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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, 1996
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-28380
CNL AMERICAN PROPERTIES FUND, INC.
(Exact name of registrant as specified in its charter)
Maryland 59-3239115
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
400 East South Street, Suite 500
Orlando, Florida 32801
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (407) 422-1574
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. [ ]
Aggregate market value of the voting stock held by nonaffiliates of the
registrant: The registrant registered an offering of shares of common stock
(the "Shares") on Form S-11 under the Securities Act of 1933, as amended.
Since no established market for such Shares exists, there is no market value
for such Shares. Each Share was originally sold at $10 per Share.
The number of shares of common stock outstanding as of February 13,
1997, was 15,435,338.
DOCUMENTS INCORPORATED BY REFERENCE:
Registrant incorporates by reference portions of the CNL American
Properties Fund, Inc. Definitive Proxy Statement for the 1997 Annual Meeting
of Stockholders (Items 10, 11, 12 and 13 of Part III) to be filed no later
than April 30, 1997.
PART I
ITEM 1. BUSINESS
CNL American Properties Fund, Inc. (the "Registrant" or the "Company")
is a Maryland corporation, which was organized on May 2, 1994, and which
operates for federal income tax purposes as a real estate investment trust (a
"REIT"). Beginning in April 1995, the Company offered for sale up to
$165,000,000 of shares of common stock (the "Shares") (16,500,000 Shares at
$10 per Share) (the "Initial Offering") pursuant to a registration statement
on Form S-11 under the Securities Act of 1933, as amended, effective March 29,
1995. As of December 31, 1996, the Company had received subscription proceeds
totalling $139,247,149 (13,924,715 Shares) from the Initial Offering,
including $591,765 (59,177 Shares) through the distribution reinvestment plan
provided under the Company's registration statement.
On November 1, 1996, the Company filed a registration statement with the
Securities and Exchange Commission in connection with the proposed sale by the
Company of up to 27,500,000 shares of common stock in a public offering (the
"Subsequent Offering") to commence immediately following the termination of
the Initial Offering. Of the 27,500,000 shares of common stock to be offered,
2,500,000 will be available only to stockholders purchasing through the
reinvestment plan. Until such time, if any, as the stockholders approve an
increase in the number of authorized shares of common stock of the Company,
the Subsequent Offering will be limited to 4,800,000 shares. The Board of
Directors expects to submit, for a vote of the stockholders at a meeting
expected to be held in April 1997, a resolution to increase the number of
authorized shares of common stock of the Company from 20,000,000 to
75,000,000. The price per share and the other terms of the Subsequent
Offering, including the percentage of gross proceeds payable to the managing
dealer for selling commissions and expenses in connection with the offering,
payable to the Advisor for acquisition fees and acquisition expenses and
reimbursable to the Advisor for organizational and offering expenses, will be
the same as those for the Company's Initial Offering. Net proceeds from the
Subsequent Offering will also be invested in additional Properties and
Mortgage Loans. Management believes that the increase in the amount of assets
of the Company that will result from the Subsequent Offering will increase the
diversification of the Company's assets and the likelihood of listing the
Company's shares of common stock on a national securities exchange or over-
the-counter market ("Listing"), although there is no assurance that Listing
will occur.
The Initial Offering terminated and the Subsequent Offering commenced on
February 6, 1997.
The Company was formed primarily to acquire properties (the
Properties ) to be leased on a long-term (generally, 15 to 20 years, plus
renewal options for an additional 10 to 20 years), triple-net basis, which
means that the tenant will be responsible for repairs, maintenance, property
taxes, utilities, and insurance. As of January 22, 1997, the Company owned a
portfolio of 100 Properties located across the United States and leased to
creditworthy operators of selected national and regional fast-food, family-
style and casual dining restaurant chains (the Restaurant Chains ). The
Company is expected to have a total portfolio of approximately 400 to 450
Properties, if the maximum number of Shares of common stock of the Company is
sold in the Subsequent Offering. 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. The Company also offers financing for the purchase of
buildings, generally by tenants that lease the underlying land from the
Company (the Mortgage Loans ). Mortgage Loans are expected to constitute
from 5% to 10% of the Company's total investments if the maximum number of
Shares is sold in the Subsequent Offering. Management believes that the
economic effects of the Mortgage Loans for the purchase of buildings are
similar to those of its leases (generally with full repayment in 15 to 20
years). To a lesser extent, the Company offers furniture, fixtures and
equipment ( Equipment ) financing to operators of Restaurant Chains pursuant
to which the Company provides, through direct financing leases, the Equipment
(collectively, the Secured Equipment Leases ). The Company has obtained a
$15,000,000 line of credit (the Loan ) to be used by the Company to fund
Secured Equipment Leases.
As of December 31, 1996, net proceeds to the Company from its offering
of Shares and capital contributions from CNL Fund Advisors, Inc., after
deduction of organizational and offering expenses, totalled $123,807,376. The
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Company acquired its first Property on June 30, 1995, and as of December 31,
1996, the Company had invested, or committed for investment, approximately
$93,000,000 of such proceeds in 94 Properties (nine of which were under
construction as of December 31, 1996), in providing mortgage financing of
$12,847,000 and to pay acquisition fees to the Advisor totalling $6,266,122
and certain acquisition expenses. In addition, as of December 31, 1996, the
Company had entered into nine Secured Equipment Leases. The Company will use
the remaining net offering proceeds, together with proceeds from the issuance
of Shares subsequent to December 31, 1996, to acquire additional Properties,
to pay construction costs relating to the Properties under construction or
renovation at December 31, 1996, to pay acquisition fees and certain
acquisition expenses and to pay expenses relating to the issuance of the
Shares. As of January 22, 1997, the Company had acquired six additional
Properties (all of which were under construction), as described below in Item
2. Properties. The number of Properties to be acquired and Mortgage Loans to
be entered into will depend upon the amount of net offering proceeds available
to the Company. The Company presently is negotiating to acquire additional
Properties, but as of January 22, 1997, had not acquired any such Properties.
The Company's primary investment objectives are to preserve, protect,
and enhance the Company's assets while (i) making quarterly distributions;
(ii) obtaining fixed income through the receipt of base rent, and increasing
the Company's income (and distributions) and providing protection against
inflation through automatic increases in base rent and receipt of percentage
rent, and obtaining fixed income through the receipt of payments from Mortgage
Loans and Secured Equipment Leases; (iii) continuing to qualify as a REIT for
federal income tax purposes; and (iv) providing stockholders of the Company
with liquidity of their investment within three to eight years after
commencement of the Subsequent Offering, either in whole or in part, through
(a) Listing, or (b) the commencement of orderly sales of the Company's assets
and distribution of the proceeds thereof (outside the ordinary course of
business and consistent with its objective of qualifying as a REIT).
For the next three to eight years, 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 on the Loan. At or prior to the end of such eight-
year period, 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 (although liquidity cannot be assured thereby) or by
commencing orderly sales of the Company's assets. 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, CNL Fund
Advisors, Inc. (the "Advisor"), 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. In addition, the Company does
not anticipate selling any Mortgage Loans prior to the expiration of the loan
term, except in the event (i) the Company owns the Property (land only)
underlying the building improvements which secure the Mortgage Loan and the
sale of the Property occurs, or (ii) the Company undertakes an orderly sale of
its assets.
2
Leases
As of December 31, 1996, the Company had acquired, either directly or
through a joint venture arrangement, 94 Properties, which are 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 venture in which the Company is a co-venturer, generally
provide for initial terms ranging from 15 to 20 years and expire between 2007
and 2016. The leases are on a triple-net basis, with the lessee 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 $61,700 to
$467,500. 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. Certain lessees 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. 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 six of the seven Properties that
are building only, the Company has also entered into tri-party agreements with
the tenants and the owners of the land. The tri-party agreements provide that
the tenant is responsible for all obligations under the ground lease and
provides certain rights to the Company to help protect its interest in the
buildings in the event of a default by the tenant under the terms of the
ground lease. In connection with the purchase of one of the Properties that
is building only, the Company has entered into an assignment of an interest in
the ground lease with the landlord of the land. The assignment provides that
the ground lessee is responsible for all obligations under the ground lease
and provides certain rights to the Company relating to the maintenance of its
interest in the building in the event of a default by the lessee under the
terms of the ground lease.
