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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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 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
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 two offerings 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 18,
1998, was 39,326,342.
DOCUMENTS INCORPORATED BY REFERENCE:
Registrant incorporates by reference portions of the CNL American
Properties Fund, Inc. Definitive Proxy Statement for the 1998 Annual Meeting of
Stockholders (Items 10, 11, 12 and 13 of Part III) to be filed no later than
April 30, 1998.
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 16,500,000
shares of common stock (the "Shares") ($165,000,000) (the "Initial Offering")
pursuant to a registration statement on Form S-11 under the Securities Act of
1933, as amended. Of the 16,500,000 Shares, 1,500,000 were available only to
stockholders who elected to participate in the Company's distribution
reinvestment plan. Upon completion of the Initial Offering, the Company had
received subscription proceeds of $150,591,765 (15,059,177 Shares), including
$591,765 (59,177 Shares) issued pursuant to the Company's reinvestment plan.
Immediately following the termination of the Initial Offering on
February 6, 1997, the Company commenced an offering of up to 27,500,000 Shares
($275,000,000) (the "1997 Offering"). Of the 27,500,000 Shares offered in the
1997 Offering, 2,500,000 are available only to stockholders who elect to
participate in the Company's reinvestment plan. As of December 31, 1997, the
Company had received subscription proceeds totalling $361,729,707 (36,172,971
Shares) from the Initial Offering and 1997 Offering, including $2,464,413
(246,441 Shares) issued pursuant to the reinvestment plan.
On October 10, 1997, the Company filed a registration statement with
the Securities and Exchange Commission in connection with the proposed sale by
the Company of up to 34,500,000 Shares ($345,000,000) (the "1998 Offering"),
which is expected to commence immediately following the completion of the
Company's 1997 Offering. Of the 34,500,000 shares of common stock to be offered,
2,000,000 will be available only to stockholders purchasing shares through the
Company's distribution reinvestment plan. The price per share and the other
terms of the 1998 Offering, including the percentage of gross proceeds payable
to the managing dealer for selling commissions and expenses in connection with
the offering, payable to CNL Fund Advisors, Inc. (the "Advisor") for acquisition
fees and acquisition expenses and reimbursable to the Advisor for offering
expenses, will be the same as those for the Company's Initial Offering and 1997
Offering. Management believes that the increase in the amount of assets of the
Company that will result from the 1998 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. If the shares are not listed on a national securities exchange or
over-the-counter market by December 31, 2005, as to which there can be no
assurance, the Company will commence orderly sale of its assets and the
distribution of the proceeds. Listing does not assure liquidity.
The Company was formed primarily to acquire restaurant properties (the
"Properties") located across the United States, directly or indirectly through
joint venture or co-tenancy arrangements, 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, 1998, the Company owned a portfolio of 246 Properties located across the
United States which are leased to operators of certain national and regional
fast-food, family-style and casual dining restaurant chains (the "Restaurant
Chains"). The Company is expected to have a total portfolio of approximately 670
to 730 Properties, if the maximum number of Shares of the Company is sold in
the 1997 Offering and the 1998 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
1997 Offering and the 1998 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). In addition,
the Company offers furniture, fixtures and equipment (the "Equipment") financing
to operators of Restaurant Chains pursuant to which the Company provides,
through direct financing leases and loans, the Equipment (collectively, the
"Secured Equipment Leases"). The Company has
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represented that at the end of each quarter, the value of the Equipment together
with any personal property owned by the Company, in the aggregate, will
represent less than 25% of the Company's total assets. In 1996, the Company
obtained a $15,000,000 line of credit and subsequently amended such line of
credit to $35,000,000, which is or will be used by the Company to fund Secured
Equipment Leases, to purchase Properties and to provide Mortgage Loans.
As of December 31, 1997, net proceeds to the Company from its Initial
Offering, 1997 Offering and capital contributions from the Advisor, after
deduction of organizational and offering expenses, totalled $323,867,890. The
Company acquired its first Property on June 30, 1995, and as of December 31,
1997, approximately $272,140,000 of such amount had been used to invest, or
committed for investment, in 244 Properties (including ten of which were under
construction as of December 31, 1997), which includes mortgage financing of
$17,047,000, acquisition fees to the Advisor totalling $16,277,837 and certain
acquisition expenses. In addition, as of December 31, 1997, the Company had
entered into 27 Secured Equipment Leases and entered into two promissory notes
totalling $13,225,000 with a borrower for equipment financing. The Company will
use the remaining net offering proceeds, together with proceeds from the
issuance of Shares subsequent to December 31, 1997, to acquire additional
Properties, to pay construction costs relating to the Properties under
construction at December 31, 1997, to provide Mortgage Loans, to pay acquisition
fees and certain acquisition expenses and to pay expenses relating to the
issuance of the Shares. As of January 22, 1998, the Company had acquired two
additional Properties (both 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, 1998, had not acquired any
such Properties.
The Company's primary investment objectives are (i) to preserve,
protect, and enhance the Company's assets; (ii) making quarterly distributions;
(iii) obtaining fixed income through the receipt of base rent, as well as
increase the Company's income (and distributions) and provide protection against
inflation through automatic increases in base rent and receipt of percentage
rent, and to obtain fixed income through the receipt of payments from Mortgage
Loans and Secured Equipment Leases; (iv) continuing to qualify as a REIT for
federal income tax purposes; and (v) providing stockholders of the Company with
liquidity of their investment within two to seven years after commencement of
the 1998 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 two to seven 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 line of credit. Within two to seven years, 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). If Listing occurs, the Company intends to reinvest
in additional Properties, Mortgage Loans and Secured Equipment Leases any net
sales proceeds not required to be distributed to stockholders in order to
preserve the Company's status as a REIT. If Listing does not occur by December
31, 2005, the Company will undertake the orderly liquidation of the Company and
the sale of the Company's assets and will distribute any net sales proceeds to
stockholders. In addition, the Company will not sell any assets if such sale
would not be consistent with the Company's objective of qualifying as a REIT.
In deciding the precise timing and terms of Property sales, the
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
2
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.
Leases
As of December 31, 1997, the Company had acquired, either directly or
through a joint venture arrangement, 244 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 2006
and 2017. 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 $61,900 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 15 of the 20 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 44 Properties consisting of land
only, the Company acquired the land and is leasing these 44 parcels to the
lessee pursuant to four master lease agreements (the "Master Lease Agreements").
The ground lessee has subleased the 44 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 44 Properties. In connection with the acquisition of the 44 Properties, the
Company provided mortgage financing of $17,047,000 to the lessee pursuant to
four Mortgage Loans evidenced by four mortgage notes which are collateralized by
the building improvements on these 44 Properties plus two additional properties.
