UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-15581
CNL Restaurant Properties, 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)
450 South Orange Avenue
Orlando, Florida 32801
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (407) 540-2000
CNL American Properties Fund, Inc.
(Former name, former address and former fiscal year, if
changed since last report)
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 checkmark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes X No___
45,248,670 shares of common stock, $0.01 par value, outstanding as of
August 8, 2003.
CONTENTS
Part I Page
----
Item 1.Financial Statements:
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of Operations 2-3
Condensed Consolidated Statements of
Stockholders' Equity and Comprehensive
Income/(Loss) 4
Condensed Consolidated Statements of Cash Flows 5-6
Notes to Condensed Consolidated Financial
Statements 7-16
Item 2.Management's Discussion and Analysis of Financial
Condition and Results of Operations 17-32
Item 3.Quantitative and Qualitative Disclosures About
Market Risk 33
Item 4.Controls and Procedures 33
Part II
Other Information 34-38
Item 1. Financial Statements
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except for share data)
June 30, December 31,
2003 2002
------------------ -----------------
ASSETS
Real estate investment properties $ 565,679 $ 575,401
Net investment in direct financing leases 109,639 112,441
Real estate held for sale 104,029 149,135
Mortgage loans held for sale 35,803 48,918
Mortgage, equipment and other notes receivable, net of allowance of
$12,631 and $12,062 respectively 317,436 334,149
Other investments 31,710 32,163
Cash and cash equivalents 27,186 15,531
Restricted cash 4,308 4,574
Receivables, less allowance for doubtful accounts
of $1,873 and $1,182, respectively 4,980 3,281
Accrued rental income 25,211 22,287
Goodwill 56,260 56,260
Other assets 32,520 30,158
------------------ -----------------
$ 1,314,761 $ 1,384,298
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Revolver $ 13,000 $ 14,000
Note payable 195,818 203,207
Mortgage warehouse facilities 99,077 145,758
Subordinated note payable 43,750 43,750
Bonds payable 414,140 424,508
Due to related parties 13,696 4,976
Other payables 44,932 35,526
------------------ -----------------
Total liabilities 824,413 871,725
------------------ -----------------
Minority interests, including redeemable partnership interest 6,742 18,422
Stockholders' equity:
Preferred stock, without par value. Authorized and unissued
3,000,000 shares -- --
Excess shares, $0.01 par value per share. Authorized and
unissued 78,000,000 shares -- --
Common stock, $0.01 par value per share. Authorized
62,500,000 shares, issued 45,285,972 shares, outstanding
45,248,670 shares 452 452
Capital in excess of par value 828,120 816,745
Accumulated other comprehensive loss (22,890 ) (16,862 )
Accumulated distributions in excess of net earnings (322,076 ) (306,184 )
------------------ -----------------
Total stockholders' equity 483,606 494,151
------------------ -----------------
$ 1,314,761 $ 1,384,298
================== =================
See accompanying notes to condensed consolidated financial statements.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except for share data)
Quarter ended Six months ended
June 30, June 30,
2003 2002 2003 2002
--------------- ---------------- -------------- ---------------
Revenues:
Sale of real estate $ -- $ 103,572 $ -- $ 140,805
Rental income from operating leases 15,944 17,890 31,390 37,337
Earned income from direct financing leases 2,557 2,921 5,294 5,881
Interest income from mortgage, equipment and
other notes receivable 7,558 9,137 15,741 18,526
Investment and interest income 1,227 699 2,329 2,406
Food and beverage sales 3,513 -- 6,933 --
Other income 2,197 3,420 4,887 6,582
Net decrease in value of mortgage loans
held for sale, net of related hedge (203 ) (26 ) (2,251 ) (3,247 )
--------------- ---------------- -------------- ---------------
32,793 137,613 64,323 208,290
--------------- ---------------- -------------- ---------------
Expenses:
Cost of real estate sold -- 96,098 -- 130,434
General operating and administrative 7,284 7,583 15,104 15,824
Interest expense 13,054 15,686 25,560 30,860
Food and other restaurant costs 3,423 -- 6,834 --
Property expenses 216 (366 ) 423 1,604
State and other taxes 100 48 172 230
Depreciation and amortization 3,305 3,400 6,629 6,786
Provision for loss on loans 2,242 -- 2,602 60
Impairment provisions 317 23 2,952 50
--------------- ---------------- -------------- ---------------
29,941 122,472 60,276 185,848
--------------- ---------------- -------------- ---------------
Earnings from continuing operations before minority
interest in income of consolidated joint ventures,
equity in earnings of unconsolidated joint ventures
and loss on sale of assets 2,852 15,141 4,047 22,442
Minority interest in income of consolidated joint (17 ) (529 ) (166 ) (664 )
ventures
Equity in earnings of unconsolidated joint ventures 315 173 927 442
Loss on sale of assets -- (216 ) (6 ) (374 )
--------------- ---------------- -------------- ---------------
Earnings from continuing operations 3,150 14,569 4,802 21,846
--------------- ---------------- -------------- ---------------
Discontinued operations
Earnings/(loss) from discontinued operations, net 1,233 (1,522 ) 2,258 (2,288 )
Gain on disposal of discontinued operations, net 6,208 1,995 11,549 1,916
--------------- ---------------- -------------- ---------------
7,441 473 13,807 (372 )
--------------- ---------------- -------------- ---------------
Net Income $ 10,591 $ 15,042 $ 18,609 $ 21,474
=============== ================ ============== ===============
See accompanying notes to condensed consolidated financial statements.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATION OPERATIONS- CONTINUED
(In thousands except for share data)
Quarter ended Six months ended
June 30, June 30,
2003 2002 2003 2002
--------------- ---------------- -------------- ---------------
Earnings (loss) per share of common stock
(basic and diluted):
From continuing operations $ 0.07 $ 0.33 $ 0.10 $ 0.50
From discontinued operations 0.16 0.01 0.31 (0.01 )
--------------- ---------------- -------------- ---------------
Net income $ 0.23 $ 0.34 $ 0.41 $ 0.49
=============== ================ ============== ===============
Weighted average number of shares of common stock
outstanding 45,248,670 44,170,902 45,248,670 44,123,535
=============== ================ ============== ===============
See accompanying notes to condensed consolidated financial statements.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS'EQUITY AND
COMPREHENSIVE INCOME/(LOSS)
Six Months Ended June 30, 2003 and Year Ended
December 31, 2002
(In thousands except for share data and per share data)
Accumulated
distributions Accumulated
Common stock Capital in in excess other
Number Par excess of of net comprehensive Comprehensive
of shares value par value earnings Income/(loss) Total Income/(loss)
----------- ---------- ----------- -------------- ------------- ---------- ----------------
Balance at December 31, 2001 44,075,641 $ 441 $ 798,154 $ (273,783 ) $ 1,370 $ 526,182
Shares issued 1,173,354 11 20,088 -- -- 20,099
Retirement of common stock (325 ) -- (4 ) -- -- (4 )
Stock issuance costs -- -- (1,493 ) -- -- (1,493 )
Net income -- -- -- 35,590 -- 35,590 $ 35,590
Other comprehensive loss,
market revaluation on
available for sale
securities -- -- -- -- (775 ) (775 ) (775 )
Current period adjustment to
recognize change in fair
value of cash flow hedges,
net of tax -- -- -- -- (17,457 ) (17,457 ) (17,457 )
------------
Total comprehensive income -- -- -- -- -- -- $ 17,358
============
Distributions declared and
paid ($1.52 per share) -- -- -- (67,991 ) -- (67,991 )
----------- ---------- ------------- ------------- ------------- ------------
Balance at December 31, 2002 45,248,670 $ 452 $ 816,745 $ (306,184 ) $ (16,862 ) $ 494,151
Acquisition of minority
interest -- -- 11,375 -- -- 11,375
Net income -- -- -- 18,609 -- 18,609 $ 18,609
Current period adjustment to
recognize change in fair
value of cash flow hedges,
net of tax -- -- -- -- (6,028 ) (6,028 ) (6,028 )
------------
Total comprehensive income -- -- -- -- -- -- $ 12,581
============
Distributions declared and
paid ($0.76 per share) -- -- -- (34,501 ) -- (34,501 )
----------- ---------- ------------- ------------- ------------- ------------
Balance at June 30, 2003 45,248,670 $ 452 $ 828,120 $(322,076 ) $ (22,890 ) $ 483,606
=========== ========== ============= ============= ============= ============
See accompanying notes to condensed consolidated financial statements.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six months ended
June 30,
2003 2002
------------------ -----------------
Cash flow from operating activities:
Net income $ 18,609 $ 21,474
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 6,669 7,545
Impairment provisions 4,933 3,196
Provision for loss on loans 2,602 60
Investments in mortgage loans held for sale (2,730 ) (1,125 )
Collection on mortgage loans held for sale 14,364 18,608
Change in inventories of real estate held for sale 42,023 102,403
Gain on sale of assets (627 ) (1,103 )
Changes in other operating assets and liabilities 410 (16,365 )
------------------ -----------------
Net cash provided by operating activities 86,253 134,693
------------------ -----------------
Cash flows from investing activities:
Additions to real estate investment properties (287 ) (362 )
Proceeds from sale of assets 7,723 25,241
Decrease in restricted cash 266 4,943
Investment in joint ventures (750 ) (205 )
Investment in mortgage, equipment and other notes
receivable -- (6,607 )
Collections on mortgage, equipment and other notes
receivable 9,775 6,446
------------------ -----------------
Net cash provided by investing activities 16,727 29,456
------------------ -----------------
Cash flows from financing activities:
Payment of stock issuance costs (1,493 ) (1,493 )
Proceeds from borrowing on revolver and note payable 19,500 222,890
Payment on revolver and note payable (27,889 ) (26,795 )
Proceeds from borrowing on mortgage warehouse facilities 47,122 37,084
Payments on mortgage warehouse facilities (93,803 ) (364,116 )
Retirement of bonds payable (10,368 ) (7,699 )
Loan from stockholder 10,210 7,500
Subscriptions received from stockholder -- 4,500
Distributions to minority interests (103 ) (123 )
Distributions to stockholders (34,501 ) (33,607 )
------------------ -----------------
Net cash used in financing activities $ (91,325 ) $ (161,859 )
------------------ -----------------
See accompanying notes to condensed consolidated financial statements.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(In thousands)
Six months ended
June 30,
2003 2002
------------------ ------------------
Net increase in cash and cash equivalents $ 11,655 $ 2,290
Cash and cash equivalents at beginning of period 15,531 19,333
------------------ ------------------
Cash and cash equivalents at end of period $ 27,186 $ 21,623
================== ==================
Supplemental disclosures of cash flow information:
Interest paid $ 25,117 $ 31,468
================== ===================
Conversion of related party advances into shares of common
stock $ -- $ 10,350
================== ===================
Supplemental disclosures of noncash investing and financing activities:
Redemption of minority interest in lieu of payment on accounts
receivable $ 317 $ --
================== ===================
Acquisition of minority interest $ 11,375 $ --
================== ===================
See accompanying notes to condensed consolidated financial statements.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 2003 and 2002
1. Organization and Nature of Business:
CNL Restaurant Properties, Inc. ("CNL Properties") formerly CNL American
Properties Fund, Inc. was organized in Maryland in May of 1994, and is a
self-administered real estate investment trust ("REIT"). The term "Company"
includes, unless the context otherwise requires, CNL Properties and its
majority owned and controlled subsidiaries. These subsidiaries include CNL
Restaurant Investments, Inc. ("CNL-Investments") formerly CNL Restaurant
Properties, Inc. and CNL Restaurant Capital Corp. ("CNL-Capital Corp.")
formerly CNL Franchise Network Corp. The Company's operations are divided
into two business segments, real estate and specialty finance. The real
estate segment, operated principally through the Company's wholly owned
subsidiary CNL-Investments and its subsidiaries, is charged with overseeing
and maximizing value on a portfolio of primarily long-term triple-net lease
properties. Those responsibilities related to the real estate segment
include portfolio management, property management and dispositions. In
addition, CNL-Investments services approximately $550 million in affiliate
portfolios and earns management fees related thereto. The specialty finance
segment, operated through the Company's wholly-owned subsidiary CNL-Capital
Corp. and a partnership with Bank of America, CNL Restaurant Capital, LP
("CNL-Capital") formerly known as CNL Franchise Network, LP and its
subsidiaries, delivers financial solutions in the forms of financing,
servicing, development and advisory services to national and regional
restaurant operators.
Effective January 1, 2003, CNL-Capital modified certain terms relating to
the alliance with Bank of America allowing the bank to assume certain costs
of its portfolio operations, decreasing the referral fees paid by the bank
and decreasing the bank's ownership in the alliance accordingly. In
addition, CNL CAS/Corp. an affiliate of the Company's chairman, agreed to
reduce its interest in the alliance. As a result, the Company's effective
ownership interest in CNL-Capital increased from 84.39% to 96.26%. The
Company reduced the minority interest and increased stockholders' equity by
approximately $11.4 million to reflect this change in ownership.
2. Basis of Presentation:
The accompanying unaudited condensed financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not
include all of the information and note disclosures required by generally
accepted accounting principles. The financial statements reflect all
adjustments consisting of normal recurring adjustments which, in the
opinion of management, are necessary to a fair statement of the results for
the interim periods presented. Operating results for the quarter and six
months ended June 30, 2003 may not be indicative of the results that may be
expected for the year ending December 31, 2003. Amounts as of December 31,
2002, included in the financial statements, have been derived from audited
financial statements as of that date. These unaudited financial statements
should be read in conjunction with the financial statements and notes
thereto included in the Company's Form 10-K for the year ended December 31,
2002. Certain items in the prior year's financial statements have been
reclassified to conform with the 2003 presentation. These reclassifications
had no effect on stockholders' equity or net income.
