purchase the
Property (including acquisition costs), plus a specified percentage from the
date of the lease or a specified percentage of the Company's purchase price, if
that amount is greater than the Property's fair market value at the time the
purchase option is exercised.
The leases also generally provide that, in the event the Company wishes
to sell the Property subject to that lease, the Company first must offer the
lessee the right to purchase the Property on the same terms and conditions, and
for the same price, as any offer which the Company has received for the sale of
the Property.
In connection with the acquisition of 28 Properties acquired during
1999 that are building only, the tenant under the ground lease assigned its
leasehold interest in the premises to the Company, and in connection therewith,
the tenant, landlord under the ground lease, and Company entered into a Landlord
Estoppel and Consent Agreement pursuant to which the tenant is responsible for
all obligations under the ground lease and the Company is provided certain
rights to help protect its interest in the building in the event of a default by
the tenant under the terms of the ground lease.
During the period January 1, 2000 through March 11, 2000, the Company
acquired 11 additional Properties (seven of which are under construction). The
leases for these Properties are substantially the same as those described above.
Major Tenants
During 1999, no single lessee, borrower or restaurant chain contributed
more than ten percent of the Company's total rental, earned, investment income
and interest income relating to its Properties, Mortgage Loans, Secured
Equipment Leases and certificates. Because the Company has not completed its
investment in Properties, Mortgage Loans and Secured Equipment Leases, it is not
possible to determine which lessees, borrowers or restaurant chains will
contribute more than ten percent of the Company's rental, earned, investment
income and interest income during 2000 and subsequent years. In the event that
certain lessees, borrowers or restaurant chains contribute more than ten percent
of the Company's rental, earned, investment income and interest income in future
years, any failure of such lessees, borrowers or restaurant chains could
materially affect the Company's income. As of December 31, 1999, no single
lessee or borrower, or group of affiliated lessees or borrowers leased
Properties or was the borrower under Mortgage Loans with an aggregate carrying
value, in excess of 20 percent of total assets of the Company.
Mortgage Loans Held for Sale
The Mortgage Loans represent first mortgage loans on the land and/or
building comprising approximately $52.4 million in fixed-rate loans and
approximately $1.5 million in variable-rate loans. Variable rate construction
loans totaled approximately $9.6 million at December 31, 1999. The fixed-rate
loans carry a weighted average interest rate of 9.97%. The variable-rate loans
carry interest rates that adjust monthly based on a 30-day LIBOR plus a margin
(average interest rate was 10.5% at December 31, 1999). The Mortgage Loans are
being collected in monthly installments with maturity dates ranging from 2000 to
2019.
Secured Equipment Loans
The Company entered into several promissory notes with several
borrowers for equipment and other financing for a total of $26,470,671. The
promissory notes are collateralized by restaurant equipment. The promissory
notes bear interest at rates ranging from ten percent to 11 percent per annum
and are being collected in monthly installments with maturity dates ranging from
2000 to 2006.
Other Investments
In August 1998, the Company acquired an investment in certain franchise
loan certificates ("the 1998 Certificates") issued in connection with a mortgage
loan securitization transaction sponsored by CNL Financial Corporation, which
was an affiliate prior to its acquisition by the Company in 1999. (see
"Mergers"). In 1998, the Company classified these investments as available for
sale for accounting purposes and as of December 31, 1998 their carrying value of
$16,201,014 approximated fair value. During 1999, the Company reassessed the
classification of the 1998 Certificates and transferred the certificates from
the available for sale category to the held to maturity category.
In connection with the merger on September 1, 1999 with CNL Restaurant
Financial Services Group (see "Mergers"), the Company acquired investments in an
interest only certificate and other residual interests which are classified as
available for sale and are carried at fair market value.
In August 1999, the Company created a $500 million loan sale facility
syndicated with two third parties. This facility permits the Company to sell
loans on a regular basis to a trust at an agreed upon advance rate. The Company
retained a residual interest from loans sold as of December 31, 1999, which is
included in the accompanying consolidated balance sheet as other investments and
is classified as a trading security and carried at its estimated fair market
value.
Certain Mortgage Loans originated or purchased by the Company were
securitized in November 1999 and Franchise Loan Trust Certificates were sold to
investors. The Company retained certain subordinated investment securities,
("the 1999 Certificates"). The 1999 Certificates were recorded by allocating the
previous carrying amount of the mortgages between the assets sold and the
retained interests based on their relative fair values. Approximately $7.7
million of the 1999 Certificates are classified as available for sale and are
carried at fair market value based on estimated discounted cash flows. The
remaining balance of approximately $13.4 million of the 1999 Certificates have a
weighted average remaining term of approximately 18 years and are classified as
held to maturity.
Borrowing
Credit Facility
At December 31, 1998, the Company had a revolving $35,000,000 unsecured
line of credit with a bank which enabled the Company to receive advances to
purchase and develop Properties, to fund Mortgage Loans and to provide equipment
financing. In June 1999, the Company obtained a new unsecured revolving credit
facility in an amount up to $300,000,000 (the "Credit Facility"), which replaced
the line of credit. Interest on advances under the Credit Facility is determined
according to (i) a tiered rate structure up to a maximum rate of 200 basis
points above LIBOR (based upon the Company's overall leverage ratio) or (ii) the
lenders' prime rate plus 0.25%, whichever the Company selects at the time of
each advance. The principal balance, together with all unpaid interest, is due
in full upon termination of the facility on June 9, 2002.
Note Payable
In October 1999, the Company entered into a secured credit facility
(the "Secured Credit Facility") in the amount of $147,000,000 which will expire
in October 2002. The proceeds of the Secured Credit Facility are intended to be
used for Property acquisitions. Borrowings under the Secured Credit Facility
bear interest at the rate of commercial paper plus 56 basis points per annum.
The Secured Credit Facility is collateralized by mortgages on Properties and an
assignment of rents.
Mortgage Warehouse Facility
At December 31, 1999, the Company had a one year $300 million mortgage
warehouse facility ("Warehouse Facility"). The Warehouse Facility provides the
Company the ability to provide mortgage financing to restaurant franchisees and
periodically securitize the loans through the securitization market. The
facility bears interest at a rate of LIBOR plus 95 basis points per annum.
Competition
The fast-food, family-style and casual dining restaurant business is
characterized by intense competition. The operators of the restaurants located
on the Company's Properties 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 people tend to return
frequently and within which they can diversify their eating habits, because in
many cases local competition may enhance the restaurant's success instead of
detracting from it. Fast-food, family-style and casual dining restaurants
frequently experience better operating results when there are other restaurants
in the same area.
The Company will be competing with other persons and entities both to
locate suitable Properties to acquire and to locate purchasers for its
Properties. The Company also will compete with other financing sources such as
banks, mortgage lenders and sale/leaseback companies for suitable tenants for
its Properties, borrowers for its Mortgage Loans and lessees and borrowers for
its Secured Equipment Leases.
Employees
As of December 31, 1999, the Company had 133 associates.
Item 2. Properties
As of December 31, 1999, the Company owned, either directly or
indirectly through joint venture arrangements, 661 Properties, located in 40
states. Reference is made to the Schedule of Real Estate and Accumulated
Depreciation filed with this report for a listing of the Properties and their
respective costs, including acquisition fees and certain acquisition expenses.
As of December 31, 1999, the Company owned 613 of the 661 Properties in
fee simple and three properties through joint venture arrangements.
As of December 31, 1999, 45 of the 661 Properties owned by the Company
consisted of building only. The Company does not own the underlying land. In
connection with the acquisition of each of these Properties, the Company entered
into either a tri-party agreement with the tenant and the owner of the land or
an assignment of interest in the ground lease with the landlord, as described in
Item 1. Business-Leases.
As of December 31, 1999 the Company had pledged 130 Properties as
collateral related to the Secured Credit Facility.
During the period January 1, 2000 through March 11, 2000, the Company
acquired 11 additional Properties (seven of which were under construction), for
cash at a total cost of approximately $10,500,000, excluding development costs
and certain acquisition expenses. The leases of these Properties are
substantially the same as the leases described in Item 1. Business -- Leases.
The Company currently is negotiating to acquire additional properties,
but as of March 11, 2000, had not acquired any such properties.
Description of Properties
Land. The Company's Property lot sizes range from approximately 4,000
to 199,000 square feet depending upon building size and local demographic
factors. Sites purchased by the Company are in locations zoned for commercial
use which have been reviewed for traffic patterns and volume.