The Mortgage Notes bear interest ranging from 10.5% to 10.75% per annum, with
all four having principal and interest due in equal monthly installments over 20
years. At the time entered into, the Mortgage Notes equaled approximately 76 to
88 percent of the appraised value of the related buildings. Management believes
that,
3
due to the fact that the Company owns the underlying land relating to the 44
Properties and due to other underwriting criteria, the Company has sufficient
collateral for the Master Mortgage Notes.
During the period January 1, 1998 through January 22, 1998, the Company
acquired two additional Properties (both of which are under construction). The
leases for the two Properties are substantially the same as those described
above.
Major Tenants
During 1997, three of the Company's lessees and borrowers, or
affiliated groups of lessees and borrowers, (i) 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"), (ii) Foodmaker, Inc. and (iii)
Houlihan's Restaurants, Inc., each contributed more than ten percent of the
Company's total rental, earned income, 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 44 restaurants and is the
borrower on Mortgage Loans relating to the buildings on such Properties.
Foodmaker, Inc. is the lessee under leases relating to 29 restaurants and
Houlihan's Restaurants Inc. is the lessee under leases relating to 20
restaurants. In addition, four Restaurant Chains, Pizza Hut, Golden Corral
Family Steakhouse, Jack in the Box and Boston Market, each accounted for more
than ten percent of the Company's total rental, earned income, and interest
income relating to Properties, Mortgage Loans and Secured Equipment Leases
during 1997. Because the Company has not completed its investment in Properties,
Mortgage Loans and Secured Equipment Leases 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, earned income, and interest income
during 1998 and subsequent years. In the event that certain lessees, borrowers
or Restaurant Chains contribute more than ten percent of the Company's rental,
earned income, and interest income in future years, any failure of such lessees,
borrowers or Restaurant Chains could materially affect the Company's income. As
of December 31, 1997, 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 1997 Offering.
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, 1997, 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.
4
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, Secured Equipment Leases and the line of
credit, 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 Properties, the Mortgage Loans, the
Secured Equipment Leases and the line of credit. In exchange for these services,
the Advisor is entitled to receive certain fees from the Company. For
supervision of the Properties and Mortgage Loans, the Advisor receives a monthly
asset and mortgage management fee, of one-twelfth of .60% of the Company's real
estate asset value and the outstanding principal balance of the Mortgage Loans
as of the end of the proceeding month. The management fee, which will not exceed
fees which are competitive for similar services in the same geographic area, may
or may not be taken, in whole or in part as to any year, in the sole discretion
of the Advisor. For negotiating equipment financing and loans 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 lease or loan (the "Secured
Equipment Lease Servicing Fee").
The Advisory Agreement continues until April 18, 1998, 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 $15,000,000 line of credit
and security agreement with a bank, the proceeds of which were to be used by the
Company to fund Secured Equipment Leases. The line of credit provided that the
Company would be able to receive advances of up to $15,000,000 until March 4,
1998. Generally, all advances under the line of credit bore interest at either
(i) a rate per annum equal to 215 basis points above the Reserve Adjusted LIBOR
Rate (as defined in the line of credit) or (ii) a rate per annum equal to the
bank's prime rate, whichever the Company selected at the time advances were
made. As a condition of obtaining the line of credit, the Company agreed to
grant to the bank a first security interest in the Secured Equipment Leases.
In August 1997, the Company's $15,000,000 line of credit was amended
and restated to enable the Company to receive advances on a revolving
$35,000,000 uncollateralized line of credit (the "Line of Credit") to provide
equipment financing, to purchase and develop Properties and to fund Mortgage
Loans. The advances bear interest at a rate of LIBOR plus 1.65% or the bank's
prime rate, whichever the Company selects at the time of borrowing. Interest
only is repayable monthly until July 31, 1999, at which time all remaining
interest and principal shall be due. The Line of Credit provides for two
one-year renewal options.
During the year ended December 31, 1997, the Company obtained advances
totalling $19,721,804 under the Line of Credit, the proceeds of which were used
to fund 27 Secured Equipment Leases (including two partially funded Secured
Equipment Leases as of December 31, 1997), to provide equipment financing in the
form of two promissory notes and to pay loan costs on the original line of
credit. The Company expects to obtain additional advances under the Line of
Credit to fund the remaining amounts due for two of the 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. As of December 31, 1997, the notional balance was approximately
$1,750,000. The Company is exposed to credit loss in the event of nonperformance
by the other party to the interest rate swap agreements; however, the Company
does not anticipate nonperformance by the counterparty.
5
The Company expects to use uninvested net offering proceeds, plus any
net offering proceeds from the sale of additional shares, to purchase additional
Properties, to fund construction costs relating to the Properties under
construction and to make Mortgage Loans. The Company does not intend to use net
offering proceeds to fund Secured Equipment Leases; however, from time to time
the Company may use uninvested net offering proceeds to repay a portion of or
all of the balance outstanding under the Line of Credit pending the investment
of such offering proceeds in Properties or Mortgage Loans in order to reduce the
Company's interest cost during such period. No Properties will be encumbered in
connection with the Line of Credit.
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, 1997, the Company owned, either directly or through
a joint venture arrangement, 244 Properties, located in 35 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, 1998 through January 22, 1998, the Company
acquired two additional Properties (both of which were under construction), for
cash at a total cost of approximately $1,067,000, excluding development costs,
acquisition fees and certain acquisition expenses. The leases of these two
Properties are substantially the same as the leases described in Item 1.
Business - Leases.
The Company presently is negotiating to acquire additional properties,
but as of January 22, 1998, had not acquired any such properties.
Description of Properties
Land. The Company's Property lot sizes range from approximately 11,300
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.
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Buildings. The buildings generally are rectangular and are constructed
from various combinations of stucco, steel, wood, brick and tile. Building sizes
range from approximately 2,000 to 12,700 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.
As of December 31, 1997, the Company owned 20 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, 1997 (see Item 1. Business - Major Tenants),
are substantially the same as those described in Item 1. Business Leases.
Castle Hill leases 44 Pizza Hut restaurants under four Master Leases.
The initial term of each Master Lease is 20 years (expiring between 2016 and
2017) and the aggregate minimum base annual rent is $857,580. In addition,
Castle Hill is the borrower on Mortgage Loans relating to the buildings on such
Properties.
Foodmaker, Inc. leases 29 Jack in the Box restaurants. The initial
term of each lease is 18 years (expiring between 2011 and 2015) and the
aggregate minimum base annual rent is approximately $3,218,000.
Houlihan's Restaurants, Inc. leases 20 Houlihan's, Charley's and
Darryl's restaurants. The initial term of each lease is 20 years (expiring in
2017) and the aggregate minimum base annual rent is approximately $2,936,000.
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.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
As of January 22, 1998, there were 17,753 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 two to seven years of commencement of the 1998
Offering, there is no assurance that listing will occur and if listing occurs
there is no assurance that a public market for the Shares will develop. 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. 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 distribution
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, 1997, no Shares
were transferred, or retired pursuant to the redemption plan.