3. Adoption of New Accounting Standards:
In November 2002, the Financial Accounting Standards Board (the "FASB")
issued FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others". FIN 45 clarifies the requirements relating to a
guarantor's accounting for, and disclosure of, the issuance of certain
types of guarantees. FIN 45 requires that upon issuance of a guarantee, the
guarantor must recognize a liability for the fair value of the obligation
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 2003 and 2002
3. Adoption of New Accounting Standards - Continued:
it assumes under that guarantee. FIN 45's provisions for initial
recognition and measurement are to be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. The Company's
previous accounting for guarantees issued prior to January 1, 2003 are not
required to be revised or restated to reflect the effect of the recognition
and measurement provisions of FIN 45. The Company has not issued or
modified any guarantees since the adoption of FIN 45.
In January 2003, FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities" to expand upon and strengthen
existing accounting guidance that addresses when a company should include
the assets, liabilities and activities of another entity in its financial
statements. FIN 46 requires that a variable interest entity be consolidated
by a company if that company is subject to a majority risk of loss from the
variable interest entity's activities or entitled to receive a majority of
the entity's residual returns or both. Prior to FIN 46, a company generally
included another entity in its consolidated financial statements only if it
controlled the entity through voting interests. Consolidation of variable
interest entities will provide more complete information about the
resources, obligations, risks and opportunities of the consolidated
company. The consolidation requirements of FIN 46 apply immediately to
variable interest entities created after January 31, 2003, and to older
entities in the first fiscal year or interim period beginning after June
15, 2003. Management believes that adoption of this standard will not
change the accounting for its bankruptcy remote securitization entities.
Management believes that adoption of this standard will result in
consolidation with respect to two of the Company's unconsolidated
subsidiaries, however, such consolidation is not expected to significantly
impact the Company's financial position or results of operations.
In May, 2003, FASB issued FASB Statement No. 150 ("FAS 150"), "Accounting
for Certain Financial Instruments with Characteristics of both Liabilities
and Equity." FAS 150 establishes standards for how an issuer classifies and
measures certain financial instruments with characteristics of both
liabilities and equity. FAS 150 will require issuers to classify certain
financial instruments as liabilities (or assets in some circumstances) that
previously were classified as equity. Financial instruments covered by FAS
150 include shares that are mandatorily redeemable, and other financial
instruments that embody an obligation to repurchase outstanding shares or a
conditional obligation that requires settlement by issuing a variable
number of the entity's shares. FAS 150 is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June
15, 2003, except for mandatorily redeemable financial instruments of
non-public entities which are subject to its provisions for the first
fiscal period beginning after December 15, 2003.
4. Real estate investment properties:
During the six months ended June 30, 2003 and 2002, the Company recorded
provisions for impairment of $3.0 million and $50,000, respectively. The
tenants of these properties experienced financial difficulties and/or
ceased payments of rents under the terms of their lease agreements. The
provisions represent the amount necessary to reduce the carrying value to
net realizable value of the properties at June 30, 2003 and 2002.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 2003 and 2002
5. Real estate held for sale:
Real estate held for sale consisted of the following at:
(In thousands)
June 30, December 31,
2003 2002
----------- ------------
Land and buildings $ 104,029 $ 149,135
=========== ============
The Company's specialty finance business segment actively acquires real
estate assets subject to leases with the intent to sell them. All assets
are subject to the provisions of Statement of Financial Accounting
Standards No. 144 ("FAS 144"), "Accounting for the Impairment or Disposal
of Long-Lived Assets" consequently, the operating results and gains or
losses on dispositions of the assets are recorded as discontinued
operations.
The Company's real estate investment subsidiary, CNL-Investments, will
divest properties from time to time when such action is strategic to its
longer-term goals. When CNL-Investments establishes its intent to sell a
property, all operating results relating to the properties and the ultimate
gain or loss on disposition of the assets are treated as discontinued
operations for all periods presented. These financial statements reflect
certain reclassifications of rental related income, interest expense and
other categories so as to conform with the requirements of FAS 144.
The operating results of the discontinued operations were as follows for
each of the periods ended:
Quarters ended June 30, Six months ended June 30,
(In thousands) 2003 2002 2003 2002
-------------- -------------- -------------- --------------
Rental income $ 2,784 $ 1,889 $ 6,213 $ 3,905
Interest expense (579 ) (583 ) (1,248 ) (1,109 )
Depreciation expense (17 ) (352 ) (40 ) (759 )
Impairment provisions (755 ) (1,962 ) (1,981 ) (3,146 )
Other expenses (200 ) (514 ) (686 ) (1,179 )
----------- ----------- ----------- -----------
Earnings/(loss) from discontinued
operations, net 1,233 (1,522 ) 2,258 (2,288 )
----------- ----------- ----------- -----------
Sales of real estate 53,347 28,013 105,839 29,933
Cost of real estate sold (47,139 ) (26,018 ) (94,290 ) (28,017)
----------- ----------- ----------- -----------
Gain on disposal of discontinued
operations, net 6,208 1,995 11,549 1,916
----------- ----------- ----------- -----------
Earnings/(loss) from discontinued
operations, net $ 7,441 $ 473 $ 13,807 $ (372 )
=========== =========== =========== ===========
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 2003 and 2002
6. Borrowing:
As of December 31, 2002, the Company, through CNL-Capital maintained two
mortgage warehouse facilities. In June 2003, the mortgage warehouse
facility with Credit Suisse First Boston was renewed until June 2004, and
the amended agreement reduced the advances that CNL-Capital is entitled to
receive under the mortgage warehouse facility to $100,000,000. Advances
under the mortgage warehouse facility bore interest at the rate of LIBOR
plus a price differential (0.90 percent and 0.70 percent as of June 30,
2003 and December 2002, respectively).
7. Related Party Transactions:
During the six months ended June 30, 2003, CNL Financial Group, Inc., an
affiliate, advanced approximately $10.2 million to the Company in the form
of a demand balloon promissory note. The note is uncollateralized, bears
interest at LIBOR plus 2.5 percent with interest payments and outstanding
principal due upon demand. At June 30, 2003, $14.6 million in total such
loans, including accrued interest, were outstanding and are included in the
due to related parties caption on the balance sheet.
8. Segment Information:
The Company has established CNL-Investments and CNL-Capital Corp. as
separate legal entities to operate and measure the real estate and
specialty finance segments, respectively.
CNL-Investments is the parent company of CNL APF Partners LP, a real estate
company that oversees real estate, mortgage and equipment loans generally
until maturity. CNL-Capital Corp. is the parent of CNL-Capital, a specialty
finance company focused on delivering financial solutions in the forms of
financing, servicing, advisory and other services to restaurant operators.
CNL-Capital delivers these solutions primarily by acquiring restaurant real
estate properties which have been subject to a triple-net lease, utilizing
short-term debt, and subsequently selling such properties at a profit
generally within one year.
The following table summarizes the operating results for the quarters and
six months ended June 30, 2003 and 2002 with segment information for the
two lines of business. Consolidating eliminations and other results of the
parent of CNL-Investments and CNL-Capital Corp. are reflected in the
"other" column.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 2003 and 2002
8. Segment Information - Continued:
Quarter ended June 30, 2003
(In thousands)
CNL-Capital Consolidated
CNL-Investments Corp. Other Totals
--------------- ----------------- -------------- ----------------
Revenues $ 25,273 $ 7,824 $ (304 ) $ 32,793
--------------- ----------------- -------------- ---------------
General operating and administrative 2,188 5,205 (109 ) 7,284
Interest expense 6,915 6,360 (221 ) 13,054
Food and other restaurant costs 3,423 -- -- 3,423
Property expenses, state and other
taxes 338 (22 ) -- 316
Depreciation and amortization 3,129 176 -- 3,305
Provision for loss on loans -- 2,242 -- 2,242
Impairment provisions 317 -- -- 317
Minority interest and equity in
earnings 269 (567 ) -- (298 )
------------ -------------- ------------- ----------------
16,579 13,394 (330 ) 29,643
------------ --------------- ------------- ----------------
Discontinued operations:
Earnings/(loss) from discontinued
operations, net (497 ) 1,730 -- 1,233
Gain on disposal of discontinued
operations, net 646 5,562 -- 6,208
------------ -------------- ------------- ----------------
149 7,292 -- 7,441
------------ --------------- ------------- ----------------
Net income $ 8,843 $ 1,722 $ 26 $ 10,591
============ =============== ============== ================
Assets at June 30, 2003 $ 816,586 $ 502,081 $ (3,906 ) $ 1,314,761
============ =============== ============== ================
Investments accounted for under the
equity method at June 30, 2003 $ 1,334 $ 506 $ -- $ 1,840
============ =============== ============== ================
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 2003 and 2002
8. Segment Information - Continued:
Quarter ended June 30, 2002
(In thousands)
CNL-Capital Consolidated
CNL-Investments Corp. Other Totals
--------------- ----------------- -------------- ----------------
Revenues $ 22,149 $ 115,823 $ (359 ) $ 137,613
--------------- ----------------- -------------- ----------------
Cost of real estate sold -- 96,098 -- 96,098
General operating and administrative 2,743 5,045 (205 ) 7,583
Interest expense 7,758 7,980 (52 ) 15,686
Property expenses, state and other
taxes (423 ) 105 -- (318 )
Depreciation and amortization 3,092 308 -- 3,400
Impairment provisions -- 23 -- 23
Minority interest and equity in
earnings 159 197 -- 356
Loss on sale of assets 199 17 -- 216
--------------- ----------------- -------------- ----------------
13,528 109,773 (257 ) 123,044
--------------- ----------------- -------------- ----------------
Discontinued operations:
Earnings/(loss) from discontinued
operations, net (1,856 ) 334 -- (1,522 )
Gain on disposal of discontinued
operations, net 1,556 439 -- 1,995
--------------- ----------------- -------------- ----------------
(300 ) 773 -- 473
--------------- ----------------- -------------- ----------------
Net income $ 8,321 $ 6,823 $ (102 ) $ 15,042
=============== ================= ============== ================
Assets at June 30, 2002 $ 891,244 $ 516,221 $ (3,985 ) $ 1,403,480
=============== ================= ============== ================
Investments accounted for under the
equity method at June 30, 2002 $ 1,120 $ 336 $ -- $ 1,456
=============== ================= ============== ================
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 2003 and 2002
8. Segment Information - Continued:
Six months ended June 30, 2003
(In thousands)
CNL-Capital Consolidated
CNL-Investments Corp. Other Totals
--------------- ----------------- -------------- ----------------
Revenues $ 50,539 $ 14,640 $ (856 ) $ 64,323
--------------- ----------------- -------------- ----------------
General operating and administrative 5,360 10,211 (467 ) 15,104
Interest expense 13,837 12,093 (370 ) 25,560
Food and other restaurant costs 6,834 -- -- 6,834
Property expenses, state and other
taxes 609 (14 ) -- 595
Depreciation and amortization 6,144 485 -- 6,629
Provision for loss on loans -- 2,602 -- 2,602
Impairment provisions 2,952 -- -- 2,952
Minority interest and equity in
earnings 433 (1,194 ) -- (761 )
Loss on sale of assets 2 4 -- 6
--------------- ----------------- -------------- ----------------
36,171 24,187 (837 ) 59,521
--------------- ----------------- -------------- ----------------
Discontinued operations:
Earnings/(loss) from discontinued
operations, net (776 ) 3,034 -- 2,258
Gain on disposal of discontinued
operations, net 912 10,637 -- 11,549
--------------- ----------------- -------------- ----------------
136 13,671 -- 13,807
--------------- ----------------- -------------- ----------------
Net income $ 14,504 $ 4,124 $ (19 ) $ 18,609
=============== ================= ============== ================
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 2003 and 2002
8. Segment Information - Continued:
Six months ended June 30, 2002
(In thousands)
CNL-Capital Consolidated
CNL-Investments Corp. Other Totals
--------------- ----------------- -------------- ----------------
Revenues $ 44,344 $ 164,774 $ (828 ) $ 208,290
--------------- ----------------- -------------- ----------------
Cost of real estate sold -- 130,434 -- 130,434
General operating and administrative 5,379 10,861 (416 ) 15,824
Interest expense 15,692 15,439 (271 ) 30,860
Property expenses, state and other
taxes 1,650 184 -- 1,834
Depreciation and amortization 6,169 617 -- 6,786
Provision for loss on loans -- 60 -- 60
Impairment provisions 27 23 -- 50
Minority interest and equity in
earnings 192 30 -- 222
Loss on sale of assets 357 17 -- 374
--------------- ----------------- -------------- ----------------
29,466 157,665 (687 ) 186,444
--------------- ----------------- -------------- ----------------
Discontinued operations:
Earnings/(loss) from discontinued
operations, net (2,313 ) 25 -- (2,288 )
Gain on disposal of discontinued
operations, net 1,477 439 -- 1,916
--------------- ----------------- -------------- ----------------
(836 ) 464 -- (372 )
--------------- ----------------- -------------- ----------------
Net income $ 14,042 $ 7,573 $ (141 ) $ 21,474
=============== ================= ============== ================
9. Income Tax:
The Company elected to be taxed as a REIT under the Internal Revenue Code.