The following table lists the Properties owned by the Company as of
December 31, 1999 by state. More detailed information regarding the location of
the Properties is contained in the Schedule of Real Estate and Accumulated
Depreciation filed with this report.
Total Number of
State Restaurant Properties
Alabama 22
Arizona 20
California 36
Colorado 12
Connecticut 1
Delaware 1
Florida 80
Georgia 23
Idaho 3
Illinois 25
Indiana 10
Iowa 6
Kansas 13
Kentucky 9
Louisiana 10
Maryland 9
Michigan 16
Minnesota 11
Mississippi 8
Missouri 32
Nebraska 3
Nevada 4
New Hampshire 2
New Jersey 7
New Mexico 4
New York 4
North Carolina 22
Ohio 55
Oklahoma 10
Oregon 7
Pennsylvania 9
Rhode Island 1
South Carolina 13
Tennessee 38
Texas 83
Utah 4
Virginia 20
Washington 13
West Virginia 12
Wisconsin 3
=======
TOTAL PROPERTIES 661
=======
Buildings. The buildings generally are rectangular and are constructed
from various combinations of stucco, steel, wood, brick and tile. Building sizes
range from approximately 1,300 to 12,700 square feet. Generally, buildings on
Properties owned by the Company are freestanding and are surrounded by paved
parking areas. Buildings are suitable for conversion to various uses, although
modifications may be required prior to use for other than restaurant operations.
As of December 31, 1999, 45 of the Company's Properties were under construction
or renovation. As of December 31, 1999, the Company had no plans for renovations
of its remaining 616 Properties. Depreciation expense is computed for buildings
and improvements using the straight-line method using a depreciable life of 39
years for federal income tax purposes. As of December 31, 1999, the aggregate
cost basis of the Properties owned by the Company (including Properties owned
through joint ventures) for federal income tax purposes was $452,349,747.
The following table lists the Properties owned by the Company as of
December 31, 1999 by restaurant chain.
Restaurant Chain Number of Properties
Golden Corral 48
Jack in the Box 65
Bennigan's 27
IHOP 46
Steak & Ale 20
Boston Market 23
Darryl's 15
Applebee's 16
Black-Eyed Pea 26
Pollo Tropical 11
Arby's 38
Chevy's Fresh Mex 26
Ground Round 13
Burger King 36
Big Boy 29
Denny's 15
Other 207
=====
TOTAL: 661
=====
Management considers the Properties to be well-maintained and
sufficient for the Company's operations.
Management believes that the Properties are adequately covered by
insurance. In addition, the Company has obtained contingent liability and
property coverage. This insurance is intended to reduce the Company's exposure
in the unlikely event a tenant's insurance policy lapses or is insufficient to
cover a claim relating to the Property.
Leases. The Company leases the Properties to operators of selected
national and regional fast-food restaurant chains. The leases are generally on a
long-term "triple net" basis, meaning that the tenant is responsible for
repairs, maintenance, property taxes, utilities and insurance. Generally, a
lessee is required, under the terms of its 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, if
applicable, under the franchise agreement to reflect the current commercial
image of its restaurant chain. These capital expenditures are required to be
paid by the lessee during the term of the lease. The terms of the leases of the
Properties owned by the Company are described in Item 1. Business - Leases.
At December 31, 1999, 1998, 1997, 1996 and 1995, the Properties were
97%, 99%, 100%, 100% and 100% occupied, respectively. The following is a
schedule of the average rent per Property for the years ended December 31:
1999 1998 1997 1996 1995
-------------- -------------- --------------- ------------- -------------
Rental Revenues (1) $61,907,812 $33,129,661 $15,490,615 $ 4,357,298 $ 539,776
Properties (2) 642 408 244 94 18
Average Rent Per Property $ 96,430 $ 81,200 $ 63,486 $ 46,354 $ 29,988
(1) Rental income includes the Company's share of rental income from the
Properties owned through joint venture arrangements. Rental revenues have
been adjusted, as applicable, for any amounts for which the Company has
established an allowance for doubtful accounts. Rents do not include
Properties under construction at December 31, 1999.
(2) Excludes Properties that were vacant at December 31 and that did not
generate rental revenues during the year.
The following table lists Properties owned by the Company as of
December 31, 1999 by tenant and includes average age of buildings, annualized
total rental revenue and percent of total revenue. To calculate annualized total
rental revenue the Company used, for each restaurant Property owned and leased
at December 31, 1999, the monthly rental revenue, for that Property and
multiplied that number by 12 to present the annualized rental revenues for a 12
month period. The Company has not included any contingent rental income in the
calculation of annualized total rental revenue.
Total Number
of
Restaurant Average Age Annualized Percent of
Properties of Buildings Total Rental Total Rental
Tenant (1) (years) Revenue(2) Revenue
-------------- -------------- ------------- --------------
S&A Properties Corporation 42 17.4 7,838,068 10.6%
Jack in the Box Inc. (formerly Foodmaker, Inc.) 57 1.8 7,367,459 10.0%
Golden Corral Corporation 40 1.6 5,743,081 7.8%
IHOP Corp. 46 2.5 5,490,191 7.4%
Houlihan's Restaurants, Inc 20 19.4 3,221,535 4.4%
Woodland Group, Inc. 10 4.4 1,607,326 2.2%
Chevy's, Inc. 26 1.4 6,386,685 8.6%
Phoenix Restaurant Group 32 5.8 3,658,424 4.9%
Boston Chicken, Inc 16 2.4 2,021,114 2.7%
Carrols Corporation 14 6.5 2,127,135 2.9%
RTM, Inc. 26 2.5 2,023,786 2.7%
Vicorp Restaurants, Inc. 14 18.1 2,086,908 2.8%
Burger King Corporation 14 18.1 1,463,217 2.0%
Other 285 6.9 $22,989,674 31.0%
----- ------------- ----------
Total 642 $74,024,603 100.0%
===== ============= ==========
(1) Excludes Properties that were vacant at December 31, 1999 and that did not
generate rental revenues during the year.
(2) The Company has straight-lined the contractual increases in rental income
over the life of each of the leases in order to calculate rental revenue in
accordance with generally accepted accounting principles.
The following table shows the aggregate number of leases in the
Company's Property portfolio which expire each calendar year through the year
2014, as well as the number of leases which expire after December 31, 2014. The
table does not reflect the exercise of any of the renewal options provided to
the tenant under the terms of such leases.
Base Rent
--------------------------------------------
Year Number (3) Amount(1) Percent
---- ------------------ ------------------ -------------------
2000 -- $ -- --
2001 -- -- --
2002 2 209,635 0.3%
2003 1 63,663 0.1%
2004 1 67,225 0.1%
2005 8 892,500 1.2%
2006 7 621,115 0.8%
2007 -- -- --
2008 2 140,190 0.2%
2009 2 56,633 0.1%
2010 9 943,940 1.3%
2011 23 3,199,740 4.3%
2012 39 5,281,189 7.1%
2013 47 5,501,891 7.4%
2014 109 11,948,792 16.1%
Thereafter 406 45,098,090 61.0%
--------- --------------- ----------
Total (2) 656 $74,024,603 100.0%
========= =============== ==========
(1) The Company has straight-lined the contractual increases in rental income
over the life of each of the leases in order to calculate rental revenue in
accordance with generally accepted accounting principles.
(2) The number of leases and base rent exclude leases of five Properties with
aggregate original base rental income of $459,295 for which the leases have
been terminated. Base rent also excludes base rental income attributable to
45 Properties under construction at December 31, 1999.
(3) Includes 14 Properties for which the Company did not receive rental
payments during the year ended December 31, 1999.
Item 3. Legal Proceedings
On May 11, 1999, four limited partners in several CNL Income Funds
served a derivative and purported class action lawsuit filed April 22, 1999
against the general partners of the CNL Income Funds and APF in the Circuit
Court of the Ninth Judicial Circuit of Orange County, Florida, alleging that the
general partners breached their fiduciary duties and violated provisions of
certain of the CNL Income Fund partnership agreements in connection with the
proposed merger with the Income Funds. The plaintiffs are seeking unspecified
damages and equitable relief. On July 8, 1999, the plaintiffs filed an amended
complaint which, in addition to naming three additional plaintiffs, includes
allegations of aiding and abetting and conspiring to breach fiduciary duties,
negligence and breach of duty of good faith against certain of the defendants
and seeks additional equitable relief. As amended, the caption of the case is
Jon Hale, Mary J. Hewitt, Charles A. Hewitt, Gretchen M. Hewitt, Bernard J.