In connection with the acquisition of 35 Properties consisting of land
only, the Company acquired the land and is leasing these 35 parcels to the
lessee pursuant to three master lease agreements (the "Master Lease
Agreements"). The ground lessee has subleased the 35 Properties to three of
its affiliates, which are the operators of the restaurants. The general terms
of the Master Lease Agreements are similar to those described above in the
first three paragraphs. Upon termination of the Master Lease Agreements, the
sublessees and lessee will surrender possession of the Properties to the
Company, together with any improvements on such Properties. The lessee owns
the buildings located on the 35 Properties. In connection with the
acquisition of the 35 Properties, the Company provided mortgage financing of
$12,847,000 to the lessee pursuant to three Mortgage Loans evidenced by three
master mortgage notes (the "Master Mortgage Notes") which are collateralized
by the building improvements on these 35 Properties. The Master Mortgage
Notes bear interest at a rate of 10.75% per annum and principal and interest
are due in equal monthly installments over 20 years. At the time entered
into, the Master Mortgage Notes equaled approximately 76 to 87 percent of the
appraised value of the related buildings. Management believes that, due to
the fact that the Company owns the underlying land relating to the 35
Properties and due to other underwriting criteria, the Company has sufficient
collateral for the Master Mortgage Notes.
During the period January 1, 1997 through January 22, 1997, the Company
acquired six additional Properties (all of which are under construction). The
leases for the six Properties are substantially the same as those described
above.
3
Major Tenants
During 1996, two of the Company's lessees and borrowers, or affiliated
groups of lessees and borrowers, Castle Hill Holdings V, L.L.C., Castle Hill
Holdings VI, L.L.C. and Castle Hill Holdings VII, L.L.C. (hereinafter referred
to as "Castle Hill"), and Golden Corral Corporation, each contributed more
than ten percent of the Company's total rental and interest income relating to
its Properties, Mortgage Loans and Secured Equipment Leases. Castle Hill is
the lessee under leases relating to the land portion of 35 restaurants and is
the borrower on Mortgage Loans relating to the buildings on such Properties.
Golden Corral Corporation is the lessee under leases relating to seven
restaurants. In addition, three Restaurant Chains, Pizza Hut, Golden Corral
Family Steakhouse and Boston Market, each accounted for more than ten percent
of the Company's total rental and interest income relating to Properties,
Mortgage Loans and Secured Equipment Leases during 1996. Because the Company
has not completed its investment in Properties and Mortgage Loans as yet, it
is not possible to determine which lessees, borrowers or Restaurant Chains
will contribute more than ten percent of the Company's rental and interest
income during 1997 and subsequent years. In the event that certain lessees,
borrowers or Restaurant Chains contribute more than ten percent of the
Company's rental 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, 1996, no single lessee or borrower, or group of
affiliated lessees or borrowers lease Properties or are the borrower under
Mortgage Loans with an aggregate carrying value, excluding acquisition fees
and certain acquisition expenses, in excess of 20 percent of the anticipated
total assets of the Company upon completion of the offering of Shares.
Joint Venture Arrangement
In August 1995, the Company entered into a joint venture arrangement,
CNL/Corral South Joint Venture, with an unaffiliated entity to purchase and
hold one Property. The joint venture arrangement provides for the Company and
its joint venture partner to share in all costs and benefits associated with
the joint venture in accordance with their respective percentage interests in
the joint venture. The Company and its joint venture partner are also jointly
and severally liable for all debts, obligations and other liabilities of the
joint venture.
CNL/Corral South Joint Venture has an initial term of 15 years and,
after the expiration of the initial term, continues in existence from year to
year unless terminated at the option of either of the joint venturers or by an
event of dissolution. Events of dissolution include the bankruptcy,
insolvency or termination of any joint venturer, sale of the property owned by
the joint venture and mutual agreement of the Company and its joint venture
partner to dissolve the joint venture.
The Company has management control of CNL/Corral South Joint Venture.
The joint venture agreement restricts each venturer's ability to sell,
transfer or assign its joint venture interest without first offering it for
sale to its joint venture partner, either upon such terms and conditions as to
which the venturers may agree or, in the event the venturers cannot agree, on
the same terms and conditions as any offer from a third party to purchase such
joint venture interest.
As of December 31, 1996, the Company owned an 85.47% interest in the
joint venture. Net cash flow from operations of CNL/Corral South Joint
Venture are distributed to the Company and its joint venture partner in
accordance with each partners' respective interest. Any liquidation proceeds,
after paying joint venture debts and liabilities and funding reserves for
contingent liabilities, will be distributed first to the Company until it has
received a return of its capital contribution, plus a 20 percent return on its
capital contributions, then to the other joint venture partner to the extent
of its positive capital account balance plus 20 percent thereof; and
thereafter, in proportion to each joint venture partner's percentage interest
in the joint venture.
Certain Management Services
The Advisor provides management services relating to the Company, the
Properties, the Mortgage Loans and the Secured Equipment Lease program
pursuant to an advisory agreement (the "Advisory Agreement") between it and
the Company. Under this agreement, the Advisor is responsible for assisting
the Company in negotiating leases, Mortgage Loans, the Loan and Secured
Equipment Leases, collecting rental, Mortgage Loan and Secured Equipment Lease
payments, inspecting the Properties and the tenants' books and records, and
responding to tenant inquiries and notices. The Advisor also provides
information to the Company about the status of the leases, the
4
Properties, the Mortgage Loans, the Loan and the Secured Equipment Leases. In
exchange for these services, the Advisor is entitled to receive certain fees
from the Company. For supervision of the Properties, the Advisor receives the
asset management fee, which, generally, is payable monthly in an amount equal
to one-twelfth of .60% of the total amount invested in the Properties as of
the end of the preceding month, exclusive of acquisition fees and acquisition
expenses (the "Real Estate Asset Value"). For supervision of the Mortgage
Loans, the Advisor will receive a fee, which generally, will be payable
monthly in an amount equal to one-twelfth of .60% of the total principal
amount of the Mortgage Loans as of the end of the preceding month (the
"Mortgage Management Fee"). For negotiating Secured Equipment Leases and
supervising the Secured Equipment Lease program, the Advisor is entitled to
receive a one-time secured equipment lease servicing fee of two percent of the
purchase price of the equipment that is the subject of a Secured Equipment
Lease (the "Secured Equipment Lease Servicing Fee").
The Advisory Agreement continues until April 19, 1997, and thereafter
may be extended annually upon mutual consent of the Advisor and the Board of
Directors of the Company unless terminated at an earlier date upon 60 days
prior notice by each party.
Borrowing
In March 1996, the Company entered into a line of credit (the "Loan")
and security agreement with a bank, the proceeds of which are used by the
Company to offer Secured Equipment Leases. The Loan provides that the Company
will be able to receive advances of up to $15,000,000 until March 4, 1998.
Generally, advances under the Loan will be fully amortizing term loans
repayable in terms equal to the duration of the Secured Equipment Leases, but
in no event greater than 72 months. Generally, all advances under the Loan
will bear interest at either (i) a rate per annum equal to 215 basis points
above the Reserve Adjusted LIBOR Rate (as defined in the Loan) or (ii) a rate
per annum equal to the bank's prime rate, whichever the Company selects at the
time advances are made. As a condition of obtaining the Loan, the Company
agreed to grant to the bank a first security interest in the Secured Equipment
Leases. In addition, in connection with the Loan, the Company incurred a
commitment fee, legal fees and closing costs of approximately $54,533.
As of December 31, 1996, the Company had obtained advances totalling
$3,666,896 under the Loan, the proceeds of which were used to fund nine
Secured Equipment Leases (including three partially funded Secured Equipment
Leases as of December 31, 1996) and to pay loan costs. The Company expects to
obtain additional advances under the Loan to fund the remaining amounts due
for the three Secured Equipment Leases and any Secured Equipment Leases
entered into in the future. The Company intends to limit the amount of
Secured Equipment Leases it enters into to 10% of gross proceeds of its
offerings.
During 1996, the Company entered into interest rate swap agreements with
a commercial bank to reduce the impact of changes in interest rates on its
floating rate long-term debt. These agreements effectively change the
Company's interest rate exposure on notional amounts totalling approximately
$2,110,000 of the outstanding floating rate notes to fixed rates ranging from
8.75% to nine percent per annum. The notional amounts of the interest rate
swap agreements amortize over the period of the agreements which approximate
the term of the related notes. The Company is exposed to credit loss in the
event of nonperformance by the other party to the interest rate swap
agreements; however, the Company does not anticipate nonperformance by the
counterparty.
To the extent that sufficient proceeds from the Initial Offering and the
Subsequent Offering are not available to acquire Properties, the Company plans
to obtain short-term financing (the "Line of Credit") in an amount up to
$20,000,000, the proceeds of which will be used to acquire Properties.
Management believes that, during the offering period, the Line of Credit will
allow the Company to take advantage of investment opportunities that might
otherwise be lost if the Company was forced to delay making the investments
until it had raised a sufficient amount of offering proceeds. In addition,
management believes that the use of the Line of Credit will enable the Company
to reduce or eliminate the instances in which the Company will be required to
pay duplicate closing costs as a result of an affiliate of the Advisor
purchasing Properties, pending receipt by the Company of sufficient offering
proceeds, in order to preserve the investment opportunity for the Company, and
the Company subsequently purchasing the Properties from the affiliate. The
Line of Credit will be repaid from the proceeds of the Company's offerings.