To qualify as a REIT, the Company must meet a number of organizational and
operational requirements, including a current requirement that it
distribute at least 90 percent of its taxable income to its stockholders.
As a REIT the Company generally will not be subject to corporate level
federal income tax on net income it distributes to its stockholders, except
taxes applicable to its taxable REIT subsidiaries ("TRSs") as described
below. This benefit allows earnings from a REIT to be subject to federal
taxation at the stockholder level, and avoids the typical double taxation
applicable to most corporations. If the Company fails to qualify as a REIT
in any taxable year, it will be subject to federal income taxes at regular
corporate rates (including any alternative minimum tax) and may not be able
to qualify as a REIT for four subsequent tax years. Even if the Company
qualifies for taxation as a REIT, the Company may be subject to state and
local taxes on its income and property, and to federal income and excise
taxes on its undistributed taxable income.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 2003 and 2002
9. Income Tax - Continued:
Stockholder distributions that are characterized as return of capital are
generally non-taxable to the stockholder and the amount reduces the
stockholder's basis in Company stock. Since distributions commenced in 1995
a portion of each year's distribution has been characterized as a return of
capital. To illustrate, a stockholder's tax basis in a share of stock
purchased in 1995 would have been reduced by approximately $4.42 in
aggregate amounts of return of capital through December 31, 2002. Each
stockholder must maintain records of the purchase price, distributions
received, and the applicable tax treatment of such distributions in order
to determine the gain or loss upon sale of Company stock.
For income tax purposes the Company has two taxable REIT subsidiaries
(TRSs) in which activities of the specialty finance segment and select
activities of the real estate segment are conducted. Prior to January 1,
2001, Company subsidiaries were not subject to federal income tax.
Loan valuation adjustments, loss reserves, loan fees, and depreciation,
among other items, are treated differently for tax than for financial
reporting purposes. In the aggregate, the Company's TRSs have an excess of
available future deductible items over future taxable items and as such may
more fully benefit from these items when the related subsidiaries produce a
greater level of taxable income. The subsidiaries involved do not have
sufficient historical earnings on which to expect a full potential future
benefit of these future deductions. Therefore the Company has recorded an
allowance against a portion of the deferred tax asset associated with the
future deductible items.
The consolidated provision for federal income taxes differs from the amount
computed by applying the statutory federal income tax rate to the earnings
of the CNL-Capital Corp segment and the earnings of the real estate segment
TRS as follows:
Six months ended June 30:
----------------------------------------------------------------
2003 2002
------------------------------- -----------------------------
Amount Amount
(In thousands) Rate (In thousands) Rate
------------------ --------- ----------------- ---------
Expected tax at US statutory rate $ 1,510 $ 34% $ 2,462 34 %
Adjustments:
Other 51 1 121 2
Change in valuation allowances (1,561 ) (35) (2,583 ) (36 )
------------------ --------- ----------------- ---------
Provision for income taxes $ -- -- % $ -- -- %
================== ========= ================= =========
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters and Six Months Ended June 30, 2003 and 2002
9. Income Tax - Continued:
The components of the net deferred tax asset are as follows at:
(In thousands)
June 30, December 31,
2003 2002
------------------- ------------------
Deferred tax asset:
Cash flow hedge related difference $ 7,563 $ 5,789
Loan valuation and related hedge differences 2,419 1,899
Loan origination fees 13 619
Real estate loss reserves 544 300
Reserve for investment losses 839 736
Unconsolidated affiliates difference (1,915 ) --
Net operating losses 372 250
Other 236 (19 )
----------------- ---------------
Total 10,071 9,574
Valuation allowance (6,971 ) (7,846)
----------------- ---------------
Net recorded deferred tax asset $ 3,100 $ 1,728
================= ===============
The income tax provision consists of the following components:
Six months ending
(In thousands)
2003 2002*
------------- ---------------
Current:
Federal $ 1,182 $ --
State 191 --
------------- ---------------
1,373 --
------------- ---------------
Deferred:
Federal (1,182 ) --
State (191 ) --
------------- ---------------
(1,373 ) --
------------- ---------------
Total Provision $ -- $ --
============= ===============
* The TRS returns filed for the year ended December 31, 2001 reflected a
net operating loss and through June 30, 2002 no current taxes were payable.
For reasons stated above, there was no tax benefit recorded for the loss or
other future deductible items.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following information, including, without limitation, the Quantitative and
Qualitative Disclosures About Market Risk that are not historical facts, may be
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
statements generally are characterized by the use of terms such as "believe,"
"expect" and "may." Although the Company believes that the expectations
reflected in such forward-looking statements are based upon reasonable
assumptions, the Company's actual results could differ materially from those set
forth in the forward-looking statements. Factors that might cause such a
difference include: changes in general economic conditions, changes in real
estate conditions, availability of capital from borrowings under the Company's
credit facilities, the availability of other debt and equity financing
alternatives, changes in interest rates under the Company's current credit
facilities and under any additional variable rate debt arrangements that the
Company may enter into in the future, the ability of the Company to refinance
amounts outstanding under its credit facilities at maturity on terms favorable
to the Company, the ability of the Company to locate suitable tenants for its
restaurant properties and borrowers for its mortgage loans, the ability of
tenants and borrowers to make payments under their respective leases, secured
equipment leases or mortgage loans, the ability of the Company to re-lease
properties that are currently vacant or that may become vacant and the ability
of the Company to securitize or sell mortgage loans or net lease properties on a
favorable and timely basis. Given these uncertainties, readers are cautioned not
to place undue reliance on such statements.
Organization and Business
CNL Restaurant Properties, Inc. ("CNL-Properties" or the "Company"), formerly
CNL American Properties Fund, Inc., is the nation's largest self-advised real
estate investment trust ("REIT") focused on the restaurant industry. The Company
operates as a holding company for two primary subsidiary operating companies,
CNL Restaurant Investments, Inc. and CNL Restaurant Capital Corp. The Company
was founded in 1994 and at June 30, 2003, has financial interests in
approximately 1,010 properties diversified among more than 125 restaurant
concepts in 47 states. The Company's total real estate holdings subject to lease
includes over 650 properties, of which approximately 90 properties are
classified as held for sale. At June 30, 2003, the servicing portfolio of net
lease properties and mortgages includes approximately 2,225 units, of which over
1,200 are serviced on behalf of third parties.
The Company operates two business segments - real estate, with a strong capital
base and stable cash flows, and specialty finance, a growth business partnered
with a large financial institution.
o The real estate segment, operated principally through the Company's
wholly owned subsidiary CNL Restaurant Investments, Inc.
("CNL-Investments"), formerly known as CNL Restaurant Properties, Inc (a
name now used by the Company effective June 27, 2003), and its
subsidiaries, are charged with overseeing and maximizing value on a
portfolio of primarily long-term triple-net lease properties. Those
responsibilities include portfolio management, property management and
dispositions. In addition, CNL-Investments services approximately $550
million in affiliate real estate portfolios and earns management fees
related thereto.
o The specialty finance segment, operated through the Company's
wholly-owned subsidiary CNL Restaurant Capital Corp. ("CNL-Capital
Corp"), formerly known as CNL Franchise Network Corp., is partnered with
Bank of America in owning CNL Restaurant Capital, LP ("CNL-Capital") and
with its subsidiaries, delivers financial solutions in the forms of
financing, servicing, advisory and other services to national and larger
regional restaurant operators primarily by acquiring restaurant real
estate properties, which have been subject to a triple-net lease,
utilizing short-term debt and selling such properties at a profit.
Effective January 1, 2003 CNL-Capital modified certain terms relating to
the alliance with Bank of America allowing the bank to assume certain
costs of its portfolio operations and decreasing the referral fees paid
by the bank, and decreasing the bank's ownership interest in
CNL-Capital. In addition, an affiliate of the Company's chairman agreed
to reduce its interest in CNL-Capital. As a result, the Company's
effective interest in the specialty finance operations increased from
84.39 percent to 96.26 percent.
Effective January 1, 2001, CNL-Capital Corp elected to be treated as a taxable
REIT subsidiary ("TRS") pursuant to the provisions of the REIT Modernization
Act. As a TRS, CNL-Capital Corp engages in activities that would previously have
caused income to the Company from CNL-Capital to be disqualified from being
eligible REIT income under the federal income tax rules. Now CNL-Capital
earnings are subject to tax, but management can control the timing of
distributions to the Company. CNL-Capital Corp originates triple-net lease
properties for sale to third parties and, when market conditions may allow,
securitization. CNL-Capital Corp also performs net lease and loan servicing on
behalf of non-Company owners. Also, certain activities of CNL-Investments are
conducted in a subsidiary that has made a similar TRS election.
When the Company was created in 1994, the intent was to provide stockholders
liquidity by December 31, 2005 through either listing on a national exchange,
merging with another public company or liquidating its assets. The Company's
officers and directors continue to monitor the public markets for opportunities
and the Company's board does not intend to liquidate the Company. To comply with
certain tax guidelines governing the significance of taxable REIT subsidiaries,
the Company may pursue other alternatives relative to CNL-Capital Corp that
would provide stockholder liquidity for all or a portion of the Company's
investment.
Liquidity and Capital Resources
The Company is a self-advised real estate investment trust that reflects the
earnings of its two primary segment subsidiaries, CNL-Investments and
CNL-Capital Corp. The Company elected to reinvest the earnings of the specialty
finance business to date, as contemplated by the agreement with Bank of America.
The Company will continue to reinvest earnings into this subsidiary if the
subsidiary is able to generate higher returns. CNL-Properties has continued to
declare and pay distributions to its stockholders that are primarily funded by
CNL-Investments activities. The remainder of the distribution was funded by
sales of its common stock to the Company's Chairman through a private company
affiliate, CNL Financial Group, Inc. ("CNL Financial Group"), and loans from CNL
Financial Group.
The Company is pursuing a strategy built around CNL-Investments' strong capital
base and stable cash flows coupled with CNL-Capital Corp's specialty finance
growth business. The Company's ability to internally fund capital needs is
limited since it must distribute at least 90 percent of its net taxable income
(excluding net capital gains) to stockholders to qualify as a REIT. In the six
months ended June 30, 2003 and 2002 the Company distributed $34.5 million and
$33.6 million, respectively, or $0.38125 per share each quarter, to its
stockholders. For 2002, these distributions constituted a return of capital for
tax purposes and were generally not taxable to the shareholders, but did reflect
tax deductions associated with impairments and loan loss reserves recorded in
2001 and differences in non-cash charges including depreciation and
amortization. The REIT's taxable income in 2002 did not include any of
CNL-Capital Corp's $12.6 million in annual earnings. Through December 31, 2002
the Company has distributed approximately $4.17 per share of an investor's
original purchase price since December 31, 1995 as a non-taxable return of
capital for tax purposes. The taxability of the distribution made in 2003 will
not be determined until January 2004, but is likely that a portion will be
considered a return of capital for income tax purposes.
In order to ensure that the Company maintains its historical level of
distributions to its stockholders, the Company's Chairman, through CNL Financial
Group, advanced to the Company $10.2 million during the six months ended June
30, 2003. Throughout 2002, the Chairman received 1,173,354 shares of the
Company's stock in exchange for $20.1 million in cash, including the conversion
of amounts previously treated as advances. Similar stock purchases occurred in
2001. This provided capital that allowed the Company to reinvest the earnings
generated by the specialty finance business. The number of shares were
determined using an estimated fair value per share of $17.13 as concluded in an
early 2002 valuation from a third party firm, which based its valuation on an
analysis of comparable publicly traded real estate investment trusts and a
discounted cash flow analysis. Also, the Chairman advanced $4.2 million to the
Company in December 2002. The Company's Chairman was under no obligation to do
so. Should the Company's Chairman determine not to purchase additional shares or
loan additional funds to the Company, and the Company does not generate adequate
cash flow from other sources, the Company may have to reduce its distribution
rate.
As described above, during the six months ended June 30, 2003, CNL Financial
Group, an affiliate, advanced approximately $10.2 million to the Company in the
form of a demand balloon promissory note. The note is uncollaterized, bears
interest at LIBOR plus 2.5 percent with interest payments and outstanding
principal due upon demand. At June 30, 2003, the principal amount of such loans
outstanding was $14.5 million.
The Company is currently exploring any interest in an offering of the Company's
preferred stock. The proceeds of any sale of preferred stock would be used for
general corporate purposes and potentially to retire existing debt.
The Company's management expects to continue meeting short-term and long-term
liquidity requirements through distributions from CNL-Investments, issuance of
debt and sales of common or preferred stock. To date CNL-Capital Corp has
reinvested its earnings in ongoing operations. Management expects distributions
from CNL-Capital Corp to begin within the next two years.
The Company may continue selling additional shares of its common stock and
borrowing additional funds in order to satisfy future distribution requirements.
The Company's Chairman is under no obligation to purchase additional shares of
the Company's common stock or loan additional funds to the Company in order to
guarantee that the Company maintains its historical distribution level to
stockholders.
Selling additional shares of the Company's stock may dilute a shareholder's
investment, affecting its future value. However, selling stock to enable
CNL-Capital to reinvest earnings may be accretive to the extent that the value
of the specialty finance segment increases. In connection with maintaining its
historical distribution level, the Company may sell additional shares of its
common stock to CNL Financial Group or to additional third party purchasers.
