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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT of 1934
For the quarterly period ended September 30, 2002
--------------------------------------------------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT of 1934
For the transition period from _________________________ to ____________________
Commission file number
001-15581
---------------------------------------
CNL American Properties Fund, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 59-3239115
- --------------------------------- ---------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
450 South Orange Avenue
Orlando, Florida 32801
- --------------------------------- ----------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number
(including area code) (407) 540-2000
-----------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for 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 the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
45,248,670 shares of common stock, $0.01 par value, outstanding as of November
12, 2002.
CONTENTS
Part I - FINANCIAL INFORMATION 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 7-17
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18-28
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 28
Item 4. Controls and Procedures 28-29
Part II - OTHER INFORMATION 30-33
Item 1. Financial Statements
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands except for share data)
September 30, December 31,
2002 2001
------------------ -----------------
ASSETS
Real estate investment properties $ 595,368 $ 597,099
Net investment in direct financing leases 116,294 123,969
Real estate held for sale 171,226 241,211
Mortgage loans held for sale 46,580 315,835
Mortgage, equipment and other notes receivable, net of allowance of
$28,005 and $29,631, respectively 340,462 103,962
Other investments 32,374 32,797
Cash and cash equivalents 18,735 19,333
Restricted cash 3,928 12,456
Receivables, less allowance for doubtful accounts of $1,808 and
$4,315, respectively 10,738 4,990
Accrued rental income 21,174 17,929
Goodwill 56,260 56,260
Other assets 32,280 33,273
------------------ -----------------
$ 1,445,419 $ 1,559,114
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Credit facility $ 6,000 $ 10,000
Note payable 227,246 48,731
Mortgage warehouse facilities 171,412 430,169
Subordinated note payable 43,750 43,750
Bonds payable 429,168 441,065
Due to related parties 85 5,201
Other payables 39,173 35,505
------------------ -----------------
Total liabilities 916,834 1,014,421
------------------ -----------------
Minority interests, including redeemable partnership interest 18,216 18,511
------------------ -----------------
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 45,286,297 and 44,112,943 shares, respectively,
outstanding 45,248,670 and 44,075,641 shares, respectively 453 441
Capital in excess of par value 818,238 798,154
Accumulated other comprehensive income/(loss) (16,515 ) 1,370
Accumulated distributions in excess of net earnings (291,807 ) (273,783 )
------------------ -----------------
Total stockholders' equity 510,369 526,182
------------------ -----------------
$ 1,445,419 $ 1,559,114
================== =================
See accompanying notes to condensed consolidated financial statements.
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands except for per share data)
Quarter Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---------------- ------------------ --------------- ---------------
Revenues:
Sale of real estate $ 34,032 $ 41,173 $ 174,837 $ 68,400
Rental income from operating leases 16,014 18,501 54,416 57,784
Earned income from direct financing leases 3,986 3,387 9,884 10,448
Interest income from mortgage, equipment and other
notes receivables 8,459 8,705 26,985 32,958
Investment and interest income 941 1,469 2,281 4,747
Gain on sale of assets - operating -- 2,168 -- 1,087
Other income 3,593 2,627 10,092 10,172
Net increase (decrease) in value of mortgage loans
held for sale, net of related hedge (2,072 ) (2,582 ) (5,319 ) 32
---------------- ------------------ --------------- ---------------
64,953 75,448 273,176 185,628
---------------- ------------------ --------------- ---------------
Expenses:
Cost of real estate sold 31,284 37,384 161,718 63,300
General operating and administrative 6,909 6,572 21,734 23,288
Interest expense 13,343 16,743 43,736 52,497
Property expenses 501 1,172 2,521 1,782
State and other taxes 236 193 471 881
Depreciation and amortization 3,910 4,850 11,584 15,823
Loss on investment in securities -- -- -- 121
Loss on termination of cash flow hedge accounting -- 6,417 -- 6,417
Provision for loss on loans 339 24,200 399 24,200
Impairment provisions 451 4,134 1,737 8,463
---------------- ------------------ --------------- ---------------
56,973 101,665 243,900 196,772
---------------- ------------------ --------------- ---------------
Earnings (loss) from continuing operations before
minority interest in (income)/loss of consolidated
joint ventures, equity in earnings (loss) of
unconsolidated joint ventures and gain (loss)
on sale of assets 7,980 (26,217 ) 29,276 (11,144 )
Minority interest in (income)/loss of consolidated joint
ventures (175 ) 86 (839 ) 154
Equity in earnings (loss) of unconsolidated joint ventures 301 (343 ) 743 74
Gain (loss) on sale of assets 21 60 (606 ) (1,244 )
---------------- ------------------ --------------- ---------------
Earnings (loss) from continuing operations, net 8,127 (26,414 ) 28,574 (12,160 )
---------------- ------------------ --------------- ---------------
Discontinued operations
Income/(loss) from discontinued operations, net (597 ) (1,230 ) (1,739 ) 1,726
Gain on disposal of discontinued operations, net 3,713 -- 5,882 --
---------------- ------------------ --------------- ---------------
3,116 (1,230 ) 4,143 1,726
---------------- ------------------ --------------- ---------------
See accompanying notes to condensed consolidated financial statements.
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME - CONTINUED
(In Thousands except for per share data)
Quarter Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
--------------- ---------------- -------------- ---------------
Earnings (loss) before cumulative effect of accounting
change 11,243 (27,644) 32,717 (10,434)
--------------- ---------------- -------------- ---------------
Cumulative effect of accounting change -- -- -- (3,841)
--------------- ---------------- -------------- ---------------
Net earnings (loss) $ 11,243 $ (27,644) $ 32,717 $ (14,275)
=============== ================ ============== ===============
Earnings (loss) per share of common stock (basic and diluted):
From continuing operations $ 0.18 $ (0.61) $ 0.65 $ ( 0.28)
From discontinued operations 0.07 (0.03) 0.09 0.04
--------------- ---------------- -------------- ---------------
Before cumulative effect of accounting change 0.25 (0.64) 0.74 (0.24)
Cumulative effect of accounting change -- -- -- (.09)
--------------- ---------------- -------------- ---------------
Net earnings (loss) $ 0.25 $ (0.64) $ 0.74 $ (0.33)
=============== ================ ============== ===============
Weighted average number of shares of common stock
outstanding 44,969,003 43,499,829 44,408,454 43,497,237
=============== ================ ============== ===============
See accompanying notes to condensed consolidated financial statements.
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND
COMPREHENSIVE INCOME/(LOSS)
Nine Months Ended September 30, 2002 and Year Ended December 31, 2001
(In Thousands except for share data and per share data)
Accumulated Accumulated
Common Stock Capital in distributions Other
Number Par excess of in excess of Comprehensive Comprehensive
of shares value par value net earnings Income/(Loss) Total Income/(Loss)
------------ --------- ---------- ------------- -------------- ----------- ---------------
Balance at December 31, 2000 43,495,919 $ 435 $ 789,926 $(182,865 ) $ 242 $ 607,738 $ --
Shares issued 579,722 6 9,722 -- -- 9,728 --
Stock issuance costs -- -- (1,494 ) -- -- (1,494 ) --
Net loss -- -- -- (24,452 ) -- (24,452 ) (24,452 )
Other comprehensive income,
market revaluation on available
for sale securities -- -- -- -- 839 839 839
Cumulative effect adjustment
to recognize fair value of
cash flow hedges -- -- -- -- (5,172 ) (5,172 ) (5,172 )
Reclassification of cash flow
hedge losses to statement
of operations -- -- -- -- 8,060 8,060 8,060
Current period adjustment to
recognize change in fair
value of cash flow hedges -- -- -- -- (2,599 ) (2,599 ) (2,599 )
------------
Total comprehensive loss -- -- -- -- -- -- $ (23,324 )
============
Distributions declared and
paid ($1.52 per share) -- -- -- (66,466 ) -- (66,466 )
---------- ------ ----------- -------------- -------- ----------- ------------
Balance at December 31, 2001 44,075,641 $ 441 $ 798,154 $ (273,783 ) $ 1,370 $ 526,182 $ --
Shares issued 1,173,354 12 20,088 -- -- 20,100 --
Retirement of common stock (325) -- (4 ) -- -- (4 ) --
Net earnings -- -- -- 32,717 -- 32,717 32,717
Other comprehensive loss,
market revaluation available
for sale securities -- -- -- -- (426 ) (426 ) (426 )
Current period adjustment to
recognize change in fair
value of cash flow hedge -- -- -- -- (17,459 ) (17,459 ) (17,459 )
---------------
Total comprehensive income -- -- -- -- -- -- $ 14,832
===============
Distributions declared and
paid ($1.14 per share) -- -- -- (50,741 ) -- (50,741 )
---------- ------ ---------- ---------- --------- ---------
Balance at September 30, 2002 45,248,670 $ 453 $ 818,238 $ (291,807 ) $ (16,515) $510,369
========== ====== ========== ========== ========= =========
See accompanying notes to condensed consolidated financial statements.
