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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 June 30, 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
August 9, 2004.
CONTENTS
Part I Page
----
Item 1.Financial Statements:
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 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 8-15
Item 2.Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-33
Item 3.Quantitative and Qualitative Disclosures About
Market Risk 34
Item 4.Controls and Procedures 34-35
Part II
Other Information 36-39
Item 1. Financial Statements
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except for share data)
June 30, December 31,
2004 2003
------------------ -----------------
ASSETS
Real estate investment properties $ 540,373 $ 532,138
Net investment in direct financing leases 102,129 103,662
Real estate and restaurant assets held for sale 196,628 142,143
Mortgage loans held for sale 537 1,490
Mortgage, equipment and other notes receivable, net of allowance of
$6,780 and $13,964, respectively 308,842 320,900
Other investments 29,340 29,671
Cash and cash equivalents 11,512 36,955
Restricted cash 8,842 12,462
Receivables, net of allowance for doubtful accounts
of $1,376 and $872, respectively 3,222 3,382
Accrued rental income 27,394 25,836
Goodwill 56,260 56,260
Other assets 30,240 33,217
------------------ -----------------
$ 1,315,319 $ 1,298,116
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Revolver $ 7,500 $ 2,000
Note payable 168,536 182,560
Mortgage warehouse facilities 153,178 93,513
Subordinated note payable 33,750 43,750
Bonds payable 416,684 430,011
Due to related parties 34,779 25,038
Other payables 25,393 34,096
------------------ -----------------
Total liabilities 839,820 810,968
------------------ -----------------
Minority interests, including redeemable partnership interest 6,558 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 (10,960 ) (14,447 )
Accumulated distributions in excess of net earnings (347,178 ) (332,746 )
------------------ -----------------
Total stockholders' equity 468,941 479,886
------------------ -----------------
$ 1,315,319 $ 1,298,116
================== =================
See accompanying notes to condensed consolidated financial statements.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands except for share data and per share data)
Quarter ended Six months ended
June 30, June 30,
2004 2003 2004 2003
------------- ------------- --------------- -------------
Revenues:
Rental income from operating leases $ 14,323 $ 15,415 $ 28,892 $ 30,342
Earned income from direct financing leases 2,566 2,525 5,190 5,229
Interest income from mortgage, equipment and
other notes receivable 6,674 7,513 13,327 15,519
Investment and interest income 979 1,229 2,170 2,334
Other income 1,146 1,771 2,502 4,172
Net decrease in value of mortgage loans
held for sale, net of related hedge -- (203 ) -- (2,251 )
------------- ------------- --------------- -------------
25,688 28,250 52,081 55,345
------------- ------------- --------------- -------------
Expenses:
General operating and administrative 6,756 6,964 13,181 14,505
Interest expense 11,994 13,136 23,824 25,570
Property expenses, state and other taxes 93 208 242 475
Depreciation and amortization 2,954 3,103 5,770 6,289
Loss on termination of cash flow hedge 585 -- 940 --
Impairments and provisions on assets 1,010 2,496 1,557 4,802
------------- ------------- --------------- -------------
23,392 25,907 45,514 51,641
------------- ------------- --------------- -------------
Income 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 2,296 2,343 6,567 3,704
Minority interest in income of consolidated joint ventures (1,296 ) (545 ) (1,957 ) (1,413 )
Equity in earnings of unconsolidated joint ventures 31 29 65 59
Gain/(loss) on sale of assets -- -- 6 (6 )
------------- ------------- --------------- -------------
Income from continuing operations, net 1,031 1,827 4,681 2,344
Income from discontinued operations, net of income tax
provision 8,189 8,764 15,388 16,265
------------- ------------- --------------- -------------
Net income $ 9,220 $ 10,591 $ 20,069 $ 18,609
============= ============= =============== =============
Income per share of common stock (basic and diluted):
From continuing operations $ 0.02 $ 0.04 $ 0.10 $ 0.05
From discontinued operations 0.18 0.19 0.34 0.36
------------- ------------- --------------- -------------
Net income $ 0.20 $ 0.23 $ 0.44 $ 0.41
============= ============= =============== =============
Weighted average number of shares of common stock
outstanding 45,248,670 45,248,670 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)
Six months ended June 30, 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 income -- -- -- -- (78 ) (78 ) (78 )
Reclassification of cash
flow hedge losses to
statement of income -- -- -- -- 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 -- -- -- 20,069 -- 20,069 $ 20,069
Reclassification of cash
flow hedge losses to
statement of income -- -- -- -- 940 940 940
Current period adjustment to
recognize change in fair
value of cash flow
hedges, net of $2,036 in
tax provision -- -- -- -- 2,547 2,547 2,547
--------------
Total comprehensive income -- -- -- -- -- -- $ 23,556
==============
Distributions declared and
paid ($0.76 per share) -- -- -- (34,501 ) -- (34,501 )
------------ --------- ------------- -------------- ------------- -----------
Balance at June 30, 2004 45,248,670 $ 452 $ 826,627 $ (347,178 ) $ (10,960 ) $ 468,941
============ ========= ============= ============== ============= ===========
See accompanying notes to condensed consolidated financial statements.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six months ended
June 30,
2004 2003
------------------ -----------------
Cash flows from operating activities:
Net income $ 20,069 $ 18,609
Adjustments to reconcile net income to net cash provided by/(used
in) operating activities:
Depreciation and amortization 6,151 6,669
Amortization of deferred financing costs 2,685 2,321
Impairments and provisions on assets 2,261 7,978
Gain on sales of assets (1,309 ) (627 )
Increase in income taxes payable 1,053 --
Investment in mortgage loans held for sale -- (63 )
Collection on mortgage loans held for sale -- 2,817
Changes in inventories of real estate held for sale (72,672 ) 52,042
Changes in other operating assets and liabilities (4,323 ) (2,863 )
------------------ -----------------
Net cash provided by/(used in) operating activities (46,085 ) 86,883
------------------ -----------------
Cash flows from investing activities:
Additions to real estate investment properties (12,081 ) (287 )
