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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-15581
CNL Restaurant Properties, Inc.
(Exact name of registrant as specified in its charter)
Maryland 59-3239115
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
450 South Orange Avenue
Orlando, Florida 32801
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (407) 540-2000
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by checkmark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes X No___
45,248,670 shares of common stock, $0.01 par value, outstanding as of
May 7, 2004.
CONTENTS
Part I Page
----
Item 1.Financial Statements:
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of
Stockholders' Equity and Comprehensive
Income/(Loss) 5
Condensed Consolidated Statements of Cash Flows 6-7
Notes to Condensed Consolidated Financial
Statements 8-13
Item 2.Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-30
Item 3.Quantitative and Qualitative Disclosures About
Market Risk 30
Item 4.Controls and Procedures 31-32
Part II
Other Information 33-36
Item 1. Financial Statements
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except for share data)
March 31, December 31,
2004 2003
------------------ -----------------
ASSETS
Real estate investment properties $ 535,814 $ 536,054
Net investment in direct financing leases 103,136 103,662
Real estate and restaurant assets held for sale 157,143 138,227
Mortgage loans held for sale 2,024 1,490
Mortgage, equipment and other notes receivable, net of allowance of
$9,961 and $13,964, respectively 316,588 320,900
Other investments 29,477 29,671
Cash and cash equivalents 22,323 36,955
Restricted cash 8,589 12,462
Receivables, net of allowance for doubtful accounts
of $1,266 and $872, respectively 3,107 3,382
Accrued rental income 26,627 25,836
Goodwill 56,260 56,260
Other assets 33,998 33,217
------------------ -----------------
$ 1,295,086 $ 1,298,116
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Revolver $ 8,500 $ 2,000
Note payable 176,413 182,560
Mortgage warehouse facilities 110,601 93,513
Subordinated note payable 33,750 43,750
Bonds payable 424,805 430,011
Due to related parties 29,506 25,038
Other payables 34,268 34,096
------------------ -----------------
Total liabilities 817,843 810,968
------------------ -----------------
Minority interests, including redeemable partnership interest 6,481 7,262
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 shares, outstanding
45,248,670 shares 452 452
Capital in excess of par value 826,627 826,627
Accumulated other comprehensive loss (17,168 ) (14,447 )
Accumulated distributions in excess of net earnings (339,149 ) (332,746 )
------------------ -----------------
Total stockholders' equity 470,762 479,886
------------------ -----------------
$ 1,295,086 $ 1,298,116
================== =================
See accompanying notes to condensed consolidated financial statements.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except for share data and per share data)
Quarter ended
March 31,
2004 2003
----------------- ------------------
Revenues:
Rental income from operating leases $ 14,596 $ 14,894
Earned income from direct financing leases 2,624 2,686
Interest income from mortgage, equipment and
other notes receivable 6,653 8,045
Investment and interest income 1,191 1,105
Other income 1,356 2,400
Net decrease in value of mortgage loans
held for sale, net of related hedge -- (2,047 )
----------------- ------------------
26,420 27,083
----------------- ------------------
Expenses:
General operating and administrative 6,423 7,542
Interest expense 11,829 12,434
Property expenses, state and other taxes 163 273
Depreciation and amortization 2,861 3,212
Loss on termination of cash flow hedge 355 --
Impairments and provisions on assets 547 2,182
----------------- ------------------
22,178 25,643
----------------- ------------------
Earnings from continuing operations before minority interest
in income of consolidated joint ventures, equity in
earnings of unconsolidated joint ventures and gain/(loss)
on sale of assets 4,242 1,440
Minority interest in income of consolidated joint ventures (662 ) (868 )
Equity in earnings of unconsolidated joint ventures 34 31
Gain/(loss) on sale of assets 6 (6 )
----------------- ------------------
Earnings from continuing operations, net 3,620 597
Earnings from discontinued operations, net of income tax provision 7,228 7,422
----------------- ------------------
Net income $ 10,848 $ 8,019
================= ==================
Earnings per share of common stock (basic and diluted):
From continuing operations $ 0.08 $ 0.01
From discontinued operations 0.16 0.17
----------------- ------------------
Net income $ 0.24 $ 0.18
================= ==================
Weighted average number of shares of common stock outstanding 45,248,670 45,248,670
================= ==================
See accompanying notes to condensed consolidated financial statements.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY AND COMPREHENSIVE INCOME/(LOSS)
Quarter Ended March 31, 2004 and Year Ended
December 31, 2003
(In thousands except for share data and per share data)
Accumulated
distributions Accumulated
Common stock Capital in in excess other
Number Par excess of of net comprehensive Comprehensive
of shares value par value earnings loss Total Income
------------ --------- ------------- -------------- -------------- --------- --------------
Balance at December 31, 2002 45,248,670 $ 452 $ 816,745 $ (306,184 ) $ (16,862 ) $ 494,151
Acquisition of minority -- -- 11,375 -- -- 11,375
interest
Stock issuance costs -- -- (1,493 ) -- -- (1,493 )
Net income -- -- -- 42,440 -- 42,440 $ 42,440
Reclassification of market
revaluation on available
for sale securities to
statement of operations -- -- -- -- (78 ) (78 ) (78 )
Reclassification of cash
flow hedge losses to
statement of operations -- -- -- -- 502 502 502
Current period adjustment to
recognize change in fair
value of cash flow hedges,
net of $1,750 in tax benefit -- -- -- -- 1,991 1,991 1,991
-------------
Total comprehensive income -- -- -- -- -- -- $ 44,855
=============
Distributions declared and
paid ($1.52 per share) -- -- -- (69,002 ) -- (69,002 )
------------ --------- ------------- -------------- ------------- -----------
Balance at December 31, 2003 45,248,670 452 826,627 (332,746 ) (14,447 ) 479,886
Net income -- -- -- 10,848 -- 10,848 $ 10,848
Reclassification of cash
flow hedge losses to
statement of operations -- -- -- -- 355 355 355
Current period adjustment to
recognize change in fair
value of cash flow
hedges, net of $1,367 in
tax benefit -- -- -- -- (3,076 ) (3,076 ) (3,076 )
-------------
Total comprehensive income -- -- -- -- -- -- $ 8,127
=============
Distributions declared and
paid ($0.38 per share -- -- -- (17,251 ) -- (17,251 )
------------ --------- ------------- -------------- ------------- -----------
Balance at March 31, 2004 45,248,670 $ 452 $ 826,627 $ (339,149 ) $ (17,168 ) $ 470,762
============ ========= ============= ============== ============= ===========
See accompanying notes to condensed consolidated financial statements.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Quarter Ended
March 31,
2004 2003
------------------ -----------------
Cash flows from operating activities:
Net income $ 10,848 $ 8,019
Adjustments to reconcile net income to net cash provided by/(used
in) operating activities:
Depreciation and amortization 3,065 3,347
Impairments and provisions on assets 547 4,409
Gain on sales of assets (1,452 ) (260 )
Increase in income taxes payable 1,234 --
Investment in mortgage loans held for sale -- (18 )
Collection on mortgage loans held for sale -- 879
Changes in inventories of real estate held for sale (28,997 ) 23,956
Changes in other operating assets and liabilities (3,930 ) (353 )
------------------ -----------------
Net cash provided by/(used in) operating activities (18,685 ) 39,979
------------------ -----------------
Cash flows from investing activities:
Proceeds from sale of assets 9,164 5,000
Decrease in restricted cash 3,873 567
Collection on mortgage, equipment and other notes
receivable 3,112 2,776
------------------ -----------------
Net cash provided by investing activities 16,149 8,343
------------------ -----------------
Cash flows from financing activities:
Payment of stock issuance costs (1,493 ) --
Proceeds from borrowing on revolver 8,500 11,500
Payment on revolver, note payable and subordinated note
payable (18,147 ) (18,263 )
Proceeds from borrowing on mortgage warehouse facilities 49,957 25,721
Payments on mortgage warehouse facilities (32,869 ) (44,915 )
Retirement of bonds payable (5,206 ) (3,901 )
Payment of bond issuance costs (16 ) --
Loan from stockholder 5,700 4,500
Distributions to minority interest (513 ) (484 )
Distributions to stockholders (18,009 ) (17,251 )
------------------ ------------------
Net cash used in financing activities (12,096 ) (43,093 )
------------------ ------------------
Net increase (decrease) in cash and cash equivalents (14,632 ) 5,229
Cash and cash equivalents at beginning of period, as restated 36,955 16,579
------------------ ------------------
Cash and cash equivalents at end of period $ 22,323 $ 21,808
================== ==================
See accompanying notes to condensed consolidated financial statements.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Quarter Ended
March 31,
2004 2003
------------------ -------------------
Supplemental disclosures of cash flow information:
Interest paid $ 11,188 $ 13,600
================== ===================
Interest capitalized $ 14 $ 29
================== ===================
Income taxes paid $ 545 $ --
================== ===================
Supplemental disclosures of non-cash investing and financing activities:
Redemption of minority interest in lieu of payment on accounts
receivable $ 894 $ 317
================== ===================
Acquisition of minority interest $ -- $ 11,375
================== ===================
Foreclosure on mortgage notes receivable and acceptance of
underlying real estate collateral $ 452 $ --
================== ===================
See accompanying notes to condensed consolidated financial statements.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters Ended March 31, 2004 and 2003
1. Organization and Nature of Business:
Organization - CNL Restaurant Properties, Inc. ("the Company") formerly
CNL American Properties Fund, Inc. was organized in Maryland in May of
1994, and is a self-administered real estate investment trust ("REIT").
The term "Company" includes, unless the context otherwise requires, CNL
Restaurant Properties, Inc. and its majority owned and controlled
subsidiaries. These subsidiaries include CNL Restaurant Investments,
Inc. ("CNL-Investments") formerly CNL Restaurant Properties, Inc. and
CNL Restaurant Capital Corp. ("CNL-Capital Corp.") formerly CNL
Franchise Network Corp. The Company's operations are divided into two
business segments, real estate and specialty finance. The real estate
segment, operated principally through the Company's wholly-owned
subsidiary CNL-Investments and its subsidiaries, owns and manages a
portfolio of primarily long-term triple-net lease properties. Its
activities include portfolio management, property management and
dispositions. In addition, it services approximately $525 million in
affiliate portfolios and earns management fees related thereto. The
specialty finance segment, CNL Restaurant Capital, LP ("CNL-Capital")
and its subsidiaries, is operated through the Company's wholly-owned
subsidiary CNL-Capital Corp., a partnership with Bank of America, N.A.
(the "Bank") and CNL/CAS Corp., an affiliate of the Company's Chairman.
CNL-Capital offers real estate financing, advisory and other services
to national and larger regional restaurant operators. It does this
primarily by acquiring restaurant real estate properties, which are
subject to triple-net lease, utilizing short-term debt and generally
selling such properties at a profit.
Effective January 1, 2004, the Bank redeemed a portion of its ownership
interest in CNL-Capital in lieu of payment of referral fees to the
Company. As a result, the Company's effective ownership interest in
CNL-Capital increased from 96.26 percent to 96.97 percent.
2. Basis of Presentation:
The accompanying unaudited condensed consolidated 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 ended March 31, 2004 may not be indicative of the results
that may be expected for the year ending December 31, 2004. Amounts as
of December 31, 2003, 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, 2003. Certain items in the prior
year's financial statements have been reclassified to conform with the
2004 presentation. These reclassifications had no effect on
stockholders' equity or net income.