Such sales may reduce the value a shareholder receives for his or her investment
upon a future liquidity event.
o Specialty Finance Segment (CNL Restaurant Capital Corp)
CNL-Capital originates triple-net leases, temporarily financing those assets
with warehouse credit facilities and periodically selling or refinancing those
assets. CNL-Capital generates income by earning a spread on assets with a return
greater than its cost of borrowings, and by selling assets at gains. A
triple-net lease is a long-term lease with periodic rent increases that requires
the tenant to pay expenses on the property, insulating the Company from making
significant cash outflows for maintenance, repair, real estate taxes or
insurance. In a securitization refinancing, the Company sells or transfers a
pool of loans or properties with triple-net leases to a special purpose entity
which, in turn, issues to investors securities backed by an interest in the
revenue originating from the loans or triple-net leases. These transactions
generate cash that is used for additional acquisitions.
CNL-Capital has the following borrowing sources as of June 30, 2003, with the
stated total capacity and average interest rate based on the interest rates
charged for the most recent six months:
In thousands
Amount Used Capacity Maturity Average Rate
---------------- ------------- --------------- ----------------
Note payable (medium term financing) (1) $ 195,818 $ 195,818 Jun 2007 2.63%
Mortgage warehouse facilities (1) 99,077 360,000 Annual 2.54%
Subordinated note payable 43,750 43,750 Jun 2007 8.50%
Series 2001-4 bonds payable (2) 39,756 39,756 2009 - 2013 8.90%
Mirror liquidity facility -- 10,000 Oct 2003 (3)
---------------- -------------
$ 378,401 $ 649,324
================ =============
(1) average rate excludes the impact of hedge transactions that bring
the total average rate to 5.87 percent on the medium term financing
and 3.22 percent on financing the warehouse facilities.
(2) includes $4,811 in bonds held by CNL-Investments eliminated upon
consolidation in Company financial statements.
(3) no amounts were withdrawn in the period.
The Company, through its alliance with Bank of America, originates triple-net
leases and refers portfolio loan financing. In forming the alliance, the Company
invested certain assets and operations into CNL-Capital and Bank of America
provided CNL-Capital with a $43.75 million subordinated debt facility (the
"Subordinated Debt Facility") and a warehouse credit facility (the "Warehouse
Credit Facility") with an initial capacity of $500 million.
The securitization market experienced considerable volatility in late 2000 as a
result of rising delinquencies in securitized loan pools, falling treasury
rates, macroeconomic uncertainties and sluggish restaurant sales. Investors
demanded higher interest rates on the securities issued in securitizations while
ratings agencies downgraded the securities backed by the underlying loans. While
many of the Company's competitors experienced downgrades or ratings actions on
bonds previously issued, the Company's prior loan and lease securitizations to
date have not been subject to any such ratings action. In response to the market
conditions, management used private market sales channels to either refinance or
sell existing mortgage loans, and halted the origination of new loans.
Company warehouse borrowings were initially designed to provide interim
financing until periodic securitizations could occur. The instability of this
market led to renegotiated terms of the relationship with Bank of America by
October 2001, including having CNL-Investments provide a $15 million guaranty
until $187 million of loans held as collateral on the Bank of America Warehouse
Credit Facility were removed, with the guaranty having since been reduced to $2
million and tied to the removal of the last of the remaining loans. Management
is seeking resolution to these last remaining loans and a likely resolution will
be their transfer to CNL-Investments to allow CNL-Investments to bundle them
with other mortgage loans for a medium-term financing in the fourth quarter of
2003. In addition, a second $15 million guaranty was tied to successfully
achieving an earnings and liquidity target within a required timeframe, and this
second guaranty has since been eliminated through the achievement of these
targets. Bank of America also extended a $10 million unsecured credit facility
to CNL-Investments and CNL-Investments then entered into a $10 million mirror
credit facility with CNL-Capital. CNL-Capital utilizes this mirror facility for
working capital as necessary to fund its equity in new properties substantially
financed on the mortgage warehouse facilities and to meet margin calls on the
mortgage warehouse facilities. Bank of America agreed to finance the remaining
loans held as collateral on the Warehouse Credit Facility until November 2003.
The mirror credit facility has no amounts outstanding at June 30, 2003 and will
expire in October 2003; management is currently in negotiation with the lender
to potentially structure a comparable replacement facility.
In June 2002, in order to repay warehouse financing, the Company entered into a
five-year term $207 million financing collateralized with $225 million in
mortgage loans re-designated to reflect the Company's intention to hold them to
maturity. This five-year term financing carries a variable interest rate tied to
the weighted average rate of commercial paper plus 1.25 percent with a portion
of such interest fixed through the initiation of a hedge transaction. The
transaction provides CNL-Capital ongoing earnings on the excess of interest
income over interest expense.
Most sources of debt financing require that CNL-Capital maintain certain
standards of financial performance such as a fixed-charge coverage ratio, a
tangible net worth requirement and certain levels of available cash. Any failure
to comply with the terms of these covenants would constitute a default and may
create an immediate need to find alternate borrowing sources. Management
believes it has complied with all covenants at June 30, 2003.
In 2001, CNL-Capital introduced its program to sell investment properties to
third parties (the "Investment Property Sales" program) adding diversity to its
original securitization model. These leased properties can be sold and may
qualify the buyer for special tax treatment under Section 1031 of the Internal
Revenue Code (a "Section 1031 Exchange"). Generally, Section 1031 Exchanges
allow an investor who realizes a gain from selling appreciated real estate to
defer paying taxes on such gain by reinvesting the sales proceeds in like-kind
real estate. In addition, the Company formed a partnership with a third party
client to engage in a similar program. During the six months ended June 30, 2003
and 2002, CNL-Capital has generated gains of $11.1 million and $11.0 million
respectively, including its share of partnership gains. The success of this
program is dependent upon achieving an optimal balance of cash flows from lease
income earned in excess of holding costs versus a maximum gain on the sale. The
chart below illustrates cash flows from Investment Property Sales proceeds and
real estate originations for CNL-Capital and the affiliated joint venture in the
comparative six-month periods:
(In thousands)
Six months Six months
ended June 30, ended June 30,
2003 2002
------------------ -------------------
Proceeds from Investment Property Sales program sales $ 111,494 $ 157,023
================== ===================
Purchases of properties to be sold under the Investment
Property Sales program $ 45,874 $ 23,181
================== ===================
CNL-Capital's earnings depend on its continued origination and holding of new
real estate inventory in order to sustain the level of earnings and sales
achieved in the initial six months of 2003. By selling more properties than are
originated during a period, CNL-Capital will have fewer properties on which to
earn income in a future period. At June 30, 2003, CNL-Capital had $94.9 million
in properties held for sale under this program, an amount that management
believes is significantly below the desirable level of inventory to sustain
continued earnings. Purchases of new properties have been challenging as
described below. Management expects continued strong demand for Investment
Property Sales assets by the investor community, but such demand could diminish
if interest rates increase. Management continues to investigate other sales
channels in which to market net lease assets and to monitor the securitization
market for potential re-entry in the future.
During the six months ended June 30, 2003, CNL-Capital Corp derived its primary
cash flows from lease and interest income earned in excess of interest expense
paid ("net spread"), net gains from the Investment Property Sales program and
servicing revenues. Significant cash outflows consist of operating expenses,
real property purchases and capital enhancements in the loan portfolio (excess
of investment over related borrowings). CNL-Capital has taken steps to reduce
its credit capacity in its warehouse credit facilities. CNL-Capital had a
warehouse credit capacity of $360 million at June 30, 2003. One of the Company's
warehouse credit facilities was recently renewed until June 2004 with its
capacity decreased by $25 million. Management has and may continue to decrease
the mortgage warehouse facility capacity from its present level in order to
economize on its cost, provided that there continue to be costs associated with
excess capacity. CNL-Capital may also be subject to margin calls on its
warehouse credit facilities. Bank of America and the other third party lender
monitors asset securitization market conditions, performance of the Company's
derivatives and delinquencies and based on changes in market conditions, may
require a margin call to reduce the level of warehouse financing. During the six
months ended June 30, 2003 CNL-Capital was not required to make a margin call;
during the same period in 2002, CNL-Capital funded approximately $16 million in
net margin calls on its warehouse credit facilities. CNL-Capital's medium term
financing that provides $196 million in financing secured by Company mortgage
notes receivables also contains provisions that obligate the Company to make
margin calls in the event of certain borrower non-payments. Significant cash
outflows could result from all such margin call provisions.
Management originally contemplated strong demand for net lease financing in
2003, targeting up to $300 million in net lease property purchases for the year
ending December 31, 2003, but now expects to fall short of this amount. As
interest rates rise, management believes that demand for the net lease financing
product will escalate, therefore they continue to view the triple-net lease
product as the core product offering to restaurant operators. While demand for
restaurant real estate financing is very strong, a large number of approved
deals were lost to competitors offering debt due to the prevailing low interest
rates. Large national and regional banks now offer inexpensive restaurant
financing that many premier operators find more attractive than leases.
CNL-Capital does not currently offer debt financing to its clients due to the
volatility and high cost of capital currently associated with the securitization
market, but continues to refer such opportunities to Bank of America pursuant to
the terms of that alliance. Management continues to monitor the potential
reemergence of a mortgage loan product through developments on the
securitization front but based on prevailing market sentiment management does
not believe this market will be viable for the foreseeable future. In addition
to the impact of low interest rates, CNL-Capital has lost some transactions as
new competitors have emerged with a net lease program styled after CNL-Capital's
Investment Property Sales program.
For the six months ended June 30, 2003, CNL-Capital purchased $45.9 million in
net lease properties as compared with $23.2 million in the same period last
year. In both years these originations were low compared with the $85.6 million
closed in the first half of 2001. These originations provide inventory necessary
to execute the Investment Property Sales program and CNL-Capital typically
profits from the leases while holding them. At June 30, 2003, CNL-Capital was
involved in numerous opportunities for continued net lease originations with $44
million approved for funding and accepted by the client, and an additional $20
million approved with acceptance pending. CNL-Capital's warehouse facilities
provide advances for up to 97 percent of the real estate purchase value. The
Company is reinvesting its operating profits to fund the amounts not advanced by
the mortgage warehouse facilities.
At June 30, 2003, CNL-Capital had approximately $73 million in capital
supporting its loan and lease portfolio. CNL-Capital management maintains
regular contact with its mortgage warehouse facility lenders and believes that
the relatively low-cost, high-advance rate financing they provide has been
integral to CNL-Capital's success. As is typical of revolving debt facilities,
these facilities carry a 364-day maturity and CNL-Capital is vulnerable to any
changes in the terms of these facilities. The warehouse facilities currently
advance an average of 95.1 percent of the original real estate value. One such
warehouse has special terms currently relating to the disposition of the
remaining amounts of the $117 million portfolio of properties acquired in
September 2002 that creates an acceleration of principal repayment designed to
protect the lender from any problem properties that may have been interspersed
within that portfolio. This repayment provision is about to be triggered, as
most of the portfolio has now been sold. However, management believes that the
remaining properties are desirable and that they will sell quickly enough to
generate cash to cover this requirement. Management believes that the average
advance rates offered by lenders will decline in the future as this provision
takes hold and as warehouse lenders continue to manage their respective risk. A
five percent decrease in advance rates, for example, would create a $4.5 million
cash requirement for CNL-Capital, based on the outstanding net lease properties
in the warehouse credit facilities at June 30, 2003. While management expects
its mortgage warehouse facilities to renew, any non-renewal would create an
immediate need to find alternate borrowing sources.
Additional liquidity risks include the possible occurrence of economic events
that could have a negative impact on the franchise asset-backed securitization
market and affect the quality or perception of the loans or leases underlying
CNL-Capital's securitization transactions. The Company conducted its previous
securitizations using bankruptcy remote entities. These entities exist
independent from the Company and their assets are not available to satisfy the
claims of creditors of the Company, any subsidiary or its affiliates. To date,
the ratings on the loans underlying the securities issued in these transactions
have been affirmed unlike the ratings of many competitors' loan pools that have
been downgraded. Upon the occurrence of a significant amount of delinquencies
and/or defaults, one or more of the three rating agencies may choose to place a
specific transaction on ratings watch or even downgrade one or more classes of
securities to a lower rating. Should the loans underlying the securities
default, and the securities undergo a negative ratings action, CNL-Capital could
experience material adverse consequences impacting its ability to continue
earning income as servicer, and its ability to engage in future profitable
securitization transactions. To potentially avoid those consequences,
CNL-Capital could choose to contribute capital to serve as additional collateral
supporting one or more of the bankruptcy remote entities used to facilitate a
securitization. CNL-Capital holds an interest in the following securitizations,
the assets and liabilities of which are not consolidated in the Company
financial statements:
June 30, 2003
------------------------------------------
(In thousands)
Mortgage loans in Bonds outstanding
pool at par at face value
-------------------- ---------------------
Loans and debt supporting 1998-1 Certificates issued by CNL
Funding 1998-1, LP $ 202,345 $ 199,996
Loans and debt supporting 1999-1 Certificates issued by CNL
Funding 1999-1, LP 233,098 233,098
-------------------- ---------------------
$ 436,443 $ 433,094
==================== =====================
Note: Certain bonds in both the 1998-1 and 1999-1 pools are owned by
CNL-Investments and CNL-Capital and appear as investments in the
consolidated financial statements of the Company.