Proceeds from sale of assets 17,299 7,723
Decrease in restricted cash 3,620 266
Collection on mortgage, equipment and other notes
receivable 12,284 9,774
------------------ -----------------
Net cash provided by investing activities 21,122 17,476
------------------ -----------------
Cash flows from financing activities:
Payment of stock issuance costs (1,493 ) (1,493 )
Proceeds from borrowing on revolver 24,000 19,892
Payment on revolver, note payable and subordinated note
payable (42,524 ) (27,888 )
Proceeds from borrowing on mortgage warehouse facilities 140,998 47,122
Payments on mortgage warehouse facilities (81,333 ) (93,803 )
Proceeds from issuance of bonds 5,000 --
Retirement of bonds payable (18,458 ) (10,541 )
Payment of bond issuance costs (489 ) (300 )
Loans from stockholder 10,900 10,209
Distributions to minority interest (1,822 ) (1,284 )
Distributions to stockholders (35,259 ) (34,501 )
------------------ ------------------
Net cash used in financing activities (480 ) (92,587 )
------------------ ------------------
Net (decrease)/increase in cash and cash equivalents (25,443 ) 11,772
Cash and cash equivalents at beginning of period, as restated 36,955 16,579
------------------ ------------------
Cash and cash equivalents at end of period $ 11,512 $ 28,351
================== ==================
See accompanying notes to condensed consolidated financial statements.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(In thousands)
Six months ended
June 30,
2004 2003
------------------ -------------------
Supplemental disclosures of cash flow information:
Interest paid $ 22,268 $ 24,427
================== ===================
Interest capitalized $ 16 $ 60
================== ===================
Income taxes paid $ 2,180 $ 3,960
================== ===================
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 and six months ended June 30, 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. and CNL Restaurant
Capital Corp. The Company's operations are divided into two business
segments. The real estate segment, operated principally through CNL
Restaurant Investments, Inc. ("CNL-Investments"), owns and manages a
portfolio of primarily long-term triple-net lease properties.
CNL-Investments provides portfolio management, property management and
dispositions, and opportunistically acquires real estate investments for
sale. In addition, CNL-Investments services approximately $503 million in
affiliate real estate portfolios and earns management fees related thereto.
The specialty finance segment is operated through the Company's
wholly-owned subsidiary CNL Restaurant Capital Corp. ("CNL-Capital"), 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 acquires restaurant real estate properties, which
are subject to triple-net lease, utilizing short-term debt and generally
sells the 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 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 and six
months ended June 30, 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. Real estate investment properties:
During the six months ended June 30, 2004 and 2003, the Company recorded
provisions for impairment of $0.7 million and $1.8 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.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters and six months ended June 30, 2004 and 2003
4. Real estate and restaurant assets held for sale:
Real estate and restaurant assets held for sale consists of the following:
(In thousands)
June 30, December 31,
2004 2003
----------------- -------------------
Land and buildings $ 195,365 $ 140,530
Restaurant assets 1,263 1,613
----------------- -------------------
$ 196,628 $ 142,143
================= ===================
CNL-Capital 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", 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, 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
Quarters and six months ended June 30, 2004 and 2003
4. Real estate and restaurant assets held for sale - Continued:
Operating results of discontinued operations are as follows:
(In thousands)
Quarters ended June 30, Six months ended June 30,
2004 2003 2004 2003
------------ -------------- ------------- -------------
Rental income $ 2,747 $ 3,347 $ 5,395 $ 7,457
Food and beverage income 3,739 3,513 7,557 6,933
Food and beverage expenses (3,717 ) (3,415 ) (7,725 ) (6,736 )
Other property related expenses (91 ) (430 ) (334 ) (1,075 )
Interest expense (774 ) (483 ) (1,491 ) (1,220 )
Impairment and provisions on assets (705 ) (1,072 ) (705 ) (3,176 )
------------ -------------- ------------- -------------
Earnings from discontinued operations 1,199 1,460 2,697 2,183
------------ -------------- ------------- -------------
Sales of real estate 75,566 59,524 127,742 115,857
Cost of real estate sold (66,577 ) (52,220 ) (111,818 ) (101,775 )
------------ -------------- ------------- -------------
Gain on disposal of discontinued
operations 8,989 7,304 15,924 14,082
------------ -------------- ------------- -------------
Income tax provision (1,999 ) -- (3,233 ) --
------------ -------------- ------------- -------------
Income from discontinued operations,
net $ 8,189 $ 8,764 $ 15,388 $ 16,265
============ ============== ============= =============
5. Borrowings:
In January 2004, the Company amended its subordinated note payable
agreement with the Bank, made 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 $11.88 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.
As of December 31, 2003, the Company, through CNL-Capital maintained a $100
million and a $160 million mortgage warehouse facility. In March 2004, the
$160 million mortgage warehouse facility was renewed with similar terms
until March 2005. Under this facility the Bank finances property
acquisitions at an advance rate of up to 97% of the real estate purchase
value. In May 2004, the $100 million warehouse facility was renewed until
June 2005. The amended agreement increased the facility advance rate for
real estate acquisitions from 90 percent to 92 percent of the real estate
purchase value. Advances under this mortgage warehouse facility continue to
bear interest at the rate of LIBOR plus a 0.90 percent price differential.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Quarters and six months ended June 30, 2004 and 2003
5. Borrowings- Continued:
In May 2004, the Company issued an additional $5 million note from its
Series 2003 offering that had closed in December 2003. The note is
collateralized by a pool of mortgage notes, bears interest at LIBOR plus
600 basis points and matures in 2011.