Schulte, Edward M. and Margaret Berol Trust, and Vicky Berol v. James M. Seneff,
Jr., Robert A. Bourne, CNL Realty Corporation, and CNL American Properties Fund,
Inc., Case No. CIO-99-0003561.
On June 22, 1999, a limited partner of several CNL Income Funds served
a purported class action lawsuit filed April 29, 1999 against the general
partners and APF, Ira Gaines, individually and on behalf of a class of persons
similarly situated, v. CNL American Properties Fund, Inc., James M. Seneff, Jr.,
Robert A. Bourne, CNL Realty Corporation, CNL Fund Advisors, Inc., CNL Financial
Corporation a/k/a CNL Financial Corp., CNL Financial Services, Inc. and CNL
Group, Inc., Case No. CIO-99-3796, in the Circuit Court of the Ninth Judicial
Circuit of Orange County, Florida, alleging that the general partners breached
their fiduciary duties and that APF aided and abetted their breach of fiduciary
duties in connection with the proposed merger with the Income Funds. The
plaintiff is seeking unspecified damages and equitable relief.
On September 23, 1999, Judge Lawrence Kirkwood entered an order
consolidating the two cases under the caption In re: CNL Income Funds
Litigation, Case No. 99-3561. Pursuant to this order, the plaintiffs in these
cases filed a consolidated and amended complaint on November 8, 1999. On
December 22, 1999, the General Partners and CNL Group, Inc. filed motions to
dismiss and motions to strike. On December 28, 1999, APF and CNL Fund Advisors,
Inc. filed motions to dismiss. On March 6, 2000, all of the defendants filed a
Joint Notice of Filing Form 8-K Reports and Suggestion of Mootness.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
As of March 11, 2000, there were 32,270 stockholders of record of
common stock. There is no public trading market for the Shares, and even though
the Company intends to list the Shares on the New York Stock Exchange or other
national securities exchange or over-the-counter market no later than December
31, 2005, there is no assurance that listing will occur and if listing occurs
there is no assurance that a public market for the Shares will develop. In
October 1998, the Board of Directors elected to implement the Company's
redemption plan. Under the redemption plan, the Company elected to redeem
Shares, subject to certain conditions and limitations. As of December 31, 1999,
the redemption plan was terminated. During the year ended December 31, 1998,
34,757 Shares were redeemed at $18.40 per Share ($639,528) and retired from
Shares outstanding of common stock. As of December 31, 1999, the capital
contribution per Share was $20.
The Company expects to make distributions to the stockholders pursuant
to the provisions of the Articles of Incorporation. For the years ended December
31, 1999 and 1998, the Company declared cash distributions of $60,078,825 and
$39,449,149, respectively, to stockholders. For federal income tax purposes, 97
percent and 85 percent of distributions paid in 1999 and 1998, respectively,
were considered to be ordinary income and three percent and 15 percent,
respectively, were considered to be a return of capital. No amounts distributed
to stockholders for the years ended December 31, 1999 and 1998, are required to
be or have been treated by the Company as a return of capital for purposes of
calculating the stockholders' return on their invested capital. The following
table presents total distributions and distributions per Share:
First Second Third Fourth Year
-------------- --------------- -------------- --------------- ---------------
1999 Quarter
Total distributions
declared $14,237,405 $14,238,745 $15,020,274 $16,582,401 $60,078,825
Distributions per
Share 0.38 0.38 0.38 0.38 1.52
1998 Quarter
Total distributions
declared $7,281,343 $8,711,463 $10,467,640 $12,988,703 $39,449,149
Distributions per
Share 0.38 0.38 0.38 0.38 1.52
In each of January, February and March 2000, the Company declared
distributions to stockholders of $5,527,461 ($0.12708 per Share) payable in
March 2000.
The Company intends to continue to declare distributions of cash to the
stockholders. The Company expects that future distributions will be declared on
a quarterly basis.
Item 6. Selected Financial Data
1999 1998 1997 1996 1995
---------------- ---------------- -------------- -------------- --------------
Year ended December 31:
Revenues $ 75,500,597 $ 42,187,037 $19,457,933 $ 6,206,684 $ 659,131
Net earnings/(loss) (49,837,334 ) 32,152,408 15,564,456 4,745,962 368,779
Cash distributions declared 60,078,825 39,449,149 16,854,297 5,436,072 638,618
Funds from operations (1) 44,384,300 37,348,119 17,732,888 5,355,464 471,670
Earnings/(loss) per Share (2) (1.26 ) 1.21 1.33 1.18 0.39
Cash distributions declared
per Share (2) 1.52 1.52 1.49 1.41 0.62
Weighted average number of
Shares outstanding (2)(3) 39,402,941 26,648,219 11,711,934 4,035,835 949,175
At December 31:
Total assets $1,138,192,793 $680,352,013 $339,077,762 $134,825,048 $ 33,603,084
Total stockholders' equity 672,214,104 660,810,286 321,638,101 122,867,427 31,980,648
(1) 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
("GAAP"), excluding gains or losses from debt restructuring and sales
of assets, plus depreciation and amortization of real estate assets,
plus amortization of direct financing leases and after adjustments for
unconsolidated partnerships and joint ventures, plus an addback for
non-recurring charges such as the advisor acquisition expense and
transaction costs. (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
property prior to the date it is placed in service. This
straight-lining 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 years ended December 31, 1999, 1998, 1997,
1996 and 1995, net earnings included $5,143,552, $2,734,767,
$1,941,054, $517,067 and $39,142, respectively, of these amounts.) FFO
was restated by the Company 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 the Company's
operating performance, or to cash flow from operating activities
determined in accordance with GAAP as a measure of either liquidity or
the Company's ability to make distributions. Accordingly, the Company
believes that in order to facilitate a clear understanding of the
consolidated historical operating results of the Company, FFO should be
considered in conjunction with the Company's net earnings and cash
flows as reported in the accompanying consolidated financial statements
and notes thereto. However, the Company's measure of FFO may not be
comparable to similarly titled measures of other REITS because these
REITS may not apply the definition of FFO in the same manner as the
Company.
(2) All Share and per Share amounts have been restated herein to reflect
the one-for-two reverse stock split.
(3) The weighted average number of Shares outstanding for 1995 is based
upon the period the Company was operational.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The Company
CNL American Properties Fund, Inc. is a real estate investment trust,
or REIT. The term "Company" includes, unless the context otherwise requires, CNL
American Properties Fund, Inc. and its direct and indirect subsidiaries. These
subsidiaries include CNL APF Partners, LP, a Delaware limited partnership formed
in May 1998, and CNL APF GP Corp. and CNL APF LP Corp., the general and limited
partner, respectively, of CNL APF Partners, LP. As a result of the merger on
September 1, 1999 (see "Mergers"), subsidiaries also include CNL Fund Advisors,
Inc., CNL Financial GP Holding Corp., CNL Financial LP Holding, LP, CNL
Financial Services GP Corp. and CNL Financial Services, LP.
The Company provides a complete range of financial, development and
other real estate services to operators of national and regional restaurant
chains. The Company'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 customers with financing options, such as
triple-net leasing, mortgage loans and secured equipment financing, makes the
Company a preferred provider for all of the real estate related business needs
of operators of national and regional restaurant chains.
As of December 31, 1999, the Company had total assets of over $1.1
billion and a portfolio consisting of investments in 661 restaurant properties.
Generally, the real estate (the "Properties") owned by the Company consists of
land and buildings subject to triple-net leases. Triple-net leases generally
provide that the tenants bear responsibility for all of the costs and expenses
associated with the ongoing maintenance and operations of the leased restaurant
properties, including utilities, property taxes, insurance and structural
repairs. Mortgage financing (the "Mortgage Loans") involves lending money at a
specified interest rate to owners of restaurant properties and securing that
loan with a mortgage lien on the restaurant property. Securitizing mortgages
involves bundling a group of mortgages into an investment entity, usually a
trust, and selling securities of that entity to the public.