3. Adoption of New Accounting Standards:
During 2003, the Company implemented FAS Interpretation No. 46 ("FIN
46"), "Consolidation of Variable Interest Entities" that resulted in
the consolidation of two subsidiaries that were previously not
consolidated. In December 2003, the Financial Accounting Standards
Board (the "FASB") issued FIN 46R, "Consolidation of Variable Interest
Entities". This Interpretation requires existing unconsolidated
variable interest entities to be consolidated by their primary
beneficiaries. The primary beneficiary of a variable interest entity is
the party that absorbs a majority of the entity's expected losses,
receives a majority of its expected residual returns, or both, as a
result of holding variable interests, which are the ownership,
contractual, or other pecuniary interests in an entity that change with
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters Ended March 31, 2004 and 2003
3. Adoption of New Accounting Standards - Continued:
changes in the fair value of the entity's net assets excluding variable
interests. Prior to FIN 46R, a company generally included another
entity in its consolidated financial statements only if it controlled
the entity through voting interests. Application of FIN 46R is required
in financial statements of public entities that have interests in
variable interest entities for periods ending after March 15, 2004.
Application of this interpretation did not have an effect on the
Company's financial position or results of operations.
4. Real estate investment properties:
During the quarters ended March 31, 2004 and 2003, the Company recorded
provisions for impairment of $0.2 million and $1.6 million,
respectively. The tenants of these properties experienced financial
difficulties and/or ceased payments of rents under the terms of their
lease agreements. The provisions represent the amount necessary to
reduce the carrying value to the estimated fair value of the
properties.
5. Real estate and restaurant assets held for sale:
Real estate and restaurant assets held for sale consists of the
following:
(In thousands)
March 31, December 31,
2004 2003
----------------- ----------------
Land and buildings $ 155,765 $ 136,614
Restaurant assets 1,378 1,613
----------------- ----------------
$ 157,143 $ 138,227
================= ================
The Company's specialty finance business segment actively acquires real
estate assets subject to leases with the intent to sell. In accordance
with Statement of Financial Accounting Standard No. 144 "Accounting for
the Impairment or Disposal of Long-Lived Assets" ("FAS 144"), the
properties' operating results and the gains or losses resulting from
the disposition of properties are recorded as discontinued operations.
In addition to its business of investing in new restaurant properties
subject to triple-net leases, the Company's real estate investment
subsidiary, CNL-Investments, will divest properties from time to time
when it is strategic to the Company's longer-term goals. When
CNL-Investments establishes its intent to sell a property, all
operating results relating to the properties and the ultimate gain or
loss on disposition of the properties are treated as discontinued
operations for all periods presented. During 2002, the Company
purchased the operations of certain restaurants. In December 2003, the
Company decided to dispose of these restaurant operations. As a result,
all operating results relating to these restaurant operations are
recorded as discontinued operations.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Quarters Ended March 31, 2004 and 2003
5. Real estate and restaurant assets held for sale - Continued:
The operating results of the discontinued operations were as follows
for the quarters ended March 31:
(In thousands)
2004 2003
----------------- -----------------
Rental income $ 2,621 $ 4,161
Food and beverage income 3,819 3,420
Food and beverage expenses (4,008 ) (3,313 )
Other property related expenses (188 ) (661 )
Interest expense (717 ) (735 )
Impairment provisions -- (2,227 )
----------------- -----------------
Earnings from discontinued operations 1,527 645
----------------- -----------------
Sales of real estate 48,049 60,973
Cost of real estate sold (41,114 ) (54,196 )
----------------- -----------------
Gain on disposal of discontinued operations 6,935 6,777
----------------- -----------------
Income tax provision (1,234 ) (2,267 )
Income tax benefit -- 2,267
----------------- -----------------
Net income tax (1,234 ) --
----------------- -----------------
Income from discontinued operations, net $ 7,228 $ 7,422
================= =================
6. Borrowing:
In January 2004, the Company amended the subordinated note payable
agreement while at the same time making a $10 million prepayment,
reduced the balance to $33.75 million, reduced the interest rate from
8.50 percent to 7.00 percent per annum and reduced the Bank's ownership
from the conversion feature in CNL-Capital from 13.1 percent to 10.11
percent. In addition, the Company agreed to make a mandatory prepayment
of $11.875 million prior to or on December 31, 2004. The subordinated
note will amortize over five years with a balloon payment due on
December 31, 2008.
7. Related Party Transactions:
During the quarter ended March 31, 2004, CNL Financial Group, Inc., an
affiliate, advanced approximately $5.7 million to the Company in the
form of a demand balloon promissory note. The note is uncollateralized,
bears interest at LIBOR plus 2.5 percent with interest payments and
outstanding principal due upon demand. At March 31, 2004, $29.4 million
in total demand loans, including accrued interest, were outstanding and
were included in the due to related parties caption on the condensed
consolidated balance sheet.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Quarters Ended March 31, 2004 and 2003
8. Segment Information:
The Company has established CNL-Investments and CNL-Capital Corp. as
separate legal entities to operate and measure the real estate and
specialty finance segments, respectively.
CNL-Investments is the parent company of CNL APF Partners LP, a real
estate company that acquires and holds real estate, mortgage and
equipment loans generally until maturity. CNL-Capital Corp. is the
parent of CNL-Capital, a specialty finance company that offers real
estate financing, servicing, advisory and other services to restaurant
operators. CNL-Capital acquires restaurant real estate properties
subject to triple-net leases, utilizing short-term debt, and then sells
them generally within one year.
The following table summarizes the operating results for the quarters
ended March 31, 2004 and 2003 with segment information for the two
lines of business. Consolidating eliminations and other results of the
parent of CNL-Investments and CNL-Capital Corp. are reflected in the
"other" column.
Quarter ended March 31, 2004
(In thousands)
CNL- CNL-Capital Consolidated
Investments Corp. Other Totals
------------- --------------- ------------- --------------
Revenues $ 20,132 $ 7,040 $ (752 ) $ 26,420
------------- --------------- ------------- --------------
General operating and administrative 2,175 4,824 (576 ) 6,423
Interest expense 7,175 4,683 (29 ) 11,829
Property expenses, state and other taxes 163 -- -- 163
Depreciation and amortization 2,730 131 -- 2,861
Loss on termination of cash flow hedge -- 355 -- 355
Impairments and provisions on assets 273 274 -- 547
Minority interest net of equity in
earnings 8 620 -- 628
Gain on sale of assets (6 ) -- -- (6 )
------------- --------------- ------------- --------------
12,518 10,887 (605 ) 22,800
------------- --------------- ------------- --------------
Discontinued operations:
Income from discontinued
operations, net of income tax 1,419 5,809 -- 7,228
------------- --------------- ------------- --------------
Net income $ 9,033 $ 1,962 $ (147 ) $ 10,848
============= =============== ============= ==============
Assets at March 31, 2004 $ 809,103 $ 492,045 $ (6,062 ) $ 1,295,086
============= =============== ============= ==============
Investments accounted for under the
equity method at March 31, 2004 $ 1,041 $ -- $ -- $ 1,041
============= =============== ============= ==============
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters Ended March 31, 2004 and 2003
8. Segment Information - Continued:
Quarter ended March 31, 2003
(In thousands)
CNL- CNL-Capital Consolidated
Investments Corp. Other Totals
------------- --------------- ------------ ----------------
Revenues $ 21,281 $ 6,672 $ (870 ) $ 27,083
------------- --------------- ------------ ----------------
General operating and administrative 3,396 4,821 (675 ) 7,542
Interest expense 6,926 5,657 (149 ) 12,434
Property expenses, state and other taxes 264 9 -- 273
Depreciation and amortization 2,903 309 -- 3,212
Impairments and provisions on assets 1,634 548 -- 2,182
Minority interest net of equity in
earnings 26 811 -- 837
Loss on sale of assets 2 4 -- 6
------------- --------------- ------------ ----------------
15,151 12,159 (824 ) 26,486
------------- --------------- ------------ ----------------
Discontinued operations:
Income/(loss) from discontinued
operations, net of income tax (468 ) 7,890 -- 7,422
------------- --------------- ------------ ----------------
Net income $ 5,662 $ 2,403 $ (46 ) $ 8,019
============= =============== ============ ================
Assets at March 31, 2003 $ 821,320 $ 534,512 $ (3,944 ) $ 1,351,888
============= =============== ============ ================
Investments accounted for under the
equity method at March 31, 2003 $ 1,124 $ -- $ -- $ 1,124
============= =============== ============ ================
9. Income Tax:
The Company elected to be taxed as a REIT under the Internal Revenue
Code. To qualify as a REIT, the Company must meet a number of
organizational and operational requirements, including a current
requirement that it distribute at least 90 percent of its taxable
income to its stockholders. As a REIT, the Company generally will not
be subject to corporate level federal income tax on net income it
distributes to its stockholders, except for taxes applicable to its
taxable REIT subsidiaries ("TRSs").
The Company has two TRSs for income tax purposes, in which activities
of CNL-Capital, the specialty finance segment, and select activities of
CNL-Investments, the real estate segment, are conducted. The
CNL-Capital TRS recorded a current income tax provision of $1.2 million
during the quarter ended March 31, 2004, all of which was allocated to
discontinued operations. The effective tax rate used by CNL-Capital
approximated the statutory rate. No net income tax provision was
recorded during the quarter ended March 31, 2003 as a result of
recognition of deferred tax assets previously subject to valuation
allowances.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters Ended March 31, 2004 and 2003
9. Income Tax: - Continued
As of March 31, 2004, the CNL-Investments TRS had a deferred tax asset
of $0.8 million. This TRS has not yet generated any taxable income.
Therefore, CNL-Investments has established a valuation allowance to
completely offset the deferred tax asset.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following information, including, without limitation, the Quantitative and
Qualitative Disclosures About Market Risk that are not historical facts, may be
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
statements generally are characterized by the use of terms such as "believe,"
"expect" and "may." Although the Company believes that the expectations
reflected in such forward-looking statements are based upon reasonable
assumptions, the Company's actual results could differ materially from those set
forth in the forward-looking statements. Factors that might cause such a
difference include: changes in general economic conditions, changes in real
estate conditions, availability of capital from borrowings under the Company's
credit facilities, the availability of other debt and equity financing
alternatives, changes in interest rates under the Company's current credit
facilities and under any additional variable rate debt arrangements that the
Company may enter into in the future, the ability of the Company to refinance
amounts outstanding under its credit facilities at maturity on terms favorable
to the Company, the ability of the Company to locate suitable tenants for its
restaurant properties and borrowers for its mortgage loans, the ability of
tenants and borrowers to make payments under their respective leases, secured
equipment leases or mortgage loans, the ability of the Company to re-lease
properties that are currently vacant or that may become vacant and the ability
of the Company to securitize or sell mortgage loans or net lease properties on a
favorable and timely basis. Given these uncertainties, readers are cautioned not
to place undue reliance on such statements.
Organization and Business
CNL Restaurant Properties, Inc. ("CNL-Properties" or the "Company"), formerly
CNL American Properties Fund, Inc., is the nation's largest self-advised real
estate investment trust ("REIT") focused on the restaurant industry. The Company
has two primary subsidiary operating companies, CNL Restaurant Investments, Inc.
and CNL Restaurant Capital Corp. The Company was founded in 1994 and at March
31, 2004, had financial interests in approximately 1,000 properties diversified
among more than 120 restaurant concepts in 43 states. The Company's total real
estate holdings subject to lease (including properties classified as held for
sale) include over 640 properties. At March 31, 2004, the servicing portfolio of
net lease properties and mortgages consists of approximately 2,200 units, of
which over 1,200 are serviced on behalf of third parties.
The Company operates two business segments - real estate and specialty finance.
o The real estate segment, operated principally through the Company's
wholly-owned subsidiary CNL Restaurant Investments, Inc.
("CNL-Investments"), formerly known as CNL Restaurant Properties, Inc.