6. Related Party Transactions:
During the six months ended June 30, 2004, CNL Financial Group, Inc., an
affiliate, advanced an aggregate of approximately $10.9 million to the
Company in the form of demand balloon promissory notes. The notes are
uncollateralized, bear interest at LIBOR plus 2.5 percent with interest
payments and outstanding principal due upon demand. At June 30, 2004, $34.9
million in total demand loans, including accrued interest, are outstanding
and included in the due to related parties caption on the condensed
consolidated balance sheet.
7. Segment Information:
The following tables summarize the operating results for the Company's two
lines of business. Consolidating eliminations and other results of the
parent of CNL-Investments and CNL-Capital are reflected in the "other"
column.
Quarter ended June 30, 2004
(In thousands)
CNL- Consolidated
Investments CNL-Capital Other Totals
------------- --------------- ------------- --------------
Revenues $ 19,462 $ 6,888 $ (662 ) $ 25,688
------------- --------------- ------------- --------------
General operating and administrative 2,198 5,023 (465 ) 6,756
Interest expense 7,187 4,727 80 11,994
Property expenses, state and other taxes 93 -- -- 93
Depreciation and amortization 2,714 240 -- 2,954
Loss on termination of cash flow hedge -- 585 -- 585
Impairments and provisions on assets 925 85 -- 1,010
Minority interest net of equity in 23 1,242 -- 1,265
earnings
------------- --------------- ------------- --------------
13,140 11,902 (385 ) 24,657
------------- --------------- ------------- --------------
Discontinued operations:
Income/(loss) from discontinued
operations, net of income tax (2 ) 8,191 -- 8,189
------------- --------------- ------------- --------------
Net income $ 6,320 $ 3,177 $ (277 ) $ 9,220
============= =============== ============= ==============
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters and six months ended June 30, 2004 and 2003
7. Segment Information - Continued:
Quarter ended June 30, 2003
(In thousands)
CNL- Consolidated
Investments CNL-Capital Other Totals
------------- --------------- ------------ ----------------
Revenues $ 21,199 $ 7,753 $ (702 ) $ 28,250
------------- --------------- ------------ ----------------
General operating and administrative 2,516 4,955 (507 ) 6,964
Interest expense 6,928 6,429 (221 ) 13,136
Property expenses, state and other taxes 230 (22 ) -- 208
Depreciation and amortization 2,927 176 -- 3,103
Impairments and provisions on assets -- 2,496 -- 2,496
Minority interest net of equity in
earnings 28 488 -- 516
------------- --------------- ------------ ----------------
12,629 14,522 (728 ) 26,423
------------- --------------- ------------ ----------------
Discontinued operations:
Income from discontinued
operations, net of income tax 274 8,490 -- 8,764
------------- --------------- ------------ ----------------
Net income $ 8,844 $ 1,721 $ 26 $ 10,591
============= =============== ============ ================
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters and six months ended June 30, 2004 and 2003
7. Segment Information - Continued:
Six months ended June 30, 2004
(In thousands)
CNL- Consolidated
Investments CNL-Capital Other Totals
------------- --------------- ------------ ----------------
Revenues $ 39,567 $ 13,928 $ (1,414 ) $ 52,081
------------- --------------- ------------ ----------------
General operating and administrative 4,374 9,848 (1,041 ) 13,181
Interest expense 14,363 9,410 51 23,824
Property expenses, state and other taxes 242 -- -- 242
Depreciation and amortization 5,399 371 -- 5,770
Loss on termination of cash flow hedge -- 940 -- 940
Impairments and provisions on assets 1,199 358 -- 1,557
Minority interest net of equity in
earnings 30 1,862 -- 1,892
Gain on sale of assets (6) -- -- (6 )
------------- --------------- ------------ ----------------
25,601 22,789 (990 ) 47,400
------------- --------------- ------------ ----------------
Discontinued operations:
Income from discontinued
operations, net of income tax 1,388 14,000 -- 15,388
------------- --------------- ------------ ----------------
Net income $ 15,354 $ 5,139 $ (424 ) $ 20,069
============= =============== ============ ================
Assets at June 30, 2004 $ 805,256 $ 516,002 $ (5,939 ) $ 1,315,319
============= =============== ============ ================
Investments accounted for under the
equity method at June 30, 2004 $ 1,017 $ -- -- $ 1,017
============= =============== ============ ================
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters and six months ended June 30, 2004 and 2003
7. Segment Information - Continued:
Six months ended June 30, 2003
(In thousands)
CNL- Consolidated
Investments CNL-Capital Other Totals
------------- --------------- ------------ ----------------
Revenues $ 42,492 $ 14,425 $ (1,572 ) $ 55,345
------------- --------------- ------------ ----------------
General operating and administrative 5,912 9,775 (1,182 ) 14,505
Interest expense 13,854 12,086 (370 ) 25,570
Property expenses, state and other taxes 487 (12 ) -- 475
Depreciation and amortization 5,804 485 -- 6,289
Impairments and provisions on assets 1,758 3,044 -- 4,802
Minority interest net of equity in 55 1,299 -- 1,354
earnings
Loss on sale of assets 2 4 -- 6
------------- --------------- ------------ ----------------
27,872 26,681 (1,552 ) 53,001
------------- --------------- ------------ ----------------
Discontinued operations:
Income/(loss) from discontinued
operations, net of income tax (116 ) 16,381 -- 16,265
------------- --------------- ------------ ----------------
Net income $ 14,504 $ 4,125 $ (20 ) $ 18,609
============= =============== ============ ================
Assets at June 30, 2003 $ 812,771 $ 502,675 $ (3,905 ) $ 1,311,541
============= =============== ============ ================
Investments accounted for under the
equity method at June 30, 2003 $ 1,107 $ -- $ -- $ 1,107
============= =============== ============ ================
8. 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 is not 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 and select activities of CNL-Investments are conducted. The
CNL-Capital TRS recorded a current income tax provision of $2.0 million and
$3.2 million during the quarter and six months ended June 30, 2004,
respectively, all of which was allocated to discontinued operations. The
effective tax rate used by CNL-Capital approximated the statutory rate. No
income tax provision was recorded during the quarter and six months ended
June 30, 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 and six months ended June 30, 2004 and 2003
8. Income Tax: - Continued:
As of June 30, 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.