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Nine Months Ended
September 30,
2002 2001
----------------- ------------------
Cash Flow from Operating Activities:
Net earnings (loss) $ 32,717 $ (14,275 )
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization 11,584 15,823
Impairment provisions 1,737 8,463
Provision for loan losses 399 24,200
Investments in mortgage loans held for sale (5,851 ) (129,884 )
Collection on mortgage loans held for sale 29,512 34,422
Proceeds from sale of mortgage loans held for sale -- 104,146
Change in inventories of real estate held for sale 21,751 (15,250 )
Proceeds from sale of securities -- 148
Loss on sale of assets 606 1,244
Decrease (increase) in value of mortgage loans held for sale,
net of related hedge 5,319 (32 )
Changes in other operating assets and liabilities (20,752 ) 6,150
----------------- ------------------
Net cash provided by operating activities $ 77,022 $ 35,155
----------------- ------------------
Cash Flows from Investing Activities:
Additions to real estate investment properties (6,232 ) (9,159 )
Proceeds from sale of assets 46,686 8,532
Decrease (increase) in restricted cash 8,528 (11,073 )
Investment in joint ventures (543 ) (60 )
Investment in mortgage, equipment and other notes
receivable (6,607 ) (12,164 )
Collections on mortgage, equipment and other notes
receivable 11,853 8,872
Other -- 400
----------------- ------------------
Net cash provided by (used in) investing activities $ 53,685 $ (14,652 )
----------------- ------------------
See accompanying notes to condensed consolidated financial statments.
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(In Thousands)
Nine Months Ended
September 30,
2002 2001
------------------ ------------------
Cash Flows from Financing Activities:
Payment of stock issuance costs $ (1,493 ) --
Proceeds from borrowing from affiliate 7,500 6,000
Proceeds from borrowing on line of credit, note payable and
subordinated note payable 235,333 52,454
Payment on line of credit and note payable (60,818 ) (26,155 )
Proceeds from borrowing on mortgage warehouse facilities 154,235 194,952
Issuance of bonds -- 41,723
Payments on mortgage warehouse facilities (412,992 ) (230,139 )
Retirement of bonds payable (11,896 ) (6,960 )
Proceeds from sale of shares 9,750 --
Distributions to minority interests (183 ) (178 )
Distributions to stockholders (50,741 ) (49,747 )
------------------ ------------------
Net cash used in financing activities $ (131,305 ) $ (18,050 )
------------------ ------------------
Net Increase (Decrease) in Cash and Cash Equivalents (598 ) 2,453
Cash and Cash Equivalents at Beginning of Period 19,333 23,772
------------------ ------------------
Cash and Cash Equivalents at End of Period $ 18,735 $ 26,225
================== ==================
Supplemental Disclosures of Cash Flow Information:
Non-Cash Investing and Financing Activities:
Conversion of related party advances into shares of common
stock $ 10,350 $ --
================== ==================
Cash paid for interest $ 43,608 $ 51,498
================== ==================
Non-Cash Transaction:
During the nine months ended September 30, 2002, approximately $225 million in
mortgage loans formerly designated as held for sale were designated as being
held for investment in conjunction with the refinancing described in Note 6 to
the Condensed Consolidated Financial Statements of the Company.
See accompanying noteds to condensed consolidated financial statements.
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2002 and 2001
1. Organization and Nature of Business:
CNL American Properties Fund, Inc. was organized in Maryland on May 2,
1994, and is a self-administered real estate investment trust ("REIT").
The term "Company" includes, unless the context otherwise requires, CNL
American Properties Fund, Inc. and its majority owned and controlled
subsidiaries. These subsidiaries include CNL Restaurant Properties,
Inc. ("CNL-RP") and CNL Franchise Network, Corp. ("CNL-FNC"). 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-RP 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-RP
manages approximately $520 million in affiliate portfolios and earns
management fees related thereto. The specialty finance segment,
operated through the Company's wholly-owned subsidiary CNL-FNC and a
partnership with Bank of America, CNL Franchise Network, LP ("CNL-FN")
and its subsidiaries, delivers financial solutions in the forms of
financing, servicing, development and advisory services to national and
regional restaurant operators.
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 nine months ended September 30, 2002 may not be
indicative of the results that may be expected for the year ending
December 31, 2002. Amounts as of December 31, 2001, 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,
2001. Certain items in the prior year's financial statements have been
reclassified to conform with the 2002 presentation. These
reclassifications had no effect on stockholders' equity or net
earnings.
3. Adoption of New Accounting Standards:
In July 2001, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" ("FAS 142"). FAS 142 requires the use of a
nonamortization approach to account for purchased goodwill and certain
intangibles. Under a nonamortization approach, goodwill and certain
intangibles will not be amortized into results of operations, but
instead are reviewed for impairment and written down and charged to
results of operations only in the periods in which the recorded value
is more than its fair value. The Company adopted the provisions of this
statement on January 1, 2002. The Company's goodwill relates to its
specialty finance segment. The adoption of this accounting standard had
the impact of reducing the Company's amortization of goodwill and
intangibles commencing January 1, 2002; however, impairment reviews may
result in future periodic write-downs. As of September 30, 2002, the
Company has not identified any requirement for goodwill impairment.
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2002 and 2001
3. Adoption of New Accounting Standards - Continued:
------------------------------------------------
The following table summarizes the effect of this adoption:
Quarter Ended Nine Months Ended
September 30, September 30,
(In Thousands except for per share data) 2002 2001 2002 2001
------------ ------------- -------------- -------------
Reported earnings(loss)before
cumulative effect of accounting change $ 11,243 $ (27,644 ) $ 32,717 $ (10,434 )
Add back: Goodwill amortization -- 786 -- 2,357
------------ ------------- -------------- -------------
Adjusted earnings (loss) before
cumulative effect of accounting change $ 11,243 $ (26,858 ) $ 32,717 $ (8,077 )
============ ============= ============== =============
`
Reported net earnings (loss) $ 11,243 $ (27,644 ) $ 32,717 $ (14,275 )
Add back: Goodwill amortization -- 786 -- 2,357
------------ ------------- -------------- -------------
Adjusted net earnings (loss) $ 11,243 $ (26,858 ) $ 32,717 $ (11,918 )
============ ============= ============== =============
Quarter Ended Nine Months Ended
Earnings (loss) per share of common September 30, June 30,
(basic and diluted): 2002 2001 2002 2001
------------ ------------- -------------- -------------
Reported earnings (loss)before
cumulative effect of accounting change $ 0.25 $ (0.64 ) $ 0.74 $ (0.24 )
Add back: Goodwill amortization -- 0.02 -- 0.05
------------ ------------- -------------- -------------
Adjusted earnings (loss)before
cumulative effect of accounting change $ 0.25 $ (0.62 ) $ 0.74 $ (0.19 )
============ ============= ============== =============
Reported net earnings (loss) $ 0.25 $ (0.64 ) $ 0.74 $ (0.33 )
Add back: Goodwill amortization -- 0.02 -- 0.05
------------ ------------- -------------- -------------
Adjusted net earnings (loss) $ 0.25 $ (0.62 ) $ 0.74 $ (0.28 )
============ ============= ============== =============
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2002 and 2001
3. Adoption of New Accounting Standards - Continued:
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 144 "Accounting for the Impairment or Disposal
of Long-Lived Assets" ("FAS 144"). This statement requires that a
long-lived asset be tested for recoverability whenever events or
changes in circumstances indicate that its carrying amount may not be
recoverable. The carrying amount of a long-lived asset is not
recoverable if it exceeds the sum of the undiscounted cash flows
expected to result from the use and eventual disposition of the asset.
The assessment is based on the carrying amount of the asset at the date
it is tested for recoverability. An impairment loss is recognized when
the carrying amount of a long-lived asset exceeds its fair value. If an
impairment is recognized, the adjusted carrying amount of a long-lived
asset is its new cost basis. The statement also requires that the
results of operations of a component of an entity that either has been
disposed of or is classified as held for sale be reported as a
discontinued operation, for components designated on or after the
effective date.
The Company's specialty finance subsidiary CNL-FNC actively acquires
real estate assets with the intent to sell or securitize them. Assets
acquired after December 31, 2001 under this program are subject to FAS
144, and the operating results and gains or losses on such assets are
treated as discontinued operations. This transition rule will alter the
comparability between periods of the level of sales under the CNL-FNC
program, until the last of such properties held at December 31, 2001 is
sold.
The Company's real estate investment subsidiary, CNL-RP will divest
properties from time to time when such measure is strategic to its
longer-term goals. When CNL-RP establishes its intent to sell a
property, all operating results and the ultimate gain or loss, are
treated as discontinued operations for all periods presented. These
statements reflect certain reclassifications of rental related income,
interest expense and other categories so as to conform with the
requirements of FAS 144.
As of September 30, 2002, the Company had designated approximately $171
million in real estate as held for sale, including $144 million
acquired or designated after December 31, 2001, with approximately $152
million financed through the Company's mortgage warehouse facilities.
The operating results of these discontinued operations are as follows:
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2002 and 2001
3. Adoption of New Accounting Standards - Continued:
------------------------------------------------
Quarter Ended Nine Months Ended
September 30, September 30,
(In Thousands) 2002 2001 2002 2001
----------------- ---------------- --------------- -------------------
Rental income $ 1,093 $ 1,134 $ 3,999 $ 5,481
Interest expense (287 ) (379 ) (1,176 ) (1,138 )
Impairment provisions (1,175 ) (1,279 ) (3,086 ) (1,279 )
Other expenses (228 ) (706 ) (1,476 ) (1,338 )
----------------- ---------------- --------------- -------------------
Income/(loss) from
discontinued operations, net (597 ) (1,230 ) (1,739 ) 1,726
----------------- ---------------- --------------- -------------------
Sales of real estate 52,532 -- 84,651 --
Cost of real estate sold (48,819 ) -- (78,769 ) --
----------------- ---------------- --------------- -------------------
Gain on disposal of discontinued
operations, net 3,713 -- 5,882 --
----------------- ---------------- --------------- -------------------
Income (loss) from discontinued
operations, net $ 3,116 $ (1,230 ) $ 4,143 $ 1,726
================= ================ =============== ===================
In April 2002, the FASB issued Statement of Financial Accounting
Standards No. 145, "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections." ("FAS
145"). This statement rescinds FASB Statement No. 4, "Reporting Gains
and Losses from Extinguishment of Debt," and an amendment of that
Statement, FASB Statement No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements." This statement also rescinds FASB
Statement No. 44, "Accounting for Intangible Assets of Motor Carriers."