Liquidity and Capital Resources
Common Share Offerings
The Company was formed in May 1994, at which time it received initial
capital contributions of $200,000 for 10,000 Shares of common stock. Since
inception, the Company has completed three separate public offerings of Shares
of common stock. The Company received the final proceeds of $210,736 from its
third public offering of common stock in January 1999, at which point the
Company had received aggregate subscription proceeds from its three offerings of
$747,464,420 (37,373,221 Shares), including $5,572,261 (278,613 Shares) issued
through the Company's reinvestment plan. Net proceeds to the Company from its
three offerings and the initial capital contributions, after deduction of stock
issuance costs, totaled $670,351,200, all of which have been invested in
Properties or Mortgage Loans.
On May 27, 1999, the stockholders approved a one-for-two reverse split
of common stock that was effective on June 3, 1999 with the filing of the
amended Articles of Incorporation with the Maryland Department of Assessments
and Taxation. All share and per share amounts have been restated herein to
reflect the one-for-two reverse stock split.
Debt Financing
Line of Credit
At December 31, 1998, the Company had a revolving $35,000,000 unsecured
line of credit with a bank which enabled the Company to receive advances to
provide equipment financing, to purchase and develop Properties and to fund
Mortgage Loans. In June 1999, the Company obtained a new unsecured revolving
credit facility in an amount up to $300,000,000 (the "Credit Facility"). In
connection with obtaining the amended Credit Facility, the Company incurred
commitment fees, legal fees and closing costs. Interest on advances under the
Credit Facility is determined according to (i) a tiered rate structure up to a
maximum rate of 200 basis points above LIBOR (based upon the Company's overall
leverage ratio) or (ii) the lenders' prime rate plus 0.25%, whichever the
Company selects at the time of each advance. As of December 31, 1999, the
weighted average interest rate for interest paid over the prior year was 6.99%.
The principal balance, together with all unpaid interest, is due in full upon
termination of the facility on June 9, 2002. The terms of the agreement for the
amended Credit Facility include financial covenants which provide for the
maintenance of certain financial ratios. The Company was in compliance with all
such covenants as of December 31, 1999.
The Company believes, based on current terms, that the carrying value
of its Credit Facility at December 31, 1999 and 1998 approximates fair value.
In June 1999, in connection with the amended Credit Facility, the
Company entered into an interest rate swap agreement. The purpose of the
interest rate swap agreement is to reduce the impact of changes in interest
rates on its floating rate Credit Facility. The agreement effectively changes
the Company's interest rate on $75,000,000 of the outstanding floating rate
Credit Facility to a fixed rate of 6.17% plus the spread above LIBOR on related
debt per annum, as of December 31, 1999. The Company is exposed to credit loss
in the event of nonperformance by the other party to the interest rate swap
agreement; however, the Company does not anticipate nonperformance by the
counterparty as they maintain long-term credit ratings of "A" or better, as
rated by Moody's or Standard & Poors.
The effective interest rate for the outstanding balance of $248,000,000
relating to the amended Credit Facility, as of December 31, 1999, as a result of
the impact of the interest rate swap in the amount of $75,000,000 was 7.17% per
annum.
Note Payable
In October 1999, the Company entered into a secured credit facility
(the "Secured Credit Facility") in the amount of $147,000,000 which will expire
in October 2002. The proceeds of the Secured Credit Facility are intended to be
used for property acquisitions. Borrowings under the Secured Credit Facility
bear interest at the rate of commercial paper plus 56 basis points per annum. As
of December 31, 1999, the interest rate was 6.96%. The Secured Credit Facility
is collateralized by mortgages on Properties and an assignment of rents. Under
the terms of the Secured Credit Facility, the Company is required to maintain
certain financial ratios and other financial covenants. The Company was in
compliance with all such covenants as of December 31, 1999.
Mortgage Warehouse Facility
At December 31, 1999, the Company had a one year $300 million mortgage
warehouse facility ("Warehouse Facility"). The Warehouse Facility provides the
Company the ability to provide mortgage financing to restaurant franchisees and
periodically securitize the loans through the securitization market. The
facility bears an interest rate of LIBOR plus 95 basis points per annum. As of
December 31, 1999 the interest rate was 6.77%. As of December 31, 1999, the
Company had approximately $31 million outstanding under this Warehouse Facility.
The Company believes, based on current terms, that the carrying value at
December 31, 1999 approximates fair value.
For the years ended December 31, 1999, 1998 and 1997, the Company
incurred interest costs (including amortization of loan costs) of $14,094,524,
$402,292 and $544,788, respectively, $3,889,327, $402,292 and $544,788,
respectively, of which were capitalized as part of the cost of buildings under
construction. For the years ended December 31, 1999, 1998 and 1997, the Company
paid interest of $10,937,309, $338,569 and $502,680, respectively.
Interest Rate Risk
As of December 31, 1999, the Company had $248,000,000, $140,504,000 and
$30,749,540 outstanding under its Credit Facility, Secured Credit Facility and
Warehouse Facility, respectively. The Company has exposure to interest rate risk
associated with the Credit Facility, Secured Credit Facility and Warehouse
Facility due to the variable interest rates. The Company believes this risk has
been mitigated with the interest rate swap agreements to reduce the impact of
changes in interest rates on its floating rate debt (see "Debt Financing").
The Company invests in certain financial instruments that are subject
to various forms of market risk such as interest rate fluctuations, credit risk
and prepayment risk. The Company's primary exposure is the risk of loss that may
result from the potential change in the value of its mortgage loans held for
sale and investments held for sale as a result of changes in interest rates.
Generally, from the time the fixed-rate mortgage loans are originated until the
time they are sold through a securitization transaction, the Company hedges
against fluctuations in interest rates through the use of derivative financial
instruments (primarily interest rate swap contracts). The Company terminates
certain of these contracts upon securitization of the related fixed-rate
mortgage loans and, at that time, both the gain or loss on the sale of the loans
and the gain or loss on the termination of the interest rate swap contracts will
be measured and recognized in the consolidated statement of operations. Under
interest rate swaps, the Company agrees with other parties to exchange, at
specified intervals, the difference between fixed-rate and floating-rate
interest amounts calculated by reference to an agreed upon notional principal
amount.
The Company estimates that a hypothetical one percentage point increase
in long-term interest rates at December 31, 1999 would impact the financial
instruments described above and result in a change to net earnings of
approximately $3 million. This sensitivity analysis contains certain simplifying
assumptions (for example, it does not consider the impact of changes in
prepayment risk or credit spread risk). Therefore, although it gives an
indication of the Company's exposure to interest rate changes at December 31,
1999, it is not intended to predict future results and the Company's actual
results will likely vary.
Acquisitions and Investments
During the year ended December 31, 1999, the Company used the remaining
net offering proceeds from its public offering of common stock, proceeds from
its Credit Facility and Secured Credit Facility, the net sales proceeds from the
sale of Properties and cash collected from the prepayment of Secured Equipment
Leases to acquire 258 Properties (including 45 Properties on which a restaurant
was being constructed or renovated as of December 31, 1999), to fund Mortgage
Loans and to provide equipment financing. In connection with the purchase of
each Property, the Company, as lessor, entered into a long-term, triple-net
lease agreement. The buildings under construction or renovation are expected to
be operational by June 2000.
Since the merger on September 1, 1999 with CNL Restaurant Financial
Services Group, described below, the Company also originated approximately $29
million in new mortgage loans through the Warehouse Facility and approximately
$79 million through the off-balance sheet loan sale facility. The $29 million in
originations was funded through the Mortgage Warehouse Facility and certain
mortgages were subsequently securitized in November 1999 (see "Securitization").
During the years ended December 31, 1999 and 1998, the Company incurred
$6,185,005 and $17,317,297, respectively, in acquisition fees, based on the
amount of offering proceeds received during the period and advances obtained
from the Credit Facility, payable to CNL Fund Advisors, Inc. in connection with
the acquisition of Properties, construction and renovation of Properties and
investment in Mortgage Loans. As a result of the acquisition of the CNL Fund
Advisors, Inc. on September 1, 1999, the Company ceased to incur such
acquisition fees, although, it will continue to incur acquisition expenses.
Mergers
The Company's goal is to be a leading provider of financial,
development, advisory and other real estate services to operators of national
restaurant chains. In furtherance of this goal, on September 1, 1999, the
Company became internally advised and gained complete acquisition, development
and in-house management functions by acquiring its external advisor, CNL Fund
Advisors, Inc. (the "Advisor"). Because the Company has had no employees since
its inception, the Advisor provided these functions on behalf of the Company and
was responsible for the day-to-day operations of the Company, including raising
capital, investment analysis, acquisitions, due diligence, asset management and
accounting services. The acquisition of the Advisor also provides the Company
with restaurant development capabilities including site selection, construction
management and build-to-suit development.