As of December 31, 1997, the offering price 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, 1997 and
1996, the Company declared cash distributions of $16,854,297 and $5,436,072,
respectively, to stockholders. For federal income tax purposes, 93.33% and
90.25% of distributions paid in 1997 and 1996, respectively, were considered to
be ordinary income and 6.67% and 9.75%, respectively, were considered to be a
return of capital. No amounts distributed to stockholders for the years ended
December 31, 1997 and 1996, are required to be or have been treated by the
Company as a return of capital for purposes of calculating the stockholders'
return on their invested capital. The following table presents total
distributions and distributions per share:
First Second Third Fourth Year
1997 Quarter
Total distributions declared $2,693,357 $3,589,113 $4,597,499 $5,974,328 $16,854,297
Distributions per share 0.1792 0.1865 0.1885 0.1906 0.7448
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
In January 1998, the Company declared distributions to stockholders
totalling $2,299,701, ($0.06354 per Share) payable in March 1998.
The Company intends to continue to declare distributions of cash to the
stockholders on a monthly basis during the offering period, and quarterly
thereafter.
8
Item 6. Selected Financial Data
1997 1996 1995 1994 (1)
-------------- ------------- ------------- -----------
Year Ended December 31:
Revenues $ 19,457,933 $ 6,206,684 $ 659,131 $ -
Net earnings 15,564,456 4,745,962 368,779 -
Cash distributions declared 16,854,297 5,436,072 638,618 -
Funds from operations (2) 17,348,723 5,257,040 469,097 -
Earnings per Share 0.66 0.59 0.19 -
Cash distributions declared per Share 0.74 0.71 0.31 -
Weighted average number of Shares
outstanding (3) 23,423,868 8,071,670 1,898,350 -
At December 31:
Total assets $339,077,762 $134,825,048 $33,603,084 $ 929,585
Total stockholders' equity 321,638,101 122,867,427 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. (Net earnings determined in accordance with GAAP
include the noncash effect of straight-lining rent increases throughout
the lease term and/or rental payments during the construction of a
property prior to the date it is placed in service. This
straight-lining is a GAAP convention requiring real estate companies to
report rental revenue based on the average rent per year over the life
of the lease. During the years ended December 31, 1997, 1996 and 1995,
net earnings included $1,941,054, $517,067 and $39,142, respectively,
of these amounts.) 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.
9
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
CNL American Properties Fund, Inc. 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 operators of
certain national and regional fast-food, family-style and casual dining
Restaurant Chains. In addition, the Company provides Mortgage Loans for the
purchase of buildings, generally by tenants that lease the underlying land from
the Company. In addition, the Company offers furniture, fixtures and equipment
financing through Secured Equipment Leases 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 Advisors. In April 1995, the Company commenced a public offering for the
sale of up to 16,500,000 Shares ($165,000,000) of common stock, the net proceeds
of which were used to invest in Properties and Mortgage Loans. Of the 16,500,000
Shares of common stock offered, 1,500,000 Shares ($15,000,000) were available
only to stockholders who elected to participate in the Company's distribution
reinvestment plan. Upon completion of its Initial Offering on February 6, 1997,
the Company had received subscription proceeds of $150,591,765 (15,059,177
shares), including $591,765 (59,177 shares) issued pursuant to the Company's
reinvestment plan.
Following the completion of its Initial Offering, on February 6, 1997,
the Company commenced the 1997 Offering of up to 27,500,000 Shares of common
stock. Of the 27,500,000 Shares of common stock being offered, 2,500,000 are
available only to stockholders who elect to participate in the Company's
reinvestment plan. As of December 31, 1997, the Company had received
subscription proceeds of $361,729,707 (36,172,971 shares) from the Initial
Offering and 1997 Offering, including $2,464,413 (246,441 shares) issued
pursuant to the reinvestment plan.
As of December 31, 1997, net proceeds to the Company from its Initial
Offering, 1997 Offering and capital contributions from the Advisor, after
deduction of organizational and offering expenses, totalled $323,867,890.
Approximately $272,140,000 of such amount had been used to invest, or committed
for investment, in 244 Properties (including ten Properties on which a
restaurant was being constructed as of December 31, 1997), which includes
mortgage financing of $17,047,000, acquisition fees to the Advisor totalling
$16,277,837 and certain acquisition expenses as of December 31, 1997. The
Company acquired 18 of the 244 Properties from affiliates for purchase prices
totalling approximately $14,681,000. 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 acquired from an
affiliate was purchased 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 ten Properties under construction at December
31, 1997, the Company has entered into various development agreements with
tenants which provide terms and specifications for the construction of buildings
the tenants have agreed to lease. The agreements provide a maximum amount of
development costs (including the purchase price of the land and closing costs)
to be paid by the Company. The aggregate maximum development costs the Company
has agreed to pay are approximately $14,495,000, of which approximately
$10,202,000 had been incurred as of December 31, 1997. The buildings currently
under construction are expected to be operational by June 1998. In connection
with the purchase of each Property, the Company, as lessor, entered into a
long-term lease agreement.
On October 10, 1997, the Company filed a registration statement with
the Securities and Exchange Commission in connection with the proposed sale by
the Company of up to 34,500,000 Shares of common stock in its 1998 Offering,
which is expected to commence immediately following the completion of the
Company's 1997 Offering. Of the 34,500,000 Shares of common stock to be offered,
2,000,000 will be available only to stockholders purchasing shares through the
reinvestment plan. The price per share and the other terms of the 1998 Offering,
including the percentage of gross proceeds payable to the managing dealer for
selling commissions and expenses in connection with the offering, payable to the
Advisor for acquisition fees and acquisition expenses and reimbursable to the
Advisor for offering expenses, will be the same as those for the Company's
Initial Offering and 1997 Offering.
10
Management believes that the increase in the amount of assets of the Company
that will result from the 1998 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. If the Shares are not
listed on a national securities exchange or over-the-counter market by December
31, 2005, as to which there can be no assurance, the Company will commence
orderly sale of its assets and the distribution of the proceeds. Listing does
not assure liquidity.
As of January 22, 1998, the Company had received subscription proceeds
of $374,047,498 (37,404,750 Shares) from its Initial Offering and 1997 Offering,
including $2,464,413 (246,441 Shares) issued pursuant to the Company's
reinvestment plan. As of January 22, 1998, the Company had invested, or
committed for investment, a total of approximately $275,403,000 of such proceeds
in 246 Properties, in providing mortgage financing for Mortgage Loans relating
to 44 Properties consisting of land only and the buildings on two additional
Properties through Mortgage Loans and to pay acquisition fees and expenses
totalling $16,832,137 to the Advisor, leaving approximately $59,242,000 in
aggregate net offering proceeds available for investment in Properties and
Mortgage Loans.