This statement amends FASB Statement No. 13, "Accounting for Leases,"
to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain
lease modifications that have economic effects that are similar to
sale-leaseback transactions. This statement also amends other existing
authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed
conditions. The provisions of this statement related to the rescission
of Statement 4 are applicable in fiscal years beginning after May 15,
2002. The provisions of this statement related to Statement 13 are
effective for transactions occurring after May 15, 2002. All other
provisions of this statement are effective for financial statements
issued on or after May 15, 2002. The provisions of this statement, to
the extent already applicable, did not have a significant impact on the
financial position or results of operations of the Company. Provisions
applicable to future reporting periods are not expected to have a
significant impact on the financial position or results of operations
of the Company.
In July 2002, the FASB issued Statement of Financial Accounting
Standards No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" ("FAS 146"). The statement requires companies to
recognize costs associated with exit or disposal activities when they
are incurred rather than at the date of a
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS Nine Months Ended September 30, 2002 and 2001
3. Adoption of New Accounting Standards - Continued:
commitment to an exit or disposal plan. Examples of costs covered by
the statement include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. The
statement is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The adoption of this statement is
not expected to have a significant impact on the financial position or
results of operations of the Company.
4. Mortgage Loans Held for Sale:
Mortgage loans held for sale are wholly or partially collateralized by
first mortgages on land and/or buildings of franchised restaurant
businesses. As a result of the Company's refinancing in June 2002,
approximately $225 million in mortgage loans formerly designated as
held for sale were designated as held for investment and are serving as
collateral for a new five-year borrowing facility. As of September 30,
2002, the Company has approximately $51.5 million remaining fixed-rate
loans, classified as held for sale, carrying a weighted average
interest rate of 8.4 percent. The mortgage loans are due in monthly
installments with maturity dates ranging from 2004 to 2022.
Mortgage loans held for sale consist of the following as of:
(In Thousands) September 30, 2002 December 31, 2001
--------------------- ---------------------
Outstanding principal $ 51,512 $ 306,887
Accrued interest income 741 2,059
Deferred financing income (283 ) (1,640 )
Valuation adjustment (5,390 ) 8,529
--------------------- ---------------------
$ 46,580 $ 315,835
===================== =====================
The valuation adjustment at September 30, 2002 is primarily associated
with borrower delinquencies.
5. Mortgages, Equipment and Other Notes Receivable:
Mortgage, equipment and other notes receivable consist of the following
at:
(In Thousands) September 30, 2002 December 31, 2001
------------------ ------------------
Outstanding principal $ 351,328 $ 132,519
Accrued interest income 2,887 694
Deferred financing income (2,011 ) (893 )
Unamortized loan costs/premiums 16,263 1,273
Allowance for uncollectible notes (28,005 ) (29,631 )
--------------- ------------------
$ 340,462 $ 103,962
=============== ==================
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS Nine Months Ended September 30, 2002 and 2001
5. Mortgage, Equipment and Other Notes Receivable - Continued:
The Company has redesignated approximately $225 million in mortgage
loans formerly held for sale as a result of the refinancing agreement
signed in June 2002. Approximately $306 million and $88 million of the
outstanding principal balance as of September 30, 2002 and December 31,
2001, respectively, is secured by mortgages. The remaining principal is
secured by equipment and other collateral. As of September 30, 2002 and
December 31, 2001, approximately $27 million and $40 million,
respectively, in notes receivable were considered impaired and
approximately $27 million and $38.5 million, respectively, were on
non-accrual status with regard to recognition of interest.
Changes in the allowance for loan losses for 2002 and 2001 are
summarized as follows:
(In Thousands) September 30, 2002 December 31, 2001
--------------------- ---------------------
Balance at beginning of
year $ 29,631 $ 3,108
Provision for loan losses 399 28,200
Loans charged off (2,025 ) (1,677 )
--------------------- ---------------------
Balance at end of the
period $ 28,005 $ 29,631
===================== =====================
6. Note Payable:
In June 2002, the Company entered into a loan and security agreement
with Nieuw Amsterdam Receivables Corporation with an initial borrowing
amount of $207 million that bears interest at a rate of weighted
average commercial paper plus 1.25 percent per annum. The Company used
the proceeds from the new facility to refinance a pool of approximately
$225 million of franchise loans formerly held on its other mortgage
warehouse facilities. The loan agreement has an initial term of five
years with a renewal provision based on the Company's request and the
lender's consent.
7. Mortgage Warehouse Facilities:
As of September 30, 2002, CNL-FN maintains mortgage warehouse
facilities ("Mortgage Warehouse Facilities") with a total borrowing
capacity of $510 million that bear interest at LIBOR plus a weighted
average of 119 basis points per annum. The Company is financing
approximately $46.6 million in mortgage loans held for sale and $155
million of land, buildings, and real estate held for sale within these
facilities. For the nine months ended September 30, 2002, the weighted
average interest rate for funding on the facilities approximated 2.91
percent. After consideration of the Company's interest rate swaps, the
effective weighted average interest rate for the outstanding balance
relating to mortgage warehouse facilities was 4.07 percent for the nine
months ended September 30, 2002. In connection with the renewal of the
strategic alliance with Bank of America in October 2001, CNL-FN agreed
to remove $187 million in loans by October 2002 and CNL-RP provided a
$15 million guaranty related to the removal or disposition. In June
2002, Bank of America agreed to reduce the total amount of loans to be
removed from the mortgage warehouse facilities to $162 miilion. As of
September 30, 2002, the Company has successfully refinanced $162
million in loans, the guarantee has been reduced to $2 million and Bank
of America has agreed to finance the remaining loans until November
2003.
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2002 and 2001
8. Subordinated Note Payable:
In October of 2001, CNL-RP agreed to provide a guarantee in the amount
of $15 million related to CNL-FN's $43.75 million subordinated note. As
a result of the removal of certain loans from the mortgage warehouse
facility in June of 2002 and the achievement of certain earnings
targets the guarantee was removed in October of 2003.
9. Related Party Transactions:
As of December 31, 2001, CNL Financial Group, Inc. an affiliate, had
advanced $2.7 million to the Company in the form of a demand balloon
promissory note. The loan bore interest at a rate of LIBOR plus 2.5
percent. During 2002, CNL Financial Group, Inc. advanced an additional
$7.5 million to the Company under the same terms of the previous
advances. In June 2002, the Company converted the $10.3 million of
outstanding principal plus accrued interest under the advances, into
604,177 shares of stock. During the nine months ended September 30,
2002 the Company also issued 569,177 shares to CNL Financial Group,
Inc. in exchange for $9.75 million paid to the Company in cash.
During the nine months ended September 30, 2002, a tenant and borrower
of the Company assigned loans in the amount of $7.5 million to
Restaurants Acquisitions I, LLC, an affiliate of the Company. The
Company agreed to the assignment and advanced an additional $3.6
million to the affiliate in exchange for an $11.1 million participating
note. The note bears interest at a rate of ten percent per annum and
matures on May 1, 2014. The participating note entitles the Company to
receive a percentage of all cash flows generated by the borrower on a
quarterly basis until the note matures.
In May 2002, the Company purchased a combined five percent partnership
interest in CNL Plaza, Ltd. and CNL Plaza Venture, Ltd. (the "Plaza")
for $0.2 million. Affiliates of a member of the Company's board of
directors own the remaining partnership interests. Since November 1999,
the Company has leased its office space from the Plaza. The Company's
lease expires in October 2014. During the nine months ended September
30, 2002 and 2001, the Company incurred rental expenses in connection
with the lease of $1.0 million and $0.6 million, respectively. For the
quarters ended September 30, 2002 and 2001, rental expenses in
connection with the lease totaled $0.3 million and $0.2 million,
respectively. In addition, the Company has guaranteed 8.33 percent or
$1.3 million of a $15.5 million unsecured promissory note of the Plaza.
In September 2002 CNL-FN acquired a portfolio of 109 real estate
properties, which have been classified as held for sale, for
approximately $117 million by acquiring all of the limited partner and
general partners interests in CNL Net Lease Investors, LP, ("NLI").
Eight of the properties acquired were vacant and the remaining 101
properties were leased to restaurant operators under triple net leases,
meaning that the tenant is responsible for costs such as repairs,
maintenance, property taxes, utilities and insurance. The Chairman of
the Board and Vice Chairman of the Board of Directors of the Company,
through an affiliate, owned the .01% general partner interest in NLI
prior to the acquisition by CNL-FN and agreed to waive their rights to
benefit from the transaction. In September 2002, CNL-FN sold five
properties to CNL-RP for approximately $5.3 million, which represented
CFN-LP's cost of the properties. In addition, CNL-FN sold six
properties to several of the CNL Income Funds, which are affiliates of
the Chairman and Vice Chairman of the Board of Directors of the
Company. CNL-FN sold the six properties for approximately $6.4 million,
which represented CFN-LP's cost of the properties.