9. Subsequent Event
On August 9, 2004, the Company announced that it had entered into a
definitive Agreement and Plan of Merger with U.S. Restaurant Properties,
Inc. ("USRP"), a publicly traded real estate investment trust, which owns
or finances 789 freestanding, net lease properties located in 48 states
(the "Merger"). In the Merger, each share of Company common stock will be
converted into 0.7742 shares of USRP common stock and 0.16 newly issued
shares of USRP's 7.5% Series C Redeemable Convertible Preferred Stock ($25
liquidation preference). The exchange ratio is not subject to change and
there is no "collar" or minimum trading price for the shares of the
Company's common stock or USRP's common stock. The Merger is structured to
be tax-free to the stockholders of the Company and USRP.
The Merger is subject to certain conditions including approval by a
majority of the stockholders of the Company and USRP, and the consummation
of a minimum number of mergers between USRP and 18 affiliated limited
partnerships representing at least 75% of the aggregate purchase price for
all of the limited partnerships. The general partners of the 18 affiliated
limited partnerships are directors of the Company. The transaction is
expected to be consummated in the first quarter of 2005, but there can be
no assurance that the merger will be consummated by such time or at all.
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 (as defined below) 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 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. (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 June 30,
2004, had financial interests in approximately 1,000 properties diversified
among more than 116 restaurant concepts in 43 states. The Company's total real
estate holdings subject to lease (including properties classified as held for
sale) include over 668 properties. At June 30, 2004, the servicing portfolio of
net lease properties and mortgages consists of approximately 2,100 units, of
which over 1,100 are serviced on behalf of third parties.
The Company operates two business segments - real estate and specialty finance
o The real estate segment ("CNL-Investments"), operated through the
Company's wholly-owned subsidiary CNL Restaurant Investments, Inc.,
manages a portfolio of primarily long-term triple-net lease
properties. CNL-Investments provides portfolio management, property
management and dispositions, and opportunistically acquires real
estate investments for sale. In addition, CNL-Investments services
approximately $503 million in affiliate real estate portfolios and
earns management fees related thereto. Revenues from
CNL-Investments represented approximately 76 percent and 77 percent
of the Company's total revenues for the six months ended June 30,
2004 and 2003, respectively.
o The specialty finance segment consists of CNL Restaurant Capital,
LP ("CNL-Capital"), which is operated through a partnership with
the Company's wholly-owned subsidiary CNL Restaurant Capital Corp.,
CNL/CAS Corp., an affiliate of the Company's Chairman, and Bank of
America ("the Bank"). 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 a
triple-net lease, utilizing short-term debt and generally selling
such properties at a profit. Revenues from CNL-Capital represented
approximately 24 percent and 23 percent of the Company's total
revenues for the six months ended June 30, 2004 and 2003,
respectively.
When the Company was created in 1994, the intent was to provide stockholders
with liquidity by December 31, 2005 through either listing on a national
exchange, merging with another public company or liquidating its assets. In
furtherance of this goal, on August 9, 2004, the Company announced that it had
entered into a definitive Agreement and Plan of Merger with U.S. Restaurant
Properties, Inc. ("USRP"), a publicly traded real estate investment trust, which
owns 789 freestanding, net lease properties located in 48 states (the "Merger").
In the Merger, each share of Company common stock will be converted into 0.7742
shares of USRP common stock and 0.16 newly issued shares of USRP's 7.5% Series C
Redeemable Convertible Preferred Stock ($25 liquidation preference). The
exchange ratio is not subject to change and there is no "collar" or minimum
trading price for the shares of the Company's common stock or USRP's common
stock. The Merger is expected to be tax-free to the stockholders of the Company
and USRP.
The Merger is subject to certain conditions including approval by a majority of
the stockholders of the Company and USRP, and the consummation of a minimum
number of mergers between USRP and 18 affiliated limited partnerships
representing at least 75% of the aggregate purchase price for all of the limited
partnerships. The general partners of the 18 affiliated limited partnership are
directors of the Company. The transaction is expected to be consummated in the
first quarter of 2005, but there can be no assurance that the merger will be
consummated by such time or at all.
The Company has received opinions from Bank of America Securities and Legg Mason
Wood Walker, Incorporated that, as of August 9, 2004, the merger consideration
to be received by the stockholders of the Company is fair from a financial point
of view.
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 and
CNL-Capital, issuance of debt and sales of common and/or preferred stock.