The Company expects to use uninvested net offering proceeds, plus any
net offering proceeds from the sale of additional Shares in the 1997 Offering
and the 1998 Offering, to purchase additional Properties, to fund construction
costs relating to the Properties under construction and to make Mortgage Loans.
The Company does not intend to use net offering proceeds to fund Secured
Equipment Leases; however, from time to time the Company may use uninvested net
offering proceeds to repay a portion of or all of the balance outstanding under
the Line of Credit pending the investment of such offering proceeds in
Properties or Mortgage Loans in order to reduce the Company's interest cost
during such period. The Company expects to fund the Secured Equipment Leases
with proceeds from the Line of Credit. 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, although the Company is expected to
have a total portfolio of 670 to 730 Properties if the maximum number of shares
is sold in the 1997 Offering and 1998 Offering. The Company intends to limit
equipment financing to ten percent of the aggregate gross offering proceeds from
its offerings.
The Company currently is negotiating to acquire additional Properties,
but as of January 22, 1998, had not acquired any such Properties.
During 1996, the Company entered into three Mortgage Loans in the
aggregate principal sum of $12,847,000, collateralized by mortgages on the
buildings relating to 35 Pizza Hut Properties. The Mortgage Loans bear interest
at a rate of 10.75% per annum and are being collected in 240 equal installments
totalling $130,426. In February 1997, the Company entered into an additional
Mortgage Loan in the principal sum of $4,200,000, collateralized by mortgages on
the buildings on nine Pizza Hut Properties and two additional Pizza Hut
buildings. The Mortgage Loan bears interest at a rate of 10.5% per annum and is
being collected in 240 monthly installments of $41,943. Mortgage notes
receivable at December 31, 1997 and 1996 of $17,622,010 and $13,389,607,
respectively, include accrued interest of $118,887 and $35,285, respectively.
During 1997, the Company sold five of its Properties and the Equipment
relating to two Secured Equipment Leases to tenants. The Company received net
proceeds of approximately $7,252,000, which were equal to the carrying value of
the Properties and the Equipment at the time of the sales. As a result, no gain
or loss was recognized for financial reporting purposes. The Company used the
net sales proceeds relating to the sale of the Equipment to repay amounts
previously advanced under its line of credit. The Company reinvested the
proceeds from the sale of Properties in additional Properties.
In October 1997, the Company entered into two promissory notes with a
borrower for equipment financing, totalling $13,225,000 which are collateralized
by restaurant equipment. The promissory notes bear interest at a rate of ten
percent per annum and will be collected in 84 equal monthly installments
totalling $219,550 beginning January 1, 1998. As of December 31, 1997, the
Company had advanced $12,521,400 to the borrower and had a remaining balance to
fund of $703,600. Notes receivable at December 31, 1997, of $13,548,044 include
accrued interest of $323,044. In January 1998, at the borrower's request, the
Company applied the majority of the $703,600 balance remaining to be funded,
towards the January payments of principal and interest, the interest accrued
since October 1997.
11
In March 1996, the Company entered into a line of credit and security
agreement with a bank, the proceeds of which were to be used by the Company to
fund Secured Equipment Leases. The line of credit provided that the Company
would be able to receive advances of up to $15,000,000 until March 4, 1998.
Generally, all advances under the line of credit bore interest at either (i) a
rate per annum equal to 215 basis points above the Reserve Adjusted LIBOR Rate
(as defined in the line of credit) or (ii) a rate per annum equal to the bank's
prime rate, whichever the Company selected at the time advances were made. As a
condition of obtaining the line of credit, the Company agreed to grant to the
bank a first security interest in the Secured Equipment Leases.
In August 1997, the Company's $15,000,000 line of credit was amended
and restated to enable the Company to receive advances on a revolving
$35,000,000 uncollateralized Line of Credit to provide equipment financing, to
purchase and develop Properties and to fund Mortgage Loans. The advances bear
interest at a rate of LIBOR plus 1.65% or the bank's prime rate, whichever the
Company selects at the time of borrowing. Interest only is repayable monthly
until July 31, 1999, at which time all remaining interest and principal shall be
due. The Line of Credit provides for two one-year renewal options.
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. As of December 31, 1997, the notional balance was approximately
$1,750,000. The Company is exposed to credit loss in the event of nonperformance
by the other party to the interest rate swap agreements; however, the Company
does not anticipate nonperformance by the counterparty.
Advances used to fund Secured Equipment Leases will be repaid using
payments received from Secured Equipment Leases and will be refinanced in regard
to any Secured Equipment Lease not fully repaid at the end of the term of the
Line of Credit. The Company, from time to time, may use uninvested net offering
proceeds to repay a portion of or all of the balance outstanding under the Line
of Credit pending the investment of such offering proceeds in Properties or
Mortgage Loans in order to reduce the Company's interest cost during such
period. Advances used to purchase and develop Properties and to fund Mortgage
Loans will be repaid using additional offering proceeds or refinanced on a
long-term basis.
The Company will not encumber Properties in connection with the Line of
Credit. Management believes that during the offering period the Line of Credit
will allow the Company to make investments in Properties and Mortgage Loans that
the Company otherwise would be forced to delay until it raised a sufficient
amount of proceeds from the sale of shares to allow the Company to make the
investments. By eliminating this delay the Company will also eliminate the risk
that these investments will no longer be available, or the terms of the
investments will be less favorable, when the Company has raised sufficient
offering proceeds. Alternatively, affiliates of the Advisor could make such
investments, pending receipt by the Company of sufficient offering proceeds, in
order to preserve the investment opportunities for the Company. However,
Properties acquired by the Company in this manner would be subject to closing
costs both on the original purchase by the affiliate and on the subsequent
purchase by the Company, which would increase the amount of expenses associated
with the acquisition of Properties and reduce the amount of offering proceeds
available for investment in income-producing assets. Management believes that
the use of the Line of Credit by the Company will enable the Company to reduce
or eliminate the instances in which the Company will be required to pay
duplicate closing costs.
During the years ended December 31, 1997 and 1996, the Company obtained
advances totalling $19,721,804 and $3,666,896, respectively, under the Line of
Credit, the proceeds of which were used to fund Secured Equipment Leases and to
pay loan costs. During the year ended December 31, 1997, the Company used
proceeds relating to the sale of the equipment during 1997, as described above,
and uninvested net offering proceeds, to repay $20,784,577 of amounts advanced
under the Line of Credit. During the year ended December 31, 1996, the Company
used amounts collected under the terms of the Secured Equipment Leases to repay
$145,080 of amounts advanced under the Line of Credit. The Company expects to
obtain additional advances under the Line of Credit to fund future equipment
financing requirements and to purchase Properties and to invest in Mortgage
Loans.