No Properties will be encumbered in connection with the Line of Credit. The
Company is engaged in preliminary discussions with potential lenders but has
not yet obtained a commitment letter for the Line of Credit and may not be
able to obtain the Line of Credit on satisfactory terms.
5
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 in competition 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
Properties, tenants, and Equipment tenants.
Employees
Reference is made to Item 10. Directors and Executive Officers of the
Registrant for a listing of the Company's Executive Officers. The Company has
no other employees.
ITEM 2. PROPERTIES
As of December 31, 1996, the Company owned, either directly or through a
joint venture arrangement, 94 Properties, located in 20 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.
During the period January 1, 1997 through January 22, 1997, the Company
acquired six additional Properties (all of which were under construction), for
cash at a total cost of approximately $6,879,700, excluding development costs,
acquisition fees and certain acquisition expenses. The leases of these six
Properties are substantially the same as the leases described in Item 1.
Business - Leases.
The Company presently is negotiating to acquire additional properties
and as of January 22, 1997, had not acquired any such properties.
Description of Properties
Land. The Company's Property lot sizes range from approximately 13,900
to 190,100 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.
Buildings. The buildings generally are rectangular and are constructed
from various combinations of stucco, steel, wood, brick and tile. Building
sizes range from approximately 1,000 to 11,200 square feet. All 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.
Generally, a lessee is required, under the terms of its lease agreement,
to make such capital expenditures as may be reasonably necessary to refurbish
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.
6
As of December 31, 1996, the Company owned seven Properties that consist
of only building. The Company does not own the underlying land. In
connection with the acquisition of these Properties, the Company entered into
a tri-party agreement with the tenant and the owner of the land or assignment
of interest in the ground lease with the landlord, as described in Item 1.
Business - Leases.
Leases with Major Tenants. The terms of the leases with the Company's
major tenants as of December 31, 1996 (see Item 1. Business - Major Tenants),
are substantially the same as those described in Item 1. Business - Leases.
Castle Hill leases 35 Pizza Hut restaurants under three Master Leases.
The initial term of each Master Lease is 20 years (expiring in 2016) and the
aggregate minimum base annual rent is $633,820. In addition, Castle Hill is
the borrower on Mortgage Loans relating to the buildings on such Properties.
Golden Corral Corporation leases seven Golden Corral restaurants. The
initial term of each lease is 15 years (expiring between 2010 and 2011) and
the aggregate minimum base annual rent is approximately $862,300.
Management considers the Properties to be well-maintained and sufficient
for the Company's operations.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company, nor its Advisor or any affiliates of the Advisor,
nor any of their respective properties, is a party to, or subject to, any
material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of January 22, 1997, there were 7,486 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 a national securities
exchange or over-the-counter market within three to eight years of
commencement of the Subsequent Offering, there is no assurance that one will
develop and it is not known at this time if a public market for the Shares
will develop. After the termination of the offering and prior to such time,
if any, as Listing occurs, any stockholder (other than the Advisor) may
present all or any portion equal to at least 25% of such stockholder's Shares
to the Company for redemption at any time. At such time, the Company may, at
its option, subject to certain conditions, redeem such Shares presented for
redemption for cash to the extent it has sufficient net proceeds
("Reinvestment Proceeds") from the sale of Shares under the Company's
distribution reinvestment plan (the "Reinvestment Plan"). Stockholders who
wish to have their distributions used to acquire additional Shares (to the
extent Shares are available for purchase), may do so pursuant to the Company's
Reinvestment Plan. There is no assurance that there will be Reinvestment
Proceeds available for redemption and, accordingly, a stockholder's Shares may
not be redeemed. Any Shares acquired pursuant to a redemption will be retired
and no longer available for issuance by the Company. The Board of Directors
of the Company, in their discretion, may amend or suspend the redemption plan
at any time they determine that such amendment or suspension is in the best
interest of the Company. The price to be paid for any Share transferred other
than pursuant to the redemption plan is subject to negotiation by the
purchaser and the selling stockholder. For the year ended December 31, 1996,
no Shares were transferred, or retired pursuant to the redemption plan.
As of December 31, 1996, the capital contribution per share was $10.
The Company expects to distribute at least 95% of its real estate
investment trust taxable income to the stockholders pursuant to the provisions
of the Articles of Incorporation. For the years ended December 31, 1996 and
1995, the Company declared cash distributions of $5,436,072 and $638,618,
respectively, to stockholders. For federal income tax purposes, 90.25% and
59.82% of distributions paid in 1996 and 1995, respectively, were considered
to be ordinary income and 9.75% and 40.18%, respectively, were considered to
be a return of capital. No amounts distributed to stockholders for the years
ended December 31, 1996 and 1995, are required to be or have been treated by
the Company as a return of capital for purposes of calculating the
stockholders' return on their invested capital. The following table presents
total distributions and distributions per share:
First Second Third Fourth Year
-------- ---------- ---------- ---------- ----------
1996 Quarter
------------
Total distributions declared $768,808 $1,099,679 $1,536,145 $2,031,440 $5,436,072
Distributions per Share 0.1749 0.1749 0.1781 0.1781 0.7060
1995 Quarter
------------
Total distributions declared (1) $15,148 $172,888 $450,582 $638,618
Distributions per Share (1) 0.0300 0.1150 0.1666 0.3116
(1) For the period May 2, 1994 (date of inception) through June 1, 1995, the
Company did not make any cash distributions because operations had not
commenced.
8
In January 1997, the Company declared distributions to stockholders
totalling $827,967 payable in March 1997.
The Company intends to continue to declare distributions of cash to the
stockholders on a monthly basis during the offering period, and quarterly
thereafter.
ITEM 6. SELECTED FINANCIAL DATA
1996 1995 1994 (1)
------------ ----------- --------
Year Ended December 31:
Revenues $ 6,206,684 $ 659,131 $ -
Net earnings 4,745,962 368,779 -
Cash distributions declared 5,436,072 638,618 -
Funds from operations (2) 5,257,040 469,097 -
Earnings per Share 0.59 0.19 -
Cash distributions declared per Share 0.71 0.31 -
Weighted average number of Shares
outstanding (3) 8,071,670 1,898,350 -
At December 31:
Total assets $134,825,048 $33,603,084 $929,585
Total equity (4) 122,867,427 31,980,648 200,000
(1) Selected financial data for 1994 represents the period May 2, 1994 (date
of inception) through December 31, 1994.
(2) Funds from operations ("FFO"), based on the revised definition adopted
by the Board of Governors of 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 property, plus depreciation and amortization of real estate
assets, and after adjustments for unconsolidated partnerships and joint
ventures. 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.
(3) The weighted average number of Shares outstanding is based upon the
period the Company was operational.
(4) Includes subscriptions received of $100,792,991 and $38,454,158, net of
stock issuance costs of $9,216,102 and $6,403,671 for the years ended
December 31, 1996 and 1995, respectively. Stock issuance costs consist
of selling commissions, marketing support and due diligence expense
reimbursement fees and organizational and offering expenses. The ratio
of stock issuance costs to subscriptions received was 1:11 and 1:6
during 1996 and 1995, respectively. The Company's advisor has agreed to
pay all organizational and offering expenses which exceed 3% of the
gross offering proceeds received from the sale of shares of the Company.
9
(5) During 1996 and 1995, Operating Expenses incurred by the Company
represented approximately 1.5% and 1.4%, respectively, of Average
Invested Assets and approximately 15.9% and 34.8%, respectively, of Net
Income, as each term is defined in the Company's prospectus. Operating
Expenses incurred during 1996 and 1995 were within the 2%/25%
Guidelines, as described in the Company's prospectus.
The above selected financial data should be read in conjunction with the
financial statements and related notes contained in Item 8 hereof.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company is a Maryland corporation that was organized on May 2, 1994,
to acquire restaurant Properties located across the United States, directly or
indirectly through joint venture or co-tenancy arrangements, to be leased on a
long-term, triple-net basis to creditworthy operators of certain national
and regional fast-food, family-style and casual dining Restaurant Chains. In
addition, the Company may provide financing generally for the purchase of
buildings by borrowers that lease the underlying land from the Company. To a
lesser extent, the Company may offer furniture, fixtures and equipment
financing to operators of Restaurant Chains.
Liquidity and Capital Resources
The Company was formed in May 1994, at which time the Company received
initial capital contributions of $200,000 for 20,000 shares of common stock
from the Advisor. In April 1995, the Company commenced a public offering for
the sale of up to 15,000,000 Shares ($150,000,000) of common stock through its
Initial Offering, the net proceeds of which are used to invest in Properties
and Mortgage Loans. The Company also registered an additional 1,500,000
Shares ($15,000,000) to be available for stockholders who elect to participate
in the Company's Reinvestment Plan. As of December 31, 1996, the Company had
received subscription proceeds totalling $139,247,149 (13,924,715 Shares) from
the Initial Offering, including $591,765 (59,177 Shares) through the Company's
Reinvestment Plan.