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. Through March
31, 2004, distributions had been primarily funded by CNL-Investments' activities
because the Company had elected to reinvest the earnings of CNL-Capital as
contemplated by the agreement with the partners of CNL-Capital. CNL-Capital made
its first distribution to the Company in June 2004. The remainder of the
distributions to date have been partially 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. The Company declared distributions of $34.5 million or $0.76
per share to its stockholders for each of the six months ended June 30, 2004 and
2003. The Company's cash used in operations for the six months ended June 30,
2004 was $46.1 million and cash provided by operations for the six months ended
June 30, 2003 was $86.9 million. Because increases in assets held for sale are
funded through warehouse facilities, management believes that a better indicator
of liquidity generated from operations would exclude the changes in the held for
sale loans and real estate portfolio. Net cash provided by operating activities
excluding changes in mortgage loans and inventories of real estate held for sale
was $26.6 million and $32.1 million for the six months ended June 30, 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 $10.9 million and $10.2 million during
the six months ended June 30, 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 June 30, 2004 was $34.9 million relating to
various advances received from December 2002 through June 30, 2004. As of June
30, 2004, the Chairman, through CFG, had received 1,753,076 shares of the
Company's stock in exchange for $29.8 million in cash, including the conversion
of amounts previously treated as advances. This provided capital that allowed
the Company to reinvest the earnings generated by CNL-Capital. 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 or loan additional funds to the Company in order to guarantee that the
Company maintains its historical distribution level to stockholders. Selling
additional shares may dilute a shareholder's investment and may reduce the value
a shareholder would receive in a future liquidity event.
CNL-Capital
CNL-Capital's current demand for funds includes (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 $165.0 million of new originations of real
estate properties that exceeded the $107.6 million received from the sales of
properties. In addition, CNL-Capital utilized $10 million in January 2004 to pay
down a portion of the Subordinated Note Payable (as defined below) and modify
the existing terms. CNL-Capital also paid margin calls of $5.8 million during
the six months ended June 30, 2004 to reduce the level of debt financing as
required by the lenders due to delinquency levels or restructures of mortgage
loan payments from borrowers.
During the six months ended June 30, 2004 and 2003, CNL-Capital 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 $9.7 million and $31.9 million at
June 30, 2004 and December 31, 2003, respectively.
CNL-Capital's long-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 long-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
severely limiting the securitization financing channel for the franchise asset
class. Rising delinquencies in securitized loan pools, falling treasury rates,
macroeconomic uncertainties combined with sluggish restaurant sales within
certain concepts all contributed to the volatility. Investors required higher
interest rates on securities issued in securitizations while rating 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 beginning in 2000,
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 originations on its traditional core product of 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, combined with a
maximum gain on the sale.
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 enhancement
from the Company. This additional capital requirement along with lower than
expected gains from property sales could adversely affect the Company's
liquidity.
The chart below illustrates cash flows from Investment Property Sales proceeds
and the cost of properties sold as follows:
(In millions)
For the six months ended June 30,
2004 2003
-------------- ----------------
Proceeds from Investment Property Sales $ 107.5 $ 111.5
============== ================
Cost of properties sold under the Investment Property
Sales program $ 93.5 $ 98.3
============== ================
Generally accepted accounting principles require that investment properties held
for sale be accounted for as discontinued operations. A significant element of
the ongoing activities of CNL-Capital 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 CNL-Capital (without treating the Investment Property Sales
Program as discontinued operations) for each of the periods presented:
(In millions)
For the quarters ended For the six months ended
June 30, June 30,
2004 2003 2004 2003
------------- ------------- --------------- ----------------
Revenues:
Sale of real estate $ 67.5 $ 55.2 $ 107.5 $ 111.5
Rental income 2.7 2.6 5.2 6.0
Other revenue items 7.0 7.8 14.1 14.4
------------- ------------- --------------- ----------------
77.2 65.6 126.8 131.9
------------- ------------- --------------- ----------------
Expenses:
Cost of real estate sold 58.9 48.5 93.5 98.3
Interest expense 5.5 6.9 10.9 13.3
Depreciation and amortization 0.3 0.2 0.5 0.5
Other expenses 7.3 8.3 13.6 15.7
------------- ------------- --------------- ----------------
72.0 63.9 118.5 127.8
------------- ------------- --------------- ----------------
Pre-tax income 5.2 1.7 8.3 4.1
Income tax provision (2.0) -- (3.2 ) --
------------- ------------- --------------- ----------------
Net income $ 3.2 $ 1.7 $ 5.1 $ 4.1
============= ============= =============== ================
Management expects continued demand for the Investment Property Sales Program
but continues to study other sales channels to market net lease assets. Despite
selling 56 properties versus 91 properties during the six months ended June 30,
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 six months ended June 30, 2004 and 2003,
CNL-Capital originated $165.0 million and $45.9 million in net leases
respectively. Management expects strengthening demand for its core triple-net
lease financing during the rest of 2004 but acknowledges that the demand is
impacted by low interest rates and the following factors:
o Identified lease transactions have been lost to competitors
offering mortgage debt financing. With 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 and earns a fee for these referrals.
Management continues to monitor the potential re-emergence 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. Net lease originations provide inventory necessary to
execute the Investment Property Sales Program and CNL-Capital typically profits
from the leases while holding them. At June 30, 2004, CNL-Capital was involved
in several opportunities for net lease originations with $85 million approved
for funding and accepted by the client, and an additional $144 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 six months ended June 30, 2004, CNL-Capital used its "net spread" to
pay operating expenses and used borrowings on its warehouse facilities to fund
new real estate originations. 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 six months ended June 30, 2004 and 2003,
CNL-Capital made $5.8 million and $2.6 million in margin calls, respectively. Of
the $5.8 million payment in 2004, $5.3 million was required by a lender when
CNL-Capital provided debt service relief to a borrower/tenant who was
experiencing financial difficulties, as described below in "Liquidity Risks."