On September 1, 1999, the Company acquired the Advisor through the
exchange of 100% of the outstanding Shares of common stock of the Advisor for
3.8 million Shares ($76,000,000) of the Company's common stock. The acquisition
of the Advisor was recorded under the purchase method of accounting. The Company
expensed the excess purchase price (plus costs incurred related to the
acquisition) over the fair value of the net assets acquired of $76,333,516.
In addition, to increase its financing capabilities and expand its
mortgage loan portfolio, the Company acquired CNL Financial Corporation and CNL
Financial Services, Inc. which are referred to, together, as the CNL Restaurant
Financial Services Group, at the same time that it acquired the Advisor. The CNL
Restaurant Financial Services Group makes and services mortgage loans, and
securitizes a portion of such loans, to operators of national and regional
restaurant chains comparable to the restaurant chain operators that currently
are tenants of the Company. The Company acquired CNL Restaurant Financial
Services Group through the exchange of 100% of the outstanding Shares of common
stock of these entities for 2.35 million Shares ($47,000,000) of the Company's
common stock. The acquisition was recorded under the purchase method of
accounting. The Company recognized the excess purchase price (plus costs
incurred related to the acquisition) over the fair value of the net assets
acquired, of $45,703,072 as goodwill. The Company recorded amortization expense
relating to goodwill of $689,516 as of and for the year ended December 31, 1999.
Upon consummation of the mergers on September 1, 1999, all employees of
the acquired entities became employees of the Company, and any obligations for
the Company to pay fees to the Advisor (such as acquisition fees and asset
management fees) under the advisory agreement terminated.
As consideration in its acquisition of the Advisor and CNL Restaurant
Financial Services Group, the Company paid 6.15 million Shares. Of the 6.15
million Shares issued, 1.0 million are being held in escrow. The Shares held in
escrow will be released to the former stockholders of the Advisor and the CNL
Restaurant Financial Services Group based on the value of the restaurant
Properties acquired, Mortgage Loans made and development projects completed by
the Company during the "escrow term". The "escrow term" began on September 1,
1999. If the Company fails, during the escrow term, to acquire restaurant
Properties, make Mortgage Loans and complete development projects of at least
$750 million in the aggregate, any Shares remaining in escrow at the end of the
escrow term will be returned to the Company, and the former stockholders of the
Advisor and CNL Restaurant Financial Services Group will no longer have any
rights to such Company Shares. The Company's Board of Directors may, in its
reasonable discretion, extend the escrow term for an additional six months
following the escrow term if it reasonably believes that it is in the Company's
best interest to do so. Management believes that the total number Shares will be
released from escrow during the term beyond a reasonable doubt, and therefore,
the Shares have been included in the acquisition price and included in issued
and outstanding for financial reporting purposes, even though the unearned
Shares are held in escrow at December 31, 1999. As of December 31, 1999,
approximately 229,841 Shares have been released from escrow.
Securitization
Several factors affect the Company's ability to complete
securitizations of its loans, including conditions in the securities markets,
the credit quality of the Company's loans and compliance of the Company's loans
with the eligibility requirements established by the securitization documents.
Adverse changes in any of these factors could impair the Company's ability to
originate and sell loans on a favorable or timely basis. The Company's inability
to securitize loans may adversely affect the Company's financial performance and
growth prospects. Accordingly, the cost of raising debt or equity capital may be
higher in the future, which could adversely impact the Company's results of
operations.
As described above in "Mergers," in September 1999, 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 the Company. As a result of this
acquisition, the Company also "securitizes" mortgage loans. A mortgage loan
securitization involves raising capital by combining a group of mortgage loans
into a pool, creating securities that are backed by the combined pool and then
issuing those securities to investors. The Company makes loans and securitizes
them by selling them to a special purpose entity formed for the purpose of
issuing certificates representing beneficial interest in the pool of mortgage
loans. The Company receives the following from its securitizations: (i) the net
proceeds from the sale of the certificates; (ii) income in the form of the
"spread" or difference between the interest that is earned on the securitized
mortgage loans, less transaction fees and expenses and any portfolio losses, and
the interest earned on the certificates sold to third parties; and (iii) fees
for servicing mortgage loans that were securitized.
Additionally, the Company generally retains 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. The acquisition of the CNL
Restaurant Financial Services Group has provided a platform for the expansion of
the Company's existing financing opportunities and, ultimately, is intended to
increase cash available to be distributed to its stockholders. The Company
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 the Company's equity or debt securities.
In November 1999, certain mortgage loans aggregating approximately
$278.27 million were securitized and Franchise Loan Trust Certificates were sold
to investors through a trust. This transaction is backed by fee simple
mortgages, space leasehold mortgages, ground lease mortgages, and mortgages
secured by equipment. The majority of the securitized loan pool was sold to
third parties, while the Company retained subordinated investment securities
approximating $21 million of the total mortgage loan pool balance (see "Other
Investments"). The Company also retained the servicing rights on the mortgage
loans sold. The Company received gross proceeds of approximately $278 million
from the securitization transaction. The transaction resulted in a financial
statement loss of approximately $1 million.
Other Investments
In August, 1998 the Company acquired an investment in certain franchise
loan certificates ("the 1998 Certificates") issued in connection with a mortgage
loan securitization transaction sponsored by CNL Financial Corporation, which
was an affiliate prior to its acquisition by the Company in 1999 (see
"Mergers"). Certain of the 1998 Certificates bear interest at an 8.4% pass
through rate with an effective yield of 11.46%. Other 1998 Certificates bear
interest at adjustable pass through rates which generated an effective yield of
10.65% in 1999. In 1998, the Company classified these investments as available
for sale for accounting purposes and as of December 31, 1998 their carrying
value of $16,201,014 approximated fair value. During 1999, the Company
reassessed the classification of the 1998 Certificates and transferred the
certificates from the available for sale category to the held to maturity
category. The estimated fair value of the 1998 Certificates at the transfer date
of $16,199,792 approximated the carrying value resulting in no gains or losses
at the time of transfer. At December 31, 1999 the carrying value of this
investment was $16,201,732 which approximated its fair value and its weighted
average remaining term range from approximately 14 to 16.5 years.
In connection with the merger on September 1, 1999 (see "Mergers") the
Company acquired investments in an interest only certificate and other residual
interests with a fair market value of $5,965,941. The interest only certificate
and the other residual interest are classified as available for sale and are
carried at fair market value based on estimated discounted cash flows. The
unrealized loss at December 31, 1999 was $177,119 and is shown as accumulated
other comprehensive loss on the consolidated balance sheet.
In August 1999 the Company created a $500 million loan sale facility
syndicated with two third parties. The Company intends to use the proceeds from
subsequent securitizations of mortgage loans to payoff this facility. This
facility permits the Company to sell loans on a regular basis to a trust at an
agreed upon advance rate. As of December 31, 1999 the Company had sold loans
with an approximate principal balance of $300 million to the trust. The Company
retained a residual interest which is included in the accompanying consolidated
balance sheet as of December 31, 1999 as other investments and is classified as
a trading security and carried at its estimated fair market value of
$32,496,222.
Certain mortgage loans originated or purchased by the Company were
securitized in November 1999 and Franchise Loan Trust Certificates were sold to
investors. The Company retained certain subordinated investment securities,
("the 1999 Certificates"). The 1999 Certificates totaling $21,142,843 at
December 31, 1999 were recorded by allocating the previous carrying amount of
the mortgages between the assets sold and the retained interests based on their
relative fair values. Approximately $7.7 million of the 1999 Certificates are
classified as available for sale and are carried at fair market value based on
estimated discounted cash flows. The remaining balance of approximately $13.4
million of the 1999 Certificates have a weighted average remaining term of
approximately 18 years and are classified as held to maturity. Their carrying
amounts approximated their fair value at December 31, 1999.
The Company is subject to market risk in the event the value of the
underlying mortgages decline.
Dispositions
During 1999 and 1998, the Company sold six and three Properties,
respectively. The Company received net proceeds of approximately $5,302,433 and
$2,386,000, respectively, which resulted in a loss of $781,192 for financial
reporting purposes in 1999. The net sales proceeds received in 1998 approximated
the carrying value of the Properties, resulting in no gain or loss. The Company
reinvested the proceeds from the sale of Properties in additional Properties.