12
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, 1997, the
Company had $49,595,001 invested in such short-term investments (including a
certificate of deposit in the amount of $2,000,000) as compared to $42,450,088
at December 31, 1996. 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, 1997, net of the repayment of amounts
advanced under the Line of Credit, as described above. 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 temporarily reduce
amounts outstanding under the Company's Line of Credit pending the investment of
net offering proceeds, to meet Company expenses and, in management's discretion,
to create cash reserves.
During the years ended December 31, 1997, 1996 and 1995, affiliates of
the Company incurred on behalf of the Company $2,351,244, $804,617 and
$2,084,145, respectively, for certain organizational and offering expenses. In
addition, during the years ended December 31, 1997, 1996 and 1995, affiliates of
the Company incurred on behalf of the Company $514,908, $206,103 and $131,629,
respectively, for certain acquisition expenses and $368,516, $243,402 and
$54,234, respectively, for certain operating expenses. As of December 31, 1997,
the Company owed the Advisor and its affiliates $1,524,294 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 from each of the Initial
Offering, 1997 Offering and 1998 Offering.
During the years ended December 31, 1997, 1996 and 1995, the Company
generated cash from operations (which includes cash received from tenants and
interest and other income received, less cash paid for operating expenses) of
$17,076,214, $5,482,540 and $498,459, respectively. Based on current and
anticipated future cash from operations, the Company declared distributions to
the stockholders of $16,854,297, $5,436,072 and $638,618 during 1997, 1996 and
1995, respectively. In addition, in January 1998, the Company declared
distributions to its stockholders totalling $2,299,701, payable in March 1998.
For the years ended December 31, 1997, 1996 and 1995, 93.33%, 90.25% and 59.82%,
respectively, of the distributions received by stockholders were considered to
be ordinary income and 6.67%, 9.75% and 40.18%, respectively, were considered a
return of capital for federal income tax purposes. However, no amounts
distributed or to be distributed to the stockholders as of January 22, 1998, are
required to be or have been treated by the Company as a return of capital for
purposes of calculating the stockholders' return on their invested capital.
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.
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 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.
13
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, 1997, the Company and its consolidated joint
venture, CNL/Corral South Joint Venture, had purchased and entered into
long-term, triple-net leases for 244 Properties. The leases provide for minimum
annual base rental payments (payable in monthly installments) ranging from
approximately $61,900 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, during the years ended December 31, 1997, 1996, and 1995,
the Company earned a total of $15,490,615, $4,357,298 and $539,776,
respectively, in rental income from operating leases, earned income from the
direct financing leases and contingent rental income from 244 Properties and 27
Secured Equipment Leases in 1997, 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 intends to make additional investments in
Properties, Mortgage Loans and Secured Equipment Leases, revenues for the years
ended December 31, 1997, 1996 and 1995, represent only a portion of revenues
which the Company is expected to earn during future years in which the Company
has completed additional investments and the Company's Properties are
operational (and other investments in place) for the full period.
During the years ended December 31, 1997 and 1996, the Company earned
$1,687,456 and $1,069,349, respectively, in mortgage interest income relating to
the Mortgage Loans collateralized by Pizza Hut Properties, as described above in
"Liquidity and Capital Resources". The increase during the year ended December
31, 1997, is attributable to investing in an additional Mortgage Loan during
1997.
During 1997, three of the Company's lessees and borrowers, or
affiliated groups of lessees and borrowers, Castle Hill, Foodmaker, Inc. and
Houlihan's Restaurants Inc., each contributed more than ten percent of the
Company's total rental, earned income 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 44 restaurants and is the
borrower on Mortgage Loans relating to the buildings on such Properties, as well
as two additional properties. Foodmaker, Inc. is the lessee under leases
relating to 29 restaurants and Houlihan's Restaurants, Inc. is the lessee under
leases relating to 20 restaurants. In addition, four Restaurant Chains, Pizza
Hut, Golden Corral Family Steakhouse, Jack in the Box and Boston Market, each
accounted for more than ten percent of the Company's total rental, earned income
and interest income relating to Properties, Mortgage Loans and Secured Equipment
Leases during 1997. Because the Company has not completed its investment in
Properties, Mortgage Loans and Secured Equipment Leases 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, earned income and
interest income during 1998 and subsequent years. In the event that certain
lessees, borrowers or Restaurant Chains contribute more than ten percent of the
Company's rental, earned income 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, 1997, 1996 and 1995, the Company
earned $2,254,375, $773,404 and $118,859, respectively, in interest income
earned on the promissory notes with a borrower for equipment financing, as
described above in "Liquidity and Capital Resources", and 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 1997 Offering
and the 1998 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 $3,862,024, $1,430,795 and $290,276 for the years ended December 31, 1997,
1996 and 1995, respectively. Total operating expenses increased during each of
the years ended December 31, 1997 and 1996, as compared to the prior year,
primarily as a result of the Company having invested in additional Properties
and Mortgage Loans during each year. General and administrative expenses as a
percentage of total revenues is expected to decrease as the Company acquires
additional
14
Properties, invests in additional Mortgage Loans and the Properties under
construction become operational. However, asset and mortgage management fees and
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 net 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, 1997, 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.
All of the Company's leases as of December 31, 1997, 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.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share". The
statement, which is effective for fiscal years ending after December 15, 1997,
provides for a revised computation of earnings per share. The Company adopted
this standard during the year ended December 31, 1997. Adoption of this standard
had no material effect on the Company's financial position or results of
operations.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 129, "Disclosure of Information
about Capital Structure". The statement, which is effective for fiscal years
ending after December 15, 1997, provides for disclosure of the Company's capital
structure. At this time, the Company's Board of Directors has not determined the
relative rights, preferences, and privileges of each class or series of
preferred stock authorized. Since the Company has not issued preferred shares,
the disclosures to this standard are not applicable.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130 "Reporting Comprehensive Income". The statement, which is effective for
fiscal years beginning after December 15, 1997, requires the reporting of net
earnings and all other changes to equity during the period, except those
resulting from investments by owners and distributions to owners, in a separate
statement that begins with net earnings. Currently, the Company's only component
of comprehensive income is its net earnings. The Company does not believe that
adoption of this standard will have a material effect on the Company's financial
position or results of operations.
The Advisor of the Company is in the process of assessing and
addressing the impact of the year 2000 on its computer package software. The
hardware and built-in software are believed to be year 2000 compliant.
Accordingly, the Company does not expect this matter to materially impact how it
conducts business nor its future results of operations or financial position.
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 real estate conditions, continued availability of proceeds from the
Company's 1997 Offering and the availability of proceeds
15
from the Company's 1998 Offering, the ability of the Company to locate suitable
tenants for its Properties and borrowers for its Mortgage Loans, and the ability
of such tenants and borrowers to make payments under their respective leases,
Secured Equipment Leases or Mortgage Loans.