(a name used by the Company effective June 27, 2003), and its
subsidiaries, manage a portfolio of primarily long-term triple-net lease
properties. Those responsibilities included portfolio management,
property management, dispositions and the opportunistic acquisition and
profitable sale of real estate investments. In addition, CNL-Investments
services approximately $525 million in affiliate real estate portfolios
and earns management fees related thereto. Revenues from the real estate
segment represented approximately 76 percent and 79 percent of the
Company's total revenues for the quarters ended March 31, 2004 and 2003,
respectively.
o The specialty finance segment, operated through the Company's
wholly-owned subsidiary CNL Restaurant Capital Corp. ("CNL-Capital
Corp"), formerly known as CNL Franchise Network Corp., is partnered with
a financial institution, Bank of America ("the Bank"), in owning CNL
Restaurant Capital, LP ("CNL-Capital"). CNL-Capital, through its
subsidiaries, offers real estate financing, advisory and other services
to national and larger regional restaurant operators. It does this
primarily by acquiring restaurant real estate properties, which are
subject to a triple-net lease, utilizing short-term debt and generally
selling such properties at a profit. Revenues from the specialty finance
segment represented approximately 24 percent and 21 percent of the
Company's total revenues for the quarters ended March 31, 2004 and 2003,
respectively.
When the Company was created in 1994, the intent was to provide stockholders
liquidity by December 31, 2005 through either listing on a national exchange,
merging with another public company or liquidating its assets. The Company's
officers and directors continue to actively monitor the public markets for
opportunities to satisfy the liquidity objectives of the Company. The Company's
board presently has no intention to liquidate the Company.
Liquidity and Capital Resources
General. Historically, the Company's demand for funds has been for payment of
operating expenses and dividends, for payment of principal and interest on its
outstanding indebtedness and for acquisitions of properties with the intent to
sell. The Company's management expects to continue meeting short-term and
long-term liquidity requirements through distributions from CNL-Investments,
issuance of debt and sales of common and/or preferred stock. To date, the
Company has not received distributions from CNL-Capital because this subsidiary
has reinvested its earnings in ongoing operations. Management expects that
distributions from CNL-Capital will begin within the next two years.
Dividends. The Company's ability to internally fund capital needs is limited
since it must distribute at least 90 percent of its net taxable income
(excluding net capital gains) to stockholders to qualify as a REIT. The Company
is a self-advised real estate investment trust that reflects the earnings of its
two primary segment subsidiaries, CNL-Investments and CNL-Capital Corp. The
Company has continued to declare and pay distributions to its stockholders.
These distributions have been primarily funded by CNL-Investments' activities
because the Company has elected to reinvest the earnings of CNL-Capital, its
specialty finance business, to date as contemplated by the agreement with the
partners of CNL-Capital. The remainder of the distributions to date has been
funded by sales of the Company's common stock to the Company's Chairman through
a private company affiliate, CNL Financial Group, Inc. ("CFG"), and loans from
CFG.
The Company has elected to distribute amounts in excess of that necessary to
qualify as a REIT. During each of the quarters ended March 31, 2004 and 2003,
the Company distributed $17.3 million, or $0.38 per share each quarter, to its
stockholders. The Company's cash used in operations for the quarter ended March
31, 2004 was $18.7 million and cash from operations for the quarter ended March
31, 2003 was $40.0 million. Management believes that a better indicator of cash
from operations would exclude the changes in the held for sale loans and real
estate portfolio and proceeds from the sale of loans. Net cash provided by
operating activities excluding changes in mortgage loans and inventories of real
estate held for sale was $10.3 million and $15.2 million for the quarters ended
March 31, 2004 and 2003, respectively.
In order to ensure that the Company maintained its historical level of
distributions to its stockholders, the Company's Chairman, through CFG, made
advances to the Company in the amount of $5.7 million and $4.5 million during
the quarters ended March 31, 2004 and 2003, respectively, in the form of demand
balloon promissory notes. The notes are non-collateralized, bear interest at
LIBOR plus 2.5 percent or at the Base Rate, as defined in the loan agreement,
with interest payments and outstanding principal due upon demand. The principal
amount including accrued interest at March 31, 2004 was $29.4 million relating
to various advances received from December 2002 through March 31, 2004. In
addition, during 2002 and 2001, the Chairman, through CFG, received 1,173,354
shares and 579,722 shares, respectively, of the Company's stock in exchange for
$20.1 million and $9.7 million, respectively, in cash, including the conversion
of amounts previously treated as advances. This provided capital that allowed
the Company to reinvest the earnings generated by the specialty finance
business. The number of shares was determined using an estimated fair value per
share of $16.78 and $17.13 during 2001 and 2002, respectively. The value per
share for 2001 and 2002 was determined by a third party firm, which based its
valuation on an analysis of comparable publicly traded real estate investment
trusts and a discounted cash flow analysis. The Company's Chairman is under no
obligation to purchase additional shares or make advances to the Company. Should
the Company's Chairman determine not to purchase additional shares or loan
additional funds to the Company, and the Company does not generate adequate cash
flow from other sources, the Company may have to reduce its distribution rate.
In connection with maintaining its historical distribution level, the Company
may sell additional shares of its common stock to CFG or to third party
purchasers. The Company's Chairman is under no obligation to purchase additional
shares of the Company's common stock or loan additional funds to the Company in
order to guarantee that the Company maintains its historical distribution level
to stockholders. Selling additional shares of the Company's stock may dilute a
shareholder's investment and may reduce the value a shareholder would receive in
a future liquidity event. However, selling stock to enable CNL-Capital to
reinvest earnings may be accretive to the extent that the value of the specialty
finance segment increases.
o Specialty Finance Segment (CNL-Capital)
CNL-Capital's current demand for funds include (i) payment of operating
expenses, (ii) funds necessary for net lease originations to be sold in its
Investment Property Sales Program (as defined below) and (iii) payment of
principal and interest on its outstanding indebtedness. Demand for funds
increased during 2004 to cover the $56.7 million of new originations of real
estate properties that exceeded the $40.0 million received from the sales of
properties under the Investment Property Sales Program. In addition, CNL-Capital
utilized $10 million in January 2004 to pay down a portion of the Subordinated
Debt Facility (as defined below) and modify the existing terms.
During the quarters ended March 31, 2004 and 2003, CNL-Capital Corp derived its
primary cash flows from lease and interest income earned in excess of interest
expense paid ("net spread"), net gains from the Investment Property Sales
Program, advisory services and servicing revenues. Significant cash outflows
consist of operating expenses, real property purchases and capital enhancements
in the loan portfolio (excess of investment over related borrowings).
CNL-Capital had cash and cash equivalents of $17.0 million and $31.9 million at
March 31, 2004 and December 31, 2003, respectively.
CNL-Capital's longer-term liquidity requirements (beyond one year) are expected
to be met through successful renewal of its warehouse credit facilities and
gains from the Company's Investment Property Sales Program. In addition,
management believes CNL-Capital's longer term liquidity requirements will be
satisfied in part by operating cash flows provided by servicing and advisory
services. CNL-Capital may also seek additional debt or equity financing. Any
decision to pursue additional debt or equity capital will depend on a number of
factors, such as compliance with the terms of existing credit agreements, the
Company's financial performance, industry or market trends and the general
availability of attractive financing transactions.
Investment Property Sales Program
The Company's Investment Property Sales Program came into being as a reaction to
uncertainty in the franchise asset-backed securitization market. CNL-Capital was
formed in June of 2000 through an alliance between the Company and the Bank. The
original vision of CNL-Capital was centered on securitization. This business
model was predicated upon the origination of pools of loans or triple-net leases
and the subsequent issuance of bonds collateralized by real estate and other
restaurant assets underlying the loan or lease. The securitization market
experienced considerable volatility in late 2000 that has continued to date
virtually shutting down that securitization financing channel for the franchise
asset class. Rising delinquencies in securitized loan pools, falling treasury
rates, macroeconomic uncertainties combined with the sluggish restaurant sales
within certain concepts all contributed to the volatility. Investors required
higher interest rates on securities issued in securitizations while ratings
agencies downgraded the quality of many of the loans underlying the securities.
While many of the Company's competitors experienced downgrades or ratings
actions on bonds previously issued, the Company's prior loan and lease
securitizations to date have not been subject to any such ratings action.
As a result of the volatility in the securitization market, CNL-Capital changed
its business focus in 2001 and halted the origination of new loans. Uncertainty
in the franchise asset-backed securitization market led management to focus its
originations effort toward new long-term, triple-net leases on real estate with
the intent of selling these properties to third parties. In 2001, CNL-Capital
began selling investment properties to third parties (the "Investment Property
Sales Program") adding diversity to its original securitization model. These
leased properties may qualify the buyer for special tax treatment under Section
1031 of the Internal Revenue Code (a "Section 1031 Exchange"). Generally,
Section 1031 Exchanges allow an investor who realizes a gain from selling
appreciated real estate to defer paying taxes on such gain by reinvesting the
sales proceeds in like-kind real estate. The success of this program is
dependent upon achieving an optimal balance of cash flows from lease income
earned in excess of borrowing costs versus a maximum gain on the sale.
The chart below illustrates cash flows from Investment Property Sales proceeds
and purchases of properties as follows:
(In thousands)
For the quarters ended
March 31,
2004 2003
-------------- -------------
Proceeds from Investment Property Sales program sales $ 39,972 $ 56,333
============== =============
Cost of properties sold under the Investment Property
Sales program $ 34,678 $ 49,821
============== =============
Generally accepted accounting principles require that the sale of investment
properties be designated as discontinued operations. A significant element of
the ongoing activities of the specialty finance segment is the Investment
Property Sales Program that consists of the origination of new triple-net lease
financing on properties and the subsequent disposition of those properties. The
following table shows the combined results of the Investment Property Sales
Program and the rest of the operations of the specialty finance segment (without
treating the Investment Property Sales Program as discontinued operations) for
each of the periods presented:
(In thousands)
For the quarters ended March 31,
2004 2003
--------------- ---------------
Revenues:
Sale of real estate $ 39,972 $ 56,333
Rental income 2,517 3,342
Other revenue items 7,134 6,675
--------------- ---------------
49,623 66,350
--------------- ---------------
Expenses:
Cost of real estate sold 34,678 49,821
Interest expense 5,400 6,392
Depreciation and amortization 227 309
Other expenses 6,122 7,425
--------------- ---------------
46,427 63,947
--------------- ---------------
Pre-tax income 3,196 2,403
Income tax provision (1,234) --
--------------- ---------------
Net income $ 1,962 $ 2,403
=============== ===============
Management expects continued demand for the Investment Property Sales Program
but continues to study other sales channels to market net lease assets. Despite
selling 24 properties versus 41 properties during the quarters ended March 31,
2004 and 2003, respectively, gains per property were higher in 2004 versus 2003.
The success of the Investment Property Sales business is dependent on
successfully originating new triple-net leases and the continued liquidity of
the 1031 exchange marketplace. For the quarters ended March 31, 2004 and 2003,
CNL-Capital originated $56.7 million and $22.4 million in net leases
respectively. Management continues to expect strengthening demand for its core
triple-net lease financing during the rest of 2004 but acknowledges that the
demand is impacted by a low interest rate environment and the following factors:
o A number of identified lease transactions have been lost to competitors
offering mortgage debt financing. With the low prevailing interest
rates, large national and regional banks have offered less expensive
mortgage financing that many restaurant operators find more attractive
than leases. CNL-Capital does not currently originate debt financing due
to the volatility and high cost of capital currently associated with the
securitization market. CNL-Capital instead provides referrals of
mortgage debt transactions to the Bank (its financial institution
partner) and earns a fee for such referrals. Management continues to
monitor the potential reemergence of a mortgage loan product, but does
not expect this market to be viable in the near term.
o Various real estate brokerage firms compete against CNL-Capital and
receive a brokerage fee upon the sale of the restaurant properties.
Generally the brokers serve as an intermediary and do not have capital
to ensure certainty of close for the restaurant operator. CNL-Capital,
through its warehouse facilities, is able to provide that assurance
which to date has mitigated this competitive threat, particularly on the
larger transactions. The threat exists more in the market for smaller
transaction sizes than the typical CNL-Capital prospect.