During 1999, the Company received proceeds from various borrowers for
the prepayment of nine Secured Equipment Leases. The Company collected
$2,252,766 which was approximately equal to the net investment in the direct
financing leases at the time of the prepayment. As a result, no gain or loss was
recognized for financial reporting purposes.
Capital Commitments
In connection with the acquisition of the 45 Properties under
construction or renovation at December 31, 1999, the Company entered into
development agreements with tenants which provide terms and specifications for
the construction or renovation of buildings the tenants have agreed to lease or
equipment financing the Company has agreed to provide. The agreements provide a
maximum amount of development costs (including the purchase price of the land
and closing costs) to be paid by the Company. In addition, the Company, as a
result of the acquisition of the Advisor, has unfunded letters of commitment to
develop Properties for specific tenants. The aggregate maximum development costs
and unfunded letters of commitment the Company had agreed to pay as of December
31, 1999 were approximately $214,022,000, of which approximately $60,201,000 had
been incurred as of December 31, 1999.
In the ordinary course of business, the Company has outstanding
commitments to qualified borrowers that are not reflected in the accompanying
consolidated financial statements. These commitments, if accepted by the
potential borrowers, obligate the Company to provide funding. The accepted and
unfunded commitment totaled approximately $108,165,000 at December 31, 1999
which includes both the Warehouse Facility and the off-balance sheet loan sale
facility.
Cash and Cash Equivalents
At December 31, 1999 and 1998, the Company had $46,011,592 and
$125,207,377, (including certificates of deposit of $2,007,540 at December 31,
1998), respectively, invested in short-term, highly-liquid investments such as
demand deposits at commercial banks and money markets with less than a 30-day
maturity date. The decrease in the amount invested in short-term investments was
primarily attributable to the Company investing in Properties, Mortgage Loans,
and Secured Equipment Leases during 1999.
Liquidity Requirements
The Company expects to meet its short-term liquidity requirements,
other than for acquisition and development of Properties and investment in
Mortgage Loans and Secured Equipment Leases, through cash flow provided by
operating activities. The Company believes that cash flow provided by operating
activities will be sufficient to fund normal recurring operating expenses,
regular debt service requirements and distributions to stockholders. To the
extent that the Company's cash flow provided by operating activities is not
sufficient to meet such short-term liquidity requirements as a result, for
example, of unforeseen expenses due to tenants defaulting under the terms of
their lease agreements, the Company will use borrowings under its Credit
Facility.
Due to the fact that the Company generally leases its Properties on a
triple-net basis, meaning that tenants are generally required to pay all repairs
and maintenance, property taxes, insurance and utilities, management does not
believe that working capital reserves are necessary at this time. Management
believes that the Properties are adequately covered by insurance. The Company
has obtained contingent liability and property coverage; this insurance policy
is intended to reduce the Company's exposure in the unlikely event a tenant's
insurance policy lapses or is insufficient to cover a claim relating to a
Property.
The Company expects to meet its other short-term liquidity
requirements, including Property acquisition and development and investment in
Secured Equipment Leases, with additional advances under its Credit Facility and
Secured Credit Facility. The Company also intends to meet short-term liquidity
requirements through the use of its Warehouse Facility to fund the acquisition
of Mortgage Loans, and use the proceeds from the subsequent securitizations of
these Mortgage Loans to repay the Warehouse Facility.
The Company expects to meet its long-term liquidity requirements
through short or long-term, unsecured or secured debt financing or equity
financing. As of March 11, 2000, the Company's only long-term liquidity
requirements were the maturities of its Mortgage Warehouse Facility in 2000,
Credit Facility in June 2002 and the Secured Credit Facility in October 2002.
In addition, the management of APF has been in discussions with Bank of
America regarding a potential strategic alliance. Assuming an agreement can be
reached, management of APF believes that this strategic alliance will provide
APF with an additional source of capital on favorable terms. It is management's
desire to grow its ability to make triple-net lease and mortgage financings and
to expand the financial services offered to the restaurant industry.
Distributions
During the years ended December 31, 1999, 1998 and 1997, the Company
generated cash from operations (which includes cash received from tenants and
interest and other income received, less cash paid for operating expenses) of
$307,261,214, $39,116,275 and $17,076,214, respectively. Based primarily on cash
from operations, the Company declared and paid distributions to its stockholders
of $60,078,825, $39,449,149 and $16,854,297 during the years ended December 31,
1999, 1998 and 1997, respectively. In addition, on each of January 1, February 1
and March 1, 2000, the Company declared distributions to its stockholders of
$5,527,461, payable in March 2000. For the years ended December 31, 1999, 1998
and 1997, approximately 97 percent, 85 percent and 93 percent, respectively, of
the distributions received by stockholders were considered to be ordinary income
and approximately three percent, 15 percent and seven percent, respectively,
were considered a return of capital for federal income tax purposes. However, no
amounts distributed or to be distributed to the stockholders as of March 11,
2000, 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.
Amounts Due To Related Parties
During the years ended December 31, 1999, 1998 and 1997, and prior to
the acquisition of the Advisor (see "Mergers") the Advisor and its affiliates
incurred on behalf of the Company $124,031, $4,228,480 and $2,351,244,
respectively, for certain offering expenses, $579,206, $1,113,580 and $514,908,
respectively, for certain acquisition expenses, and $4,438,798, $924,683 and
$368,516, respectively, for certain operating expenses. As of December 31, 1999
and 1998, the Company owed its affiliates $1,809,237 and $1,608,670,
respectively, for such amounts, unpaid fees and administrative expenses
(including services for accounting; financial, tax and regulatory compliance and
reporting; lease and loan compliance; stockholder distributions and reporting;
due diligence and marketing; and investor relations) and for soliciting dealer
servicing fees. As of March 11, 2000, the Company had reimbursed all such
amounts. In addition, as of December 31, 1999, the Company held an obligation
under a capital lease with an affiliate of $8,817,692 relating to office space
occupied by the Company.
Terminated Mergers
On March 11, 1999, the Company entered into agreements to acquire the
18 CNL Income Funds whose Properties are substantially the same type as the
Company's. In connection with these agreements, the Company agreed to issue up
to 30.5 million Shares of common stock, after restatement for the one-for-two
reverse stock split. On June 3, 1999, the general partners, on behalf of CNL
Income Funds XVII and XVIII, and the Company agreed that it would be in the best
interests of CNL Income Funds XVII and XVIII and the Company that the Company
not attempt to acquire CNL Income Funds XVII and XVIII in the acquisition.
Therefore, in June 1999, the Company entered into termination agreements with
CNL Income Funds XVII and XVIII.
On March 1, 2000, the Company announced that it had entered into
termination agreements with the remaining 16 CNL Income Funds. This decision was
based on a number of factors including, concern of the general partners of the
CNL Income Funds that, in light of the market conditions relating to publicly
traded real estate investment trusts generally ("REITS"), the potential value of
the transaction had diminished. As a result of such diminishment, the general
partners' ability to unequivocally recommend voting for the transaction, in the
exercise of their fiduciary duties, had become questionable. Due to the general
partners' reluctance to recommend the transaction to the limited partners of the
CNL Income Funds, the Company believed that pursuing the transaction without an
unequivocal recommendation of the CNL Income Funds' general partners would not
result in a favorable vote, and that therefore the continued pursuit of the
acquisition by the Company would not be in the best interests of its
stockholders. Furthermore, a primary objective of the Company for acquiring the
CNL Income Funds was to significantly increase its asset base for the purpose of
listing its Shares on the New York Stock Exchange and potentially, by virtue of
size, create an institutional investor following. In light of the current market
conditions relating to publicly traded REITS, the Company believes that
increasing its size would not provide it with such following and would not
provide the Company with access to capital on favorable terms. Therefore, being
forced to list at this time, which is a condition to closing the acquisition of
the CNL Income Funds, would not, in the opinion of the Company, produce the
results the Company had initially envisioned at the time the merger agreements
were executed.
On May 11, 1999, four limited partners in several CNL Income Funds
served a lawsuit against the general partners of the CNL Income Funds and the
Company in connection with the proposed merger with the CNL Income Funds. On
July 8, 1999, the plaintiffs amended the complaint to add three additional
limited partners as plaintiffs. Additionally, on June 22, 1999 a limited partner
in certain of the CNL Income Funds served a lawsuit against the Company, the
Advisor, certain of its affiliates and the CNL Income Funds in connection with
the proposed merger.