Item 8. Financial Statements and Supplementary Data
16
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
CONTENTS
Page
Report of Independent Accountants 18
Financial Statements:
Consolidated Balance Sheets 19
Consolidated Statements of Earnings 20
Consolidated Statements of Stockholders' Equity 21
Consolidated Statements of Cash Flows 22
Notes to Consolidated Financial Statements 24
17
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, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. 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, 1998
18
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31,
ASSETS 1997 1996
------------ ------------
Land and buildings on operating leases,
less accumulated depreciation $205,338,186 $ 60,243,146
Net investment in direct financing leases 47,613,595 15,204,972
Cash and cash equivalents 47,586,777 42,450,088
Certificates of deposit 2,008,224 -
Receivables, less allowance for doubtful
accounts of $99,964 and $2,857 635,796 142,389
Notes receivable 13,548,044 -
Mortgage notes receivable 17,622,010 13,389,607
Accrued rental income 1,772,261 422,076
Intangibles and other assets 2,952,869 2,972,770
------------ ------------
$339,077,762 $134,825,048
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Line of credit $ 2,459,043 $ 3,521,816
Accrued construction costs payable 10,978,211 6,587,573
Accounts payable and other accrued expenses 1,060,497 79,817
Due to related parties 1,524,294 997,084
Rents paid in advance 517,428 118,900
Deferred rental income 557,576 335,849
Other payables 56,878 28,281
------------ ------------
Total liabilities 17,153,927 11,669,320
------------ ------------
Minority interest 285,734 288,301
------------ ------------
Commitments (Note 13)
Stockholders' equity:
Preferred stock, without par value.
Authorized and unissued 3,000,000
shares - -
Excess shares, $0.01 par value per share.
Authorized and unissued 78,000,000
and 23,000,000 shares, respectively - -
Common stock, $0.01 par value per share.
Authorized 75,000,000 and 20,000,000
shares, respectively, issued and
outstanding 36,192,971 and 13,944,715,
respectively 361,930 139,447
Capital in excess of par value 323,525,961 123,687,929
Accumulated distributions in excess of
net earnings (2,249,790) (959,949)
------------ ------------
Total stockholders' equity 321,638,101 122,867,427
------------ ------------
$339,077,762 $134,825,048
============ ============
See accompanying notes to consolidated financial statements.
19
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended December 31,
1997 1996 1995
----------- ----------- -----------
Revenues:
Rental income from operating
leases $12,457,200 $ 3,731,806 $ 510,841
Earned income from direct
financing leases 3,033,415 625,492 28,935
Interest income from
mortgage notes receivable 1,687,456 1,069,349 -
Other interest income 2,254,375 773,404 118,859
Other income 25,487 6,633 496
----------- ----------- -----------
19,457,933 6,206,684 659,131
----------- ----------- -----------
Expenses:
General operating and
administrative 944,763 542,564 134,759
Professional services 65,962 58,976 8,119
Asset and mortgage manage-
ment fees to related party 804,879 251,200 23,078
State taxes 251,358 56,184 20,189
Depreciation and amorti-
zation 1,795,062 521,871 104,131
----------- ----------- -----------
3,862,024 1,430,795 290,276
----------- ----------- -----------
Earnings Before Minority
Interest in Income of
Consolidated Joint Venture 15,595,909 4,775,889 368,855
Minority Interest in Income of
Consolidated Joint Venture (31,453) (29,927) (76)
----------- ----------- -----------
Net Earnings $15,564,456 $ 4,745,962 $ 368,779
=========== =========== ===========
Earnings Per Share of Common
Stock (Basic and Diluted) $ 0.66 $ 0.59 $ 0.19
=========== =========== ===========
Weighted Average Number of
Shares of Common Stock
Outstanding 23,423,868 8,071,670 1,898,350
=========== =========== ===========
See accompanying notes to consolidated financial statements.
20
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1997, 1996 and 1995
Accumulated
Common stock Capital in distributions
Number Par excess of in excess of
of shares value par value net earnings Total
Balance at December 31,
1994 20,000 $ 200 $ 199,800 $ - $ 200,000
Subscriptions received
for common stock
through public offering
and distribution
reinvestment plan 3,845,416 38,454 38,415,704 - 38,454,158
Stock issuance costs - - (6,403,671) - (6,403,671)
Net earnings - - - 368,779 368,779
Distributions declared
($0.31 per share) - - - (638,618) (638,618)
---------- -------- ------------ ----------- ------------
Balance at December 31,
1995 3,865,416 38,654 32,211,833 (269,839) 31,980,648
Subscriptions received
for common stock
through public offering
and distribution
reinvestment plan 10,079,299 100,793 100,692,198 - 100,792,991
Stock issuance costs - - (9,216,102) - (9,216,102)
Net earnings - - - 4,745,962 4,745,962
Distributions declared
($0.71 per share) - - - (5,436,072) (5,436,072)
---------- -------- ------------ ----------- ------------
Balance at December 31,
1996 13,944,715 139,447 123,687,929 (959,949) 122,867,427
Subscriptions received
for common stock
through public offering
and distribution
reinvestment plan 22,248,256 222,483 222,260,077 - 222,482,560
Stock issuance costs - - (22,422,045) - (22,422,045)
Net earnings - - - 15,564,456 15,564,456
Distributions declared
($0.74 per share) - - - (16,854,297) (16,854,297)
---------- -------- ------------ ----------- ------------
Balance at December 31,
1997 36,192,971 $361,930 $323,525,961 $(2,249,790) $321,638,101
========== ======== ============ =========== ============
See accompanying notes to consolidated financial statements.
21
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
1997 1996 1995
------------ ------------ --------
Increase (Decrease) in Cash and Cash
Equivalents:
Cash Flows From Operating Activities:
Cash received from tenants $ 15,440,803 $ 4,543,506 $ 492,488
Cash paid for expenses (1,903,876) (928,001) (113,384)
Interest received 3,539,287 1,867,035 119,355
------------ ------------ ------------
Net cash provided by operating
activities 17,076,214 5,482,540 498,459
------------ ------------ ------------
Cash Flows From Investing Activities:
Additions to land and buildings on
operating leases (143,542,667) (36,104,148) (18,835,969)
Increase in net investment in direct
financing leases (39,155,974) (13,372,621) (1,364,960)
Proceeds from sale of buildings and
equipment under direct financing
leases 7,251,510 - -
Investment in certificates of deposit (2,000,000) - -
Investment in notes receivable (12,521,401) - -
Investment in mortgage notes
receivable (4,401,982) (13,547,264) -
Collections on mortgage notes
receivable 250,732 133,850 -
Increase in intangibles and other
assets - (1,103,896) (628,142)
------------ ------------ ------------
Net cash used in investing
activities (194,119,782) (63,994,079) (20,829,071)
------------ ------------ ------------
Cash Flows From Financing Activities:
Reimbursement of acquisition,
organization, deferred offering and
stock issuance costs paid by related
parties on behalf of the Company (2,857,352) (939,798) (2,500,056)
Proceeds from borrowing on line of
credit 19,721,804 3,666,896 -
Payment on line of credit (20,784,577) (145,080) -
Contribution from minority interest
of consolidated joint venture - 97,419 200,000
Subscriptions received from
stockholders 222,482,560 100,792,991 38,454,158
Distributions to minority interest (34,020) (39,121) -
Distributions to stockholders (16,854,297) (5,439,404) (635,286)
Payment of stock issuance costs (19,542,862) (8,486,188) (3,680,704)
Other 49,001 (54,533) -
------------ ------------ -----------
Net cash provided by financing
activities 182,180,257 89,453,182 31,838,112
------------ ------------ ------------
Net Increase in Cash and Cash Equivalents 5,136,689 30,941,643 11,507,500
Cash and Cash Equivalents at Beginning of
Year 42,450,088 11,508,445 945
------------ ------------ ------------
Cash and Cash Equivalents at End of Year $ 47,586,777 $ 42,450,088 $ 11,508,445
============ ============ ============
See accompanying notes to consolidated financial statements.