Liquidity risk also exists from the possibility of borrower delinquencies on the
mortgage loans held for sale or held to maturity. In the event of a borrower
delinquency, the Company could suffer not only shortfalls on scheduled payments
but also margin calls by the lenders that provide the warehouse facilities and
the five-year note, subjecting the Company to unanticipated cash outflows. The
Company is obligated under the provisions of its mortgage warehouse facilities
and its five-year refinancing to pay down certain debt associated with borrower
delinquencies or defaults within a required time frame. Most properties acquired
on the mortgage warehouse facilities are required to be sold within a certain
time frame. Any delinquency, default or delay in the resale of properties
financed through one of these facilities would generally result in an immediate
pay-down of the related debt and may restrict the Company's ability to find
alternative financing. The Company's debt, excluding bonds payable, generally
provides for cross-default triggers. A default of a mortgage warehouse facility,
for example from a failure to make a margin call, could result in other Company
borrowings becoming immediately due and payable.
CNL-Capital has developed a successful Investment Property Sales program, in
part because some buyers of CNL-Capital's properties are motivated to defer the
taxation of gains on other properties they have sold. While some have advocated
the elimination of a capital gains tax, legislation enacted May 5, 2003 has only
decreased the taxation of capital gains. Management believes that the recent
changes are not significant enough to impact the continued performance of that
program.
Net lease properties acquired in anticipation of sales through the Investment
Property Sales program can typically be leased to tenants at a rate that exceeds
the rate a Section 1031 Exchange or other buyer is willing to accept. An
increase in general levels of interest rates could result in buyers requiring a
higher yield that would reduce the gain on the sale of existing properties.
Neither the rate of return on leased properties nor the rate of return required
by a buyer correlate directly with prevailing interest rates. CNL-Capital is
therefore at risk that any interest rate increases causing buyers to demand
higher yields may not be matched with higher yields from tenants. This risk
could cause CNL-Capital to experience lower average gains on the future sales of
Investment Property Sales properties.
In summary, the Company's specialty finance segment expects to meet its
liquidity requirements in 2003 with a combination of cash from operating
activities, including cash from its Investment Property Sales program and
borrowings on its warehouse credit facilities or its mirror credit facility.
CNL-Capital renews its warehouse credit facilities annually and to date has been
successful in doing so at substantially comparable terms. CNL-Capital's
longer-term liquidity requirements (beyond one year) are expected to be met
through successful renewal of its warehouse credit facilities and the renewal or
restructure of the mirror credit facility, successful execution of the Company's
Investment Property Sales program, portfolio debt origination fees, asset
securitizations, and augmented by operating cash flows provided by servicing and
advisory services. In addition, CNL-Capital may seek to obtain additional debt
or equity financing. Any decision to pursue additional debt or equity capital
will depend on a number of factors, such as compliance with the terms of
existing credit agreements, the Company's financial performance, industry or
market trends and the general availability of attractive financing transactions.
However, there can be no assurance that future expansion will be successful due
to competitive, regulatory, market, economic and other factors.
o Real Estate Segment (CNL Restaurant Investments, Inc.)
CNL-Investments operates as a real estate company and its cash flows primarily
consist of rental income from tenants on restaurant properties owned, interest
income on mortgage loans, dispositions of properties and income from holding
interests in prior loan securitizations. CNL-Investments' cash outflows are
predominantly interest expense, operating expenses, reinvestment of disposition
proceeds and distributions to CNL-Properties. Borrowing resources at June 30,
2003 for CNL-Investments include:
(In thousands)
Amount Used Capacity Maturity Average Rate
--------------- -------------- -------------- ---------------
Revolver $ 13,000 $ 30,000 Oct 2003 3.83%
Series 2000-A bonds payable 257,482 257,482 2009 - 2017 7.94%
Series 2001 bonds payable 121,713 121,713 Oct 2006 1.82%
--------------- --------------
$ 392,195 $ 409,195
=============== ==============
CNL-Investments provides a guaranty of $2 million of CNL-Capital's mortgage
warehouse facility debt and also provides a guaranty of up to ten percent of
CNL-Capital's five year term financing.
CNL-Investments's short-term debt consists of the $30 million revolving line of
credit (the "Revolver") entered into in October 2001. The Company utilizes the
Revolver from time to time to manage the timing of inflows and outflows of cash
from operating activities. The Company's Revolver is a two-year facility,
maturing in October 2003, and includes a one-year renewal option. Management is
currently in discussions with the lender to secure the renewal and possible
restructure of this debt.
CNL-Investments also had medium-term and long-term bond financing. Rental income
received on the 379 properties pledged as collateral on medium and long-term
financing is used to make scheduled reductions in bond principal and interest.
Liquidity risks within the real estate business include the potential that a
tenant's financial condition could deteriorate, rendering it unable to make its
rent payments and thereby reducing CNL-Investments' income and cash flows.
Generally, CNL-Investments uses a triple-net lease to lease its properties to
its tenants. The triple-net lease is a long-term lease with periodic rent
increases and requires the tenant to pay expenses on the property. The lease
somewhat insulates CNL-Investments from significant cash outflows for
maintenance, repair, real estate taxes or insurance. However, if the tenant
experiences financial problems, rental payments could be interrupted and in the
event of tenant bankruptcy the Company may be required to fund certain expenses
in order to retain control or take possession of the property. This could expose
the Company to successor liabilities and further affect liquidity. Such events
may adversely affect the Company's revenue and operating cash flow.
Most sources of debt financing require that CNL-Investments maintain certain
standards of financial performance such as a fixed-charge coverage ratio, and
impose a limitation on the distributions from CNL-Investments to the Company
tied to funds from operations. Any failure to comply with the terms of these
covenants would constitute a default and may create an immediate need to find
alternate borrowing sources.
Management is aware of multi-unit tenants that are experiencing financial
difficulties, including one significant tenant, that may seek bankruptcy
protection near term, possibly by the end of the year. In the event the
financial difficulties continue, the Company's collection of rental payments
could be interrupted. At present, these tenants continue to pay rent
substantially in accordance with lease terms and there are no material
delinquencies. However, the Company continues to monitor each tenant's situation
carefully and will take appropriate action to place the Company in a position to
maximize the value of its investment. Management has estimated the loss or
impairment on the related properties and included such charge in earnings
through June 30, 2003, but acknowledges that the estimation process is
challenging due to the number of possible outcomes that may result from a
default situation. While management believes it has recorded an appropriate
impairment charge at June 30, 2003, based on its assessment of the tenants'
financial difficulties and its knowledge of the properties, facts may develop in
future periods that may suggest the need for a larger impairment charge.
The Company has experienced tenant bankruptcies and may commit further resources
in seeking resolution to these properties including funding restaurant
businesses directly or on behalf of successor tenants. For example, where the
value of the leased real estate is linked to the financial performance of the
tenant, CNL-Investments may allocate capital to invest in turnaround
opportunities.
Certain net lease properties are pledged as collateral for the Series 2000-A and
Series 2001 triple-net lease mortgage bonds payable. In the event of a tenant
default relating to any such pledged properties, the Company may elect to
substitute properties into these securitized pools from properties it owns not
otherwise pledged as collateral. In the event that the Company has no such
suitable substitute property, the adverse performance of the pool might inhibit
the Company's future capital raising efforts, including the ability to refinance
the Series 2001 bonds maturing in 2006.
CNL-Investments management believes the combination of availability on its line
of credit and the projected disposition volume in 2003 will permit it to meet
its short-term liquidity objectives. Long-term liquidity requirements will be
met through a combination of selectively disposing assets and reinvesting the
proceeds in higher-yielding investments and cash from operating activities.
Off-Balance Sheet Transactions
The Company holds a retained interest in approximately $450 million in loans
transferred to unconsolidated trusts that provide the collateral for long-term
bonds as discussed in the specialty finance segment liquidity section above.
While the Company is not contractually obligated to guarantee the repayment of
the bonds, in the event borrower repayments of principal and interest are not
adequate to repay the bondholders, the Company may elect to contribute funds
into these unconsolidated entities to supplement cash flows and maintain
attractive ratings on these pools. Management believes that recent accounting
pronouncements will not require the consolidation of these trusts.
The Company is a partner in several joint ventures to acquire and improve and/or
sell certain real properties that are accounted for under the equity method. The
Company's earnings reflect its proportionate share of the earnings or losses of
these activities. Recent accounting pronouncements will require that these
activities be fully consolidated in the financial statements after June 30,
2003. Management does not expect the consolidation to be significant to the
presentation of the Company's financial position or results of operations.
Interest Rate Risk
The Company generally invests in assets with a fixed return by financing them
with variable rate debt. Floating interest rates on variable rate debt expose
the Company to interest rate risk. As of June 30, 2003, the Company's variable
rate debt includes the following:
o $13 million on its Revolver;
o $99 million on its mortgage warehouse facilities;
o $196 million on the June 2002 five-year financing; and
o $122 million outstanding on the Series 2001 bonds.
Generally, the Company uses derivative financial instruments (primarily interest
rate swap contracts) to hedge against fluctuations in interest rates from the
time it originates fixed-rate mortgage loans until the time they are sold. The
Company would terminate certain of these contracts upon the sale of the loans
and both the gain or loss on the sale of the loans and the additional gain or
loss on the termination of the interest rate swap contracts would be measured
and recognized in the consolidated statement of operations.
Additionally, the Company uses interest rate swaps and caps to hedge against
fluctuations in interest rates on a portion of its floating rate debt. Under
interest rate swaps, the Company agrees with other parties to exchange, at
specified intervals, the difference between fixed-rate and floating-rate
interest amounts calculated by reference to an agreed upon notional principal
amount. Under a cap, a third party agrees to assume any interest costs above a
stated rate. Changes in the values of these interest rate swaps and caps are
reflected in other comprehensive income.
The Company also invests in certain financial instruments that are subject to
various forms of market risk such as interest rate fluctuations, credit risk and
prepayment risk. Management believes that the value of its mortgage loans held
for sale and its investments could potentially change as a result of fluctuating
interest rates, credit risk, market sentiment and other external forces, which
could materially adversely affect the Company's liquidity and capital resources.
Management estimates that a one-percentage point increase in long-term interest
rates as of June 30, 2003 would have resulted in a decrease in the fair value of
its fixed-rate loans held for sale of $0.5 million. This decline in fair value
would have been offset by an increase in the fair value of certain interest rate
swap positions of $1.4 million. In addition, a one-percentage point increase in
short-term interest rates for the six months ended June 30, 2003 would have
resulted in additional interest costs of approximately $1.4 million. The impact
of a one-percentage point increase in long-term interest rates on the cash flow
hedge relating to variable rate debt would not generally create a significant
impact to reported earnings. This sensitivity analysis contains certain
simplifying assumptions (for example, it does not consider the impact of changes
in prepayment risk or credit spread risk). Therefore, although it gives an
indication of the Company's exposure to interest rate change, it is not intended
to predict future results and the Company's actual results will likely vary.
Management believes inflation has not significantly affected the Company's
earnings because the inflation rate has remained moderate. Additionally, the
Company's earnings primarily reflect long-term investments with fixed rents or
interest rates. The Company mainly finances these investments with a combination
of equity, senior notes and borrowings under the revolving lines of credit or
warehouse facilities. During inflationary periods, which generally are
accompanied by rising interest rates, the Company's ability to grow may be
adversely affected because the yield on new investments may increase at a slower
rate than new borrowing costs. However, sustained low inflation could lead to
net lease pricing pressure as tenants request decreasing rates for longer
maturities.
Results from Operations
The following discussion of results from operations is by segment. All segment
results herein are before eliminating adjustments and results of the holding
company. As a result, the sum of amounts applicable to each segment will not, in
some cases, equal the Company total amount reflected in the condensed
consolidated statement of operations. Company earnings by segment for
comparative three-month and six-month periods are reflected in the following
table:
Three months ended Six months ended
June 30, June 30,
Net income by segment (in millions) 2003 2002 2003 2002
------------ -------------- -------------- -------------
Real estate segment $ 8.8 $ 8.3 $ 14.5 $ 14.0
Specialty finance segment 1.8 6.8 4.1 7.6
Other holding company results
and consolidating eliminations -- (0.1 ) -- (0.1 )
------------ -------------- -------------- -------------
Net income $ 10.6 $ 15.0 $ 18.6 $ 21.5
============ ============== ============== =============
o The real estate business segment posted comparable earnings in
three-month and six-month periods ended June 30, 2003 compared with
the same periods in 2002. Decreases in interest expense are
resulting from a lower interest rate environment in 2003 and
decreased debt. However, impairment provisions, including amounts
attributed to discontinued operations, have increased from $2.4
million to $3.9 million in the six months ended June 30, 2002 and
2003, respectively, erasing the impact of decreased interest
expense. A significant tenant default led to increased property
expenses in early 2002 that have not been repeated to date in 2003.
o The specialty finance business segment posted $0.5 million less in
earnings comparable to the first quarter 2003 earnings. The
segment's earnings have fallen behind the earlier quarter and the
comparable periods for 2002 as a result of larger loan related loss
reserves in 2003 and a decrease in revenues associated with bank
product referrals and advisory services.