As of December 31, 1996, net proceeds to the Company from its Initial
Offering and capital contributions from the Advisor, after deduction of
organizational and offering expenses, totalled $123,807,376. Approximately
$93,000,000 of such amount had been used to invest, or committed for
investment, in 94 Properties (nine of which were under construction as of
December 31, 1996), in providing mortgage financing of $12,847,000 and to pay
acquisition fees to the Advisor totalling $6,266,122 and certain acquisition
expenses as of December 31, 1996. The Company acquired 13 of the 94
Properties from affiliates for purchase prices totalling approximately
$9,230,800. The affiliates had purchased and temporarily held title to these
Properties in order to facilitate the acquisition of the Properties by the
Company. Each Property was acquired at a cost no greater than the lesser of
the cost of the Property to the affiliate (including carrying costs) or the
Property's appraised value.
In connection with the nine Properties under construction at December
31, 1996, the Company has entered into various development agreements with
tenants which provide terms and specifications for the construction of
buildings the tenants have agreed to lease. The agreements provide a maximum
amount of development costs (including the purchase price of the land and
closing costs) to be paid by the Company. The aggregate maximum development
costs the Company has agreed to pay is approximately $11,749,700, of which
approximately $7,495,200 in land and other costs had been incurred as of
December 31, 1996. The buildings currently under construction are expected to
be operational by August 1997. In connection with the purchase of each
Property, the Company, as lessor, entered into a long-term lease agreement.
On November 1, 1996, the Company filed a registration statement with the
Securities and Exchange Commission in connection with the proposed sale by the
Company of up to 27,500,000 shares of common stock in a public offering (the
Subsequent Offering) expected to commence in February 1997, immediately
following the termination of the Initial Offering. Of the 27,500,000 shares
of common stock to be offered, 2,500,000 will be available only to
stockholders purchasing through the reinvestment plan. Until such time, if
any, as the stockholders approve an increase in the number of authorized
shares of common stock of the Company, the Subsequent Offering will be limited
to 4,800,000 shares. The Board of Directors expects to submit, for a vote of
the stockholders at a
10
meeting expected to be held in April 1997, a resolution to increase the number
of authorized shares of common stock of the Company from 20,000,000 to
75,000,000. The price per share and the other terms of the Subsequent
Offering, including the percentage of gross proceeds payable to the managing
dealer for selling commissions and expenses in connection with the offering,
payable to the Advisor for acquisition fees and acquisition expenses and
reimbursable to the Advisor for organizational and offering expenses, will be
the same as those for the Company's Initial Offering. Net proceeds from the
Subsequent Offering will also be invested in additional Properties and
Mortgage Loans. The Company is expected to have a total portfolio of
approximately 400 to 450 Properties if the maximum number of Shares are sold
in the Initial Offering and the Subsequent Offering. Management believes that
the increase in the amount of assets of the Company that will result from the
Subsequent Offering will increase the diversification of the Company's assets
and the likelihood of listing the Company's shares of common stock on a
national securities exchange or over-the-counter market, although there is no
assurance that Listing will occur.
As of January 22, 1997, the Company had received subscription proceeds
of $145,410,447 (14,541,045 Shares) from its Initial Offering, including
$591,765 (59,177 Shares) issued pursuant to the Company's Reinvestment Plan.
As of January 22, 1997, the Company had invested, or committed for investment,
a total of approximately $100,200,000 of such proceeds in 100 Properties, in
providing mortgage financing for Mortgage Loans relating to 35 Properties and
to pay acquisition fees totalling $6,543,470 to the Advisor and acquisition
expenses, leaving approximately $29,300,000 in net offering proceeds available
for investment in Properties and Mortgage Loans. The Company expects to use
the remaining net offering proceeds, along with net offering proceeds received
from the sale of the remaining shares in the Initial Offering and from the
sale of shares through the Subsequent Offering, to purchase additional
Properties, to fund construction costs relating to the Properties under
construction, and to make Mortgage Loans. The number of Properties to be
acquired and Mortgage Loans to be entered into will depend upon the amount of
net offering proceeds available to the Company. The Company presently is
negotiating to acquire additional Properties, but as of January 22, 1997, had
not acquired any such Properties.
The Company plans to obtain short-term financing in an amount up to
$20,000,000, the proceeds of which will be used to acquire Properties.
Management believes that, during the offering period, the Line of Credit will
allow the Company to take advantage of investment opportunities that might
otherwise be lost if the Company was forced to delay making the investments
until it had raised a sufficient amount of offering proceeds. In addition,
management believes that the use of the Line of Credit will enable the Company
to reduce or eliminate the instances in which the Company will be required to
pay duplicate closing costs as a result of an affiliate of the Advisor
purchasing Properties, pending receipt by the Company of sufficient offering
proceeds, in order to preserve the investment opportunity for the Company, and
the Company subsequently purchasing the Properties from the affiliate. The
Line of Credit will be repaid from the proceeds of the Company's offerings.
No Properties will be encumbered in connection with the Line of Credit. The
Company is engaged in preliminary discussions with potential lenders but has
not yet obtained a commitment letter for the Line of Credit and may not be
able to obtain the Line of Credit on satisfactory terms.
In March 1996, the Company entered into a Loan and security agreement
with a bank, the proceeds of which are used by the Company to offer Secured
Equipment Leases. The Loan provides that the Company will be able to receive
advances of up to $15,000,000 until March 4, 1998. Generally, advances under
the Loan will be fully amortizing term loans repayable in terms equal to the
duration of the Secured Equipment Leases, but in no event greater than 72
months. Generally, all advances under the Loan will bear interest at either
(i) a rate per annum equal to 215 basis points above the Reserve Adjusted
LIBOR Rate (as defined in the Loan) or (ii) a rate per annum equal to the
bank's prime rate, whichever the Company selects at the time advances are
made. As a condition of obtaining the Loan, the Company agreed to grant to
the bank a first security interest in the Secured Equipment Leases. In
addition, in connection with the Loan, the Company incurred a commitment fee,
legal fees and closing costs of $54,533.
During 1996, the Company entered into interest rate swap agreements with
a commercial bank to reduce the impact of changes in interest rates on its
floating rate long-term debt. These agreements effectively change the
Company's interest rate exposure on notional amounts totalling approximately
$2,110,000 of the outstanding floating rate notes to fixed rates ranging from
8.75% to nine percent per annum. The notional amounts of the interest rate
swap agreements amortize over the period of the agreements which approximate
the term of the related notes. The Company is exposed to credit loss in the
event of nonperformance by the other party to the interest rate swap
agreements; however, the Company does not anticipate nonperformance by the
counterparty.
11
As of December 31, 1996, the Company had obtained advances totalling
$3,666,896 under the Loan, the proceeds of which were used to fund nine
Secured Equipment Leases (including three partially funded Secured Equipment
Leases as of December 31, 1996) and to pay loan costs. The Company expects to
obtain additional advances under the Loan to fund the remaining amounts due
for the three Secured Equipment Leases and any Secured Equipment Leases
entered into in the future. The Company intends to limit the amount of
Secured Equipment Leases it enters into to 10% of gross proceeds of its
offerings.
Properties are and will be leased on a long-term, triple-net basis,
meaning that tenants are generally required to pay all repairs and
maintenance, property taxes, insurance and utilities. Rental payments under
the leases are expected to exceed the Company's operating expenses. For these
reasons, no short-term or long-term liquidity problems currently are
anticipated by management.
Until Properties are acquired, or Mortgage Loans are entered into, net
offering proceeds are held in short-term, highly liquid investments which
management believes to have appropriate safety of principal. This investment
strategy provides high liquidity in order to facilitate the Company's use of
these funds to acquire Properties at such time as Properties suitable for
acquisition are located or to fund Mortgage Loans. At December 31, 1996, the
Company had $42,450,088 invested in such short-term investments as compared to
$11,508,445 at December 31, 1995. The increase in the amount invested in
short-term investments reflects subscription proceeds derived from the sale of
shares during the year ended December 31, 1996. These funds will be used
primarily to purchase and develop or renovate Properties (directly or
indirectly through joint venture arrangements), to make Mortgage Loans, to pay
offering and acquisition costs, to pay distributions to stockholders, to meet
Company expenses and, in management's discretion, to create cash reserves.
During the years ended December 31, 1996 and 1995, and the period May 2,
1994 (date of inception) through December 31, 1994, affiliates of the Company
incurred on behalf of the Company $804,617, $2,084,145 and $461,866,
respectively, for certain organizational and offering expenses. In addition,
during the years ended December 31, 1996 and 1995, affiliates of the Company
incurred on behalf of the Company $206,103 and $131,629, respectively, for
certain acquisition expenses and $243,402 and $54,234, respectively, for
certain operating expenses. As of December 31, 1996, the Company owed the
Advisor and its affiliates $997,084 for such amounts, unpaid fees and
accounting and administrative expenses. The Advisor has agreed to pay or
reimburse to the Company all organizational and offering expenses in excess of
three percent of gross offering proceeds.