On September 23, 1999, the judge assigned to the two cases entered an
order consolidating the two cases. Pursuant to this order the plaintiffs in
these cases filed a consolidated and amended complaint on November 8, 1999.
Various defendants, including the Company, filed a motion to dismiss the
consolidated complaint on December 28, 1999. The Company and the general
partners of the CNL Income Funds believe that the lawsuits are without merit and
intend to defend vigorously against the claims.
Results of Operations
Revenues
During the years ended December 31, 1999, 1998 and 1997, the Company
earned $61,907,812, $33,129,661 and $15,490,615, respectively, in rental income
from operating leases and earned income from direct financing leases from 661,
409 and 244 Properties, respectively, and 74, 35 and 29 Secured Equipment Leases
structured as leases, respectively. The increase during 1999 and 1998, each as
compared to the previous year, was attributable to the Company investing in
additional Properties and Secured Equipment Leases during 1999 and 1998. The
increase in rental and earned income was slightly offset by the fact that the
leases of 12 Boston Market Properties were rejected in 1998 in connection with
the tenants filing for bankruptcy, as described below.
During 1998, Boston Chicken, Inc. and its affiliates, which at that
time leased 31 Boston Market Properties from the Company, filed a voluntary
petition for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code.
As a result of these bankruptcy filings, the tenants had the legal right to
either reject or affirm one or more of their leases with the Company. As of
March 11, 2000, of the 28 Properties remaining in the Company's portfolio
relating to these tenants (excluding Properties sold), the Company had re-leased
five Properties to new tenants, had ceased receiving rental payments for six
Properties, the leases of which had been rejected and which remained vacant, and
continued to receive rental payments for 17 Properties. While the tenants have
not rejected or affirmed the remaining 17 leases, there can be no assurance that
some or all of these leases will not be rejected in the future. The lost
revenues that would result from the six vacant Properties remaining in the
portfolio whose leases were rejected and in the event the remaining 17 leases
are rejected could have an adverse effect on the liquidity and results of
operations of the Company, if the Company is unable to re-lease or sell the
Properties in a timely manner. Currently, the Company is actively marketing the
six Properties with rejected leases to existing and prospective clients and
local and regional restaurant operators. The Company recorded provisions for
losses relating to some of these vacant Properties, as described below in
"Provisions for Losses on Assets."
The Company earned $6,651,774, $3,085,518 and $2,010,500 in interest
income from Mortgage Loans and Secured Equipment Leases structured as loans
during the years ended December 31, 1999, 1998 and 1997, respectively. The
increase in interest income from Mortgage Loans and Secured Equipment Leases
during the years ended December 31, 1999 and 1998, each as compared to the
previous year, was attributable to the Company investing in additional loans in
1999 and 1998.
During the years ended December 31, 1999, 1998 and 1997, the Company
earned $6,683,372, $5,899,028 and $1,931,331, respectively, in investment and
interest income from investments in franchise loan certificates, residual
interests in loan sales, money market accounts or other short-term, highly
liquid investments. The increase in investment and interest income during the
years ended December 31, 1999 and 1998, each as compared to the previous year,
was primarily attributable to the acquisition of certain investment securities
and residual interests in securitizations during 1999 and 1998.
Because the Company expects to continue to acquire Properties and
invest in Mortgage Loans and Secured Equipment Leases, and because certain
Properties were under construction as of December 31, 1999, revenues for the
year ended December 31, 1999 represent only a portion of revenues which the
Company is expected to earn in future periods.
Expenses
Operating expenses, including depreciation and amortization expense,
were $115,762,527, $9,408,957 and $3,862,024 for the years ended December 31,
1999, 1998 and 1997, respectively . Total operating expenses increased primarily
as a result of a $76,333,516 charge related to the cost incurred in acquiring
the Advisor from a related party during 1999 (see "Liquidity and Capital
Resources - Mergers"). On September 1, the Company acquired the Advisor and
became internally managed. Effective September 1, 1999, the advisory fee,
acquisition fees and other fees previously paid to the Advisor were replaced
with the actual personnel and other operating costs associated with being
internally managed. Costs relating to acquisitions and development activities
have been capitalized in accordance with generally accepted accounting
principles.
The increase in operating expenses for the years ended December 31,
1999 and 1998 was also partially due to the fact that the Company incurred
$6,798,803 and $157,054 in transaction costs during the years ended December 31,
1999 and 1998, respectively, related to the mergers as described above in
"Liquidity and Capital Resources - Terminated Mergers." In addition, the Company
invested in additional Properties, Mortgage Loans and Secured Equipment Leases
during 1999 and 1998, which resulted in increased depreciation expense.
Depreciation expense is expected to increase as the Company invests in
additional Properties and Mortgage Loans. In addition, the increase in operating
expenses during 1999 as compared to 1998 and 1997, is a result of the increase
in the level of borrowings during 1999 to invest in Properties and Mortgage
Loans, which resulted in incurring approximately $11 million in interest
expense. During 1998 and 1997, all interest costs were capitalized.
Loss on Sale of Assets
As a result of the sale of certain assets, as described above in
"Liquidity and Capital Resources" the Company recognized a loss of $1,851,838
during 1999. No gains or losses were recorded for financial reporting purposes
relating to the sale of assets during the years ended December 31, 1998 and
1997.
Provisions for Losses on Assets
During the years ended December 31, 1999 and 1998, the Company recorded
provisions for losses on land, buildings and direct financing leases totaling
$7,779,195 and $611,534, respectively, for financial reporting purposes. The
tenants of these Properties experienced financial difficulties and ceased
payment of rents under the terms of their lease agreements. The allowances
represent the difference between the carrying value of the Properties at
December 31, 1999 and 1998 and the estimated net realizable value for these
Properties. No provisions were recorded at December 31, 1997.
Summary of New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively, referred to as
derivatives), and for hedging activities. The Statement requires the recognition
of all derivatives as either assets or liabilities in the balance sheet and
measurement of those instruments at fair value. In June 1999, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 137, "Accounting for Derivative Instruments and Hedging Activities --
Deferral of the Effective Date of FASB Statement No. 133, an Amendment of FASB
Statement No. 133." Statement No. 137 defers the effective date of Statement No.
133, "Accounting for Derivative Instruments and Hedging Activities" for one
year. Statement No. 133, as amended is now effective for all fiscal quarters of
all fiscal years beginning after June 15, 2000. The Company will adopt this
statement in the third quarter of 2000. The Company does not expect the adoption
of this statement to have a material impact on the financial statements.
Overview of Year 2000 Problem
The year 2000 problem concerned the inability of information and
non-information technology systems to properly recognize and process
date-sensitive information beyond January 1, 2000. The failure to accurately
recognize the year 2000 could have resulted in a variety of problems from data
miscalculations to the failure of entire systems.
Status
Prior to the acquisition of CNL Fund Advisors, Inc. (the "Advisor") by
the Company in September 1999, the Company had no information and
non-information technology systems. Upon the acquisition of the Advisor, the
Company acquired the information and non-information technology systems of the
Advisor. In early 1998, the Advisor and its affiliates formed a year 2000
committee ("the Y2K Team") that assessed the readiness of any systems that were
date sensitive and completed upgrades for the hardware equipment and software
that were not year 2000 compliant, as necessary. The cost for these upgrades was
approximately $5,000. The Company does not expect to incur any additional costs
in connection with the year 2000 remedial measures. In addition, the Y2K Team
requested and received certifications of compliance from other companies with
which the Company and its affiliates have material third party relationships.
In assessing the risks presented by the year 2000 problem, the Y2K Team
identified potential worst case scenarios involving the future of the
information and non-information technology systems used by the Company's
transfer agent, financial institutions and tenants. As of January 14, 2000, the
Company and its affiliates had tested the information and non-information
technology systems used by the Company and have not experienced material
disruption or other significant problems. In addition, as of March 11, 2000, the
Company was not aware of any material year 2000 problems relating to information
and non-information technology systems of third parties with which the Company
maintains material relationships, including those of the Company's transfer
agent, financial institutions and tenants. In addition, in the Company's
interactions with its transfer agent, financial institutions and tenants, the
systems of these third parties have functioned normally. Until the Company's
first distribution in 2000 and the delivery of the information by the transfer
agent to stockholders in early 2000, the Company will continue to monitor the
year 2000 compliance of the transfer agent. In addition, the Company will
continue to monitor the systems used by and to maintain contact with third
parties with which the Company has material relationships with respect to year
2000 compliance and any year 2000 issues that may arise at a later date. The
Company will develop contingency plans relating to ongoing year 2000 issues at
the time that such issues are identified and such plans are deemed necessary.