Revenues
The total revenues by segment for comparative three-month and six-month periods
are as follows:
For the three months ended For the six months ended
June 30, June 30,
Total revenues by segment (in millions) 2003 2002 2003 2002
------------- ------------- ------------- ------------
Real estate segment $ 25.3 $ 22.1 $ 50.5 $ 44.3
Specialty finance segment * 7.8 115.8 14.6 164.8
Other holding company results
and consolidating eliminations (0.3 ) (0.3 ) (0.8 ) (0.8 )
------------- ------------- ------------- --------------
Total revenues $ 32.8 $ 137.6 $ 64.3 $ 208.3
============= ============= ============= ==============
* See discussion below for the accounting treatment of discontinued operations.
Revenues are discussed based on the individual segment results beginning first
with the results of the core real estate segment:
For the three months ended For the six months ended
June 30, June 30,
Real estate segment revenues by line item (in millions) 2003 2002 2003 2002
------------ ------------ ------------- ----------
Rental income from operating leases $ 15.8 $ 15.4 $ 31.4 $ 31.3
Earned income from direct financing 2.6 2.9 5.3 5.9
Interest income from mortgage 1.1 1.1 2.2 2.1
equipment and other notes receivable
Investment and interest income 1.2 1.2 2.3 2.4
Food and beverage sales 3.5 - 6.9 -
Other income 1.1 1.5 2.4 2.6
------------ ------------ ------------- ------------
Total segment revenues $ 25.3 $ 22.1 $ 50.5 $ 44.3
============ ============ ============= ============
The rental revenue from vacant and other properties sold is classified as a
component of discontinued operations for all periods presented and is not
included in the segment revenues above. The change in rental income from
operating leases between periods is not significant. The decrease in earned
income from direct financing leases is the result of non-recurring additional
revenues in 2002 relating to the resolution of several tenant bankruptcies. The
most significant change in revenues relates to food and beverage sales. If
management believes doing so will protect the Company's restaurant real estate
values, the Company may purchase or assume the operations of a tenant for a
period of time. Revenues to date from turnaround opportunities are offset by
general operating and administrative expenses and food and beverage costs, and
have not materially impacted earnings.
The revenues of the specialty finance segment are more variable than those of
the real estate segment. The following table provides additional information
relating to the revenues of this segment:
For the three months ended For the six months ended
June 30, June 30,
Specialty finance segment revenues by line item (in millions) 2003 2002 2003 2002
------------- ------------ ------------ -----------
Sale of real estate $ -- $ 103.6 $ -- $ 140.8
Rental income from operating leases -- 2.5 -- 6.1
Interest income from mortgage equipment and other notes
receivable 6.5 8.1 13.6 16.4
Investment and interest income 0.2 (0.4 ) 0.4 0.4
Other income 1.3 2.0 2.9 4.4
Net decrease in value of mortgage loans held for sale,
net of related hedge (0.2 ) -- (2.3 ) (3.3 )
------------- ------------ ------------ -----------
Total segment revenues $ 7.8 $ 115.8 $ 14.6 $ 164.8
============= ============ ============ ===========
The comparability of CNL-Capital Corp revenues is significantly impacted by the
method of accounting for its sales of real estate that are recorded pursuant to
new guidance described more fully below. The following information assembles
select financial information, presented in accordance with generally accepted
accounting principles, so as to improve comparability between periods of this
segment's Investment Property Sales program sales, excluding sales conducted in
a joint venture program:
Specialty finance segment Investment
Property Sales program sales,
excluding sales in joint venture For the three months ended For the six months ended
program (in millions) June 30, June 30,
2003 2002 2003 2002
------------- ------------- ------------- --------------
Sale of real estate, as reported $ -- $ 103.6 $ -- $ 140.8
Cost of real estate sold, as reported -- 96.1 -- 130.4
Gain on disposal of discontinued
operations, net as reported 5.6 0.4 10.6 0.4
------------- ------------- ------------- --------------
Total gains from Investment Property
Sales program sales, excluding sales
in joint venture program $ 5.6 $ 7.9 $ 10.6 $ 10.8
============= ============= ============= ==============
Actual proceeds from Investment Property Sales program sales have decreased from
2002 to 2003 as a smaller number of properties have been sold. However gains
from such sales in the six months ended June 30, 2003 are keeping pace with the
same period in 2002 as a result of an increase in the realized gain percentage
between years. Demand for these properties has been strong and the declining
interest rate environment between years presented has resulted in an attractive
market for buyers of restaurant real estate. Inventory of properties on hand is
lower than expected at June 30, 2003 and it is not likely that gains for the
remainder of the year will continue at the same pace.
Other matters impacting the comparability of the various components of the
CNL-Capital Corp revenues between the comparative quarters presented include:
o Rental income from operating leases reflects a decrease because in 2002
rental revenues associated with properties acquired after December 31, 2001
were recorded as a component of income from discontinued operations while
properties acquired prior to January 1, 2002 were recorded in rental
income. However beginning January 1, 2003 all such revenues are recorded in
discontinued operations regardless of the date of acquisition. All
properties owned by this segment are held with the intent to be sold.
o Interest income from mortgage, equipment and other notes receivable has
decreased between the comparative quarters presented as a result of normal
principal repayments as well as foreclosure actions, the modification of
terms and other impact of certain delinquent loans between years. The
Company has not originated new mortgage loans since May of 2001, focusing
instead on the opportunity to refer potential borrowers to Bank of America.
o Despite a hedging strategy designed to address market volatility in the
value of loans held for sale, in both periods presented the loan valuation
increases associated with decreases in interest rates were more than offset
by estimated potential default losses and valuation decreases in hedge
contracts.
o Investment and interest income reflects the yield on retained interests in
securitization pools. While the six month periods are comparable between
years, the three month periods reflect a non-recurring item. During the
three months ended June 30, 2002 pool activity included principal
repayments that impacted the carrying value of the remaining retained
interest and a charge to earnings resulted.
o Other income reflects, among other items, a $0.6 million reduction
associated with advisory services in the six months ended June 30, 2003
compared with the six months ended June 30, 2002 as fewer transactions
closed in the current year. Other income also reflects a $0.2 million
reduction during the comparative six month periods relating to fees from
loans and other referrals to Bank of America as a result of a modification
of certain terms of the alliance agreement. Other income for the three
months ended June 30, 2003 has decreased $0.8 million compared to the same
period in 2002 including $0.1 million in reduced advisory services revenues
and $0.3 million in reduced referral fees.
Expenses
Cost of real estate sold is associated solely with the Investment Property Sales
program of the specialty finance segment and relates to properties on hand at
the beginning of 2002 that were sold by December 31, 2002. In 2002 costs
associated with properties acquired after 2001 were required to be included as a
component of the gain on disposal of discontinued operations, while in 2003 this
treatment is required regardless of acquisition date. A table and related
discussion of the comparative results from this program is reported above under
the discussion of related revenues.
General operating and administrative expenses consist primarily of
payroll-related and legal and other professional expenses. The following table
illustrates the comparative period expenses by segment:
For the three months ended For the six months ended
General operating and administrative expenses June 30, June 30,
by segment (in millions) 2003 2002 2003 2002
----------- ------------ ------------ ------------
Real estate segment $ 2.2 $ 2.7 $ 5.4 $ 5.3
Specialty finance segment 5.2 5.0 10.2 10.9
Other holding company results and
consolidating eliminations (0.1 ) (0.2 ) (0.5 ) (0.4 )
----------- ------------ ------------ ------------
Total general operating and
administrative expenses $ 7.3 $ 7.5 $ 15.1 $ 15.8
=========== ============ ============ ============
o CNL-Investments general operating and administrative expenses include the
costs associated with resolving delinquencies and pursuing turnaround
opportunities presented by defaulted tenants. While these expenses have
decreased in the three months ending June 30, 2003 compared to the prior
year period, the six months comparative amounts remain very consistent.
Fluctuations in the timing of professional, legal and other expenses can
give rise to such quarterly variations.
o CNL-Capital has maintained fairly constant levels of general and
administrative expenses across the periods presented.
CNL-Investments has selectively leveraged assets and CNL-Capital has leveraged
its real estate and loan assets and in addition has drawn on subordinated notes
to finance operations. As a result, interest expense constitutes one of the most
significant operating expenses, excluding cost of real estate sold by
CFN-Capital, which is a component of the gain from the disposal of discontinued
operations for properties acquired after 2001. Certain interest expense is
included in operating results from discontinued operations.
For the three months ended For the six months ended
June 30, June 30,
Interest expenses by segment (in millions) 2003 2002 2003 2002
----------- ------------- ------------- --------------
Real estate segment $ 6.9 $ 7.8 $ 13.8 $ 15.7
Specialty finance segment 6.4 8.0 12.1 15.4
Other holding company results and
consolidating eliminations (0.2 ) (0.1 ) (0.3 ) (0.2 )
----------- ------------- ------------- --------------
Total interest expense $ 13.1 $ 15.7 $ 25.6 $ 30.9
=========== ============= ============= ==============
o CNL-Investments decreased its level of debt throughout most of 2002 through
sales of real estate. In addition the segment reflects a lower cost of debt
as a result of the decline in interest rates.
o CNL-Capital has reduced its interest-bearing debt, in particular as a
result of decreased real estate assets on hand as it entered 2003 compared
with 2002. The decrease is due in part to a decrease in loan assets and the
corresponding debt from 2002 as a result of principal amortization, payoffs
and foreclosures without the origination of new loans to replace these
assets. Interest expense associated with properties held for sale acquired
after December 31, 2001 was recorded as a component of income from
discontinued operations and in 2003 this same treatment is given all
properties, regardless of acquisition date. This new treatment has served
to decrease interest expense reported in this category from 2002 to 2003.
While the weighted average effective interest charged by the mortgage
warehouse facilities has decreased from 4.56 percent in the six months
ended June 30, 2002 to 3.22 percent in the six months ended June 30, 2003,
the weighted average rate charged by the five-year financing of over $225
million in loans entered into in June 2002 is 5.79 percent, so the cost to
hold the loan portfolio has actually increased between years. By removing
these assets from warehouse financing, the Company complied with the terms
of the warehouse facility and was able to preserve net spread resulting
from the excess of the interest income received over the interest expense
paid, despite the increased interest expense on the five-year financing.
During the three and six months ended June 30, 2003, the Company incurred food
and other restaurant costs associated with CNL-Investments' operation of
restaurant units of $3.4 million and $6.8 million respectively. These amounts
approximately equal the revenues attributed to food and beverage sales. No such
operations existed prior to 2003. CNL-Investments employs a strategy of
temporarily operating defaulted restaurants properties and potentially acquiring
other restaurant operations to either recapture value in the underlying real
estate or to take advantage of its access to turnaround specialists, and in so
doing seeks to bring value to the Company. To date these operations have been
insignificant to earnings.
The Company recognized $0.2 million and $0.4 million in property expenses during
the three and six months ended June 30, 2003, respectively, compared with a
credit of $0.4 million in the three months, and a charge of $1.6 million in the
six months ended June 30, 2002. Property expenses typically occur when
properties are defaulted in the real estate segment. A large number of defaulted
properties led to significant estimated property expenses in the first quarter
last year, some of which were reversed later in 2002 when actual expenses were
paid. In 2003, however, fewer vacant properties are on hand. Some expenses
previously presented in this category associated with properties treated as
discontinued operations are incorporated in the income or loss from discontinued
operations for all periods presented.
Depreciation and amortization expenses have reflected and will continue to
reflect the level of assets invested in leased properties held by the real
estate segment. Certain of these expenses have been reflected as a component of
discontinued operations. The specialty finance segment does not depreciate its
properties held for sale, but has recorded $0.2 million and $0.5 million in
depreciation in the three and six months ended June 30, 2003, respectively, on
office and computer equipment compared with $0.3 million and $0.6 million during
the three and six months ended June 30, 2002, respectively.
The Company through the specialty finance segment recorded a provision for loan
losses of $2.2 million in three months ended June 30, 2003, with no such charge
in the same period in 2002. The provision for loan losses is $2.6 million and
$0.1 million during the six months ended June 30, 2003 and 2002, respectively.
Management maintains a watch on the potential for future losses against its loan
portfolio and records a reserve as potential losses become evident.
The Company has recorded impairment provisions of $3.0 million in the six months
ended June 30, 2003, excluding impairments on properties treated as discontinued
operations as described below, compared with less than $0.1 million in such
charges during the six months ended June 30, 2002. Impairment provisions are
recorded when circumstances indicate that future expected cash flows do not
recover the carrying cost of the individual properties. As previously discussed,
in the current periods certain properties required impairment charges due to
financial difficulties experienced by the tenants.
The Company's statement of operations reflects a charge for minority interest in
income of consolidated joint ventures of $0.2 million and $0.7 million for the
six months ended June 30, 2003 and 2002, respectively. Similarly, the three
month periods ended June 30, 2003 and 2002 reflect a negligible charge and a
charge of $0.5 million, respectively. The reduction between years resulted from
the January 1, 2003, reduction in minority ownership of CNL-Capital.