22
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Year Ended December 31,
1997 1996 1995
------------ ------------ --------
Reconciliation of Net Earnings to Net Cash
Provided by Operating Activities:
Net earnings $ 15,564,456 $ 4,745,962 $ 368,779
------------ ------------ ------------
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation 1,784,268 511,078 100,318
Amortization 10,794 69,886 3,813
Increase in receivables (905,339) (160,984) (44,749)
Decrease in net investment in direct
financing leases 1,130,095 259,740 1,078
Increase in accrued rental income (1,350,185) (382,934) (39,142)
Increase in intangibles and other
assets (6,869) (4,293) (8,090)
Increase (decrease) in accounts
payable and other accrued expenses 153,223 (2,896) 38,461
Increase (decrease) in due to related
parties, excluding reimbursement of
acquisition, organization, deferred
offering and stock issuance costs
paid on behalf of the Company 15,466 (30,929) 42,868
Increase in rents paid in advance 398,528 93,549 25,351
Increase in deferred rental income 221,727 335,849 -
Increase in other payables 28,597 18,585 9,696
Increase in minority interest 31,453 29,927 76
------------ ------------ ------------
Total adjustments 1,511,758 736,578 129,680
------------ ------------ ------------
Net Cash Provided by Operating Activities $ 17,076,214 $ 5,482,540 $ 498,459
============ ============ ============
Supplemental Schedule of Non-Cash Investing
and Financing Activities:
Related parties paid certain acquisition,
organization, deferred offering and
stock issuance costs on behalf of the
Company as follows:
Acquisition costs $ 514,908 $ 206,103 $ 131,629
Organization costs - - 20,000
Deferred offering costs - 466,405 -
Stock issuance costs 2,351,244 338,212 2,084,145
------------ ------------ ------------
$ 2,866,152 $ 1,010,720 $ 2,235,774
============ ============ ============
See accompanying notes to consolidated financial statements.
23
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
1. Significant Accounting Policies:
Organization and Nature of Business - CNL American Properties Fund,
Inc. (the "Company") was organized in Maryland on May 2, 1994,
primarily for the purpose of acquiring, directly or indirectly through
joint venture or co-tenancy arrangements, restaurant properties (the
"Properties") to be leased on a long-term, triple-net basis to
operators of certain national and regional fast-food, family-style and
casual dining restaurant chains. The Company also provides financing
(the "Mortgage Loans") for the purchase of buildings, generally by
tenants that lease the underlying land from the Company. In addition,
the Company offers furniture, fixtures and equipment financing through
leases or loans ("Secured Equipment Leases") to operators of restaurant
chains.
The Company was a development stage enterprise from May 2, 1994 through
June 1, 1995. Since operations had not begun, activities through June
1, 1995, were devoted to organization of the Company.
Principles of Consolidation - The Company accounts for its 85.47%
interest in CNL/Corral South Joint Venture using the consolidation
method. Minority interest represents the minority joint venture
partner's proportionate share of the equity in the Company's
consolidated joint venture. All significant intercompany accounts and
transactions have been eliminated.
Real Estate and Lease Accounting - The Company records the acquisition
of land, buildings and equipment at cost, including acquisition and
closing costs. In addition, interest costs incurred during construction
are capitalized in accordance with accounting standards. Land and
buildings are leased to unrelated third parties on a triple-net basis,
whereby the tenant is generally responsible for all operating expenses
relating to the Property, including property taxes, insurance,
maintenance and repairs. In addition, the Company offers equipment
financing through leases or loans. The Property leases are accounted
for using either the direct financing or the operating method. The
Secured Equipment Leases are accounted for using the direct financing
method. Such methods are described below:
24
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1997, 1996 and 1995
1. Significant Accounting Policies - Continued:
Direct financing method - The leases accounted for using the
direct financing method are recorded at their net investment
(which at the inception of the lease generally represents the
cost of the asset) (Note 5). Unearned income is deferred and
amortized to income over the lease terms so as to produce a
constant periodic rate of return on the Company's net
investment in the leases.
Operating method - Land and building leases accounted for
using the operating method are recorded at cost, revenue is
recognized as rentals are earned and depreciation is charged
to operations as incurred. Buildings are depreciated on the
straight-line method over their estimated useful lives of 30
years. When scheduled rentals (including rental payments, if
any, required during the construction of a Property) vary
during the lease term, income is recognized on a straight-line
basis so as to produce a constant periodic rent over the lease
term commencing on the date the Property is placed in service.
Accrued rental income represents the aggregate amount of
income recognized on a straight-line basis in excess of
scheduled rental payments to date. In contrast, deferred
rental income represents the aggregate amount of scheduled
rental payments to date (including rental payments due during
construction and prior to the Property being placed in
service) in excess of income recognized on a straight-line
basis over the lease term commencing on the date the Property
is placed in service.
When the Properties or equipment are sold, the related cost and
accumulated depreciation for operating leases and the net investment
for direct financing leases, plus any accrued rental income or deferred
rental income, will be removed from the accounts and any gains or
losses from sales will be reflected in income. Management reviews its
Properties for
25
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1997, 1996 and 1995
1. Significant Accounting Policies - Continued:
impairment whenever events or changes in circumstances indicate that
the carrying amount of the assets may not be recoverable through
operations. Management determines whether an impairment in value has
occurred by comparing the estimated future undiscounted cash flows,
including the residual value of the Property, with the carrying cost of
the individual Property. If an impairment is indicated, the assets are
adjusted to their fair value.
Mortgage Loans - The Company accounts for loan origination fees and
costs incurred in connection with Mortgage Loans in accordance with
Statement of Financial Accounting Standards No. 91, "Accounting for
Nonrefundable Fees and Costs Associated with Originating or Acquiring
Loans and Initial Direct Costs of Leases". This statement requires the
deferral of loan origination fees and the capitalization of direct loan
costs. The costs capitalized, net of the fees deferred, are amortized
to interest income as an adjustment of yield over the life of the
loans. The unpaid principal and accrued interest on the Mortgage Loans,
plus the unamortized balance of such fees and costs are included in
mortgage notes receivable (see Note 7).