Management has responded to this slow-down by adjusting net lease rates,
identifying larger transactions and identifying new areas within the selling
process to reduce costs. These originations provide inventory necessary to
execute the Investment Property Sales Program and CNL-Capital typically profits
from the leases while holding them. At March 31, 2004, CNL-Capital was involved
in several opportunities for net lease originations with $84 million approved
for funding and accepted by the client, and an additional $104 million approved
with client acceptance pending. CNL-Capital's warehouse facilities provide
advances for up to 97 percent of the real estate purchase value. The Company is
reinvesting its operating profits to fund the amounts not advanced by the
mortgage warehouse facilities.
Indebtedness
During the quarter ended March 31, 2004, CNL-Capital used "net spread" to pay
operating expenses and used borrowings on its warehouse facilities to fund new
real estate originations. CNL-Capital has continued to reduce its warehouse
credit capacity to align triple-net lease financing opportunities to its
financing capacity requirements and to reduce its overall financing costs. The
Company has reduced its warehouse credit capacity from $385 million to $260
million, thereby realizing economies from the reduced capacity. CNL-Capital may
be subject to margin calls on its warehouse credit facilities. The Bank and the
other lenders monitor delinquency assumptions and may require one or more margin
calls to reduce the level of warehouse financing. During the quarters ended
March 31, 2004 and 2003, CNL-Capital made $0.5 million and $2.6 million in
margin calls, respectively.
CNL-Capital has the following borrowing sources at March 31, 2004, with the
stated total capacity and interest rate:
In thousands
Amount used Capacity Maturity Interest rate (4)
----------------- ------------- --------------- -------------------
Note payable (medium term financing) (1) $ 175,808 $ 175,808 Jun 2007 2.33%
Mortgage warehouse facilities (2) 110,601 260,000 Annual 2.61%
Subordinated note payable 33,750 33,750 Dec 2008 7.00%
Series 2001-4 bonds payable (3) 38,565 38,565 2009 - 2013 8.90%
----------------- -------------
$ 358,724 $ 508,123
================= =============
(1) Average rate excludes the impact of hedge transactions that bring the
total average rate to 5.77 percent on the medium term financing.
(2) In December 2003, CNL-Capital lowered the borrowing capacity on one
of its mortgage warehouse facilities from $260 million to $160
million because it did not require the full capacity. In March 2004,
CNL-Capital renewed this facility through March 2005. The second
mortgage warehouse facility of $100 million matures in June 2004.
Management is in the process of negotiating the renewal of this
facility and anticipates it will obtain a renewal through June 2005
at similar terms.
(3) Includes $5,069 in bonds held by CNL-Investments eliminated upon
consolidation in Company financial statements.
(4) Excludes debt issuance and other related costs.
Note Payable. In June 2002, in order to refinance short term debt with longer
term debt, CNL-Capital entered into a five-year term $207 million financing
collateralized with $225 million in mortgage loans re-designated to reflect the
Company's intention to hold them to maturity. The transaction provides
CNL-Capital earnings on the excess of interest income over interest expense.
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.
Mortgage Warehouse Facilities. CNL-Capital management maintains regular contact
with its mortgage warehouse facility lenders and believes that the relatively
low-cost, high-advance rate financing they provide has been integral to
CNL-Capital's success. As is typical of revolving debt facilities, these
facilities carry a 364-day maturity and accordingly CNL-Capital is vulnerable to
any changes in the terms of these facilities. The warehouse facilities currently
advance an average of 92.2 percent of the original real estate cost. As of March
31, 2004, CNL-Capital has two warehouse facilities. The first warehouse facility
is for $160 million with the Bank and matures in March 2005 (the "Warehouse
Credit Facility"). The second mortgage warehouse facility of $100 million with
another lender, matures in June 2004. Management has and may continue to
increase or decrease the mortgage warehouse facility capacity from its present
level in order to economize on its cost and meet its business plan. At March 31,
2004, CNL-Capital had approximately $10.7 million in capital supporting its loan
and lease portfolio financed through its mortgage warehouse facilities.
Subordinated Note Payable. In forming the alliance with the Bank during 2000,
the Bank provided CNL-Capital with a $43.75 million subordinated debt facility
(the "Subordinated Debt Facility"). In late December 2003, CNL-Capital removed
the remaining loans on the Warehouse Credit Facility by selling them to
CNL-Investments. CNL-Investments then executed a bond offering, supported in
part, by this collateral. In January 2004, CNL-Capital used these proceeds along
with additional funds, to repay the Bank $10 million on the Subordinated Debt
Facility. As part of the repayment, CNL-Capital and the Bank modified the terms
of the Subordinated Debt Facility. CNL-Capital extended the maturity date on the
Subordinated Debt Facility from June 2007 to December 2008 and reduced the
interest rate from 8.50 percent to 7.00 percent per annum. Under the new terms,
CNL-Capital must repay $11.875 million on this facility by December 31, 2004.
CNL-Capital will then make quarterly payments of principal and interest to the
Bank using a five-year amortization schedule beginning March 2005 with a balloon
payment due on December 31, 2008. As part of the negotiations, the Bank
eliminated a previous restriction on CNL-Capital to pay down the Subordinated
Debt Facility for every dollar distributed by CNL-Capital to the Company. In
addition, the Company agreed to provide a guaranty on the entire amount
outstanding under the Subordinated Debt Facility as part of the renegotiations.
Prior to the renegotiations, only CNL-Capital had provided a guaranty on the
Subordinated Debt Facility.
Bonds Payable. In May 2001, CNL-Capital issued bonds collateralized by a pool of
mortgages (the "Series 2001-4 Bonds"). The proceeds of $42.1 million were
applied to pay down short-term debt. The offering resulted in an initial
weighted average life of approximately 7.8 years and a rate of interest of
approximately 8.90 percent per annum (excluding capitalized financing costs).
The bond indenture requires monthly principal and interest payments received
from borrowers to be applied to the bonds. The bond indenture also provides for
an optional redemption of the bonds at their remaining principal balance when
the remaining amounts due under the loans that serve as collateral for the bonds
are less than 10 percent of the aggregate amounts due under the loans at the
time of issuance.
Some sources of debt financing require that CNL-Capital maintain certain
standards of financial performance such as a fixed-charge coverage ratio, a
tangible net worth requirement and certain levels of available cash. Any failure
to comply with the terms of these covenants would constitute a default and may
create an immediate need to find alternate borrowing sources.
Liquidity Risks
Tenants or borrowers that are experiencing financial difficulties could impact
CNL-Capital's ability to generate adequate amounts of cash to meet its needs. In
the event the financial difficulties persist, CNL-Capital's collection of
interest and principal payments could be interrupted. At present, most of these
borrowers continue to pay principal and interest substantially in accordance
with loan terms. However, CNL-Capital continues to monitor each borrower's
situation carefully and will take appropriate action to place CNL-Capital in a
position to maximize the value of its investment.
Liquidity risk also exists from the possibility of borrower delinquencies on the
mortgage loans held to maturity. In the event of a borrower delinquency, the
Company could suffer not only shortfalls on scheduled payments but also margin
calls by the lenders that provide the warehouse facilities and the five-year
note, subjecting the Company to unanticipated cash outflows. The Company is
obligated under the provisions of its five-year note to pay down certain debt
associated with borrower delinquencies or defaults within a required time frame.
Most properties acquired on the mortgage warehouse facilities are required to be
sold within a certain time frame. Any delinquency, default or delay in the
resale of properties financed through one of these facilities would generally
result in an immediate pay-down of the related debt and may restrict the
Company's ability to find alternative financing for these specific assets. In
April 2004, CNL-Capital used cash from operations to pay approximately $5.3
million under its Note Payable associated with a restructure from a borrower who
is experiencing financial difficulties. The Company's debt, excluding bonds
payable, generally provides for cross-default triggers. A default of a mortgage
warehouse facility, for example from a failure to make a margin call, could
result in other Company borrowings becoming immediately due and payable.
For those borrowers who have experienced financial difficulties or who have
defaulted under their loans, management has estimated the loss or impairment on
the related investments and included such charge in earnings through March 31,
2004. The estimation process is challenging due to the number of possible
outcomes and facts may develop in future periods that may suggest the need for
larger reserve charges.
In March 2004, CNL-Capital provided temporary debt service relief to a
borrower/tenant who is experiencing liquidity difficulties. CNL-Capital agreed
to lower the interest rate over the next twelve months on eight mortgage loans
to provide debt service relief. Repayment terms will go back to the original
terms starting with the thirteenth month. The mortgage loans receivable from
this borrower/tenant serve as collateral on the Note Payable. As a result of the
restructure, the Company paid down approximately $5.3 million under its Note
Payable, as described above. This reduction in cash flows from the temporary
debt service relief provided to the borrower tenant, after consideration of the
$5.3 million reduction in debt outstanding under the Note Payable, will have an
approximate $1 million negative impact to cash flows over the next twelve
months. Management does not believe that this temporary decline in cash flows
will have a material adverse effect on overall liquidity.
Additional liquidity risks include the possible occurrence of economic events
that could have a negative impact on the franchise securitization market and
affect the quality or perception of the loans or leases underlying CNL-Capital's
previous securitization transactions. The Company conducted its previous
securitizations using bankruptcy remote entities. These entities exist
independent from the Company and their assets are not available to satisfy the
claims of creditors of the Company, any subsidiary or its affiliates. To date,
the ratings on the loans underlying the securities issued in these transactions
have been affirmed unlike the ratings of many competitors' loan pools that have
been downgraded. Upon the occurrence of a significant amount of delinquencies
and/or defaults, one or more of the three rating agencies may choose to place a
specific transaction on ratings watch or even downgrade one or more classes of
securities to a lower rating. Should the loans underlying the securities
default, and the securities undergo a negative ratings action, CNL-Capital could
experience material adverse consequences impacting its ability to continue
earning income as servicer, renew its warehouse credit facilities and its
ability to engage in future profitable securitization transactions. In addition,
a negative ratings action against the Company's securitized pools could cause
the Company's warehouse lenders to lower the advance rates and increase the cost
of financing.
CNL-Capital holds an interest in the following securitizations (referred to as
the 1998-1 and 1999-1 residual interests), the assets and liabilities of which
are not consolidated in the Company financial statements:
March 31, 2004
-----------------------------------------
(In thousands)
Mortgage loans in Bonds outstanding
pool at par at face value (1)
------------------ ------------------
Loans and debt supporting 1998-1 Certificates issued by CNL
Funding 1998-1, LP $ 180,270 $ 178,427
Loans and debt supporting 1999-1 Certificates issued by CNL
Funding 1999-1, LP 226,715 226,715
------------------ ------------------
$ 406,985 $ 405,142
================== ==================
(1) Certain bonds in both the 1998-1 and 1999-1 pools are owned by
CNL-Investments; the aggregate principal amount of these bonds of
$27,563 appears as investments in the consolidated financial
statements of the Company.
Management believes that the Investment Property Sales Program will continue to
be successful, but not without risks. Management believes that the recent tax
law changes decreasing, but not eliminating capital gains taxes, are not
significant enough to dissuade demand created by property buyers seeking
continued tax deferrals. However any sweeping new proposal to eliminate the
capital gains tax could negatively impact demand. Restaurant properties acquired
in anticipation of sales through the Investment Property Sales program typically
are leased to tenants at a rate that exceeds the rate a buyer is willing to
accept. However, the Company could experience lower average gains or even losses
on future sales due to declining tenant performance prior to the sale of one of
more properties, a shift in the demand for real estate properties in a
particular region or nationwide or because of other factors that alter the
perceived value of a given property between the time the Company purchases the
property and the time of actual sale. An unexpected rise in interest rates could
increase the yields available on alternative non-real estate investments and may
cause real estate investors to require higher lease rates from tenants. If the
Company is holding a large inventory of properties for sale at such time, the
value of these properties may be impacted. Such a reduction in value could cause
the Company's mortgage warehouse facilities to require more equity from the
Company that could adversely affect the Company's liquidity.
o Real Estate Segment (CNL-Investments)
CNL-Investments' demands for funds are predominantly interest expense, operating
expenses, reinvestment of disposition proceeds and distributions to the Company.