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2002 and 2001
9. Related Party Transactions - continued:
As part of the agreement, CNL-FN has agreed to pay a purchase price
adjustment of 50% of the Aggregate Gain defined in the purchase
agreement as the aggregate amount of the sales prices of properties
sold to non-affiliates of the Company, less the sum of one hundred
eight percent of the aggregate portfolio sales amount, plus other
reasonable costs to the former limited partner and general partner of
NLI, at the earlier of the date on which the sale of the last property
closes or thirty six months following the closing date.
10. Segment Information:
The Company has separate legal entities to operate and measure its real
estate and specialty finance segments. Those entities are: CNL-RP and
CNL-FNC. CNL-RP is the parent company of CNL APF Partners LP, and
CNL-FNC is the parent company of CNL-FN.
The following table summarizes the results for the quarters and nine
months ended September 30, 2002 and 2001 with segment information for
the two lines of business. Consolidating eliminations and other results
of the parent of CNL-RP and CNL-FNC are reflected in the "other"
column.
Quarter Ended September 30, 2002
CNL CNL
Restaurant Franchise Consolidated
(In Thousands) Properties, Inc. Network Corp. Other Totals
--------------- ---------------- -------------- ------------------
Revenues $ 23,374 $ 42,101 $ (522 ) $ 64,953
=============== ================ ============== ==================
Earnings (loss) from continuing
operations $ 8,596 $ (469 ) $ -- $ 8,127
=============== ================ ============== ==================
Earnings from discontinued
operations $ 951 $ 2,165 $ -- $ 3,116
=============== ================ ============== ==================
Net earnings $ 9,547 $ 1,696 $ -- $ 11,243
=============== ================ ============== ==================
Assets at September 30, 2002 $ 868,607 $ 582,863 $ (6,051 ) $ 1,445,419
=============== ================ ============== ==================
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2002 and 2001
10. Segment Information - Continued:
Quarter Ended September 30, 2001
CNL CNL
Restaurant Franchise Consolidated
(In Thousands) Properties, Inc. Network Corp. Other Totals
--------------- --------------- ---------------- -------------------
Revenues $ 20,283 $ 56,407 $ (1,242 ) $ 75,448
=============== =============== ================ ===================
Loss from continuing operations $ (24,311 ) $ (2,068 ) $ (35 ) $ (26,414 )
=============== =============== ================ ===================
Loss from discontinued operations $ (1,230 ) $ -- $ -- $ (1,230 )
=============== =============== ================ ===================
Net loss $ (25,541 ) $ (2,068 ) $ (35 ) $ (27,644 )
=============== =============== ================ ===================
Assets at September 30, 2001 $ 951,154 $ 651,268 $ (6,850 ) $ 1,595,572
=============== =============== ================ ===================
Nine Months Ended September 30, 2002
CNL CNL
Restaurant Franchise Consolidated
(In Thousands) Properties, Inc Network Corp. Other Totals
--------------- ---------------- --------------- -------------------
Revenues $ 68,189 $ 206,337 $ (1,350 ) $ 273,176
=============== ================ =============== ===================
Earnings from continuing
operations $ 22,380 $ 6,336 $ (142 ) $ 28,574
=============== ================ =============== ===================
Earnings from discontinued
operations $ 1,209 $ 2,934 $ -- $ 4,143
=============== ================ =============== ===================
Net earnings $ 23,589 $ 9,270 $ (142 ) $ 32,717
=============== ================ =============== ===================
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2002 and 2001
10. Segment Information - Continued:
Nine Months Ended September 30, 2001
CNL CNL
Restaurant Franchise Consolidated
(In Thousands) Properties, Inc Network Corp. Eliminations Totals
---------------- ---------------- --------------- -------------------
Revenues $ 72,090 $ 116,922 $ (3,384 ) $ 185,628
================ ================ =============== ===================
Loss from continuing
operations $ (9,147 ) $ (980 ) $ (2,033 ) $ (12,160 )
================ ================ =============== ===================
Earnings from discontinued
operations $ 1,726 $ -- $ -- $ 1,726
================ ================ =============== ===================
Loss before cumulative effect of
accounting change $ (7,421 ) $ (980 ) $ (2,033 ) $ (10,434 )
================ ================ =============== ===================
Net loss $ (7,421 ) $ (4,821 ) $ (2,033 ) $ (14,275 )
================ ================ =============== ===================
11. Income Tax:
For income tax purposes, CNL-FNC, the Company's specialty finance
taxable REIT subsidiary ("TRS"), treats loan valuation adjustments,
loss reserves, loan fees, depreciation, and other items differently
from the treatment of these items for financial reporting purposes. In
the aggregate, the Company's specialty finance TRS has an excess of
available future deductible items over future taxable items and as such
may benefit from these items when the taxable subsidiaries produce a
greater level of taxable income. At the present, the Company has
recorded a valuation allowance since it is more likely than not that a
portion of the potential future benefit will not be recognized due to
the insufficient historical earnings.
CNL AMERICAN PROPERTIES FUND, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Nine Months Ended September 30, 2002 and 2001
11. Income Tax - Continued:
The consolidated provision for federal income taxes is composed of the
following estimates for the nine months ended September 30, 2002 and
2001 of the Company's specialty finance TRS:
Nine Months Ending
(In Thousands) September 30, 2002 September 30, 2001
---------------------- ------------------------
Expected tax at US statutory rate $ 3,152 $ (1,639 )
Adjustments arising from:
Non-deductible goodwill amortization -- 676
Hedge and loan valuation related items (2,146 ) 152
Unconsolidated affiliates -- (921 )
Loan origination fees (30 ) (88 )
Real estate valuation 213 57
Other (62 ) (116 )
Net operating losses and other future
deductions (used) (182 ) 1,879
Net deferred tax asset recognized (945 ) --
---------------------- ------------------------
Provision for income taxes $ -- $ --
====================== ========================
The components of the net deferred tax asset as of September 30, 2002
and December 31, 2001 are as follows:
(In Thousands) September 30, 2002 December 31, 2001
----------------------- ------------------------
Deferred tax asset:
Hedge and loan valuation related
differences $ 3,120 $ 5,266
Loan origination fees 506 535
Real estate reserves 290 77
Net operating losses -- 183
Other 861 923
----------------------- ------------------------
Total 4,777 6,984
Valuation allowance (3,832 ) (6,984 )
----------------------- ------------------------
Net recorded deferred tax asset $ 945 $ --
======================= ========================
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 become vacant and the ability of
the Company to securitize or sell mortgage loans on a favorable and timely
basis. Given these uncertainties, readers are cautioned not to place undue
reliance on such statements.
Organization and Business
CNL American Properties Fund, Inc. ("CNL-APF" or the "Company") is the largest
self-advised real estate investment trust ("REIT") focused on the restaurant
real estate sector. The Company operates as a holding company for two primary
subsidiary operating companies, CNL Restaurant Properties, Inc. and CNL
Franchise Network, Corp. The Company was founded in 1994 and at September 30,
2002, had financial interests in approximately 1,100 properties diversified
among more than 100 restaurant concepts in 47 states. The Company's total real
estate holdings subject to lease included over 700 properties, of which
approximately 140 properties are classified as held for sale. At September 30,
2002, the servicing portfolio of net lease properties and mortgages included
over 2,300 units, of which over 1,200 are serviced on behalf of third parties.
In June 2000 the Company divided its operations into two business segments, real
estate and specialty finance, in order to combine its real estate segment, an
entity with a strong capital base and stable cash flows, with a specialty
finance growth business that could partner with a large financial institution
and provide an additional source of liquidity.
o The real estate segment, operated principally through the Company's
wholly owned subsidiary CNL Restaurant Properties, Inc. ("CNL-RP") and
its subsidiaries, is 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-RP manages approximately $520 million in
affiliate portfolios and earns management fees related thereto.
o The specialty finance segment, operated through the Company's
wholly-owned subsidiary CNL Franchise Network Corp ("CNL-FNC") and a
partnership with Bank of America, CNL Franchise Network, LP ("CNL-FN")
and its subsidiaries, delivers financial solutions in the forms of
financing, servicing, advisory and other services to national and
regional restaurant operators.
Effective January 1, 2001, CNL-FNC elected to be treated as a taxable REIT
subsidiary ("TRS") pursuant to the provisions of the REIT Modernization Act. As
a TRS, CNL-FNC engages in activities that would previously have caused income to
the Company from CNL-FN to be disqualified from being eligible REIT income under
the federal income tax rules governing REITs. CNL-FNC originates mortgages and
triple-net lease properties for sale to third parties and, in some cases,
securitization. CNL-FNC also performs net lease and loan servicing on behalf of
third parties. While the Company intends to continue managing its existing core
portfolio of real estate leases and loans, management expects that the
activities of CNL-FNC will be an increasingly significant part of the Company's
business on a going-forward basis.
The Company was created in 1994 with a requirement to provide stockholder
liquidity by December 31, 2005 by either listing on a national exchange, merging
with another public company or liquidating its assets. The Company continues 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
taxable REIT subsidiaries, the Company may pursue other alternatives related to
CNL-FNC that would provide stockholder liquidity for all or a portion of the
Company's investment by this date.
Liquidity and Capital Resources
The Company is a real estate investment trust that receives distributions from
its two primary subsidiaries, CNL-RP and CNL-FNC. During the nine months ended
September 30, 2002, CNL-APF did not receive any distributions from CNL-FNC.