During the years ended December 31, 1996 and 1995, the Company generated
cash from operations (which includes cash received from tenants and interest
received, less cash paid for operating expenses) of $5,482,540 and $498,459,
respectively. Based on current and anticipated future cash from operations,
the Company declared distributions to the stockholders of $5,436,072 and
$638,618 during 1996 and 1995, respectively. In addition, in January 1996,
the Company declared distributions to its stockholders totalling $827,967,
payable in March 1997. For the years ended December 31, 1996 and 1995, 90.25%
and 59.82%, respectively, of the distributions received by stockholders were
considered to be ordinary income and 9.75% and 40.18%, 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 January 22,
1997, are required to be or have been treated by the Company as a return of
capital for purposes of calculating the stockholders' return on their invested
capital.
Management believes that the Properties are adequately covered by
insurance. In addition, the Advisor has obtained contingent liability and
property coverage for the Company. 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 the Property.
The Company's investment strategy of acquiring Properties for cash and leasing
them under triple-net leases to operators who meet specified financial
standards is expected to minimize the Company's operating expenses. During
the operational stage, management believes that the leases will generate cash
flow in excess of operating expenses. Since the leases are expected generally
to have an initial term of 15 to 20 years, with two or more five-year renewal
options, and provide for specified percentage rent in addition to the annual
base rent and, in certain cases, increases in the base rent or the percentage
rent at specified times during the terms of the leases, it is anticipated that
rental income will increase over time.
Due to the fact that the Properties are leased on a long-term, triple-
net basis, management does not believe that working capital reserves are
necessary at this time. Management has the right to cause the Company to
maintain
12
reserves if, in their discretion, they determine such reserves are required to
meet the Company's working capital needs.
Management expects that the cash generated from operations will be
adequate to pay operating expenses.
Results of Operations
No significant operations commenced until the Company received the
minimum offering proceeds of $1,500,000 on June 1, 1995.
As of December 31, 1996, the Company and its consolidated joint venture,
CNL/Corral South Joint Venture, had purchased and entered into long-term,
triple-net leases for 94 Properties. The leases provide for minimum annual
base rental payments (payable in monthly installments) ranging from
approximately $61,700 to $467,500. In addition, certain leases provide for
percentage rent based on sales in excess of a specified amount. The majority
of the leases also provide that, commencing in generally the sixth lease year,
the annual base rent required under the terms of the leases will increase. In
connection therewith, the Company earned a total of $4,357,298 and $539,776 in
rental income from operating leases, earned income from the direct financing
leases and contingent rental income from 85 Properties and six Secured
Equipment Leases in 1996 and from 16 Properties in 1995, respectively.
Because the Company did not commence significant operations until it received
the minimum offering proceeds on June 1, 1995, and has not yet acquired all of
its Properties, revenues for the years ended December 31, 1996 and 1995,
represent only a portion of revenues which the Company is expected to earn
during future years in which the Company's Properties are operational for the
full period.
During 1996, the Company entered into three mortgage loans in the
principal sum of $12,847,000, collateralized by mortgages on the buildings
relating to 35 Pizza Hut Properties. The mortgages bear interest at a rate of
10.75% per annum and are being collected in 240 equal monthly installments
totalling $130,427. In connection therewith, the Company earned $1,069,349 in
interest income during 1996.
During 1996, two of the Company's lessees and borrowers, or affiliated
groups of lessees and borrowers, Castle Hill and Golden Corral Corporation,
each contributed more than ten percent of the Company's total rental and
interest income relating to its Properties, Mortgage Loans and Secured
Equipment Leases. Castle Hill is the lessee under leases relating to the land
portion of 35 restaurants and is the borrower on Mortgage Loans relating to
the buildings on such Properties. Golden Corral Corporation is the lessee
under leases relating to seven restaurants. In addition, three Restaurant
Chains, Pizza Hut, Golden Corral Family Steakhouse and Boston Market, each
accounted for more than ten percent of the Company's total rental and interest
income relating to Properties, Mortgage Loans and Secured Equipment Leases
during 1996. Because the Company has not completed its investment in
Properties and Mortgage Loans as yet, it is not possible to determine which
lessees, borrowers or Restaurant Chains will contribute more than ten percent
of the Company's rental and interest income during 1997 and subsequent years.
In the event that certain lessees, borrowers or Restaurant Chains contribute
more than ten percent of the Company's rental and interest income in future
years, any failure of such lessees, borrowers or Restaurant Chains could
materially affect the Company's income.
During the years ended December 31, 1996 and 1995, the Company also
earned $780,037 and $119,355, respectively, in interest income from
investments in money market accounts or other short-term, highly liquid
investments and other income. Interest income is expected to increase as the
Company invests subscription proceeds received in the future relating to both
the Initial Offering and the Subsequent Offering in highly liquid investments
pending investment in Properties and Mortgage Loans. However, as net offering
proceeds are invested in Properties and used to make Mortgage Loans, interest
income from investments in money market accounts or other short-term, highly
liquid investments is expected to decrease.
Operating expenses, including depreciation and amortization expense,
were $1,430,795 and $290,276 for the years ended December 31, 1996 and 1995,
respectively. Operating expenses increased during the year ended December 31,
1996, as compared to the year ended December 31, 1995, primarily as a result
of the fact that the Company did not commence operations until June 1, 1995.
General and administrative expenses as a percentage of total revenues is
expected to decrease as the Company acquires additional Properties, invests in
Mortgage Loans and the Properties under construction become operational.
However, asset and mortgage management fees and
13
depreciation and amortization expense are expected to increase as the Company
invests in additional Properties and Mortgage Loans.
The Company has made an election under Section 856(c) of the Internal
Revenue Code of 1986, as amended (the "Code"), to be taxed as a REIT under the
Code beginning with its taxable year ended December 31, 1995. As a REIT, for
federal income tax purposes, the Company generally will not be subject to
federal income tax on income that it distributes to its stockholders. If the
Company fails to qualify as a REIT in any taxable year, it will be subject to
federal income tax on its taxable income at regular corporate rates and will
not be permitted to qualify for treatment as a REIT for federal income tax
purposes for four years following the year during which qualification is lost.
Such an event could materially affect the Company's income. However, the
Company believes that it is organized and operates in such a manner as to
qualify for treatment as a REIT for the years ended December 31, 1996 and
1995. In addition, the Company intends to continue to operate the Company so
as to remain qualified as a REIT for federal income tax purposes.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of. The statement requires
that an entity review long-lived assets and certain identifiable intangibles,
to be held and used, for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. Adoption of this standard had no material effect on the
Company's financial position or results of operations.
All of the Company's leases as of December 31, 1996, are triple-net
leases and contain provisions that management believes will mitigate the
adverse effect of inflation. Such provisions include clauses requiring the
payment of percentage rent based on certain restaurant sales above a specified
level and/or automatic increases in base rent at specified times during the
term of the lease. Management expects that increases in restaurant sales
volumes due to inflation and real sales growth should result in an increase in
rental income over time. Continued inflation also may cause capital
appreciation of the Company's Properties. Inflation and changing prices,
however, also may have an adverse impact on the sales of the restaurants and
on potential capital appreciation of the Properties.
This information contains 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. 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. Certain factors that might cause
such a difference include the following: changes in general economic
conditions, changes in local real estate conditions, continued availability of
proceeds from the Company's Initial Offering and the availability of proceeds
from the Company's Subsequent Offering, the ability of the Company to locate
suitable tenants for its Properties and borrowers for its Mortgage Loans, and
the ability of tenants and borrowers to make payments under their respective
leases or Mortgage Loans.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
14
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
CONTENTS
--------
Page
----
Report of Independent Accountants 16
Financial Statements:
Consolidated Balance Sheets 17
Consolidated Statements of Earnings 18
Consolidated Statements of Stockholders' Equity 19
Consolidated Statements of Cash Flows 20
Notes to Consolidated Financial Statements 22
15
Report of Independent Accountants
---------------------------------
To the Board of Directors
CNL American Properties Fund, Inc.
We have audited the consolidated financial statements and the financial
statement schedules of CNL American Properties Fund, Inc. (a Maryland
corporation) and its subsidiary listed in Item 14(a) of this Form 10-K. These
financial statements and financial statement schedules are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements and financial statement schedules based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of CNL American
Properties Fund, Inc. and its subsidiary as of December 31, 1996 and 1995, and
the consolidated results of their operations and their cash flows for each of
the two years in the period ended December 31, 1996 and for the period May 2,
1994 (date of inception) through December 31, 1994, in conformity with
generally accepted accounting principles. In addition, in our opinion, the
financial statement schedules referred to above, when considered in relation
to the basic financial statements taken as a whole, present fairly, in all
material respects, the information required to be included herein.