CNL-Capital has the following borrowing sources at June 30, 2004, with the
stated total capacity and interest rate:
In thousands
Amount used Capacity Maturity Interest rate (3)
----------------- ------------- --------------- -------------------
Note payable (1) $ 167,931 $ 167,931 Jun 2007 2.35%
Mortgage warehouse facilities 153,178 260,000 Annual 2.58%
Subordinated note payable 33,750 33,750 Dec 2008 7.00%
Series 2001-4 bonds payable (2) 35,520 35,520 2009 - 2013 8.90%
----------------- -------------
$ 390,379 $ 497,201
================= =============
(1) Average rate excludes the impact of hedge transactions that bring the
total average rate to 5.75 percent.
(2) Includes $5,157 in bonds held by CNL-Investments eliminated upon
consolidation in Company's condensed consolidated financial statements.
(3) Excludes debt issuance and other related costs.
Note Payable. 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.
Amounts outstanding were $167.9 million and $182.0 million as of June 30, 2004
and December 31, 2003, respectively. The decrease was partially due to payments
of principal in accordance with the debt agreement. The decrease was also due to
the lender requiring the payment of $5.8 million in the form of margin calls to
reduce the level of financing as a result of delinquency levels or restructures
of payments due from borrowers. In accordance with the terms of the Note Payable
and related hedging agreements, CNL-Capital unwound portions of the hedge
instrument as a result of the pay downs from the margin calls, resulting in
losses on termination of cash flow hedge of $0.9 million during 2004.
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 93 percent of the original real estate cost. As of June
30, 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 2005. At June 30, 2004, CNL-Capital had
approximately $12.0 million in capital supporting its loan and lease portfolio
financed through its mortgage warehouse facilities. Amounts outstanding under
the mortgage warehouse facilities were $153.2 million and $93.5 million as of
June 30, 2004 and December 31, 2003, respectively. The increase in the balance
outstanding resulted from the $165.0 million in new net lease originations
funded by these facilities.
Subordinated Note Payable. During 2000, the Bank provided CNL-Capital with a
$43.75 million subordinated note payable (the "Subordinated Note Payable").
Amounts outstanding were $33.75 million and $43.75 million at June 30, 2004 and
December 31, 2003, respectively. 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 Note
Payable. As part of the repayment, CNL-Capital and the Bank modified the terms
of the Subordinated Note Payable. The Bank extended the maturity date on the
Subordinated Note Payable 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 $11.88 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 requirement for CNL-Capital to pay down the Subordinated
Note Payable 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 Note Payable as part of the renegotiations.
Prior to the renegotiations, only CNL-Capital had provided a guaranty on the
Subordinated Note Payable.
Bonds Payable. In May 2001, CNL-Capital issued bonds collateralized by a pool of
mortgages. 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 ten percent of the aggregate amounts due under the
loans at the time of issuance. Amounts outstanding were $35.5 and $38.9 at June
30, 2004 and December 31, 2003, respectively.
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 alternative borrowing sources.
Liquidity Risks
In addition to the liquidity risks discussed above in connection with the
Investment Property Sales Program, 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 rental payments, and interest and principal
payments could be interrupted. At present, most of these tenants and borrowers
continue to pay rent, principal and interest substantially in accordance with
lease and 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
require an immediate pay-down of the related debt and may restrict the Company's
ability to find alternative financing for these specific assets. 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 reflected such charge in the statement
of income through June 30, 2004. However, impairment charges may be required in
future periods based upon changing circumstances.
In March 2004, CNL-Capital provided temporary debt service relief to a
borrower/tenant who was experiencing liquidity difficulties. CNL-Capital agreed
to modify the interest rate due on the outstanding debt over the next twelve
months on eight mortgage loans to provide debt service relief. Repayment terms
are scheduled to return 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, and as required
by the lender, the Company paid down approximately $5.3 million under its Note
Payable. 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 impact its
ability to engage in future net lease 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 two securitizations (referred to as the 1998-1
and 1999-1 residual interests), the assets and liabilities of which are not
consolidated in the Company's financial statements. The following table shows
the assets and the related bonds outstanding in each securitization pool at June
30, 2004:
(In thousands)
Mortgage loans Bonds outstanding
in pool at par at face value (1)
------------------ -------------------
Loans and debt supporting 1998-1 Certificates issued
by CNL Funding 1998-1, LP $ 177,144 $ 175,302
Loans and debt supporting 1999-1 Certificates issued
by CNL Funding 1999-1, LP 222,467 222,467
------------------ -------------------
$ 399,611 $ 397,769
================== ===================
(1) Certain bonds in both the 1998-1 and 1999-1 pools are owned by
CNL-Investments; the aggregate net carrying value of $27,360 appears as
investments in the condensed consolidated financial statements of the
Company.
CNL-Investments
CNL-Investments' demand for funds are predominantly interest expense, operating
expenses, acquisitions of properties 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, proceeds from
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 $1.8 million and
$4.3 million at June 30, 2004 and December 31, 2003, respectively.
CNL-Investments' management believes the availability on its revolver 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 from cash from operating activities and from
debt and equity offerings.