CNL-APF declared and paid distributions to its stockholders of $51 million and
$50 million for the nine months ended September 30, 2002 and 2001, respectively.
The distribution for the nine-month period ended September 30, 2002 was
primarily funded by distributions from CNL-RP, a loan from the Company's
chairman through a private company affiliate, CNL Financial Group, Inc. ("CNL
Financial Group"), which the Company subsequently converted into its common
stock, and sales of its common stock to CNL Financial Group. The Company's
management expects to continue meeting short-term and long-term liquidity
requirements through distributions from CNL-RP, issuance of debt and sales of
stock comparable to the current period. CNL-FNC has reinvested its earnings in
ongoing operations and has not distributed earnings to the Company to date.
Management expects the onset of distributions from CNL-FNC within the next two
years.
Specialty Finance Segment (CNL Franchise Network Corporation)
CNL-FN originates triple-net leases and loans, temporarily financing those
assets with warehouse credit facilities and periodically securitizing,
refinancing or selling those assets. CNL-FN 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 or
insurance. In a securitization the Company sells or transfers a pool of loans or
properties with triple-net leases to certain special purpose entities which, in
turn, issue to investors securities backed by an interest in the revenue
originating from the loans or triple-net leases. These transactions serve to
recycle and diversify capital.
The Company and Bank of America entered into an alliance in June 2000 to provide
a broad product offering primarily focused on the origination of triple-net
leases, securitized debt and portfolio loan financing. In forming the alliance
the Company invested certain of its CNL-RP assets and operations into CNL-FN and
Bank of America provided CNL-FN 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 maintained by the
Company's competitors, falling treasury rates, macroeconomic uncertainties and
sluggish restaurant sales. Investors demanded higher interest rates on the
securities issued in securitizations while ratings agencies downgraded their
ratings of the quality of the loans underlying the securities in ratings
actions. While many of the Company's competitors have experienced or continue to
experience downgrades or ratings actions on bonds previously issued, the
Company's prior loan or lease securitizations to date have not been subject to
any such ratings action.
In October 2001 the Company renegotiated certain terms of its relationship with
Bank of America. During the renegotiation, the parties agreed on the following:
o CNL-FN agreed to remove by October 13, 2002 approximately $187 million
in restaurant loans then held as collateral under the Bank of America
Warehouse Credit Facility.
o CNL-RP provided a guaranty of $15 million, which would be reduced
ratably as certain conditions were met, including the removal of the
restaurant loans. The parties agreed that CNL-FN, or CNL-RP in the
event CNL-FN does not have adequate liquidity, would remit any balance
remaining on October 13, 2002 to Bank of America as additional
enhancement capital against the remaining balance on the Warehouse
Credit Facility.
o CNL-RP agreed to a $15 million guaranty on Bank of America's
Subordinated Debt Facility, which at the time and as of September 30,
2002 consisted of a note payable having an outstanding amount of $43.75
million. The $15 million guaranty has provisions for its reduction tied
to achievement of an earnings target, full availability of a liquidity
facility and the removal of the $187 million in loans described above.
o Bank of America extended a $10 million unsecured credit facility to
CNL-RP. CNL-RP then entered into a $10 million mirror credit facility
with CNL-FN to provide CNL-FN working capital. CNL-FN utilizes this
mirror facility 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. At September 30,
2002 the mirror facility had no amounts outstanding and matures in
October 2003.
Management also redirected its focus during 2001 to use private market sales
channels to either refinance or sell existing loans, and to halt the continued
origination of loans.
In June 2002, as a partial resolution to Bank of America's requirement to remove
or sell what remained of the $187 million in restaurant loans held as collateral
for Bank of America's Warehouse Credit Facility by October 13, 2002, the Company
entered into a five-year term $207 million financing collateralized with $225
million in mortgage loans redesignated 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. Also, Bank of America agreed to reduce the requirement to remove
only $162 million in loans and agreed to finance the remaining loans until
November 2003. The Company used a portion of the proceeds from this financing to
pay down the mortgage warehouse facilities. As a result:
o CNL-FN removed $162 million in restaurant loans it had agreed to remove
as collateral under the Bank of America Warehouse Credit Facility.
o CNL-FN and CNL-RP eliminated $13 million of the $15 million guaranty
tied to the removal of the $162 million in restaurant loans held as
collateral under the Bank of America Warehouse Credit Facility. The
parties agreed that the remaining guaranteed amount of $2 million will
remain tied to removal of the $25 million balance of the $187 million
in restaurant loans CNL-FN had agreed to remove as collateral under the
Bank of America Warehouse Credit Facility.
o In addition to reducing the guaranty, the transaction provides CNL-FN
ongoing earnings on the excess of interest income over interest
expense, and management believes it allows more time for the franchise
asset-backed markets to stabilize, possibly offering alternatives to
holding these loans to maturity.
o CNL-FN and CNL-RP reduced the $15 million guaranty on Bank of America's
Subordinated Debt Facility to $5.4 million, and agreed with Bank of
America that they would be able to reduce the guarantee further by
achieving certain earnings and liquidity targets by October 13, 2002.
CNL-FN management is pleased to report that the referenced earnings
target has been met, resulting in the removal of the $5.4 million
guaranty.
The uncertainty in the franchise asset-backed securitization market led
management to redirect the originations effort toward new long-term, triple-net
leases on real estate that can be sold and that could potentially 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 to the Section 1031 Exchange program, the Company has formed a
partnership with a third party client to engage in a similar Section 1031
Exchange program. During the nine months ended September 30, 2002, CNL-FN and
its partnership sold $212 million under this program, generating $16 million in
gains to the Company. Management expects continued strong demand for this
product but 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 nine months ended September 30, 2002, CNL-FNC derived its primary
cash flows from lease and interest income earned in excess of interest expense
paid ("net spread"), net gains from the Section 1031 Exchange program and
servicing revenues. Significant cash outflows consist of operating expenses and
capital enhancements in the loan portfolio. CNL-FNC has taken steps to reduce
its credit capacity in its warehouse credit facilities. Through the warehouse
credit facilities provided by Bank of America and by another third party lender
to its subsidiary CNL-FN, CNL-FNC had a credit capacity of $510 million as of
September 30, 2002, but has subsequently reduced its credit capacity in these
facilities to $385 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-FNC may also be subject to margin calls on its warehouse
credit facilities. Bank of America and the other third party lender monitor
asset securitization market assumptions, assumptions on the Company's
derivatives and delinquency assumptions and based on changes in market
conditions, may require a margin call to reduce the level of warehouse
financing. During the nine months ended September 30, 2002, CNL-FN paid
approximately $16 million in net margin calls on its warehouse credit
facilities. Over the course of 2001, CNL-FN had fully drawn its subordinated
note payable. At September 30, 2002 CNL-FN has no amounts outstanding on the
mirror credit facility.
For the remainder of 2002, the Company intends to focus origination efforts on
the triple-net lease financing product. CNL-FN's warehouse facilities provide
advances for up to 97 percent of appraised real estate value. The Company
expects the remaining amount to be provided by cash flow from operating
activities which could be negatively impacted if interest rates increased,
reducing the net spread.
For the nine months ended September 30, 2002 CNL-FN originated $170 million in
net leases as compared with $120 million in the same period last year. Included
in this current year volume is a portfolio of $117 million in properties. CNL-FN
acquired this portfolio by purchasing all of the limited and general partnership
interests of CNL Net Lease Investors, L.P., an affiliate of the Company's
Chairman of the Board and Vice Chairman of the Board, that until the
acquisition, was a client of CNL-RP's property management group. Without the
volume created by this transaction origination volume would be substantially
down from the levels experienced in 2001. The decrease reflects a slowdown in
demand for net lease financing given available low interest rate mortgage
financing and aggressive lease rates offered by CNL-FN's competitors. Management
believes that net lease originations are important to CNL-FN as they provide
inventory necessary to execute the Section 1031 Exchange program and CNL-FN
typically profits from the leases while holding them. Management has responded
to this slowdown by adjusting net lease rates, identifying larger transactions
like the portfolio acquisition of $117 million in properties and by identifying
new areas to reduce costs. At September 30, 2002 CNL-FN was involved in numerous
opportunities for continued net lease originations with $66 million approved for
funding and $29 million with executed commitment letters. Management believes
that competitors will slow originations as they experience capital constraints,
and that restaurant operators will use net lease financing as other, lower-cost
alternatives diminish. Management anticipates that net lease origination volume
will continue its gradual increase during the remainder of 2002 and prove
stronger throughout 2003.
The Warehouse Credit Facility was used to finance portfolio acquisition of the
$105 million in properties (which represented the acquisition of 117 million,
net of approximately $12 million in property sales to, affiliates), CNL-FN at an
advance rate (the rate at which purchases are financed) of 97 percent of the
appraised real estate value. In negotiating this transaction, CNL-FN agreed with
the lender to apply the full amount of proceeds from subsequent sales of
properties contained in this portfolio to the financing of the remaining
portfolio in order to achieve an average advance rate of 93 percent. As a
result, CNL-FN will not be able to reinvest the gains or returned capital from a
portion of the properties sold from this portfolio.
At September 30, 2002, CNL-FN had approximately $62 million in capital
supporting its loan and lease portfolio. CNL-FN 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-FN's success. These facilities carry a 364-day maturity and CNL-FN is
vulnerable to any changes in the terms of these facilities, such as the special
terms relating to the $105 million transaction. The warehouse facilities
currently advance an average of 95.5 percent of the original real estate value.