/s/Coopers & Lybrand L.L.P.
Orlando, Florida
January 22, 1997
16
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
---------------------------
December 31,
ASSETS 1996 1995
------------ ------------
Land and buildings on operating leases,
less accumulated depreciation $ 60,243,146 $ 19,723,726
Net investment in direct financing leases 15,186,686 1,373,882
Cash and cash equivalents 42,450,088 11,508,445
Receivables 160,675 113,613
Mortgage notes receivable 13,389,607 -
Organization costs, less accumulated
amortization of $6,318 and $2,318 13,682 17,682
Loan costs, less accumulated amortization
of $22,034 at December 31, 1996 32,499 -
Accrued rental income 422,076 39,142
Other assets 2,926,589 826,594
------------ ------------
$134,825,048 $ 33,603,084
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Note payable $ 3,521,816 $ -
Accrued interest payable 13,164 -
Accrued construction costs payable 6,587,573 1,058,825
Accounts payable and other accrued expenses 79,817 79,904
Due to related parties 997,084 248,584
Rents paid in advance 118,900 25,351
Deferred rental income 335,849 -
Other payables 15,117 9,696
------------ ------------
Total liabilities 11,669,320 1,422,360
------------ ------------
Minority interest 288,301 200,076
------------ ------------
Commitments (Note 12)
Stockholders' equity:
Preferred stock, without par value.
Authorized and unissued 3,000,000
shares - -
Excess shares, $.01 par value per share.
Authorized and unissued 23,000,000
shares - -
Common stock, $.01 par value per share.
Authorized 20,000,000 shares, issued
and outstanding 13,944,715 and 3,865,416,
respectively 139,447 38,654
Capital in excess of par value 123,687,929 32,211,833
Accumulated distributions in excess of
net earnings (959,949) (269,839)
------------ ------------
Total stockholders' equity 122,867,427 31,980,648
------------ ------------
$134,825,048 $ 33,603,084
============ ============
See accompanying notes to consolidated financial statements.
17
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
-----------------------------------
May 2, 1994
(Date of
Inception)
Year Ended through
December 31, December 31,
1996 1995 1994
---------- ---------- ------------
Revenues:
Rental income from operating
leases $3,717,886 $ 498,817 $ -
Earned income from direct
financing leases 625,492 28,935 -
Contingent rental income 13,920 12,024 -
Interest income from
mortgage notes receivable 1,069,349 - -
Other interest and income 780,037 119,355 -
---------- ---------- ----------
6,206,684 659,131 -
---------- ---------- ----------
Expenses:
General operating and
administrative 542,564 134,759 -
Professional services 58,976 8,119 -
Asset and mortgage manage-
ment fees to related party 251,200 23,078 -
State taxes 56,184 20,189 -
Depreciation and amorti-
zation 521,871 104,131 -
---------- ---------- ----------
1,430,795 290,276 -
---------- ---------- ----------
Earnings Before Minority
Interest in Income of
Consolidated Joint Venture 4,775,889 368,855 -
Minority Interest in Income of
Consolidated Joint Venture (29,927) (76) -
---------- ---------- ----------
Net Earnings $4,745,962 $ 368,779 $ -
========== ========== ==========
Earnings Per Share of Common
Stock $ .59 $ .19 $ -
========== ========== ==========
Weighted Average Number of
Shares of Common Stock
Outstanding 8,071,670 1,898,350 -
========== ========== ==========
See accompanying notes to consolidated financial statements.
18
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
-----------------------------------------------
Years Ended December 31, 1996 and 1995 and the
Period May 2, 1994 (Date of Inception) through
December 31, 1994
Common stock Accumulated
--------------------- Capital in distributions
Number Par excess of in excess of
of shares value par value net earnings Total
---------- -------- ------------ ------------- ------------
Balance at May 2, 1994 - $ - $ - $ - $ -
Sale of common stock to
CNL Fund Advisors, Inc. 20,000 200 199,800 - 200,000
---------- -------- ------------ ----------- ------------
Balance at December 31,
1994 20,000 200 199,800 - 200,000
Subscriptions received
for common stock
through public offering
and distribution
reinvestment plan 3,845,416 38,454 38,415,704 - 38,454,158
Stock issuance costs - - (6,403,671) - (6,403,671)
Net earnings - - - 368,779 368,779
Distributions declared
($.31 per share) - - - (638,618) (638,618)
---------- -------- ------------ ----------- ------------
Balance at December 31,
1995 3,865,416 38,654 32,211,833 (269,839) 31,980,648
Subscriptions received
for common stock
through public offering
and distribution
reinvestment plan 10,079,299 100,793 100,692,198 - 100,792,991
Stock issuance costs - - (9,216,102) - (9,216,102)
Net earnings - - - 4,745,962 4,745,962
Distributions declared
($.71 per share) - - - (5,436,072) (5,436,072)
---------- -------- ------------ ----------- ------------
Balance at December 31,
1996 13,944,715 $139,447 $123,687,929 $ (959,949) $122,867,427
========== ======== ============= =========== ============
See accompanying notes to consolidated financial statements.
19
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
May 2, 1994
(Date of
Inception)
Year Ended through
December 31, December 31,
1996 1995 1994
------------ ------------ ------------
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows From Operating Activities:
Cash received from tenants $ 4,543,506 $ 492,488 $ -
Cash paid for expenses (928,001) (113,384) -
Interest received 1,867,035 119,355 -
------------ ------------ ------------
Net cash provided by operating
activities 5,482,540 498,459 -
------------ ------------ ------------
Cash Flows From Investing Activities:
Additions to land and buildings on
operating leases (36,104,148) (18,835,969) -
Increase in net investment in direct
financing leases (13,372,621) (1,364,960) -
Investment in mortgage notes
receivable (13,547,264) - -
Collections on mortgage notes
receivable 133,850 - -
Increase in other assets (1,103,896) (628,142) -
------------ ------------ ------------
Net cash used in investing
activities (63,994,079) (20,829,071) -
------------ ------------ ------------
Cash Flows From Financing Activities:
Reimbursement of acquisition,
organization, deferred offering and
stock issuance costs paid by related
parties on behalf of the Company (939,798) (2,500,056) (199,036)
Proceeds of borrowing on line of
credit 3,666,896 - -
Payment on line of credit (145,080) - -
Payment of loan costs (54,533) - -
Contribution from minority interest
of consolidated joint venture 97,419 200,000 -
Sale of common stock to CNL Fund
Advisors, Inc. - - 200,000
Subscriptions received from
stockholders 100,792,991 38,454,158 -
Distributions to minority interest (39,121) - -
Distributions to stockholders (5,439,404) (635,286) -
Payment of stock issuance costs (8,486,188) (3,680,704) (19)
------------ ------------ ------------
Net cash provided by financing
activities 89,453,182 31,838,112 945
------------ ------------ ------------
Net Increase in Cash and Cash Equivalents 30,941,643 11,507,500 945
Cash and Cash Equivalents at Beginning of
Period 11,508,445 945 -
------------ ------------ ------------
Cash and Cash Equivalents at End of Period $ 42,450,088 $ 11,508,445 $ 945
============ ============ ============
See accompanying notes to consolidated financial statements.
20
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
-------------------------------------------------
May 2, 1994
(Date of
Inception)
Year Ended through
December 31, December 31,
1996 1995 1994
------------ ------------ ------------
Reconciliation of Net Earnings to Net Cash
Provided by Operating Activities:
Net earnings $ 4,745,962 $ 368,779 $ -
------------ ------------ ------------
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation 511,078 100,318 -
Amortization 69,886 3,813 -
Increase in receivables (160,984) (44,749) -
Decrease in net investment in direct
financing leases 259,740 1,078 -
Increase in accrued rental income (382,934) (39,142) -
Increase in other assets (4,293) (8,090) -
Increase in accrued interest payable 13,164 - -
Increase (decrease) in accounts
payable and other accrued expenses (2,896) 38,461 -
Increase (decrease) in due to related
parties, excluding reimbursement of
acquisition, organization, deferred
offering and stock issuance costs
paid on behalf of the Company (30,929) 42,868 -
Increase in rents paid in advance 93,549 25,351 -
Increase in deferred rental income 335,849 - -
Increase in other payables 5,421 9,696 -
Increase in minority interest 29,927 76 -
------------ ------------ ------------
Total adjustments 736,578 129,680 -
------------ ------------ ------------
Net Cash Provided by Operating Activities $ 5,482,540 $ 498,459 $ -
============ ============ ============
Supplemental Schedule of Non-Cash Investing
and Financing Activities:
Related parties paid certain acquisition,
organization, deferred offering and
stock issuance costs on behalf of the
Company as follows:
Acquisition costs $ 206,103 $ 131,629 $ -
Organization costs - 20,000 -
Deferred offering costs 466,405 - 461,866
Stock issuance costs 338,212 2,084,145 -
------------ ------------ ------------
$ 1,010,720 $ 2,235,774 $ 461,866
============ ============ ============
See accompanying notes to consolidated financial statements.