The Company accounts for certain of its revenues and expenses as originating
from discontinued operations pursuant to Statement of Financial Accounting
Standard No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("FAS 144"). FAS 144 requires that sales of real estate, or the
designation of a real estate asset as held for sale, be treated as discontinued
operations. Any gain or loss from such disposition, and any income or expenses
associated with these real estate assets, are included in the income statement
as discontinued operations. CNL-Capital's Investment Property Sales program, a
vital piece of its ongoing operating strategy and a contributor of substantial
gains is nonetheless deemed to fall under the new guidance. Therefore, gains
from properties sold under the Investment Property Sales program are included as
discontinued operations, unless the gain was realized in 2002 for properties
acquired before January 1, 2002. Income and expenses associated with Investment
Property Sales program assets are also included in discontinued operations,
except for 2002 income and expenses associated with properties acquired before
January 1, 2002 and sold by December 31, 2002. In addition, CNL-Investments has
designated certain real estate assets since December 31, 2001 as held for sale
and has included income and expenses associated with the assets as well as the
gain or loss from any dispositions of these assets as discontinued operations
for all periods presented. The table below illustrates the treatment of
discontinued operations by segment:
For the three months ended For the six months ended
Income (loss) from discontinued operations June 30, June 30,
by segment (in millions) 2003 2002 2003 2002
------------- ------------ ----------- -------------
Real estate segment discontinued operations:
Operating loss $ (0.5 ) $ (1.9 ) $ (0.7 ) $ (2.3 )
Gains or (losses) on disposal of
discontinued operations 0.6 1.6 0.9 1.5
Specialty finance segment discontinued operations:
Operating income 1.7 0.4 3.0 --
Gains on disposal of discontinued operations 5.6 0.4 10.6 0.4
------------- ------------ ----------- -------------
Total income (loss) from discontinued
operations $ 7.4 $ 0.5 $ 13.8 $ (0.4 )
============= ============ =========== =============
In November 2002, the Financial Accounting Standard Board (" FASB") issued FASB
Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others". FIN 45 clarifies the requirements relating to a guarantor's accounting
for, and disclosure of, the issuance of certain types of guarantees. FIN 45
requires that upon issuance of a guarantee, the guarantor must recognize a
liability for the fair value of the obligation it assumes under that guarantee.
FIN 45's provisions for initial recognition and measurement are to be applied on
a prospective basis to guarantees issued or modified after December 31, 2002.
The Company's previous accounting for guarantees issued prior to January 1, 2003
are not required to be revised or restated to reflect the effect of the
recognition and measurement provisions of FIN 45. The Company has not issued or
modified any guarantees since the adoption of FIN 45.
In January 2003, FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities" to expand upon and strengthen
existing accounting guidance that addresses when a company should include the
assets, liabilities and activities of another entity meeting the criteria of a
variable interest entity in its financial statements. FIN 46 requires that a
variable interest entity be consolidated by a company if that company is subject
to a majority risk of loss from the variable interest entity's activities or
entitled to receive a majority of the entity's residual returns or both. Prior
to FIN 46, a company generally included another entity in its consolidated
financial statements only if it controlled the entity through voting interests.
Consolidation of variable interest entities will provide more complete
information about the resources, obligations, risks and opportunities of the
consolidated company. The consolidation requirements of FIN 46 apply immediately
to variable interest entities created after January 31, 2003, and to older
entities in the first fiscal year or interim period beginning after June 15,
2003. Management believes that adoption of this standard will not change the
accounting for its bankruptcy remote securitization entities. Management
believes adoption of this standard will result in consolidation with respect to
two of the Company's unconsolidated subsidiaries, however, such consolidation is
not expected to significantly impact the Company's financial position or results
of operations.
In May, 2003, FASB issued FASB Statement No. 150 ("FAS 150"), "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity." FAS 150 establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. FAS 150 will require issuers to classify certain financial instruments
as liabilities (or assets in some circumstances) that previously were classified
as equity. Financial instruments covered by FAS 150 include shares that are
mandatorily redeemable, and other financial instruments that embody an
obligation to repurchase outstanding shares or a conditional obligation that
requires settlement by issuing a variable number of the entity's shares. FAS 150
is effective for financial instruments entered into or modified after May 31,
2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003, except for mandatorily redeemable financial
instruments of non-public entities which are subject to its provisions for the
first fiscal period beginning after December 15, 2003.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Information regarding the Company's market risk at December 31, 2002 is
included in its Annual Report on Form 10-K for the year ended December 31, 2002.
The material changes in the Company's market risk are discussed in Item 2 above.
Information regarding the Company's market risk relating to changes in interest
rates are incorporated herein by reference to Item 2, "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Interest Rate
Risk" herein.
Item 4. Controls and Procedures.
The Company maintains a set of disclosure controls and procedures
designed to ensure that information required to be disclosed in the Company's
filings under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. The principal executive and financial
officers of the Company have evaluated the Company's disclosure controls and
procedures as of the end of the period covered by this Quarterly Report on Form
10-Q and have determined that such disclosure controls and procedures are
effective.
There was no change in internal control over financial reporting that
occurred during the most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, internal control over financial
reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. Inapplicable.
Item 2. Changes in Securities. Inapplicable.
Item 3. Default upon Senior Securities. Inapplicable.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The regular annual meeting of stockholders of the Company
was held in Orlando, Florida on June 26, 2003 for the
purpose of electing the board of directors and voting on
the proposals described below.
(b) Proxies for the meeting were solicited pursuant to Section
14(a) of the Securities Exchange Act of 1934, as amended,
and the regulations promulgated thereunder, and there was
no solicitation in opposition to management's
solicitations. All of management's nominees for director
were elected.
(c) Four proposals were submitted to a vote of stockholders as
follows:
(1) The stockholders approved the election of the
following persons as directors of the Company:
Name For Withheld
---- --- --------
Robert A. Bourne 25,547,359 330,074
G. Richard Hostetter, Esq. 25,551,800 325,633
Richard C. Huseman 25,544,870 332,563
J. Joseph Kruse 25,521,683 355,750
James M. Seneff, Jr. 25,537,781 339,652
(2) The stockholders approved, with 24,837,654
affirmative votes, 471,307 negative votes, and
568,472 abstentions, the proposal to change the name
of the Company to "CNL Restaurant Properties, Inc."
(3) The stockholders approved, with 23,250,565
affirmative votes, 1,631,694 negative votes, and
99,174 abstentions, the proposal to amend Article VII
of the Company's Second Amended and Restated Articles
of Incorporation to clarify the indemnification
already provided to the Company's officers, directors
employees and agents.
(4) The stockholders approved, with 22,658,651
affirmative votes, 2,151,621 negative votes, and
1,067,161 abstentions, the proposal to amend Article
V of the Company's Second Amended and Restated
Articles of Incorporation to allow the Company to
waive common and preferred stockholder ownership
limitations for individuals as such term is defined
under federal tax law.
Item 5. Other Information. Inapplicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
2.1 Agreement and Plan of Merger, by and among the
Registrant, CFA Acquisition Corp., CNL Fund
Advisors, Inc. and CNL Group, Inc., dated March
11, 1999 (included as Exhibit 10.38 to the
Registrant's Registration Statement No.
333-74329 on Form S-4 (the "Form S-4") as
originally filed and incorporated herein by
reference).
2.2 Agreement and Plan of Merger, by and among the
Registrant, CFC Acquisition Corp., CFS
Acquisition Corp., CNL Financial Corp., CNL
Financial Services, Inc., CNL Group, Inc., Five
Arrows Realty Securities L.L.C., Robert A.
Bourne, Curtis B. McWilliams and Brian Fluck,
dated March 11, 1999 (included as Exhibit 10.39
to the Form S-4 as originally filed and
incorporated herein by reference).
3.1 CNL American Properties Fund, Inc. Amended and
Restated Articles of Incorporation, as amended
(included as Exhibit 3.1 to the Registrant's
Form 10-Q for the quarter ended June 30, 1999
and incorporated herein by reference).
3.2 CNL American Properties Fund, Inc. Amended and
Restated Bylaws (included as Exhibit 3.2 to the
Registrant's Registration Statement No.
333-37657 on Form S-11 and incorporated herein
by reference).
3.3 CNL American Properties Fund, Inc. Second
Amended and Restated Articles of Incorporation
(included as Exhibit 3.3 to the Registrant's
Form 10-Q for the quarter ended June 30, 2000
and incorporated herein by reference).
3.4 Articles of Amendment to Second Amended and
Restated Articles of Incorporation of CNL
American Properties Fund, Inc. (included as
Exhibit 3.4 to the Registrant's Form 10-Q for
the quarter ended June 30, 2002 and
incorporated herein by reference).
3.5 Articles of Amendment to Second Amended and
Restated Articles of Incorporation of CNL
American Properties Fund, Inc. (filed
herewith).
4.1 Form of Stock Certificate (included as Exhibit
4.5 to the Registrant's Registration Statement
No. 33-78790 on Form S-11 and incorporated
herein by reference).
10.1 Form of Indemnification Agreement dated as of
April 18, 1995, between the Registrant and each
of James M. Seneff, Jr., Robert A. Bourne, G.
Richard Hostetter, J. Joseph Kruse, Richard C.
Huseman, John T. Walker, Jeanne A. Wall, Lynn
E. Rose and Edgar J. McDougall, dated as of
January 27, 1997, between the Registrant and
Steven D. Shackelford, dated as of February 18,
1998, between the Registrant and Curtis B.
McWilliams, and dated as of September 1, 1999,
between the Registrant and each of Howard J.
Singer, John L. Farren, Timothy J. Neville,
Michael I. Wood and Barry L. Goff (included as
Exhibit 10.9 to the Registrant's Registration
Statement No. 333-15411 on Form S-11 and
incorporated herein by reference).
10.2 Amended and Restated Agreement of Limited
Partnership of CNL APF Partners, LP (included
as Exhibit 10.50 to Amendment No. 2 to the Form
S-4 and incorporated herein by reference).
10.3 Franchise Receivable Funding and Servicing
Agreement dated as of October 14, 1999 between
CNL APF Partners, LP and Neptune Funding
Corporation (included as Exhibit 10.5 to the
Registrant's Form 10-K for the year ended
December 31, 1999 and incorporated herein by
reference).
10.4 Interim Wholesale Mortgage Warehouse and
Security Agreement dated as of September 18,
1998, and Amended Agreement dated as of August
30, 1999 between CNL APF Partners, LP and
Prudential Securities Credit Corporation
(included as Exhibit 10.6 to the Registrant's
Form 10-K for the year ended December 31, 1999
and incorporated herein by reference).
10.5 1999 Performance Incentive Plan (included as
Exhibit 10.1 to Amendment No. 1 to the Form S-4
and incorporated herein by reference).
10.6 Registration Rights Agreement by and among the
Registrant, Robert A. Bourne, Curtis B.
McWilliams, John T. Walker, Howard Singer,
Steven D. Shackelford and CNL Group, Inc.,
dated as of March 11, 1999 (included as Exhibit
10.40 to Amendment No. 1 to the Form S-4 and
incorporated herein by reference).
10.7 Registration Rights Agreement by and among the
Registrant, Five Arrows Realty Securities
L.L.C., James M. Seneff, Jr., Robert A. Bourne,
Curtis B. McWilliams and CNL Group, Inc., dated
as of March 11, 1999 (included as Exhibit 10.41
to Amendment No. 1 to the Form S-4 and
incorporated herein by reference).
10.8 Employment Agreement by and between Curtis B.
McWilliams and the Registrant, dated September
15, 1999 (included as Exhibit 10.42 to
Amendment No. 2 to the Form S-4 and
incorporated herein by reference).
10.9 Employment Agreement by and between Steven D.
Shackelford and the Registrant, dated September
15, 1999 (included as Exhibit 10.43 to
Amendment No. 2 to the Form S-4 and
incorporated herein by reference).
10.10 Employment Agreement by and between Barry L.
Goff and the Registrant, dated September 15,
1999 (included as Exhibit 10.46 to Amendment
No. 2 to the Form S-4 and incorporated herein
by reference).
10.11 Employment Agreement by and between Robert W.
Chapin and the Registrant, dated September 15,
1999 (included as Exhibit 10.47 to Amendment
No. 2 to the Form S-4 and incorporated herein
by reference).
10.12 Employment Agreement by and between Michael
Wood and the Registrant, dated August 31, 1999
(included as Exhibit 10.19 to the Registrant's
Form 10-Q for the quarter ended March 31, 2001
and incorporated herein by reference).
10.13 Employment Agreement by and between Brent
Heaton and the Registrant, dated September 29,
1999 (included as Exhibit 10.20 to the
Registrant's Form 10-Q for the quarter ended
March 31, 2001 and incorporated herein by
reference).
10.14 Addendum to Employment Agreement dated as of
November 1, 1999, between the Registrant and
Curtis McWilliams (included as Exhibit 10.21 to
the Registrant's Form 10-Q for the quarter
ended March 31, 2001 and incorporated herein by
reference). The following persons have signed a
substantially identical Addendum relating to
their respective employment agreements; Steve
Shackelford (dated November 1, 1999); John
Walker (dated November 3, 1999); Barry Goff
(dated November 1, 1999); and Brent Heaton
(dated November 3, 1999).
10.15 Addendum to Employment Agreement dated as of
November 1, 1999, between the Registrant and
Robert Chapin (included as Exhibit 10.22 to the
Registrant's Form 10-Q for the quarter ended
March 31, 2001 and incorporated herein by
reference). The following persons have signed a
substantially identical Addendum relating to
their respective employment agreements: Howard
Singer (dated November 1, 1999); Michael Wood
(dated November 8, 1999); and Timothy Neville
(dated November 24, 1999).
10.16 Second Addendum to Employment Agreement dated
as of June 16, 2000, between the Registrant and
Curtis McWilliams (included as Exhibit 10.23 to
the Registrant's Form 10-Q for the quarter
ended March 31, 2001 and incorporated herein by
reference). The following persons have signed a
substantially identical Second Addendum
relating to their respective employment
agreements: Howard Singer (dated June 19,
2000); Robert Chapin (dated June 20, 2000); and
Brent Heaton (dated October 30, 2000).