Indebtedness
CNL-Investments has the following borrowing sources at June 30, 2004, with the
stated total capacity and interest rate:
(In thousands)
Amount Used Capacity Maturity Interest Rate (1)
-------------- -------------- --------------- ------------------
Revolver $ 7,500 $ 30,000 July 2005 3.39%
Note payable 605 605 2005 4.35%
Series 2000-A bonds payable 243,579 243,579 2009-2017 7.94%
Series 2001 bonds payable 114,770 114,770 Oct 2006 1.59%
Series 2003 bonds payable 27,971 27,971 2005-2010 5.67%
-------------- --------------
$ 394,425 $ 416,925
============== ==============
(1) Excludes debt issuance and other related costs.
Revolver. CNL-Investments' short-term debt consists of a $30 million revolving
line of credit (the "Revolver") 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. In June 2004, CNL Investments amended the terms of
the Revolver to extend the maturity date to July 2005. Amounts outstanding were
$7.5 million and $2.0 million at June 30, 2004 and December 31, 2003,
respectively.
Note Payable. At June 30, 2004, the Company had $0.6 million outstanding
relating to a Note Payable to CNL Bank, an affiliate. Amounts outstanding are
collateralized by two mortgages on certain real property, bear interest at LIBOR
plus 325 basis points per annum and require monthly interest only payments until
maturity in August and December 2005.
Bonds Payable. CNL-Investments has medium-term note and long-term bond
financing, referred to collectively as bonds payable. 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. In May 2004,
CNL-Investments issued an additional $5 million note from its Series 2003
offering that had closed in December 2003. The note is collateralized by a pool
of mortgage notes, bears interest at LIBOR plus 600 basis points and matures in
2011. The $5 million in proceeds from the issuance of the notes were used to pay
down short-term debt.
CNL-Investments provides a guaranty of up to ten percent of CNL-Capital's Note
Payable and on the $160 million Warehouse Credit Facility with the Bank. The
Company also provides a 100 percent guaranty on CNL-Capital's Subordinated Note
Payable.
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 alternative borrowing sources.
Liquidity Risks
Liquidity risks within CNL-Investments include the potential that a tenant's or
borrower's financial condition could deteriorate, rendering it unable to make
lease payments or payments of interest and principal on mortgage and equipment
notes receivable. 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. This could expose
CNL-Investments to successor liabilities and further affect liquidity.
Management is aware of multi-unit tenants that are 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 June 30, 2004. Management believes it has recorded an
appropriate impairment charge at June 30, 2004, based on its assessment of each
tenants' financial difficulties and its knowledge of the properties. However,
impairment charges may be required in future periods based upon changing
circumstances.
In October 2003, Chevy's Holding, Inc. and numerous operating subsidiaries
("Chevy's"), a tenant of CNL-Investments, filed for voluntary bankruptcy under
the provisions of Chapter 11. Chevy's operates the Chevy's, Rio Bravo and Fuzio
concepts. As of the bankruptcy filing, CNL-Investments owned 23 Chevy's units
with a total initial investment of $56.6 million. Through August 9, 2004,
Chevy's had rejected the leases on 19 of the 23 sites. Management has recorded
impairments relating to some of these sites. Through August 9, 2004 management
has sold three sites, re-leased one site and expects the remaining rejected
sites to be re-leased or sold. Chevy's has paid rent on the four sites whose
leases have not been rejected since filing bankruptcy. As of August 9, 2004 all
but one of the properties were pledged as collateral for the Series 2000-A and
Series 2001 triple net lease bonds payable.
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. As of
the bankruptcy filing, CNL-Investments owned 12 units, with a total initial
investment of $12.9 million. All twelve properties were pledged as collateral
for the Series 2000-A triple net lease bonds payable and as of August 9, 2004,
Ground Round had closed nine of these sites. As of August 9, 2004, Ground Round
had rejected the leases on seven sites, is expected to affirm the leases on four
sites and expects to assign the lease on the remaining site to a franchisee. As
of August 9, 2004, CNL Investments had recorded impairments of approximately
$0.1 million.
In March 2004, CNL-Investments provided temporary rent forbearance to a tenant
who was 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 on cash flows
of CNL-Investments over the next twelve months but the cash flows are expected
to 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 temporarily
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 June 30, 2004 the Company owned, through an
investment of $1.3 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 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 bankruptcy filings of Chevy's and Ground Round, 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
payable maturing in 2006. The Series 2000-A and Series 2001 bonds payable
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 required performance cash flow ratios within the Series 2000-A bonds
payable due primarily to tenant defaults from the Chevy's and Ground Round
bankruptcies described above. As a result, cash flow normally exceeding the
scheduled principal and interest payments is required to be directed toward
additional debt reduction. For the six months ended June 30, 2004, the Company
was required to use cash from operations to make additional debt reductions of
approximately $1.7 million as a result of exceeding certain ratios in the net
lease pools. The Company is actively seeking new tenants or buyers for these
properties that will result in improved performance under these ratios.
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 $399.6 million in loans transferred to unconsolidated trusts that
serve as collateral for the long-term bonds discussed in "Liquidity and Capital
Resources - CNL-Capital - Indebtedness". 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 June 30, 2004, the
Company's variable rate debt includes the following:
o $7.5 million on its Revolver;
o $153.2 million on its mortgage warehouse facilities;
o $167.9 million on the June 2002 five-year financing, of which $134
million are subject to an interest-rate swap;
o $114.8 million outstanding on the Series 2001 bonds payable, of which
$113 million are subject to an interest rate cap; and
o $28.0 million outstanding on the Series 2003 bonds payable, all of
which is subject to an interest rate cap.
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 income.
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 that
qualify for hedge accounting 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 adversely affect
liquidity and capital resources.