Management believes that the advance rates could decline in 2003. A five percent
decrease in advance rates, for example, would create an $8 million cash
requirement for CNL-FN, based on the outstanding net lease and loan volume in
the warehouse credit facilities at September 30, 2002. While an advance rate
reduction is not expected at this time, a reduction could materially impact
CNL-FN liquidity.
Additional liquidity risks within the Company's specialty finance segment
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-FN's securitization
transactions. 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. 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.
Should the loans underlying the securities undergo a negative ratings action,
CNL-FN 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-FN could choose to contribute capital to serve as additional collateral
supporting one or more of the bankruptcy remote entities used to facilitate a
securitization.
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 CNL-FN financing through the
warehouse facilities and the five-year note, subjecting the Company to
unanticipated cash outflows.
In summary, the Company's specialty finance segment expects to meet its
liquidity requirements in 2002 with a combination of cash from operating
activities, including cash from its Section 1031 Exchange program and borrowings
on its warehouse credit facilities or its mirror credit facility. CNL-FN renews
its warehouse credit facilities annually and to date has been successful in
doing so at substantially comparable terms. CNL-FN's longer-term liquidity
requirements (beyond one year) are expected to be met through successful renewal
of its warehouse credit facilities and the mirror credit facility, successful
execution of the Company's Section 1031 Exchange program, portfolio debt
origination fees, and asset securitizations, and augmented by operating cash
flows provided by servicing and advisory services. In addition, CNL-FN may seek
to obtain additional debt or equity financing. Any decision to successfully
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 or other factors.
Real Estate Segment (CNL Restaurant Properties, Inc.)
CNL-RP 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 residual
interests in prior loan securitizations. CNL-RP's cash outflows are
predominantly interest expense, operating expenses, reinvestment of disposition
proceeds and distributions to CNL-APF.
CNL-RP's short-term debt includes the secured note payable entered into in
October 1999 (the "Secured Credit Facility") and the $30 million revolving line
of credit (the "Revolver") entered into in October 2001. The Secured Credit
Facility matures on February 18, 2003 and CNL-RP is currently selling select
properties to pay down the note during 2002, and has designated such properties
as discontinued operations, as described in greater detail below. CNL-RP
management is also evaluating whether any additional properties should be sold
or whether other capital resources should be utilized to pay any remaining
amounts on this Secured Credit Facility before its maturity. At September 30,
2002, the Secured Credit Facility has a balance of $22 million. The Company
utilizes the Revolver from time to time to manage the timing of inflows and
outflows of cash from operating activites. The Company's Revolver is a two-year
facility, maturing in October 2003, and includes a one-year renewal option. At
September 30, 2002, the Revolver had an outstanding balance of $6 million.
CNL-RP also had medium-term and long-term bond financing. In October 2001,
CNL-RP issued $131 million in medium-term bonds, Series 2001, bearing an
interest rate of LIBOR plus 48 basis points and maturing in 2006. In August
2000, CNL-RP issued $281 million in long-term bonds, Series 2000-A, bearing the
fixed interest rate of 7.925 percent and maturing substantially between 2009 and
2017. Rental income received on the combined 376 properties pledged as
collateral 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-RP's income. Generally, CNL-RP 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-RP from significant
cash outflows for maintenance, repair 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.
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-RP may allocate capital to invest in turnaround opportunities.
CNL-RP management believes the combination of availability on its line of credit
and the projected disposition volume in 2002 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.
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 September 30, 2002, the Company's
variable rate debt includes the following:
o $6.0 million on its Revolver;
o $22.0 million on its Secured Credit Facility;
o $171.4 million on its mortgage warehouse facilities;
o $205.3 million on the June 2002 five-year financing; and
o $126.1 million outstanding on the Series 2001 bonds.
The Company's management believes it has mitigated this risk by entering into
interest rate swap agreements and an interest rate cap agreement, which reduce
the impact of fluctuating interest rates on its floating rate debt.
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 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.
Generally, the Company uses derivative financial instruments (primarily interest
rate swap contracts) to hedge against fluctuations in interest rates from the
time it originates and holds fixed-rate mortgage loans until the time it sells
them. Additionally, the Company uses interest rate swaps to hedge against
fluctuations in interest rates on 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. The Company
will terminate certain of these contracts 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 are measured and recognized in the consolidated statement of
operations.
Management estimates that a one-percentage point increase in long-term interest
rates as of September 30, 2002 would have resulted in a decrease in the fair
value of its fixed-rate loans held for sale of $0.9 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 nine months ended September
30, 2002 would have resulted in additional interest costs of approximately $2.4
million. This sensitivity analysis contains certain simplifying assumptions (for
example, it does not consider the impact of changes in prepayment risk or credit
spread risk). Therefore, although it gives an indication of the Company's
exposure to interest rate 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 tenant's request decreasing rates for longer
maturities.
Results from Operations
The Company's net earnings were $32.7 million, compared with a loss of $14.3
million in the nine months ended September 30, 2002 and 2001, respectively, and
earnings of $11.2 million compared with a loss of $27.6 million during the
quarter ended September 30, 2002 and 2001, respectively. During the nine months
ended September 30, 2002, CNL-FNC and CNL-RP had net earnings of $9.3 million
and 23.6 million, respectively, compared with a net loss of $4.8 million and
$7.4 million respectively in the nine months ended September 30, 2001. All
segment results herein are before elimination adjustments and results of the
holding Company. As a result, the sum of amounts applicable to the segment will
not, in some cases, equal the Company's total amount reflected in the Condensed
Consolidated Statements of Income.
o The specialty finance business segment has improved its Section 1031
Exchange program results but on average held fewer properties for sale
throughout 2002. Earnings fell from $6.8 million to $1.7 million
between the quarter ended June 30, 2002 and the quarter ended September
30, 2002 reflecting greater seasonality of the Section 1031 Exchange
program and diminished inventory. Contributing to the $4.8 million loss
posted in the nine months ended September 30, 2001 was a $6.4 million
charge relating to the termination of cash-flow hedges in the third
quarter and a first quarter charge of $3.8 million to reflect the
effect of the adoption of Statement of Financial Accounting Standards
No. 133 which required that all derivative instruments be recorded on
the balance sheet at fair value. Excluding these prior year charges,
earnings between nine month periods are comparable and reflect the
success of the Section 1031 Exchange program.
o The real estate business segment posted earnings of $9.5 million in the
quarter ending September 30, 2002. During the same period in the prior
year, the real estate business segment posted a loss of $25.5 million,
including $29.6 million in charges relating to certain borrower and
tenant delinquencies. The real estate segment reflects earnings of
$23.6 million in the nine months ended September 30, 2002 compared with
a net loss of $7.4 million in the nine months ending September 30,
2001. The improved performance of the real estate segment excluding
such charges during the comparative nine-month periods reflects the
initiative to sell vacant and underperforming properties as well as
select other properties. The sales resulted in a net gain of $3.0
million and generated sales proceeds that were applied to reduce the
business segment's overall debt by $46.3 million.
Revenues
The Company recorded $273.2 million and $185.6 million in revenues during the
nine months ended September 30, 2002 and 2001, respectively, and $65.0 million
and $75.4 million during the quarter ended September 30, 2002 and 2001,
respectively.
o During the nine months ended September 30, 2002, CNL-FNC recorded
revenues (before segment elimination adjustments) of $206.3 million
compared with $116.9 million in the nine months ended September 30,
2001. CNL-FNC accounts for its sales of real estate pursuant to new
guidance described more fully below, including transition rules that
cause certain sales to be recorded in revenues and others to be treated
as discontinued operations and create difficulties in comparing
periods. The table below provides a more thorough analysis of CNL-FNC's
major components of quarterly revenues in the periods presented:
In millions Q3 Q2 Q1 Q3 Q2 Q1
2002 2002 2002 2001 2001 2001
Rental income from operating leases $ 1.0 $ 2.6 $ 4.0 $ 3.6 $ 3.7 $ 2.6
Interest income from mortgage loans 7.5 8.1 8.4 8.3 10.3 10.4
All other revenue components excluding
sales of real estate (0.4) 1.6 (1.3) 3.3 1.3 5.2
--------- --- ----- --- --- ---
Subtotal 8.1 12.3 11.1 15.2 15.3 18.2
Sales of real estate excluding sales recorded
as discontinued operations in
accordance with new accounting
standard 34.0 103.6 37.2 41.2 14.6 12.7
--------- -------- ---- ---- ---- ----
Total revenues $ 42.1 $ 115.9 $ 48.3 $ 56.4 $ 29.9 $ 30.9
======== ======== ===== ===== ===== ====
o During 2001, CNL-FN began its program of selling real estate properties
to private investors in Section 1031 Exchanges, and as a result the
gross proceeds from Section 1031 Exchanges acquired prior to 2002 now
appears as a component of operating revenues. CNL-FN's revenue from the
Section 1031 Exchange program is also attributed for the growth in
CNL-FN's total revenues from $48.3 million in the first quarter to
$115.9 in the quarter ending June 30, 2002, however the slowed
origination of new net lease properties throughout 2002 created an
excess of properties sold during the year over properties acquired and
as a result rental income from operating leases declined over the
periods presented. The portfolio acquisition occurring late in the
third quarter of 2002 is expected to increase the income in this
category.
o Separately, CNL-FN stopped offering mortgage financing in the second
quarter of 2001 and sought alternatives to securitization through sales
or refinancing. This initiative led to the decline in the level of
interest income on mortgage loans over the period presented. Most of
the original portfolio has either been sold or refinanced. Management
expects interest income to remain fairly level between periods going
forward.