Cash and Cash Equivalents - The Company considers all highly liquid
investments with a maturity of three months or less when purchased to
be cash equivalents. Cash and cash equivalents consist of demand
deposits at commercial banks, money market funds (some of which are
backed by government securities) and certificates of deposit (with
maturities of three months or less when purchased). Cash equivalents
are stated at cost plus accrued interest, which approximates market
value.
Cash accounts maintained on behalf of the Company in demand deposits at
commercial banks, money market funds and certificates of deposit may
exceed federally insured levels; however, the Company has not
experienced any losses in such accounts. The Company limits investment
of temporary cash investments to financial institutions with high
credit standing; therefore, management believes it is not exposed to
any significant credit risk on cash and cash equivalents.
26
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1997, 1996 and 1995
1. Significant Accounting Policies - Continued:
Organization Costs - Organization costs are amortized over five years
using the straight-line method and are included in intangibles and
other assets. For the years ended December 31, 1997 and 1996,
accumulated amortization of $10,318 and $6,318, respectively, was
recorded.
Loan Costs - Loan costs incurred in connection with the Company's
$35,000,000 line of credit have been capitalized and are being
amortized over the term of the loan commitment using the effective
interest method. Income or expense associated with interest rate swap
agreements related to the line of credit is recognized on the accrual
basis as earned or incurred through an adjustment to interest expense.
Loan costs are included in intangibles and other assets. As of December
31, 1997 and 1996, the Company had aggregate gross loan costs of
$100,634 and $54,533, respectively. For the years ended December 31,
1997 and 1996, accumulated amortization of $61,783 and $22,034,
respectively, was recorded.
Income Taxes - The Company has made an election to be taxed as a real
estate investment trust ("REIT") under Sections 856 through 860 of the
Internal Revenue Code of 1986, as amended, and related regulations. The
Company generally will not be subject to federal corporate income taxes
on amounts distributed to stockholders, providing it distributes at
least 95 percent of its REIT taxable income and meets certain other
requirements for qualifying as a REIT. Accordingly, no provision for
federal income taxes has been made in the accompanying consolidated
financial statements. Notwithstanding the Company's qualification for
taxation as a REIT, the Company is subject to certain state taxes on
its income and property.
Earnings Per Share - Basic earnings per share are calculated based upon
net earnings (income available to common stockholders) divided by the
weighted average number of shares of common stock outstanding during
the reporting period. The Company does not have any dilutive potential
common shares.
Use of Estimates - Management of the Company has made a number of
estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to
prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from those
estimates.
27
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1997, 1996 and 1995
1. Significant Accounting Policies - Continued:
Reclassification - Certain items in the prior years' financial
statements have been reclassified to conform with the 1997
presentation. These reclassifications had no effect on stockholders'
equity or net earnings.
New Accounting Standards - In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No.
128, "Earnings Per Share". The statement, which is effective for fiscal
years ending after December 15, 1997, provides for a revised
computation of earnings per share (see Earnings Per Share). Adoption of
this standard had no material effect on the Company's financial
position or results of operations.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure". The statement, which is effective
for fiscal years ending after December 15, 1997, provides for
disclosure of the Company's capital structure. At this time, the
Company's Board of Directors has not determined the relative rights,
preferences, and privileges of each class or series of preferred stock
authorized. Since the Company has not issued preferred shares, the
disclosures to this standard are not applicable.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130 "Reporting Comprehensive
Income". The statement, which is effective for fiscal years beginning
after December 15, 1997, requires the reporting of net earnings and all
other changes to equity during the period, except those resulting from
investments by owners and distributions to owners, in a separate
statement that begins with net earnings. Currently, the Company's only
component of comprehensive income is its net earnings. The Company does
not believe that adoption of this standard will have a material effect
on the Company's financial position or results of operations.
2. Public Offering:
The Company has a currently effective registration statement on Form
S-11 with the Securities and Exchange Commission for the sale of
27,500,000 shares ($275,000,000) of common stock (the "1997 Offering").
Of the 27,500,000 shares of common
28
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1997, 1996 and 1995
2. Public Offering - Continued:
stock, the Company has registered, 2,500,000 shares ($25,000,000) are
available only to stockholders who elect to participate in the
Company's reinvestment plan. The Company has adopted a reinvestment
plan pursuant to which stockholders may elect to have the full amount
of their cash distributions from the Company reinvested in additional
shares of common stock of the Company. Prior to the 1997 Offering, the
Company received proceeds from its initial offering (the "Initial
Offering"), of $150,591,765 (15,059,177 shares), including $591,765
(59,177 shares) issued pursuant to the Company's reinvestment plan. As
of December 31, 1997, the Company had received aggregate subscription
proceeds from its Initial Offering and 1997 Offering of $361,729,709
(36,172,971 shares), including $2,464,413 (246,441 shares) issued
through the reinvestment plan.
On October 10, 1997, the Company filed a registration statement with
the Securities and Exchange Commission in connection with the proposed
sale by the Company of up to 34,500,000 shares of common stock (the
"1998 Offering") in an offering expected to commence immediately
following the completion of the Company's 1997 Offering. Of the
34,500,000 shares of common stock to be offered, 2,000,000 will be
available only to stockholders purchasing shares through the
reinvestment plan. The price per share and the other terms of the 1998
Offering, including the percentage of gross proceeds payable to the
managing dealer for selling commissions and expenses in connection with
the offering, payable to the advisor for acquisition fees and
acquisition expenses and reimbursable to the advisor for offering
expenses, will be the same as those for the Company's 1997 Offering.
Net proceeds from the 1998 Offering will be invested in additional
Properties and Mortgage Loans.
3. Leases:
The Company leases its land, buildings and equipment to operators of
national and regional fast-food, family-style and casual dining
restaurants. The leases are accounted for under the provisions of
Statement of Financial Accounting Standards No. 13, "Accounting for
Leases". For Property leases classified as direct financing leases, the
building portions of the majority of the leases are accounted for as
direct financing leases while the land portions of these leases are
29
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Years Ended December 31, 1997, 1996 and 1995
3. Leases - Continued:
accounted for as operating leases. Substantially all Property leases
have initial terms of 15 to 20 years (expiring between 2006 and 2017)
and provide for minimum rentals. In addition, the majority of the
Property leases provide for contingent rentals and/or scheduled rent
increases over the terms of the leases. Each tenant also pays all
property taxes and assessments, fully maintains the interior and
exterior of the building and carries insurance coverage for public
liability, property damage, fire and extended coverage. The lease
options for the Property leases generally a