CNL-Investments' cash flows primarily consist of rental income from tenants on
restaurant properties owned, interest income on mortgage loans, dispositions of
properties and income from holding interests in prior loan securitizations
including those originated by predecessor entities of CNL-Capital.
CNL-Investments had cash and cash equivalents of $5.3 million and $4.4 million
at March 31, 2004 and December 31, 2003, respectively.
CNL-Investments' management believes the availability on its line of credit will
permit it to meet its short-term liquidity objectives. Long-term liquidity
requirements will be met through a combination of selectively disposing of
assets and reinvesting the proceeds in high-yielding investments, from cash from
operating activities and from debt and equity offerings.
Indebtedness
From time to time, CNL-Investments will borrow amounts available under its
Revolver (as hereinafter defined) to fund operating expenses. Borrowing
resources at March 31, 2004 for CNL-Investments include:
(In thousands)
Amount Used Capacity Maturity Interest Rate (1)
-------------- -------------- --------------- ------------------
Revolver $ 8,500 $ 30,000 Oct 2004 3.60%
Note payable 605 605 2005 4.37%
Series 2000-A bonds payable 250,260 250,260 2009-2017 7.94%
Series 2001 bonds payable 117,111 117,111 Oct 2006 1.59%
Series 2003 bonds payable 23,938 23,938 2005-2010 5.67%
-------------- --------------
$ 400,414 $ 421,914
============== ==============
(1) Excludes debt issuance and other related costs.
CNL-Investments provides a guaranty of up to ten percent of CNL-Capital's Note
Payable. The Company also provides a 100 percent guaranty on CNL-Capital's
Subordinated Debt Facility and on the $160 million warehouse credit facility
with the Bank.
CNL-Investments' short-term debt consists of a $30 million revolving line of
credit (the "Revolver") entered into in October 2001 with the Bank.
CNL-Investments utilizes the Revolver from time to time to manage the timing of
inflows and outflows of cash from operating activities. The Revolver matured in
October 2003, and at that time CNL-Investments exercised its one-year renewal
option.
In January 2003, a subsidiary of CNL-Investments, entered into a Master Credit
Facility Agreement ("the Note Payable") with CNL Bank, an affiliate. The Note
Payable had a total borrowing capacity of $5 million and was established for the
purpose of financing the acquisition and redevelopment of real estate
properties. At March 31, 2004, the Company had $0.6 million outstanding relating
to this Note Payable. Amounts outstanding are collateralized by mortgages on
certain real property, bear interest at LIBOR plus 325 basis points per annum
and require monthly interest only payments until maturity in 2005. The unused
portion of $4.4 million on the credit facility expired in January 2004 and
management of CNL-Investments elected not to renew the available capacity.
CNL-Investments also has medium-term note and long-term bond financing, referred
to collectively as bonds payable, that was used to restructure the Company's
indebtedness. Rental income received on properties and interest income received
on mortgage loans and equipment leases pledged as collateral on medium and
long-term financing is used to make scheduled reductions in bond principal and
interest.
Some sources of debt financing require that CNL-Investments maintain certain
standards of financial performance such as fixed-charge coverage ratios and
tangible net worth requirements, and impose a limitation on the distributions
from CNL-Investments to the Company tied to funds from operations. Any failure
to comply with the terms of these covenants could constitute a default and may
create an immediate need to find alternate borrowing sources.
Liquidity Risks
Liquidity risks within the real estate business include the potential that a
tenant's financial condition could deteriorate, rendering it unable to make
lease payments. Generally, CNL-Investments uses a triple-net lease to lease its
properties to its tenants. The triple-net lease is a long-term lease that
requires the tenant to pay expenses on the property. The lease somewhat
insulates CNL-Investments from significant cash outflows for maintenance,
repair, real estate taxes or insurance. However, if the tenant experiences
financial problems, rental payments could be interrupted. In the event of tenant
bankruptcy, CNL-Investments may be required to fund certain expenses in order to
retain control or take possession of the property and its operations. This could
expose CNL-Investments to successor liabilities and further affect liquidity.
Management is aware of multi-unit tenants that are also experiencing financial
difficulties. In the event the financial difficulties continue, CNL-Investments'
collection of rental payments could be interrupted. At present, most of these
tenants continue to pay rent substantially in accordance with lease terms.
However, CNL-Investments continues to monitor each tenant's situation carefully
and will take appropriate action to place CNL-Investments in a position to
maximize the value of its investment. For those tenants who have experienced
financial difficulties or have defaulted under their leases, management has
estimated the loss or impairment on the related properties and included such
charge in earnings through March 31, 2004. The estimation process is challenging
due to the number of possible outcomes that may result from a default situation.
While management believes it has recorded an appropriate impairment charge at
March 31, 2004, based on its assessment of each tenants' financial difficulties
and its knowledge of the properties, facts may develop in future periods that
may suggest the need for larger impairment charges.
In October 2003, a tenant of CNL-Investments, Chevy's Holding, Inc. and numerous
operating subsidiaries, ("Chevy's") filed for voluntary bankruptcy under the
provisions of Chapter 11. Chevy's operates the Chevy's, Rio Bravo and Fuzio
concepts. CNL-Investments owns 22 Chevy's units, with a total investment of
$56.6 million. As of May 5, 2004, Chevy's had rejected 16 of the 22 leases.
Management recorded impairments relating to some of these sites in prior years.
As of May 5, 2004, management has sold three properties whose leases were
rejected and expects the remaining rejected sites to be re-leased or sold.
Chevy's has paid rent on the six remaining sites since filing bankruptcy in
October 2003.
In February 2004, The Ground Round, Inc. ("Ground Round"), a tenant of
CNL-Investments, filed for voluntary bankruptcy under the provisions of Chapter
11. Ground Round operates the Ground Round and Tin Alley Grills concepts.
CNL-Investments owns 12 units, with a total investment of $12.9 million. Ground
Round had closed eight of these sites as of the bankruptcy filing.
CNL-Investments did not collect the February and March rents on three of these
sites but has collected rents on the other nine sites in accordance with
bankruptcy provisions. As of May 5, 2004, Ground Round had neither affirmed nor
rejected the 12 leases; however, management believes that Ground Round will
reject six of the leases. Management will continue to monitor developments
surrounding the bankruptcy, including the potential rejection of some or all of
the remaining leases. As of May 5, 2004, CNL Investments had determined that no
impairment provisions were deemed necessary.
In March 2004, CNL-Investments provided temporary rent forbearance to a tenant
who is experiencing liquidity difficulties. CNL-Investments agreed to forebear
the collection of partial rents over the next twelve months on ten sites to
provide rent relief. Under the proposed negotiations, the tenant will pay the
amounts deferred under the forbearance agreement over five years. This temporary
forbearance on the rents will have a $1.8 million negative impact to cash flows
of CNL-Investments over the next twelve months but will be collected between
months 13 through 72.
CNL-Investments has experienced tenant bankruptcies and may commit further
resources in seeking resolution to these properties including funding restaurant
businesses directly or on behalf of successor tenants. For example, where the
value of the leased real estate is linked to the financial performance of the
tenant, CNL-Investments may allocate capital to invest in turnaround
opportunities. As of March 31, 2004 the Company owned, through an investment of
$1.2 million, the business restaurant operations of twelve Denny's restaurants
that represented a strategic move to preserve the Company's real estate
investment when the franchisee of the restaurants experienced severe financial
difficulties. CNL-Investments has since successfully disposed of the real estate
and plans to sell its investment in the business by the end of 2004. This
activity is not a core operation or competency of the Company and is only
undertaken in situations where management believes the course of action best
preserves the Company's position in the real estate or loan investment.
Certain net lease properties are pledged as collateral for the Series 2000-A and
Series 2001 triple-net lease mortgage bonds payable. In the event of a tenant
default relating to pledged properties, the Company may elect to contribute
additional properties or substitute properties into these securitized pools from
properties it owns not otherwise pledged as collateral. These pools contain
properties potentially impacted by the recent bankruptcy filing of Chevy's and
the financial difficulties of other restaurant operators. Management is
evaluating the impact to the pools, including any need to identify substitute
properties. In the event that CNL-Investments has no suitable substitute
property, the adverse performance of the pool might inhibit the Company's future
capital raising efforts including the ability to refinance the Series 2001 bonds
maturing in 2006. The Series 2000-A and Series 2001 financings include certain
triggers relating to delinquency percentages or debt service coverage. If
certain ratios are exceeded or not maintained, then principal pay down on the
outstanding bonds is accelerated. The Company is currently exceeding certain
performance cash flow ratios within the Series 2000-A bonds due primarily to
tenants defaults from the Chevy's bankruptcy described above. As a result, cash
flow normally exceeding the scheduled principal and interest payments is
required to be directed toward additional debt reduction. The Company is
actively seeking new tenants or buyers for these properties that will result in
improved performance under these ratios. The additional principal payment of
approximately $0.8 million was funded from cash from operations during the
quarter ended March 31, 2004.
Off-Balance Sheet Transactions
The Company is not dependent on the use of any off-balance sheet financing
arrangements for liquidity. The Company holds a residual interest in
approximately $407.0 million in loans transferred to unconsolidated trusts that
serve as collateral for the long-term bonds discussed in "Liquidity and Capital
Resources - Specialty Finance Segment (CNL-Capital)". Recent accounting
pronouncements have not required the consolidation of these trusts.
Interest Rate Risk
Floating interest rates on variable rate debt expose the Company to interest
rate risk. The Company invests in assets with a fixed return by sometimes
financing a portion of them with variable rate debt. As of March 31, 2004, the
Company's variable rate debt includes the following:
o $8.5 million on its Revolver;
o $110.6 million on its mortgage warehouse facilities;
o $175.8 million on the June 2002 five-year financing;
o $117.1 million outstanding on the Series 2001 bonds; and
o $23.9 million outstanding on the Series 2003 bonds.
Generally, the Company uses derivative financial instruments (primarily interest
rate swap contracts) to hedge against fluctuations in interest rates from the
time it originates fixed-rate mortgage loans and leases until the time they are
sold. The Company generally terminates certain of these contracts upon the sale
of the loans or properties, 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 is recognized in the consolidated statement of operations.
Additionally, the Company uses interest rate swaps and caps to hedge against
fluctuations in variable cash flows on a portion of its floating rate debt.
Under interest rate swaps, the Company agrees with other parties to exchange, at
specified intervals, the difference between fixed-rate and floating-rate
interest amounts calculated by reference to an agreed upon notional principal
amount. Under a cap purchase, a third party agrees to assume any interest costs
above a stated rate. Changes in the values of the Company's current interest
rate swaps and caps are reflected in other comprehensive income.
The Company also invests in financial instruments that are subject to various
forms of market risk such as interest rate fluctuations, credit risk and
prepayment risk. The value of its mortgage loans held for sale and its
investments change as a result of fluctuating interest rates, credit risk,
market sentiment and other external forces, which could materially adversely
affect liquidity and capital resources.
Management estimates that a one-percentage point increase in short-term interest
rates as of March 31, 2004 would have resulted in additional interest costs of
approximately $0.7 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 low. During inflationary
periods, which generally are accompanied by rising interest rates, the Company's
ability to grow may be adversely affected because the yield on new investments
may increase at a slower rate than new borrowing costs. However, sustained low
inflation could lead to net lease pricing pressure as tenants request decreasing
rates for longer maturities.