o Other revenue components in the table above include the valuation
adjustments related to the remaining loans held for sale, servicing and
consulting revenues, and gains and losses on loans sold.
o Gains resulting from CNL-FN's Section 1031 Exchange program are now
presented in the financial statements under various headings. These
include the gross sales and cost of real estate sold, as well as
partnership income (a component of other income) and gain on disposal
of discontinued operations. The gains from this program have increased
CNL-FN's earnings by $15.5 million and $5.0 million during the nine
months and quarter ended September 30, 2002, respectively compared with
$5.4 million and $3.1 million in the same periods last year,
respectively.
o During the nine months ended September 30, 2002, CNL-RP recorded
revenues of $68.2 million compared with $72.1 million in the same
period last year. The revenue of CNL-RP has decreased as a result of
the initiative to divest certain vacant and other real estate
properties and utilize the proceeds from these sales to decrease the
business segment's debt. CNL-RP recorded revenues for the three months
ended September 30, 2002 and 2001 of $23.4 million and $20.3 million,
respectively. This variance is the result of the substantial third
quarter reduction in revenue a year ago associated with a major tenant
and borrower's default and an increase in current period revenues from
property management services. CNL-RP has experienced some tenant
defaults throughout most of 2001 and 2002 and its management has been
working diligently to resolve the tenant defaults and re-lease
properties. The bankruptcy of certain tenants impacts comparability
between periods.
Rental income from operating leases and earned income from direct financing
leases was $64.3 million and $68.2 million for nine months ended September 30,
2002 and 2001, respectively, and $20.0 million and $21.9 million for the
quarters ended September 30, 2002 and 2001, respectively.
o The specialty finance segment reports revenues in this category as
illustrated on the table above. Its decline in such revenues in
comparative year-to-date and quarterly periods is attributed to the
decline in net lease properties resulting from slowed current-year
originations.
o The real estate segment reports revenue in this category of $56.5
million and $59.5 million for the nine months ended September 30, 2002
and 2001, respectively, and $19.0 million and $18.0 million for the
quarters ended September 30, 2002 and 2001, respectively. The decline
in such revenues in comparative periods is attributed to a Company
initiative to divest certain vacant properties and other real estate
properties and utilize the proceeds from the sales to decrease the
business segment's debt and is consistent with the decline in interest
expense noted below as the Company used proceeds from the sale of
properties was used to reduce debt.
Interest income from mortgage, equipment and other notes receivable was $27.0
million and $32.9 million for the nine months ended September 30, 2002 and 2001,
respectively.
o The specialty finance segment reports revenues in this category as
illustrated on the table above. Its decline in such revenues in
comparative year-to-date and quarterly periods is attributed to
CNL-FN's sales of mortgage loans and the decision to redirect new
originations efforts net lease properties and referrals of lending
opportunities to others, including Bank of America, beginning in early
2001.
o The real estate segment reports revenues in this category of $3.1
million and $3.9 million for the nine months ended September 30, 2002
and 2001, respectively, and $1.0 million and $0.4 million for the
quarters ended September 30, 2002 and 2001, respectively. The
variability in these amounts is attributed default of Phoenix
Restuarant Group, Inc. and its subsidiaries, a major tenant and
borrower, that ultimately lead to its bankruptcy.
The Company realized gains from the sale of operating assets of $2.2 million and
$1.1 million for the quarter and nine months ended September 20, 2001 as its
specialty finance segment sold mortgage loans. No such sales have occurred in
2002.
Expenses
Cost of real estate sold is associated solely with the Section 1031 Exchange
program of the specialty finance segment and in 2002 relates to properties on
hand at the beginning of the year that have since been sold. These costs have
been $161.7 million and $63.3 million for the nine months ended September 30,
2002 and 2001 respectively, and $31.3 million and $37.4 million respectively in
the quarter ended September 30, 2002 and 2001 respectively. Costs associated
with properties acquired after 2001 are required to be included as a component
of the gain on disposal of discontinued operations.
General and administrative expenses for the Company were $21.7 million and $23.3
million for the nine months ended September 30, 2002 and 2001, respectively, and
$6.9 million and $6.6 million for the quarter ended September 30, 2002 and 2001,
respectively.
o For the nine months ended September 30, 2002, general and
administrative expenses for CNL-FNC were $14.2 compared with $17.3 in
the nine months ended September 30, 2001 and $4.4 million and $5.2
million in the quarters ended September 30, 2002 and 2001,
respectively. CNL-FNC has decreased professional expenses associated
with the resolution of loan delinquencies. Also, CNL-FNC has realized
efficiencies from computer systems changes and currently operates with
fewer employees as a result of staff changes in the second quarter of
2001.
o For the nine months ended September 30, 2002, general and
administrative expenses for CNL-RP were $8.3 million compared with $7.0
million in the nine months ended September 30, 2001 and $2.9 million
and $2.4 million in the quarters ending September 30, 2002 and 2001,
respectively. Despite cost savings in several CNL-RP general and
administrative categories similar to CNL-FN, certain costs relating to
delinquencies have increased.
Interest expense for the Company was $43.7 million and $52.5 million for the
nine months ended September 30, 2002 and 2001, respectively. Interest expense in
the current quarter ended September 30, 2002 of $13.3 million is similarly
decreasing when compared with the $16.7 million in the year-ago period.
o Interest expense for CNL-FNC during the nine months ended September 30,
2002, was $20.7 million compared with $24.8 million for the nine months
ended September 30, 2001, and $6.0 million and $7.4 million for the
quarters ended September 30, 2002 and 2001, respectively. CNL-FNC has
reduced its interest-bearing debt substantially, in particular as a
result of sales of Section 1031 Exchange properties throughout 2002
without a corresponding increase in new properties acquired. The
reduced overall debt, as well as reductions in interest rates, has
allowed CNL-FNC to realize a 17 percent reduction in this category.
o Interest expense for CNL-RP during the nine months ended September 30,
2002, was $23.4 million compared with $28.2 million for the nine months
ended September 30, 2001, and $7.6 million and $9.6 million for the
quarters ended September 30, 2002 and 2001, respectively. CNL-RP has
maintained its level of debt throughout most of 2002 decreasing it more
recently through the sales of real estate. The segment is realizing a
decrease of 20 percent in this category in the comparable nine-month
periods because of the decreased debt and because it repaid a portion
of the Secured Credit Facility with proceeds from the sale of its
Series 2001 Bonds issued in October 2001, which carry a lower rate of
interest.
Expense categories such as state taxes and depreciation and amortization
expenses have reflected and will continue to reflect, the level of assets
invested in leased properties. The category for depreciation and amortization
expenses has also included amortization on intangible assets, such as goodwill.
During 2001, the Company amortized $3.1 million in goodwill pursuant to existing
accounting standards on a straight-line basis. In July 2001, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 142 "Goodwill and Other Intangible Assets" ("FAS 142"). FAS 142 requires the
use of a non-amortization approach to account for purchased goodwill and certain
intangibles. Under a non-amortization approach, goodwill and certain intangibles
will not be amortized into results of operations, but instead would be reviewed
for impairment and written down and charged to results of operations only in the
periods in which the recorded value of goodwill and certain intangibles is more
than its fair value. The Company's adoption of this accounting standard has
eliminated its amortization of goodwill commencing January 1, 2002; however,
impairment reviews may result in future periodic write-downs. During the nine
months ended September 30, 2002, no such write-downs have been necessary.
The Company has decreased certain property expenses, in part, through decreasing
the length of time necessary to re-lease a defaulted tenant's property. However
the overall number of defaulted tenant properties increased as a result of
several significant tenant bankruptcies during the past fifteen months leading
to $2.5 million in property expenses during the nine months ended September 30,
2002 compared with $1.8 million in the nine months ended September 30, 2001, and
$0.5 million in property expenses during the quarter ended September 30, 2002
compared with $1.2 million in the same quarter last year. Some expenses formerly
presented in this category associated with properties treated as discontinued
operations are incorporated in the income or loss from discontinued operations.
The Company has recorded impairment provisions of $1.7 million and $8.5 million
for the nine months ended September 30, 2002 and 2001, respectively excluding
impairments on properties treated as discontinued operations as described below.
Impairments were $0.5 million and $4.1 million in the quarters ended September
30, 2002 and 2001, respectively. Impairment provisions are recorded when
circumstances indicate that future expected cash flows do not recover the
carrying cost of the individual properties.
Effective January 1, 2002 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-FN's Section 1031 Exchange program, a
vital piece of its ongoing operating strategy and a contributor of over $25
million in gains since December 2000 is nonetheless deemed to fall under the new
guidance. Therefore, gains from properties sold under the Section 1031 Exchange
program, unless acquired before January 1, 2002, are included as discontinued
operations; income and expenses associated with assets designated as held for
sale after December 31, 2001 are also included in discontinued operations. In
addition, CNL-RP 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.
o CNL-FNC has reflected $2.9 million in earnings from discontinued
operations during the nine months ended September 30, 2002 including
$0.6 million from property operations - collection of rental income,
payment of interest and other expenses - and $2.3 million in gains from
the disposition of such properties. CNL-FNC reflects $2.2 million in
earnings from discontinued operations during the quarter ended
September 30, 2002, including $0.3 million in property operations and
$1.9 million in gains. No amounts are applicable to periods prior to
2002.
o CNL-RP has reflected $1.2 million in earnings from discontinued
operations during the nine months ended September 30, 2002 including a
loss of $2.4 million from propety operations, including many expenses
of vacant or delinquent properties, and $3.6 million in gains from the
disposition of such properties. CNL-RP reflected $1.7 million in
earnings from discontinued operations during the nine months ended
September 30, 2001 all of which related property operations. CNL-RP
reflects a total of $1.0 million in earnings from discontinued
operations during the quarter ended September 30, 2002 compared to a
$1.2 million loss in the year ago period.