21
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Years Ended December 31, 1996 and 1995 and the Period
May 2, 1994 (Date of Inception) through
December 31, 1994
1. Significant Accounting Policies:
-------------------------------
Organization and Nature of Business - CNL Income Fund, Inc. (the
"Company") was organized in Maryland on May 2, 1994. Effective
December 6, 1994, the Company changed its name to CNL Investment Fund,
Inc. and effective February 1, 1995, the Company changed its name to CNL
American Properties Fund, Inc. The Company was organized primarily for
the purpose of acquiring, directly or indirectly through joint venture
or co-tenancy arrangements, restaurant properties ("Properties") to be
leased on a long-term, triple-net basis to operators of certain national
and regional fast-food, family-style and casual dining restaurant
chains. The Company may provide financing ("Mortgage Loans") for the
purchase of buildings, generally by tenants that lease the underlying
land from the Company. To a lesser extent, the Company may offer
furniture, fixtures and equipment financing ("Secured Equipment Leases")
to operators of restaurant chains.
The Company was a development stage enterprise from May 2, 1994 through
June 1, 1995. Since operations had not begun, activities through June
1, 1995, were devoted to organization of the Company.
Principles of Consolidation - The Company accounts for its 85.47%
interest in CNL/Corral South Joint Venture using the consolidation
method. Minority interest represents the minority joint venture
partner's proportionate share of the equity in the Company's
consolidated joint venture. All significant intercompany accounts and
transactions have been eliminated.
Real Estate and Lease Accounting - The Company records the acquisition
of land, buildings and equipment at cost, including acquisition and
closing costs. In addition, interest costs incurred during construction
are capitalized in accordance with accounting standards. Land and
buildings are leased to unrelated third parties on a triple-net basis,
whereby the tenant is generally responsible for all operating expenses
relating to the Property, including property taxes, insurance,
maintenance and repairs. In addition, the Company leases equipment
subject to Secured Equipment Leases. The
22
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
------------------------------------------------------
Years Ended December 31, 1996 and 1995 and the Period
May 2, 1994 (Date of Inception) through
December 31, 1994
1. Significant Accounting Policies - Continued:
-------------------------------------------
leases are accounted for using either the direct financing or the
operating method. Such methods are described below:
Direct financing method - The leases accounted for using the
direct financing method are recorded at their net investment
(which at the inception of the lease generally represents
the cost of the asset) (Note 5). Unearned income is
deferred and amortized to income over the lease terms so
as to produce a constant periodic rate of return on the
Company's investment in the leases.
Operating method - Land and building leases accounted for
using the operating method are recorded at cost, revenue is
recognized as rentals are earned and depreciation is charged
to operations as incurred. Buildings are depreciated on the
straight-line method over their estimated useful lives of 30
years. When scheduled rentals (including rental payments,
if any, required during the construction of a Property) vary
during the lease term, income is recognized on a straight-
line basis so as to produce a constant periodic rent over
the lease term commencing on the date the Property is placed
in service.
Accrued rental income represents the aggregate amount of
income recognized on a straight-line basis in excess of
scheduled rental payments to date. In contrast, deferred
rental income represents the aggregate amount of scheduled
rental payments to date (including rental payments due
during construction and prior to the Property being placed
in service) in excess of income recognized on a straight-
line basis over the lease term commencing on the date the
Property is placed in service.
When the Properties or equipment are sold, the related cost and
accumulated depreciation for operating leases and the net investment for
direct financing leases, plus any accrued rental income or deferred
rental income, will be removed from the accounts and gains or losses
from sales will be reflected in income. Management reviews its
Properties for impairment
23
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
------------------------------------------------------
Years Ended December 31, 1996 and 1995 and the Period
May 2, 1994 (Date of Inception) through
December 31, 1994
1. Significant Accounting Policies - Continued:
-------------------------------------------
whenever events or changes in circumstances indicate that the carrying
amount of the assets may not be recoverable through operations.
Management determines whether an impairment in value has occurred by
comparing the estimated future undiscounted cash flows, including the
residual value of the Property, with the carrying cost of the individual
Property. If an impairment is indicated, a loss will be recorded for
the amount by which the carrying value of the asset exceeds its fair
market value.
Mortgage Loans - The Company accounts for loan origination fees and
costs incurred in connection with Mortgage Loans in accordance with
Statement of Financial Accounting Standards No. 91, "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring
Loans and Initial Direct Costs of Leases." This statement requires the
deferral of loan origination fees and the capitalization of direct loan
costs. The costs capitalized, net of the fees deferred, are amortized
to interest income as an adjustment of yield over the life of the loans.
The unpaid principal and accrued interest on the Mortgage Loans, plus
the unamortized balance of such fees and costs are included in mortgage
notes receivable (see Note 6).
Cash and Cash Equivalents - The Company considers all highly liquid
investments with a maturity of three months or less when purchased to be
cash equivalents. Cash and cash equivalents consist of demand deposits
at commercial banks, money market funds (some of which are backed by
government securities) and certificates of deposit. Cash equivalents
are stated at cost plus accrued interest, which approximates market
value.
Cash accounts maintained on behalf of the Company in demand deposits at
commercial banks, money market funds and certificates of deposit may
exceed federally insured levels; however, the Company has not
experienced any losses in such accounts. The Company limits investment
of temporary cash investments to financial institutions with high credit
standing; therefore, management believes it is not exposed to any
significant credit risk on cash and cash equivalents.
Organization Costs - Organization costs are amortized over five years
using the straight-line method.
24
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
------------------------------------------------------
Years Ended December 31, 1996 and 1995 and the Period
May 2, 1994 (Date of Inception) through
December 31, 1994
1. Significant Accounting Policies - Continued:
-------------------------------------------
Loan Costs - Loan costs incurred in connection with the Company's
$15,000,000 line of credit for equipment financing have been capitalized
and are being amortized over the term of the loan commitment using the
straight-line method.
Income or expense associated with interest rate swap agreements related
to equipment financing is recognized on the accrual basis as earned or
incurred through an adjustment to interest expense.
Income Taxes - The Company has made an election to be taxed as a real
estate investment trust ("REIT") under Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended, and related regulations. The
Company generally will not be subject to federal corporate income taxes
on amounts distributed to stockholders, providing it distributes at
least 95 percent of its REIT taxable income and meets certain other
requirements for qualifying as a REIT. Accordingly, no provision for
federal income taxes has been made in the accompanying consolidated
financial statements. Notwithstanding the Company's qualification for
taxation as a REIT, the Company is subject to certain state taxes on its
income and property.
Earnings Per Share - Earnings per share are calculated based upon the
weighted average number of shares of common stock outstanding during the
period the Company was operational.
Use of Estimates - Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to
prepare these financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those
estimates.
New Accounting Standard - Effective January 1, 1996, the Company adopted
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." The statement requires that an entity review long-lived assets and
certain identifiable intangibles, to be held and used, for impairment
whenever events or changes in circumstances indicate that the
25
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
------------------------------------------------------
Years Ended December 31, 1996 and 1995 and the Period
May 2, 1994 (Date of Inception) through
December 31, 1994
1. Significant Accounting Policies - Continued:
-------------------------------------------
carrying amount of the asset may not be recoverable. Adoption of this
standard had no material effect on the Company's financial position or
results of operations.
2. Public Offering:
---------------
The Company has a currently effective registration statement on Form S-
11 with the Securities and Exchange Commission for the sale of
15,000,000 shares ($150,000,000) of common stock. In addition, the
Company has registered an additional 1,500,000 shares ($15,000,000)
which is available only to stockholders who elect to participate in the
Company's reinvestment plan. The Company has adopted a reinvestment
plan pursuant to which stockholders may elect to have the full amount of
their cash distributions from the Company reinvested in additional
shares of common stock of the Company. As of December 31, 1996, the
Company had received subscription proceeds of $139,247,149 (13,924,715
shares), including $591,765 (59,177 shares) through the reinvestment
plan.
In addition, on November 1, 1996, the Company filed a registration
statement with the Securities and Exchange Commission in connection with
the proposed sale by the Company of up to 27,500,000 additional shares
($275,000,000) of common stock in a public offering (the "Subsequent
Offering") expected to commence immediately following the termination of
the Company's current $150,000,000 offering. Until such time, if any,
as the stockholders approve an increase in the number of authorized
shares of common stock of the Company, the Subsequent Offering will be
limited to 4,800,000 shares ($48,000,000). The Board of Directors
expects to submit, for a vote of the stockholders at a meeting expected
to be held in April 1997, a resolution to increase the number of
authorized shares of common stock of the Company from 20,000,000 to
75,000,000.