New Accounting Pronouncements
During 2003, the Company implemented FAS Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities" that resulted in the consolidation
of two subsidiaries that were previously not consolidated. In December 2003, the
Financial Accounting Standards Board ("FASB") issued FIN 46R, "Consolidation of
Variable Interest Entities". This interpretation requires existing
unconsolidated variable interest entities to be consolidated by their primary
beneficiaries. The primary beneficiary of a variable interest entity is the
party that absorbs a majority of the entity's expected losses, receives a
majority of its expected residual returns, or both, as a result of holding
variable interests, which are the ownership, contractual, or other pecuniary
interests in an entity that change with changes in the fair value of the
entity's net assets excluding variable interests. Prior to FIN 46R, a company
generally included another entity in its consolidated financial statements only
if it controlled the entity through voting interests. Application of FIN 46R is
required in financial statements of public entities that have interests in
variable interest entities for periods ending after March 15, 2004. The
application of this interpretation did not have an effect on the Company's
financial position or results of operations.
Results from Operations
The Company generated net income of $10.8 million and $8.0 million for the
quarters ended March 31, 2004 and 2003, respectively. The 35 percent increase in
net income for the quarter ended March 31, 2004 as compared to the comparable
quarter in 2003 resulted from several factors. Net income increased primarily
due to lower general, operating and administrative expenses and due to decreased
impairment losses and reserves relating to the properties and loans in the
portfolio. Net income also increased due to lower interest expense and property
expenses for the quarter ended March 31, 2004 as compared to the comparable
quarter in 2003.
The following discussion of results from operations is by segment. All segment
results are before eliminating adjustments and results of the holding company.
As a result, the sum of amounts applicable to each segment will not, in some
cases, equal the Company total amount reflected in the condensed consolidated
statement of operations. Company earnings by segment reflect restatements for
prior periods resulting from consolidating previously unconsolidated entities in
accordance with the implementation of new accounting pronouncements. Company
earnings are as follows:
For the quarters ended March 31,
% of % of
Net income by segment (in Millions) 2004 Total 2003 Total
---------- --------- ----------- ----------
Real estate segment $ 9.0 83% $ 5.7 $ 71 %
Specialty finance segment 2.0 19 2.4 30
Other holding company results, results for
periods prior to segment reporting and
consolidating eliminations (0.2) (2) (0.1) (1 )
---------- --------- ----------- ----------
Net income $ 10.8 100% $ 8.0 100 %
========== ========= =========== ==========
o The real estate segment, through CNL-Investments, posted a 58 percent
increase in earnings for the quarter ended March 31, 2004 as compared to
the comparable quarter in 2003. The improved operating performance was
partially attributed to the initiative that CNL-Investments undertook in
2003 to reduce general operating expenses by transferring certain functions
related to the management of affiliated portfolios, out of CNL-Investments
and into CFG, an affiliate, as further described below. The increased
earnings were also the result of recording less property related expenses
and less impairment provisions for the quarter ended March 31, 2004, due to
having less vacant and non-performing properties in the portfolio during
the quarter ended March 31, 2004 than the comparable quarter in 2003. The
reduction in the number of vacant and non-performing properties was
achieved through the end of 2003 either through the sale of several
properties or the successful re-leasing of several properties subject to
triple-net leases.
o The specialty finance segment, through CNL-Capital, reported a 17 percent
decrease in earnings for the quarter ended March 31, 2004 as compared to
the comparable quarter in 2003. The decrease was primarily the result of
recording an income tax provision for the first time since the inception of
the specialty finance segment, as further described below in "Results of
Operations - Income Tax Provision".
Revenues
For the quarters ended March 31,
% of % of
Total revenues by segment (in Millions) 2004 Total 2003 Total
-------- ------- -------- --------
Real estate segment $ 20.1 76 % $ 21.3 78%
Specialty finance segment 7.0 27 6.7 25
Other holding company results, results for
periods prior to segment reporting and
consolidating eliminations (0.7) (3 ) (0.9) (3)
-------- ------- -------- --------
Total revenues $ 26.4 100 % $ 27.1 100%
======== ======= ======== ========
Revenues are discussed based on the individual segment results beginning with
the results of the real estate segment through CNL-Investments:
For the quarters ended March 31,
Real estate segment revenues by % of % of
line item (in Millions) 2004 Total 2003 Total
-------- ------- -------- --------
Rental income from operating
leases and earned income from
direct financing leases $17.2 86 % $17.7 83 %
Interest income from mortgage,
equipment and other notes
receivable 1.3 7 1.1 5
Investment and interest income 1.1 5 1.1 5
Other income 0.5 2 1.4 7
-------- ------- -------- --------
Total segment revenues $ 20.1 100 % $ 21.3 100 %
======== ======= ======== ========
o The rental revenue from vacant and other properties sold was classified as
a component of discontinued operations for all periods presented and was
not included in the segment revenues above. The combined amount of rental
income from operating leases and earned income from direct financing leases
from continuing operations did not change significantly for each of the
quarters presented.
o Interest income from mortgage, equipment and other notes receivable
increased slightly as a result of CNL-Investments' purchase of
approximately $26.1 million in loans from CNL-Capital in December 2003.
CNL-Investments combined these loans with other loans it previously owned
and in December 2003, issued $24.9 million of notes collateralized by
approximately $46.6 million of mortgage loans. The increase in interest
income from the new loans was partially offset by a decrease in interest
income earned on the declining balance of its original loan portfolio
resulting from the scheduled collections of principal and the lack of new
loan originations since 2000.
o Other income in the real estate segment decreased during the quarter ended
March 31, 2004 as compared to the comparable quarter in 2003 as a result of
decreased billings of direct costs to third parties using CNL-Investments
for property management services. During the late summer of 2003,
CNL-Investments transferred certain functions to CFG, an affiliate, thereby
reducing general and operating expenses, as well as reducing the billings
of these expenses collected from third parties. Other income in future
quarters is expected to be at levels comparable to the quarter ended March
31, 2004.
The revenues of the specialty finance segment through CNL-Capital are more
variable than those of the real estate segment. The following table provides
additional information relating to the revenues of this segment:
For the quarters ended March 31,
Specialty finance segment
revenues by line item (in % of % of
Millions) 2004 Total 2003 Total
-------- ------- --------- -------
Interest income from mortgage
equipment and other notes
receivable $ 5.4 77 % $ 6.9 103 %
Investment and interest income 0.2 3 0.2 3
Net decrease in value of mortgage
loans held for sale, net of related
hedge -- -- (2.0) (30 )
Other income 1.4 20 1.6 24
-------- ------- --------- -------
$ 7.0 100 % $ 6.7 100 %
======== ======= ========= =======
o Interest income from mortgage, equipment and other notes receivable
decreased 22 percent for the quarter ended March 31, 2004 as compared to
the comparable quarter in 2003 partially due to the sale of $26.1 million
in loans to CNL-Investments in December 2003, as described above. The
remainder of the decrease was due to the declining balance of its loan
portfolio resulting from scheduled collections of principal and the lack of
new loan originations since 2001.
o CNL-Capital did not record any changes in the fair value of mortgage loans
held for sale, net of related hedge, for the quarter ended March 31, 2004.
This was the result of CNL-Capital's sale in December 2003 of its remaining
loans held for sale to CNL-Investments, which then re-designated these
loans as held for investment purposes and issued bonds collateralized by
the pool of loans. During the quarter ended March 31, 2003, CNL-Capital
recorded a $2 million decline in the fair value of these loans held for
sale, net of related hedge and net of estimated potential default losses.
Despite following a hedging strategy during 2003 designed to address market
volatility in the value of loans held for sale, the loan valuation
increases associated with decreases in interest rates for mortgage loans
held for sale were more than offset by estimated potential default losses
related to certain loans in the portfolio.
Expenses
Expenses decreased for the quarter ended March 31, 2004 from the comparable
quarter in 2003. General operating and administrative expenses were lower due to
the Company's initiative of outsourcing some functions to reduce expenses.
Property expenses and impairment losses relating to the properties and loans in
the portfolio were lower due to less financial difficulties and defaults by
borrowers and tenants. Interest expense was lower as a result of the $10 million
pay down on the Subordinated Debt Facility and the related decrease of the
interest rate on this facility from 8.5 percent to 7.0 percent in January 2004.
General operating and administrative expenses consist primarily of
payroll-related and legal and other professional expenses. The following table
illustrates the comparative period expenses by segment:
For the quarters ended March 31,
General operating and administrative % of % of
expenses by segment (in Millions) 2004 Total 2003 Total
-------- ------ -------- -------
Real estate segment $ 2.2 34 % $ 3.4 45 %
Specialty finance segment 4.8 75 4.8 64
Other holding company results,
results for periods prior to
segment reporting and
consolidating eliminations (0.6) (9 ) (0.7) (9 )
-------- ------ -------- -------
Total general operating and
administrative expenses $ 6.4 100 % $ 7.5 100 %
======== ====== ======== =======
o CNL-Investments' general operating and administrative expenses decreased by
35 percent for the quarter ended March 31, 2004 from the comparable quarter
in 2003 as a result of transferring certain financial and strategic
functions, including transferring certain employees relating to the
management of the external portfolios, to a subsidiary of CFG, an
affiliate.
o CNL-Capital's general operating and administrative expenses were consistent
for the quarters ended March 31, 2004 and 2003.
Interest expense constitutes one of the most significant operating expenses.
Certain interest expense is included in operating results from discontinued
operations. Components of interest expense from continuing operations are as
follows:
For the quarters ended March 31,
Interest expense by segment (in % of % of
Millions) 2004 Total 2003 Total
-------- ------- -------- --------
Real estate segment $ 7.1 60 % $ 6.9 56 %
Specialty finance segment 4.7 40 5.7 46
Other holding company results and
consolidating eliminations -- -- (0.2) (2 )
-------- ------- -------- --------
Total interest expense $ 11.8 100 % $ 12.4 100 %
======== ======= ======== ========
o CNL-Investments had a slight increase in interest expense for the quarter
ended March 31, 2004 from the comparable quarter in 2003 due to
CNL-Investments issuing $24.9 million of notes collateralized by
approximately $46.6 million of mortgage loans in December 2003.
o CNL-Capital had an 18 percent decrease in interest expense for the quarter
ended March 31, 2004 from the comparable quarter in 2003. The decrease in
interest expense was partially the result of the $10 million pay down on
the Subordinated Debt Facility and the related decrease of the interest
rate on this facility from 8.5 percent to 7 percent in January 2004.
Interest expense was also lower in 2004 due to lower weighted average
balances outstanding under the warehouse lines of credit for the quarter
ended March 31, 2004 as compared to the quarter ended March 31, 2003. The
reduction in the weighted average balances outstanding in 2004 was the
result of a reduction in available inventory of properties for the
Investment Property Sales Program as a result of lower originations volume
during 2003 and the sale of loans to CNL-Investments in December 2003.
Depreciation and amortization expenses reflect primarily the level of assets
invested in leased properties held by the real estate segment. Certain of these
expenses have been reflected as a component of discontinued operations.
CNL-Capital recorded a loss on termination of cash flow hedge of $0.4 million
for the quarter ended March 31, 2004. The loss relates to the prepayment of
mortgage loans by a borrower causing CNL-Capital to pay down a portion of the
related debt collateralized by these mortgage loans and to also unwind a portion
of the related swap. No such loss was recorded for the quarter ended March 31,
2003.