Based on the information provided to the Y2K Team, the upgrades and
remedial measures by the Company and its affiliates, and the normal functioning
to date of information and non-information technology systems used by the
Company and those third parties, the Company does not foresee significant risks
associated with its year 2000 compliance at this time. However, there can be no
assurance that the Company and its affiliates or any third parties will not have
ongoing year 2000 issues that may have adverse effects on the Company.
Quantitative and Qualitative Disclosures About Market Risk
The Company has provided fixed rate Mortgage Loans and equipment
financing to borrowers. The Company has also invested in Certificates with fixed
and adjustable rates. Management believes that the estimated fair value of the
Mortgage Loans, equipment financing and Certificates at December 31, 1999
approximated the outstanding principal amounts. The Company is exposed to equity
loss in the event of changes in interest rates.
Additional information related to this item is incorporated by reference
from "Interest Rate Risk."
Forward Looking Statements
The information in this Management's Discussion and Analysis of
Financial Conditions and Results of Operations, including, without limitation,
the Overview Year 2000 Problem disclosure and the Quantitative and Qualitative
Disclosures About Market Risk that are not historical facts, may be
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
statements generally are characterized by the use of terms such as "believe,"
"expect" and "may." Although the Company believes that the expectations
reflected in such forward-looking statements are based upon reasonable
assumptions, the Company's actual results could differ materially from those set
forth in the forward-looking statements. Factors that might cause such a
difference include: changes in general economic conditions, changes in real
estate conditions, availability of capital from borrowings under the Company's
credit facilities, the availability of other debt and equity financing
alternatives, increases in interest rates under the Company's Credit Facility,
Mortgage Warehouse Facility, Secured Credit Facility and under any additional
variable rate debt arrangements that the Company may enter into the future, the
ability of the Company to refinance amounts outstanding under its credit
facility at maturity on terms favorable to the Company, the ability of the
Company to locate suitable tenants for its restaurant properties and borrowers
for its mortgage loans, the ability of tenants and borrowers to make payments
under their respective leases, secured equipment leases or mortgage loans, the
ability of the Company to re-lease properties that are currently vacant or that
become vacant, and the ability of the Company to securitize mortgage loans on a
favorable and timely basis. Given these uncertainties, readers are cautioned not
to place undue reliance on such statements.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
This information is described above in Item 7. Management's Discussion
and Analysis of Financial Condition and Results of Operations.
Report of Independent Certified Public Accountants
To the Board of Directors and Stockholders of
CNL American Properties Fund, Inc.
In our opinion, the consolidated financial statements listed in the accompanying
index appearing under item 14(a)1 present fairly, in all material respects, the
financial position of CNL American Properties Fund, Inc. (a Maryland
corporation) and its subsidiaries at December 31, 1999 and 1998, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States. In addition, in our opinion, the
financial statement schedules listed in the accompanying index appearing under
item 14(a)2 present fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
Orlando, Florida
February 12 except for Note 16 for which the date is March 1, 2000
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
1999 1998
--------------- ---------------
ASSETS
Land, buildings and equipment on operating leases, less
accumulated depreciation and allowance for loss $ 681,210,344 $ 393,339,334
Net investment in direct financing leases, less allowance for 145,743,195 91,675,650
loss
Mortgage loans held for sale 63,466,474 --
Mortgage notes receivable -- 19,631,693
Equipment and other notes receivables 42,748,420 19,377,380
Other investments 75,806,738 18,208,554
Cash and cash equivalents 46,011,592 123,199,837
Receivables, less allowance for doubtful accounts
of $2,660,069 and $1,069,024, respectively 3,329,557 526,650
Accrued rental income 8,116,794 3,959,913
Due from related parties 1,315,721 --
Goodwill, less accumulated amortization 45,013,556 --
Intangibles and other assets 25,430,402 10,433,002
---------------- -----------------
$1,138,192,793 $ 680,352,013
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Line of credit $ 248,000,000 $ 10,143,044
Note payable 140,504,000 --
Mortgage warehouse facility 30,749,540 --
Accrued construction costs payable 17,566,758 4,170,410
Accounts payable and accrued expenses 8,833,695 1,035,436
Due to related parties 10,626,929 1,608,670
Other payables 8,700,414 2,302,350
---------------- -----------------
Total liabilities 464,981,336 19,259,910
---------------- -----------------
Minority interests 997,353 281,817
---------------- -----------------
Commitments and Contingencies (Note 15)
Stockholders' equity:
Preferred stock, without par value. Authorized
and unissued 3,000,000 Shares -- --
Excess Shares, $0.01 par value per share.
Authorized and unissued 78,000,000 Shares -- --
Common stock, $0.01 par value per share. Authorized
62,500,000 Shares, issued 43,533,221 and 37,372,684
Shares, respectively, outstanding 43,495,919 and
37,337,927 Shares, respectively 434,958 373,379
Capital in excess of par value 791,418,955 669,983,438
Accumulated other comprehensive loss (177,119 ) --
Accumulated distributions in excess of net earnings (119,462,690 ) (9,546,531 )
---------------- -----------------
Total stockholders' equity 672,214,104 660,810,286
---------------- -----------------
$1,138,192,793 $ 680,352,013
================ =================
See accompanying notes to consolidated financial statements.
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
1999 1998 1997
-------------- -------------- -------------
Revenues:
Rental income from operating leases $ 49,755,374 $ 26,688,864 $ 12,457,200
Earned income from direct financing leases 12,152,438 6,440,797 3,033,415
Interest income from mortgage loans,
equipment and other notes receivables 6,651,774 3,085,518 2,010,500
Investment and interest income 6,683,372 5,899,028 1,931,331
Other income 257,639 72,830 25,487
--------------- --------------- --------------
75,500,597 42,187,037 19,457,933
--------------- --------------- --------------
Expenses:
General operating and administrative 8,829,861 2,798,481 1,010,725
Interest expense 10,205,197 -- --
Asset management fees to related party 2,343,307 1,851,004 804,879
State and other taxes 905,700 548,320 251,358
Depreciation and amortization 10,346,143 4,054,098 1,795,062
Transaction costs 6,798,803 157,054 --
Advisor acquisition expense 76,333,516 -- --
--------------- --------------- --------------
115,762,527 9,408,957 3,862,024
--------------- --------------- --------------
Earnings/(Losses) Before Minority Interest in Income
of Consolidated Joint Ventures, Equity in Earnings
of Unconsolidated Joint Venture, Loss on
Sale of Assets and Provision for Losses on Assets (40,261,930 ) 32,778,080 15,595,909
Minority Interest in Income of
Consolidated Joint Ventures (41,678 ) (30,156 ) (31,453 )
Equity in Earnings of Unconsolidated Joint Venture 97,307 16,018 --
Loss on Sale of Assets (1,851,838 ) -- --
Provision for Losses on Assets (7,779,195 ) (611,534 ) --
--------------- --------------- --------------
Net Earnings/(Loss) $ (49,837,334 ) $ 32,152,408 $ 15,564,456
=============== =============== ==============
Earnings/(Loss) Per Share of Common
Stock (Basic and Diluted) $ (1.26 ) $ 1.21 $ 1.33
=============== =============== ==============
Weighted Average Number of Shares
of Common Stock Outstanding 39,402,941 26,648,219 11,711,934
=============== =============== ==============
See accompanying notes to consolidated financial statements.
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
Years Ended December 31, 1999, 1998 and 1997
Accumulated Accumulated
distributions other
Common stock Capital in in excess compre-
Number Par excess of of net hensive Comprehensive
of Shares value par value earnings income (loss) Total income (loss)
----------- ---------- -------------- ------------- ------------- ------------- -------------
Balance at December 31, 1996 6,972,358 $ 69,723 $123,757,653 $ (959,949 ) $ -- $122,867,427 $ --
Subscriptions received for com-
mon stock through public
offerings and distribution 11,124,128 111,242 222,371,318 -- -- 222,482,560 --
reinvestment plan
Stock issuance costs -- -- (22,422,045 ) -- -- (22,422,045 ) --
Net earnings -- -- -- 15,564,456