3. Leases:
------
The Company leases its land, buildings and equipment subject to Secured
Equipment Leases to operators of national and regional fast-food,
family-style and casual dining restaurants. The leases are accounted
for under the provisions of Statement of Financial Accounting Standards
No. 13, "Accounting for Leases." The leases relating to 82 of the
Company's
26
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
------------------------------------------------------
Years Ended December 31, 1996 and 1995 and the Period
May 2, 1994 (Date of Inception) through
December 31, 1994
3. Leases - Continued:
------------------
Properties have been classified as operating leases (including the
leases relating to nine Properties under construction as of December 31,
1996) and the leases relating to 12 Properties and six Secured Equipment
Leases have been classified as direct financing leases. For the leases
classified as direct financing leases, the building portions of the
leases are accounted for as direct financing leases while the land
portions of four of these leases are accounted for as operating leases.
Substantially all Property leases have initial terms of 15 to 20 years
(expiring between 2007 and 2016) and provide for minimum rentals. In
addition, all of the Property leases provide for contingent rentals
and/or scheduled rent increases over the terms of the leases. Each
tenant also pays all property taxes and assessments, fully maintains the
interior and exterior of the building and carries insurance coverage for
public liability, property damage, fire and extended coverage. The
lease options for the Property leases generally allow tenants to renew
the leases for two to four successive five-year periods subject to the
same terms and conditions as the initial lease. Most leases also allow
the tenant to purchase the Property at the greater of the Company's
purchase price plus a specified percentage of such purchase price or
fair market value after a specified portion of the lease has elapsed.
The Secured Equipment Leases placed in service as of December 31, 1996,
provide for minimum rentals payable monthly and have lease terms ranging
from five to seven years. The Secured Equipment Leases generally
include an option for the lessee to acquire the equipment at the end of
the lease term for a nominal fee.
27
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
------------------------------------------------------
Years Ended December 31, 1996 and 1995 and the Period
May 2, 1994 (Date of Inception) through
December 31, 1994
4. Land and Buildings on Operating Leases:
--------------------------------------
Land and buildings on operating leases consisted of the following at
December 31:
1996 1995
----------- -----------
Land $33,850,436 $ 8,890,471
Buildings 24,152,610 10,049,032
----------- -----------
58,003,046 18,939,503
Less accumulated depreci-
ation (611,396) (100,318)
----------- -----------
57,391,650 18,839,185
Construction in progress 2,851,496 884,541
----------- -----------
$60,243,146 $19,723,726
=========== ===========
Some leases provide for scheduled rent increases throughout the lease
term and/or rental payments during the construction of a Property prior
to the date it is placed in service. Such amounts are recognized on a
straight-line basis over the terms of the leases commencing on the date
the Property is placed in service. For the years ended December 31,
1996 and 1995, the Company recognized $517,067 and $39,142,
respectively, of such rental income.
The following is a schedule of future minimum lease payments to be
received on the noncancellable operating leases at December 31, 1996:
1997 $ 5,359,617
1998 5,368,667
1999 5,383,078
2000 5,406,750
2001 5,591,865
Thereafter 73,053,334
------------
$100,163,311
============
Since lease renewal periods are exercisable at the option of the tenant,
the above table only presents future minimum lease payments due during
the initial lease terms. In addition, this table does not include any
amounts for future contingent rentals which may be received on the
leases based on a percentage of the tenant's gross sales. These amounts
also do not include minimum lease payments that will become due when
Properties under development are completed (see Note 12).
28
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
------------------------------------------------------
Years Ended December 31, 1996 and 1995 and the Period
May 2, 1994 (Date of Inception) through
December 31, 1994
5. Net Investment in Direct Financing Leases:
-----------------------------------------
The following lists the components of net investment in direct financing
leases at December 31:
1996 1995
------------ ------------
Minimum lease payments
receivable $ 30,162,465 $ 2,498,881
Estimated residual values 1,346,332 343,740
Less unearned income (16,322,111) (1,468,739)
------------ ------------
Net investment in direct
financing leases $ 15,186,686 $ 1,373,882
============ ============
The following is a schedule of future minimum lease payments to be
received on direct financing leases at December 31, 1996:
1997 $ 2,329,762
1998 2,329,762
1999 2,329,762
2000 2,333,080
2001 2,276,690
Thereafter 18,563,409
-----------
$30,162,465
===========
The above table does not include future minimum lease payments for
renewal periods or for contingent rental payments that may become due in
future periods (see Note 4).
6. Mortgage Notes Receivable:
-------------------------
During 1996, in connection with the acquisition of land for 35 Pizza Hut
restaurants, the Company accepted three promissory notes in the
aggregate principal sum of $12,847,000, collateralized by mortgages on
the buildings on the 35 Pizza Hut Properties. The promissory notes bear
interest at a rate of 10.75% per annum and are being collected in 240
equal
29
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
------------------------------------------------------
Years Ended December 31, 1996 and 1995 and the Period
May 2, 1994 (Date of Inception) through
December 31, 1994
6. Mortgage Notes Receivable - Continued:
-------------------------------------
monthly installments totalling $130,426. Mortgage notes receivable
consisted of the following at December 31, 1996:
Outstanding principal $12,713,151
Accrued interest income 35,285
Deferred financing income (46,268)
Unamortized loan costs 687,439
-----------
$13,389,607
===========
Management believes that the estimated fair value of mortgage notes
receivable at December 31, 1996, approximates the outstanding principal
amount based on estimated current rates at which similar loans would be
made to borrowers with similar credit and for similar maturities.
7. Note Payable:
------------
On March 5, 1996, the Company entered into a line of credit (the "Loan")
and security agreement with a bank. The Loan is to be used by the
Company to offer Secured Equipment Leases. The Loan provides that the
Company will be able to receive advances of up to $15,000,000 until
March 4, 1998. Generally, advances under the Loan will be fully
amortizing term loans repayable in terms equal to the duration of the
Secured Equipment Leases, but in no event greater than 72 months.
Generally, all advances under the Loan will bear interest at either (i)
a rate per annum equal to 215 basis points above the Reserve Adjusted
LIBOR Rate (as defined in the Loan) or (ii) a rate per annum equal to
the bank's prime rate, whichever the Company selects at the time
advances are made. As a condition of obtaining the Loan, the Company
agreed to grant to the bank a first security interest in the Secured
Equipment Leases. In addition, in connection with the Loan, the Company
incurred a commitment fee, legal fees and closing costs of $54,533.
As of December 31, 1996, the Company had obtained advances totalling
$3,666,896 relating to the Loan. In general, the advances are fully
amortizing term loans repayable over six years and bear interest at a
rate per annum equal to 215 basis points above the Reserve Adjusted
LIBOR Rate (ranging from 7.71% to 7.82% as of December 31, 1996). As
of December 31,
30
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
------------------------------------------------------
Years Ended December 31, 1996 and 1995 and the Period
May 2, 1994 (Date of Inception) through
December 31, 1994
7. Note Payable - Continued:
------------------------
1996, $3,521,816 of principal was outstanding relating to the Loan, plus
$13,164 of accrued interest. The Company believes, based on current
terms, that the carrying value of its note payable at December 31, 1996
approximates fair value.
During 1996, the Company entered into interest rate swap agreements with
a commercial bank to reduce the impact of changes in interest rates on
its floating rate long-term debt. The agreements effectively change the
Company's interest rate exposure on notional amounts totalling
approximately $2,110,000 of the outstanding floating rate notes to fixed
rates ranging from 8.75% to nine percent per annum. The notional
amounts of the interest rate swap agreements amortize over the period of
the agreements which approximate the term of the related notes. The
Company is exposed to credit loss in the event of nonperformance by the
other party to the interest rate swap agreements; however, the Company
does not anticipate nonperformance by the counterparty.
Interest costs (including amortization of loan costs) incurred for the
year ended December 31, 1996, were $127,012, all of which were
capitalized as part of the cost of buildings under construction.
8. Stock Issuance Costs:
--------------------
The Company has incurred certain expenses of its offering of shares,
including commissions, marketing support and due diligence expense
reimbursement fees, filing fees, legal, accounting, printing and escrow
fees, which have been deducted from the gross proceeds of the offering.
Preliminary costs incurred prior to raising capital were advanced by an
affiliate of the Company, CNL Fund Advisors, Inc. (the "Advisor").
The Advisor has agreed to pay all organizational and offering expenses
(excluding commissions and marketing support and due diligence expense
reimbursement fees) which exceed three percent of the gross offering
proceeds received from the sale of shares of the Company.
31
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
------------------------------------------------------
Years Ended December 31, 1996 and 1995 and the Period
May 2, 1994 (Date of Inception) through
December 31, 1994
8. Stock Issuance Costs - Continue