Impairments and provisions on assets consist of bad debt expense relating to
receivables that deemed uncollectible, provisions for loan losses associated
with non-performing loans, valuation allowances associated with investments in
the 1998-1 and 1999-1 residual interests and impairment provisions on properties
(excluding impairments on properties treated as discontinued operations as
described below). The following table illustrates the comparative period
expenses by segment:
For the quarters ended March 31,
Impairments and provisions on % of % of
assets (in Millions) 2004 Total 2003 Total
-------- ------- --------- -------
Real estate segment $ 0.2 40 % $ 1.6 73 %
Specialty finance segment 0.3 60 0.6 27
-------- ------- --------- -------
$ 0.5 100 % $ 2.2 100 %
======== ======= ========= =======
o CNL-Investments recorded impairment provisions of $0.2 million and $1.6
million for the quarters ended March 31, 2004 and 2003, respectively,
excluding impairments on properties treated as discontinued operations as
described below. The impairments during the quarter ended March 31, 2003
related primarily to properties previously leased to Chevy's, which
declared bankruptcy during 2003. The impairments represented the difference
between the net carrying value of the properties and the estimated fair
value of the properties.
o CNL-Capital recorded provisions for loan losses of $0.4 million for the
quarter ended March 31, 2003 associated with non-performing loans.
CNL-Capital did not record such provisions for the comparable quarter in
2004. Management evaluates its loan portfolio and records a reserve as
potential losses become evident. CNL-Capital also recorded bad debt expense
of $0.3 million and $0.2 million for the quarters ended March 31, 2004 and
2003, respectively, relating to receivables that management does not
believe are recoverable.
Discontinued Operations
The Company accounts for certain of its revenues and expenses as originating
from discontinued operations pursuant to Statement of Financial Accounting
Standard No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("FAS 144"). FAS 144 requires that sales of real estate, or the
designation of a real estate asset as held for sale, be treated as discontinued
operations. Any gain or loss from such disposition, and any income or expenses
associated with these real estate assets, are included in the income statement
as discontinued operations. CNL-Capital's Investment Property Sales program, a
vital piece of its ongoing operating strategy, falls under the new guidance.
Therefore, gains from properties sold under the Investment Property Sales
program are included as discontinued operations. Income and expenses associated
with Investment Property Sales program assets are also included in discontinued
operations. In addition, CNL-Investments has designated certain real estate
assets as held for sale and has included income and expenses associated with the
assets as well as the gain or loss from any dispositions of these assets as
discontinued operations for all periods presented.
During 2002, the Company purchased the operations of certain restaurants. In
December 2003, the Company decided to dispose of these restaurant operations.
All operating results relating to these restaurant operations have been recorded
as discontinued operations.
The table below illustrates the treatment of discontinued operations by segment:
For the quarters ended
Income from discontinued operations March 31,
by segment (in Millions) 2004 2003
------------ ------------
Real estate segment discontinued operations:
Earnings/(loss) $ (0.2 ) $ (0.7 )
Gains on disposal 1.6 0.2
Specialty finance segment discontinued operations:
Earnings 1.7 1.4
Gains on disposal 5.3 6.5
Income tax provision (1.2 ) --
------------ ------------
Total income from discontinued operations $ 7.2 $ 7.4
============ ============
o The loss from discontinued operations of the real estate segment includes
impairment provisions of $1.4 million for the quarter ended March 31, 2003.
The earnings from discontinued operations of the specialty finance segment
includes impairment provisions of $0.8 million for the quarter ended March
31, 2003. These impairments related primarily to properties designated as
held for sale or sold through March 31, 2004. No such impairment provisions
were recorded for the quarter ended March 31, 2004 for either segment.
Gains on disposal of properties of the real estate segment were higher
during 2004 as a result of selling more properties for the quarter ended
March 31, 2004 as compared to the comparable quarter in 2003. Gains on
disposal of properties of the specialty finance segment were lower for the
quarter ended March 31, 2004 versus the comparable quarter in 2003 as a
result of selling 24 properties versus 41 properties, respectively. Despite
the decline in the number of properties sold in 2004, the gain per property
was higher for the quarter ended March 31, 2004 as compared to the
comparable quarter in 2003. Additional information on actual proceeds and
related cost of sales is located in "Liquidity and Capital Resources -
Specialty Finance Segment (CNL-Capital) - Investment Property Sales
Program."
o The restaurant operations, which are recorded as discontinued operations,
generated revenues of $3.8 million and $3.4 million for the quarters ended
March 31, 2004 and 2003, respectively, and generated related expenses of
$4.0 million and $3.3 million, respectively.
Income Tax Provision
The Company is primarily treated as a REIT and generally records no tax expense.
However, effective January 1, 2001, the activities of CNL-Capital and certain
activities of CNL-Investments are taxable pursuant to rules governing TRSs.
CNL-Capital had not reflected a net income tax provision from inception through
December 31, 2003 as a result of recognition of deferred tax assets previously
subject to valuation allowances. CNL-Capital reversed the remaining valuation
allowance at December 31, 2003 and recorded an income tax provision of $1.2
million for the quarter ended March 31, 2004, which was recorded in discontinued
operations as shown in the table above. CNL-Capital anticipates recording income
tax provisions in future quarters to the extent it generates taxable earnings.
As of March 31, 2004, the CNL-Investments TRS had a deferred tax asset of $0.8
million. This TRS has not yet generated any taxable income. Therefore,
CNL-Investments has established a valuation allowance to completely offset the
deferred tax asset.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Information regarding the Company's market risk at December 31, 2003 is included
in its Annual Report on Form 10-K for the year ended December 31, 2003. The
material changes in the Company's market risk are discussed in Item 2 above.
Information regarding the Company's market risk relating to changes in interest
rates are incorporated herein by reference to Item 2, "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Interest Rate
Risk" herein.
Item 4. Controls and Procedures.
Quarterly Evaluation. Management carried out an evaluation as of March 31, 2004
of the effectiveness of the design and operation of the Company's "disclosure
controls and procedures," which management refers to as the Company's disclosure
controls. This evaluation was done under the supervision and with the
participation of management, including the Company's Chief Executive Officer and
Chief Financial Officer. Rules adopted by the Securities and Exchange Commission
(the "Commission") require that management present the conclusions of the Chief
Executive Officer and Chief Financial Officer about the effectiveness of the
Company's disclosure controls as of the end of the period covered by this
quarterly report.
CEO and CFO Certifications. Included as Exhibits 31.1 and 31.2 to this Quarterly
Report on Form 10-Q are forms of "Certification" of the Company's Chief
Executive Officer and Chief Financial Officer. The forms of Certification are
required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002. This
section of the Quarterly Report on Form 10-Q which you are currently reading is
the information concerning the evaluation referred to in the Section 302
certifications. This information should be read in conjunction with the Section
302 certifications for a more complete understanding of the topics presented.
Disclosure Controls and Procedures and Internal Control over Financial
Reporting. Disclosure controls and procedures are designed with the objective of
ensuring that information required to be disclosed in the Company's reports
filed or submitted under the Securities Exchange Act of 1934, such as this
Quarterly Report on Form 10-Q, is recorded, processed, summarized and reported
within the time periods specified in the Commission's rules and forms.
Disclosure controls and procedures are also designed with the objective of
ensuring that such information is accumulated and communicated to the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure.
Internal control over financial reporting is a process designed by, or under the
supervision of, the Company's Chief Executive Officer and Chief Financial
Officer, and effected by the Company's Board of Directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:
o pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of
our assets;
o provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that the Company's
receipts and expenditures are being made only in accordance with
authorizations of management or the Company's Board of Directors; and
o provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Company's
assets that could have a material adverse effect on the Company's
financial statements.
Limitations on the Effectiveness of Controls. Management, including the
Company's Chief Executive Officer and Chief Financial Officer, do not expect
that the Company's disclosure controls and procedures or the Company's internal
control over financial reporting will prevent all errors and all fraud. A
control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system
are met. Further, the design of a control system must reflect the fact that
there are resource constraints, and the benefits of controls must be considered
relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within the company have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management's
override of the control. The design of any system of controls also is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions; over time, controls may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
Conclusions. Based upon the evaluation, the Company's Chief Executive Officer
and Chief Financial Officer have concluded that, as of March 31, 2004 and
subject to the limitations noted above, the Company's disclosure controls and
procedures were effective at the reasonable assurance level to ensure that
material information relating to the Company and the Company's consolidated
subsidiaries is made known to management, including the Company's Chief
Executive Officer and Chief Financial Officer.
During the three months ended March 31, 2004, there were no significant changes
in the Company's internal control over financial reporting that has materially
affected, or are reasonably likely to materially affect, the Company's internal
control for financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings. Inapplicable.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchaser of
Equity Securities. Inapplicable.
Item 3. Defaults 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 Restaurant Properties, Inc. Second Amended and
Restated Articles of Incorporation, as amended by
Articles of Amendment to Second Amended and Restated
Articles of Incorporation of CNL Restaurant Properties,
Inc., as amended by Articles of Amendment to Second
Amended and Restated Articles of Incorporation of CNL
Restaurant Properties, Inc. (filed herewith).
3.2 Third Amended and Restated Bylaws of CNL Restaurant
Properties, Inc. (filed herewith).
4.1 Form of Stock Certificate (included as Exhibit 4.5 to the
Registrant's Registration Statement No. 33-78790 on Form
S-11 and incorporated herein by reference).
10.1 Form of Indemnification Agreement dated as of April 18,
1995, between the Registrant and each of James M. Seneff,
Jr., Robert A. Bourne, G. Richard Hostetter, J. Joseph
Kruse, Richard C. Huseman, John T. Walker, Jeanne A.
Wall, Lynn E. Rose and Edgar J. McDougall, dated as of
January 27, 1997, between the Registrant and Steven D.
Shackelford, dated as of February 18, 1998, between the
Registrant and Curtis B. McWilliams, and dated as of
September 1, 1999, between the Registrant and each of
Howard J. Singer, John L. Farren, Timothy J. Neville,
Michael I. Wood and Barry L. Goff (included as Exhibit
10.9 to the Registrant's Registration Statement No.
333-15411 on Form S-11 and incorporated herein by
reference).
10.2 Amended and Restated Agreement of Limited Partnership of
CNL APF Partners, LP (included as Exhibit 10.50 to
Amendment No. 2 to the Form S-4 and incorporated herein
by reference).
10.3 Franchise Receivable Funding and Servicing Agreement
dated as of October 14, 1999 between CNL APF Partners, LP
and Neptune Funding Corporation (included as Exhibit 10.5
to the Registrant's Form 10-K for the year ended December
31, 1999 and incorporated herein by reference).
10.4 Interim Wholesale Mortgage Warehouse and Security
Agreement dated as of September 18, 1998, and Amended
Agreement dated as of August 30, 1999 between CNL APF
Partners, LP and Prudential Securities Credit Corporation
(included as Exhibit 10.6 to the Registrant's Form 10-K
for the year ended December 31, 1999 and incorporated
herein by reference).
10.5 1999 Performance Incentive Plan (included as Exhibit 10.1
to Amendment No. 1 to the Form S-4 and incorporated
herein by reference).
10.6 Registration Rights Agreement by and among the
Registrant, Robert A. Bourne, Curtis B. McWilliams, John
T. Walker, Howard Singer, Steven D. Shackelford and CNL
Group, Inc., dated as of March 11, 1999 (included as
Exhibit 10.40 to Amendment No. 1 to the Form S-4 and
incorporated herein by reference).
10.7 Registration Rights Agreement by and among the
Registrant, Five Arrows Realty Securities L.L.C., James
M. Seneff, Jr., Robert A. Bourne, Curtis B. McWilliams
and CNL Group, Inc., dated as of March 11, 1999 (included
as Exhibit 10.41 to Amendment No. 1 to the Form S-4 and
incorporated herein by reference).
10.8 Employment Agreement by and between 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).
10.9 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).
10.10 Employment Agreement by and between Michael Wood and the
Registrant, dated August 31, 1999 (included as Exhibit
10.19 to the Registrant's Form 10-Q for the quarter ended
March 31, 2001 and incorporated herein by reference).