10.17 Second Addendum to Employment Agreement dated
as of August 20, 2000, between the Registrant
and Barry Goff (included as Exhibit 10.24 to
the Registrant's Form 10-Q for the quarter
ended March 31, 2001 and incorporated herein by
reference).
10.18 Second Addendum to Employment Agreement dated
as of September 1, 2000, between the Registrant
and Steve Shackelford (included as Exhibit
10.25 to the Registrant's Form 10-Q for the
quarter ended March 31, 2001 and incorporated
herein by reference).
10.19 Second Addendum to Employment Agreement dated
as of October 24, 2000, between the Registrant
and Michael Wood (included as Exhibit 10.27 to
the Registrant's Form 10-Q for the quarter
ended March 31, 2001 and incorporated herein by
reference).
10.20 Amended and Restated Master Purchase Agreement
dated as of October 11, 2001, among Bank of
America, N.A., CNL Financial VII, LP and CNL
Franchise Network, LP (included as Exhibit
10.29 to the Registrant's Form 10-K for the
year ended December 31, 2001 and incorporated
herein by reference).
10.21 Third Amended and Restated Side Letter dated as
of October 11, 2001, among Bank of America,
N.A., CNL Financial VII, LP and CNL Franchise
Network, LP (included as Exhibit 10.30 to the
Registrant's Form 10-K for the year ended
December 31, 2001 and incorporated herein by
reference).
10.22 Loan and Security Agreement dated as of June
14, 2002 between CNL Financial IX, LP and Nieuw
Amsterdam Receivables Corporation (included as
Exhibit 10.31 to the Registrant's Form 10-Q for
the quarter ended June 30, 2002 and
incorporated herein by reference).
31.1 Certification of Co-Chief Executive Officer
Pursuant to Rule 13a-14 as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
(filed herewith).
31.2 Certification of Co-Chief Executive Officer
Pursuant to Rule 13a-14 as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
(filed herewith).
31.3 Certification of Chief Financial Officer
Pursuant to Rule 13a-14 as Adopted Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
(filed herewith).
32.1 Certification of Co-Chief Executive Officer
pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (filed herewith).
32.2 Certification of Co-Chief Executive Officer
pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (filed herewith).
32.3 Certification of Chief Financial Officer
pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (filed herewith).
(b) The Registrant filed no reports on Form 8-K during the
quarter ended June 30, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Dated this 8th day of August, 2003.
CNL RESTAURANT PROPERTIES, INC.
By: /s/ James M. Seneff, Jr.
------------------------------
JAMES M. SENEFF, JR.
co-Chief Executive Officer
(Principal Executive Officer)
By: /s/ Curtis B. McWilliams
------------------------------
CURTIS B. MCWILLIAMS
co-Chief Executive Officer
(Principal Executive Officer)
By: /s/ Steven D. Shackelford
------------------------------
STEVEN D. SHACKELFORD
Chief Financial Officer
(Principal Financial and Accounting
Officer)
EXHIBIT INDEX
Exhibit Number
(c) Exhibits
2.1 Agreement and Plan of Merger, by and among
the Registrant, CFA Acquisition Corp., CNL
Fund Advisors, Inc. and CNL Group, Inc.,
dated March 11, 1999 (included as Exhibit
10.38 to the Registrant's Registration
Statement No. 333-74329 on Form S-4 (the
"Form S-4") as originally filed and
incorporated herein by reference).
2.2 Agreement and Plan of Merger, by and among
the Registrant, CFC Acquisition Corp., CFS
Acquisition Corp., CNL Financial Corp., CNL
Financial Services, Inc., CNL Group, Inc.,
Five Arrows Realty Securities L.L.C., Robert
A. Bourne, Curtis B. McWilliams and Brian
Fluck, dated March 11, 1999 (included as
Exhibit 10.39 to the Form S-4 as originally
filed and incorporated herein by reference).
3.1 CNL American Properties Fund, Inc. Amended
and Restated Articles of Incorporation, as
amended (included as Exhibit 3.1 to the
Registrant's Form 10-Q for the quarter ended
June 30, 1999 and incorporated herein by
reference).
3.2 CNL American Properties Fund, Inc. Amended
and Restated Bylaws (included as Exhibit 3.2
to the Registrant's Registration Statement
No. 333-37657 on Form S-11 and incorporated
herein by reference).
3.3 CNL American Properties Fund, Inc. Second
Amended and Restated Articles of
Incorporation (included as Exhibit 3.3 to
the Registrant's Form 10-Q for the quarter
ended June 30, 2000 and incorporated herein
by reference).
3.4 Articles of Amendment to Second Amended and
Restated Articles of Incorporation of CNL
American Properties Fund, Inc. (included as
Exhibit 3.4 to the Registrant's Form 10-Q
for the quarter ended June 30, 2002 and
incorporated herein by reference).
3.5 Articles of Amendment to Second Amended and
Restated Articles of Incorporation of CNL
American Properties Fund, Inc. (filed
herewith).
4.1 Form of Stock Certificate (included as
Exhibit 4.5 to the Registrant's Registration
Statement No. 33-78790 on Form S-11 and
incorporated herein by reference).
10.1 Form of Indemnification Agreement dated as
of April 18, 1995, between the Registrant
and each of James M. Seneff, Jr., Robert A.
Bourne, G. Richard Hostetter, J. Joseph
Kruse, Richard C. Huseman, John T. Walker,
Jeanne A. Wall, Lynn E. Rose and Edgar J.
McDougall, dated as of January 27, 1997,
between the Registrant and Steven D.
Shackelford, dated as of February 18, 1998,
between the Registrant and Curtis B.
McWilliams, and dated as of September 1,
1999, between the Registrant and each of
Howard J. Singer, John L. Farren, Timothy J.
Neville, Michael I. Wood and Barry L. Goff
(included as Exhibit 10.9 to the
Registrant's Registration Statement No.
333-15411 on Form S-11 and incorporated
herein by reference).
10.2 Amended and Restated Agreement of Limited
Partnership of CNL APF Partners, LP
(included as Exhibit 10.50 to Amendment No.
2 to the Form S-4 and incorporated herein by
reference).
10.3 Franchise Receivable Funding and Servicing
Agreement dated as of October 14, 1999
between CNL APF Partners, LP and Neptune
Funding Corporation (included as Exhibit
10.5 to the Registrant's Form 10-K for the
year ended December 31, 1999 and
incorporated herein by reference).
10.4 Interim Wholesale Mortgage Warehouse and
Security Agreement dated as of September 18,
1998, and Amended Agreement dated as of
August 30, 1999 between CNL APF Partners, LP
and Prudential Securities Credit Corporation
(included as Exhibit 10.6 to the
Registrant's Form 10-K for the year ended
December 31, 1999 and incorporated herein by
reference).
10.5 1999 Performance Incentive Plan (included as
Exhibit 10.1 to Amendment No. 1 to the Form
S-4 and incorporated herein by reference).
10.6 Registration Rights Agreement by and among
the Registrant, Robert A. Bourne, Curtis B.
McWilliams, John T. Walker, Howard Singer,
Steven D. Shackelford and CNL Group, Inc.,
dated as of March 11, 1999 (included as
Exhibit 10.40 to Amendment No. 1 to the Form
S-4 and incorporated herein by reference).
10.7 Registration Rights Agreement by and among
the Registrant, Five Arrows Realty
Securities L.L.C., James M. Seneff, Jr.,
Robert A. Bourne, Curtis B. McWilliams and
CNL Group, Inc., dated as of March 11, 1999
(included as Exhibit 10.41 to Amendment No.
1 to the Form S-4 and incorporated herein by
reference).
10.8 Employment Agreement by and between Curtis
B. McWilliams and the Registrant, dated
September 15, 1999 (included as Exhibit
10.42 to Amendment No. 2 to the Form S-4 and
incorporated herein by reference).
10.9 Employment Agreement by and between Steven
D. Shackelford and the Registrant, dated
September 15, 1999 (included as Exhibit
10.43 to Amendment No. 2 to the Form S-4 and
incorporated herein by reference).
10.10 Employment Agreement by and between Barry L.
Goff and the Registrant, dated September 15,
1999 (included as Exhibit 10.46 to Amendment
No. 2 to the Form S-4 and incorporated
herein by reference).
10.11 Employment Agreement by and between Robert
W. Chapin and the Registrant, dated
September 15, 1999 (included as Exhibit
10.47 to Amendment No. 2 to the Form S-4 and
incorporated herein by reference).
10.12 Employment Agreement by and between Michael
Wood and the Registrant, dated August 31,
1999 (included as Exhibit 10.19 to the
Registrant's Form 10-Q for the quarter ended
March 31, 2001 and incorporated herein by
reference).
10.13 Employment Agreement by and between Brent
Heaton and the Registrant, dated September
29, 1999 (included as Exhibit 10.20 to the
Registrant's Form 10-Q for the quarter ended
March 31, 2001 and incorporated herein by
reference).
10.14 Addendum to Employment Agreement dated as of
November 1, 1999, between the Registrant and
Curtis McWilliams (included as Exhibit 10.21
to the Registrant's Form 10-Q for the
quarter ended March 31, 2001 and
incorporated herein by reference). The
following persons have signed a
substantially identical Addendum relating to
their respective employment agreements;
Steve Shackelford (dated November 1, 1999);
John Walker (dated November 3, 1999); Barry
Goff (dated November 1, 1999); and Brent
Heaton (dated November 3, 1999).
10.15 Addendum to Employment Agreement dated as of
November 1, 1999, between the Registrant and
Robert Chapin (included as Exhibit 10.22 to
the Registrant's Form 10-Q for the quarter
ended March 31, 2001 and incorporated herein
by reference). The following persons have
signed a substantially identical Addendum
relating to their respective employment
agreements: Howard Singer (dated November 1,
1999); Michael Wood (dated November 8,
1999); and Timothy Neville (dated November
24, 1999).
10.16 Second Addendum to Employment Agreement
dated as of June 16, 2000, between the
Registrant and Curtis McWilliams (included
as Exhibit 10.23 to the Registrant's Form
10-Q for the quarter ended March 31, 2001
and incorporated herein by reference). The
following persons have signed a
substantially identical Second Addendum
relating to their respective employment
agreements: Howard Singer (dated June 19,
2000); Robert Chapin (dated June 20, 2000);
and Brent Heaton (dated October 30, 2000).
10.17 Second Addendum to Employment Agreement
dated as of August 20, 2000, between the
Registrant and Barry Goff (included as
Exhibit 10.24 to the Registrant's Form 10-Q
for the quarter ended March 31, 2001 and
incorporated herein by reference).
10.18 Second Addendum to Employment Agreement
dated as of September 1, 2000, between the
Registrant and Steve Shackelford (included
as Exhibit 10.25 to the Registrant's Form
10-Q for the quarter ended March 31, 2001
and incorporated herein by reference).
10.19 Second Addendum to Employment Agreement
dated as of October 24, 2000, between the
Registrant and Michael Wood (included as
Exhibit 10.27 to the Registrant's Form 10-Q
for the quarter ended March 31, 2001 and
incorporated herein by reference).
10.20 Amended and Restated Master Purchase
Agreement dated as of October 11, 2001,
among Bank of America, N.A., CNL Financial
VII, LP and CNL Franchise Network, LP
(included as Exhibit 10.29 to the
Registrant's Form 10-K for the year ended
December 31, 2001 and incorporated herein by
reference).
10.21 Third Amended and Restated Side Letter dated
as of October 11, 2001, among Bank of
America, N.A., CNL Financial VII, LP and CNL
Franchise Network, LP (included as Exhibit
10.30 to the Registrant's Form 10-K for the
year ended December 31, 2001 and
incorporated herein by reference).
10.22 Loan and Security Agreement dated as of June
14, 2002 between CNL Financial IX, LP and
Nieuw Amsterdam Receivables Corporation
(included as Exhibit 10.31 to the
Registrant's Form 10-Q for the quarter ended
June 30, 2002 and incorporated herein by
reference).
31.1 Certification of Co-Chief Executive Officer
Pursuant to Rule 13a-14 as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of
2002 (filed herewith).
31.2 Certification of Co-Chief Executive Officer
Pursuant to Rule 13a-14 as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of
2002 (filed herewith).
31.3 Certification of Chief Financial Officer
Pursuant to Rule 13a-14 as Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of
2002 (filed herewith).
32.1 Certification of Co-Chief Executive Officer
pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
32.2 Certification of Co-Chief Executive Officer
pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
32.3 Certification of Chief Financial Officer
pursuant to 18 U.S.C. Section 1350 as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
EXHIBIT 3.5
ARTICLES OF AMENDMENT TO SECOND AMENDED AND RESTATED
ARTICLES OF INCORPORATION OF CNL AMERICAN PROPERTIES FUND, INC.
EXHIBIT 31.1
CERTIFICATION OF CO-CHIEF EXECUTIVE OFFICER
EXHIBIT 31.2
CERTIFICATION OF CO-CHIEF EXECUTIVE OFFICER
EXHIBIT 31.3
CERTIFICATION OF CHIEF FINANCIAL OFFICER
EXHIBIT 32.1
CERTIFICATION OF CO-CHIEF EXECUTIVE OFFICER
EXHIBIT 32.2
CERTIFICATION OF CO-CHIEF EXECUTIVE OFFICER
EXHIBIT 32.3
CERTIFICATION OF CHIEF FINANCIAL OFFICER