In April 2002, the FASB issued Statement of Financial Accounting Standards No.
145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." This statement rescinds FASB
Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and
an amendment of that Statement, FASB Statement No. 64, "Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements." This statement also rescinds FASB
Statement No. 44, "Accounting for Intangible Assets of Motor Carriers," and
amends FASB Statement No. 13, "Accounting for Leases," to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. This statement also
amends other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. The provisions of this statement related to the rescission of
Statement 4 are applicable in fiscal years beginning after May 15, 2002. The
provisions of this statement related to Statement 13 are effective for
transactions occurring after May 15, 2002. All other provisions of this
statement are effective for financial statements issued on or after May 15,
2002. The provisions of this statement, to the extent already applicable, did
not have a significant impact on the financial position or results of operations
of the Company. Provisions applicable to future reporting periods are not
expected to have a significant impact on the financial position or results of
operations of the Company.
In July 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities." The
statement requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. Examples of costs covered by the statement include lease
termination costs and certain employee severance costs that are associated with
a restructuring, discontinued operation, plant closing, or other exit or
disposal activity. The statement is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. The adoption of this
statement is not expected to have a significant impact on the financial position
or results of operations of the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Information regarding the Company's market risk at December 31, 2001 is included
in its Annual Report on Form 10-K for the year ended December 31, 2001. 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 is incorporated herein by reference to Item 2. "Interest Rate Risk".
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
within 90 days prior to the filing of this Quarterly Report on Form 10-Q and
have determined that such disclosure controls and procedures are effective.
Subsequent to the above evaluation, there were no significant changes in
internal controls or other factors that could significantly affect these
controls, including any corrective actions with regard to significant
deficiencies and material weaknesses.
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. Inapplicable.
----------------------------------------------------
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).
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 Amended and Restated Credit Agreement by and among CNL APF
Partners, LP, Registrant, First Union National Bank, First
Union Capital Markets Group, Banc of America Securities LLC,
NationsBank, N.A., The Chase Manhattan Bank and other
financial institutions, dated June 9, 1999 (included as
Exhibit 10.51 to Amendment No. 1 to the Form S-4 and
incorporated herein by reference).
10.4 First Amendment to Amended and Restated Credit Agreement dated
as of December 31, 1999 between CNL APF Partners, LP and First
Union National Bank, as Agent (included as Exhibit 10.4 to the
Registrant's Form 10-K for the year ended December 31, 1999
and incorporated herein by reference).
10.5 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).
10.6 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).
10.7 1999 Performance Incentive Plan (included as Exhibit 10.1 to
Amendment No. 1 to the Form S-4 and incorporated herein by
reference).
10.8 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).
10.9 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).
10.10 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).
10.11 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).
10.12 Employment Agreement by and between John T. Walker and the
Registrant, dated September 15, 1999 (included as Exhibit
10.44 to Amendment No. 2 to the Form S-4 and incorporated
herein by reference).
10.13 Employment Agreement by and between Howard J. Singer and the
Registrant, dated September 15, 1999 (included as Exhibit
10.45 to Amendment No. 2 to the Form S-4 and incorporated
herein by reference).
10.14 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).
10.15 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).
10.16 Employment Agreement by and between Timothy J. Neville and the
Registrant, dated September 15, 1999 (included as Exhibit
10.48 to Amendment No. 2 to the Form S-4 and incorporated
herein by reference).
10.17 Holdback Agreement by and among the Registrant and
Stockholders, dated August 31, 1999 (included as Exhibit 10.56
to Amendment No. 2 to the Form S-4 and incorporated herein by
reference).
10.18 Amended and Restated Credit and Reimbursement Agreement by and
among CNL APF Partners, LP, CNL APF LP Corp., CNL APF GP
Corp., Bank of America, N.A. and Bank of America Securities
LLC, dated as of June 15, 2000 (included as Exhibit 10.18 to
the Registrant's Form 10-Q for the quarter ended June 30,
2000).
10.19 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).
10.20 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).
10.21 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). 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).
10.22 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). 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).
10.23 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). 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).
10.24 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).
10.25 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).
10.26 Second Addendum to Employment Agreement dated as of 2000,
between the Registrant and Timothy Neville (included as
Exhibit 10.26 to the Registrant's Form 10-Q for the quarter
ended March 31, 2001).
10.27 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).
10.28 Second Addendum to Employment Agreement dated as of October
25, 2000, between the Registrant and John Walker (included as
Exhibit 10.28 to the Registrant's Form 10-Q for the quarter
ended March 31, 2001).
10.29 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).
10.30 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).
10.31 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).
99.1 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).
99.2 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).
99.3 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) Reports on Form 8-K
The Registrant did not file any reports on Form 8-K during the
quarter ended September 30, 2002.
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 14th day of November 2002.
CNL AMERICAN PROPERTIES FUND, 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)
CERTIFICATION OF CO-CHIEF EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14 AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, James M. Seneff, Jr., the Co-Chief Executive Officer of CNL American
Properties Fund, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of CNL American
Properties Fund, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ James M. Seneff, Jr.
- ---------------------------
James M. Seneff, Jr.
Co-Chief Executive Officer
CERTIFICATION OF CO-CHIEF EXECUTIVE OFFICER
PURSUANT TO RULE 13a-14 AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Curtis B. McWilliams, the Co-Chief Executive Officer of CNL American
Properties Fund, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of CNL American
Properties Fund, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Curtis B. McWilliams
- ------------------------
Curtis B. McWilliams
Co-Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO RULE 13a-14 AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Steven D. Shackelford, Chief Financial Officer of CNL American
Properties Fund, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of CNL American
Properties Fund, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Steven D. Shackelford
- -------------------------
Steven D. Shackelford
Chief Financial 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).
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 Amended and Restated Credit Agreement by and among
CNL APF Partners, LP, Registrant, First Union
National Bank, First Union Capital Markets Group,
Banc of America Securities LLC, NationsBank, N.A.,
The Chase Manhattan Bank and other financial
institutions, dated June 9, 1999 (included as Exhibit
10.51 to Amendment No. 1 to the Form S-4 and
incorporated herein by reference).
10.4 First Amendment to Amended and Restated Credit
Agreement dated as of December 31, 1999 between CNL
APF Partners, LP and First Union National Bank, as
Agent (included as Exhibit 10.4 to the Registrant's
Form 10-K for the year ended December 31, 1999 and
incorporated herein by reference).
10.5 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).
10.6 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).
10.7 1999 Performance Incentive Plan (included as Exhibit
10.1 to Amendment No. 1 to the Form S-4 and
incorporated herein by reference).
10.8 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).
10.9 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).
10.10 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).
10.11 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).
10.12 Employment Agreement by and between John T. Walker
and the Registrant, dated September 15, 1999
(included as Exhibit 10.44 to Amendment No. 2 to the
Form S-4 and incorporated herein by reference).
10.13 Employment Agreement by and between Howard J. Singer
and the Registrant, dated September 15, 1999
(included as Exhibit 10.45 to Amendment No. 2 to the
Form S-4 and incorporated herein by reference).
10.14 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).
10.15 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).
10.16 Employment Agreement by and between Timothy J.
Neville and the Registrant, dated September 15, 1999
(included as Exhibit 10.48 to Amendment No. 2 to the
Form S-4 and incorporated herein by reference).
10.17 Holdback Agreement by and among the Registrant and
Stockholders, dated August 31, 1999 (included as
Exhibit 10.56 to Amendment No. 2 to the Form S-4 and
incorporated herein by reference).
10.18 Amended and Restated Credit and Reimbursement
Agreement by and among CNL APF Partners, LP, CNL APF
LP Corp., CNL APF GP Corp., Bank of America, N.A. and
Bank of America Securities LLC, dated as of June 15,
2000 (included as Exhibit 10.18 to the Registrant's
Form 10-Q for the quarter ended June 30, 2000).
10.19 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).
10.20 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).
10.21 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). 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).
10.22 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). 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).
10.23 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). 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).
10.24 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).
10.25 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).
10.26 Second Addendum to Employment Agreement dated as of
2000, between the Registrant and Timothy Neville
(included as Exhibit 10.26 to the Registrant's Form
10-Q for the quarter ended March 31, 2001).
10.27 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).
10.28 Second Addendum to Employment Agreement dated as of
October 25, 2000, between the Registrant and John
Walker (included as Exhibit 10.28 to the Registrant's
Form 10-Q for the quarter ended March 31, 2001).
10.29 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).
10.30 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).
10.31 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).
99.1 Certification of Co-Chief Executive Officer Pursuant
to U.S.C. Section 1350 as Adopted Pursuant to Section
906 of the Sabanes Oxley Act of 2002 (filed
herewith).
99.2 Certification of Co-Chief Executive Officer Pursuant
to U.S.C. Section 1350 as Adopted Pursuant to Section
906 of the Sarbanes Oxley Act of 2002 (filed
herewith).
99.3 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 99.1
EXHIBIT 99.2
EXHIBIT 99.3