10.11 Employment Agreement by and between Brent Heaton and the
Registrant, dated September 29, 1999 (included as Exhibit
10.20 to the Registrant's Form 10-Q for the quarter ended
March 31, 2001 and incorporated herein by reference).
10.12 Addendum to Employment Agreement dated as of November 1,
1999, between the Registrant and Curtis McWilliams
(included as Exhibit 10.21 to the Registrant's Form 10-Q
for the quarter ended March 31, 2001 and incorporated
herein by reference). The following persons have signed a
substantially identical Addendum relating to their
respective employment agreements; Steve Shackelford
(dated November 1, 1999), John Walker (dated November 3,
1999), Barry Goff (dated November 1, 1999), and Brent
Heaton (dated November 3, 1999).
10.13 Addendum to Employment Agreement dated as of November 1,
1999, between the Registrant and Robert Chapin (included
as Exhibit 10.22 to the Registrant's Form 10-Q for the
quarter ended March 31, 2001 and incorporated herein by
reference). The following persons have signed a
substantially identical Addendum relating to their
respective employment agreements: Howard Singer (dated
November 1, 1999), Michael Wood (dated November 8, 1999)
and Timothy Neville (dated November 24, 1999).
10.14 Second Addendum to Employment Agreement dated as of June
16, 2000, between the Registrant and Curtis McWilliams
(included as Exhibit 10.23 to the Registrant's Form 10-Q
for the quarter ended March 31, 2001 and incorporated
herein by reference). The following persons have signed a
substantially identical Second Addendum relating to their
respective employment agreements: Howard Singer (dated
June 19, 2000), Robert Chapin (dated June 20, 2000) and
Brent Heaton (dated October 30, 2000).
10.15 Second Addendum to Employment Agreement dated as of
August 20, 2000, between the Registrant and Barry Goff
(included as Exhibit 10.24 to the Registrant's Form 10-Q
for the quarter ended March 31, 2001 and incorporated
herein by reference).
10.16 Second Addendum to Employment Agreement dated as of
October 24, 2000, between the Registrant and Michael Wood
(included as Exhibit 10.27 to the Registrant's Form 10-Q
for the quarter ended March 31, 2001 and incorporated
herein by reference).
10.17 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).
10.18 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).
10.19 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).
10.20 Letter Agreement dated December 15, 2003 between Bank of
America, N.A., CNL Financial VII, LP and CNL Restaurant
Capital, LP (included as Exhibit 10.20 to the
Registrant's Form 10-K for the year ended December 31,
2003 and incorporated herein by reference).
10.21 Employment Agreement dated as of May 5, 2003 by and
between CNL Franchise Network GP Corp. and Steven D.
Shackelford (included as Exhibit 10.21 to the
Registrant's Form 10-K for the year ended December 31,
2003 and incorporated herein by reference).
10.22 Employment Agreement dated as of May 5, 2003 by and
between CNL Franchise Network GP Corp. and Curtis B.
McWilliams (included as Exhibit 10.22 to the Registrant's
Form 10-K for the year ended December 31, 2003 and
incorporated herein by reference).
10.23 Employment Agreement dated as of January 1, 2004 by and
between CNL Restaurant Investments, Inc. and Thomas G.
Kindred, Jr. (filed herewith).
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a) as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-14(a) as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (filed herewith).
32.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (filed herewith).
(b) The Registrant filed no reports on Form 8-K during the quarter
ended March 31, 2004.
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 7th day of May, 2004.
CNL RESTAURANT PROPERTIES, INC.
By:/s/ Curtis B. McWilliams
------------------------------------
CURTIS B. MCWILLIAMS
Chief Executive Officer
(Principal Executive Officer)
By:/s/ Steven D. Shackelford
------------------------------------
STEVEN D. SHACKELFORD
Chief Financial Officer
(Principal Financial and Accounting
Officer)
EXHIBIT INDEX
(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 Restaurant Properties, Inc. Second Amended and
Restated Articles of Incorporation, as amended by
Articles of Amendment to Second Amended and Restated
Articles of Incorporation of CNL Restaurant Properties,
Inc., as amended by Articles of Amendment to Second
Amended and Restated Articles of Incorporation of CNL
Restaurant Properties, Inc. (filed herewith).
3.2 Third Amended and Restated Bylaws of CNL Restaurant
Properties, Inc. (filed herewith).
4.1 Form of Stock Certificate (included as Exhibit 4.5 to the
Registrant's Registration Statement No. 33-78790 on Form
S-11 and incorporated herein by reference).
10.1 Form of Indemnification Agreement dated as of April 18,
1995, between the Registrant and each of James M. Seneff,
Jr., Robert A. Bourne, G. Richard Hostetter, J. Joseph
Kruse, Richard C. Huseman, John T. Walker, Jeanne A.
Wall, Lynn E. Rose and Edgar J. McDougall, dated as of
January 27, 1997, between the Registrant and Steven D.
Shackelford, dated as of February 18, 1998, between the
Registrant and Curtis B. McWilliams, and dated as of
September 1, 1999, between the Registrant and each of
Howard J. Singer, John L. Farren, Timothy J. Neville,
Michael I. Wood and Barry L. Goff (included as Exhibit
10.9 to the Registrant's Registration Statement No.
333-15411 on Form S-11 and incorporated herein by
reference).
10.2 Amended and Restated Agreement of Limited Partnership of
CNL APF Partners, LP (included as Exhibit 10.50 to
Amendment No. 2 to the Form S-4 and incorporated herein
by reference).
10.3 Franchise Receivable Funding and Servicing Agreement
dated as of October 14, 1999 between CNL APF Partners, LP
and Neptune Funding Corporation (included as Exhibit 10.5
to the Registrant's Form 10-K for the year ended December
31, 1999 and incorporated herein by reference).
10.4 Interim Wholesale Mortgage Warehouse and Security
Agreement dated as of September 18, 1998, and Amended
Agreement dated as of August 30, 1999 between CNL APF
Partners, LP and Prudential Securities Credit Corporation
(included as Exhibit 10.6 to the Registrant's Form 10-K
for the year ended December 31, 1999 and incorporated
herein by reference).
10.5 1999 Performance Incentive Plan (included as Exhibit 10.1
to Amendment No. 1 to the Form S-4 and incorporated
herein by reference).
10.6 Registration Rights Agreement by and among the
Registrant, Robert A. Bourne, Curtis B. McWilliams, John
T. Walker, Howard Singer, Steven D. Shackelford and CNL
Group, Inc., dated as of March 11, 1999 (included as
Exhibit 10.40 to Amendment No. 1 to the Form S-4 and
incorporated herein by reference).
10.7 Registration Rights Agreement by and among the
Registrant, Five Arrows Realty Securities L.L.C., James
M. Seneff, Jr., Robert A. Bourne, Curtis B. McWilliams
and CNL Group, Inc., dated as of March 11, 1999 (included
as Exhibit 10.41 to Amendment No. 1 to the Form S-4 and
incorporated herein by reference).
10.8 Employment Agreement by and between 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).
10.9 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).
10.10 Employment Agreement by and between Michael Wood and the
Registrant, dated August 31, 1999 (included as Exhibit
10.19 to the Registrant's Form 10-Q for the quarter ended
March 31, 2001 and incorporated herein by reference).
10.11 Employment Agreement by and between Brent Heaton and the
Registrant, dated September 29, 1999 (included as Exhibit
10.20 to the Registrant's Form 10-Q for the quarter ended
March 31, 2001 and incorporated herein by reference).
10.12 Addendum to Employment Agreement dated as of November 1,
1999, between the Registrant and Curtis McWilliams
(included as Exhibit 10.21 to the Registrant's Form 10-Q
for the quarter ended March 31, 2001 and incorporated
herein by reference). The following persons have signed a
substantially identical Addendum relating to their
respective employment agreements; Steve Shackelford
(dated November 1, 1999), John Walker (dated November 3,
1999), Barry Goff (dated November 1, 1999), and Brent
Heaton (dated November 3, 1999).
10.13 Addendum to Employment Agreement dated as of November 1,
1999, between the Registrant and Robert Chapin (included
as Exhibit 10.22 to the Registrant's Form 10-Q for the
quarter ended March 31, 2001 and incorporated herein by
reference). The following persons have signed a
substantially identical Addendum relating to their
respective employment agreements: Howard Singer (dated
November 1, 1999), Michael Wood (dated November 8, 1999)
and Timothy Neville (dated November 24, 1999).
10.14 Second Addendum to Employment Agreement dated as of June
16, 2000, between the Registrant and Curtis McWilliams
(included as Exhibit 10.23 to the Registrant's Form 10-Q
for the quarter ended March 31, 2001 and incorporated
herein by reference). The following persons have signed a
substantially identical Second Addendum relating to their
respective employment agreements: Howard Singer (dated
June 19, 2000), Robert Chapin (dated June 20, 2000) and
Brent Heaton (dated October 30, 2000).
10.15 Second Addendum to Employment Agreement dated as of
August 20, 2000, between the Registrant and Barry Goff
(included as Exhibit 10.24 to the Registrant's Form 10-Q
for the quarter ended March 31, 2001 and incorporated
herein by reference).
10.16 Second Addendum to Employment Agreement dated as of
October 24, 2000, between the Registrant and Michael Wood
(included as Exhibit 10.27 to the Registrant's Form 10-Q
for the quarter ended March 31, 2001 and incorporated
herein by reference).
10.17 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).
10.18 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).
10.19 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).
10.20 Letter Agreement dated December 15, 2003 between Bank of
America, N.A., CNL Financial VII, LP and CNL Restaurant
Capital, LP (included as Exhibit 10.20 to the
Registrant's Form 10-K for the year ended December 31,
2003 and incorporated herein by reference).
10.21 Employment Agreement dated as of May 5, 2003 by and
between CNL Franchise Network GP Corp. and Steven D.
Shackelford (included as Exhibit 10.21 to the
Registrant's Form 10-K for the year ended December 31,
2003 and incorporated herein by reference).
10.22 Employment Agreement dated as of May 5, 2003 by and
between CNL Franchise Network GP Corp. and Curtis B.
McWilliams (included as Exhibit 10.22 to the Registrant's
Form 10-K for the year ended December 31, 2003 and
incorporated herein by reference).
10.23 Employment Agreement dated as of January 1, 2004 by and
between CNL Restaurant Investments, Inc. and Thomas G.
Kindred, Jr. (filed herewith).
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a) as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-14(a) as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (filed herewith).
32.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350 as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (filed herewith).
EXHIBIT 3.1
CNL RESTAURANT PROPERTIES, INC.
SECOND AMENDED AND RESTATED ARTICLES OF INCORPORTION, AS AMENDED BY ARTICLES OF
AMENDMENT TO SECOND AMENDED AND RESTATED ARTICLES OF
INCORPORATION OF CNL RESTAURANT PROPERTIES, INC., AS AMENDED BY ARTICLES OF
AMENDMENT TO SECOND AMENDED AND RESTATED ARTICLES OF
INCORPORATION OF CNL RESTAURANT PROPERTIES, INC.
EXHIBIT 3.2
THIRD AMENDED AND RESTATED BYLAWS OF
CNL RESTAURANT PROPERTIES, INC.
EXHIBIT 10.23
EMPLOYMENT AGREEMENT
THOMAS G. KINDRED, JR.
EXHIBIT 31.1
RULE 13a-14(a) CERTIFICATION OF CHIEF EXECUTIVE OFFICER
EXHIBIT 31.2
RULE 13a-14(a) CERTIFICATION OF CHIEF FINANCIAL OFFICER
EXHIBIT 32.1
SECTION 1350 CERTIFICATION OF CHIEF EXECUTIVE OFFICER
EXHIBIT 32.2
SECTION 1350 CERTIFICATION OF CHIEF FINANCIAL OFFICER