Management estimates that a one-percentage point increase in short-term interest
rates as of June 30, 2004 would have resulted in additional interest costs of
approximately $1.4 million. This sensitivity analysis contains certain
simplifying assumptions (for example, it does not consider the impact of changes
in prepayment risk or credit spread risk). Therefore, although it gives an
indication of the Company's exposure to interest rate change, it is not intended
to predict future results and the Company's actual results will likely vary.
Management believes inflation has not significantly affected the Company's
earnings because the inflation rate has remained 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.
Results from Operations
The Company generated net income of $9.2 million and $20.1 million for the
quarter and six months ended June 30, 2004, respectively as compared to $10.6
million and $18.6 million for the comparable periods in 2003. Net income
decreased 13 percent for the quarter ended June 30, 2004 as compared to the same
quarter in 2003, while the six months ended June 30, 2004 posted an eight
percent increase in net income over the comparable period in 2003 as a result of
several factors. The decline in net income during the quarter ended June 30,
2004 as compared with the same period in 2003 was primarily due to CNL-Capital
recording an income tax provision in 2004, as further described below, and
CNL-Investments recording lower rental revenues due to bankruptcies of two
tenants. The decrease in net income was partially offset due to the Company
incurring less impairment losses and reserves in 2004 as compared to 2003
relating to the properties and loans in the portfolio. No income tax provision
was recorded in 2003 because the 2003 provision was offset by the recognition of
deferred tax assets that had been previously subject to a valuation allowance.
Net income has increased between the comparative six-month periods presented,
primarily as a result of lower general operating and administrative expenses and
decreased impairment losses and reserves, partially offset by the income tax
provision recorded in 2004. Net income also increased due to lower interest
expense in 2004.
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 income. Company net income is as follows:
For the quarters ended June 30,
% of % of
Net income by segment (in Millions) 2004 Total 2003 Total
--------------- --------- ----------- ----------
CNL-Investments $ 6.3 68% $ 8.9 84%
CNL-Capital 3.2 35 1.7 16
Other holding company results and
consolidating eliminations (0.3) (3) -- --
--------------- --------- ----------- ----------
Net income $ 9.2 100% $ 10.6 100%
=============== ========= =========== ==========
For the six months ended June 30,
% of % of
Net income by segment (in Millions) 2004 Total 2003 Total
--------------- --------- ----------- ----------
CNL-Investments $ 15.4 77% $ 14.5 78%
CNL-Capital 5.1 25 4.1 22
Other holding company results and
consolidating eliminations (0.4) (2) -- --
--------------- --------- ----------- ----------
Net income $ 20.1 100 % $ 18.6 100%
=============== ========= =========== ==========
Revenues are discussed based on the individual segment results beginning with
the results of CNL-Investments:
For the quarters ended June 30,
CNL-Investments revenues by % of % of
line item (in Millions) 2004 Total 2003 Total
-------------- -------- ------------ ---------
Rental income from operating
leases and earned income from
direct financing leases $ 16.8 86% $ 17.8 84%
Interest income from mortgage,
equipment and other notes receivable 1.2 6 1.1 5
Investment and interest income 1.1 6 1.2 6
Other income 0.4 2 1.1 5
-------------- -------- ------------ ---------
Total segment revenues $ 19.5 100% $ 21.2 100%
============== ======== ============ =========
For the six months ended June 30,
CNL-Investments revenues by % of % of
line item (in Millions) 2004 Total 2003 Total
-------------- -------- ------------ ---------
Rental income from operating
leases and earned income from
direct financing leases $ 34.1 86% $ 35.6 84%
Interest income from mortgage,
equipment and other notes receivable 2.4 6 2.2 5
Investment and interest income 2.2 6 2.2 5
Other income 0.9 2 2.5 6
-------------- -------- ------------ ---------
Total segment revenues $ 39.6 100% $ 42.5 100%
============== ======== ============ =========
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 decreased during the
quarter and six months ended June 30, 2004 as compared to comparable
periods in 2003 due to lower rental revenues in connection with tenant
bankruptcies including Chevy's and Ground Round.
o Interest income from mortgage, equipment and other notes receivable
increased slightly as a result of the purchase of approximately $26.1
million in mortgage loans from CNL-Capital in December 2003.
CNL-Investments combined these mortgage loans with other mortgage loans
it previously owned and in December 2003, issued notes ("bonds
payable") 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 decreased during the quarter and six months ended June 30,
2004 as compared to the comparable periods in 2003 as a result of
decreased billings of direct costs to third parties using
CNL-Investments for property management services. During 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 June 30, 2004.
The revenues of CNL-Capital are generally more variable than those of
CNL-Investments. The following table provides additional information relating to
the revenues of this segment:
For the quarters ended June 30,
CNL-Capital revenues by % of % of
line item (in Millions) 2004 Total 2003 Total
----------- -------- ------------ ---------
Interest income from mortgage
equipment and other notes
receivable $ 5.5 80% $ 6.5 83%
Investment and interest income 0.1 1 0.2 3
Net decrease in value of mortgage
loans held for sale, net of related hedge -- -- (0.2) (3)
Other income 1.3 19 1.3 17
----------- -------- ------------ ---------
$ 6.9 100% $ 7.8 100%
=========== ======== ============ =========
For the six months ended June 30,
CNL-Capital revenues by % of % of
line item (in Millions) 2004 Total 2003 Total
----------- -------- ------------ ---------
Interest income from mortgage
equipment and other notes
receivable $ 10.9 78% $ 13.4 93%
Investment and interest income 0.4 3 0.4 3
Net decrease in value of mortgage
loans held for sale, net of related hedge -- -- (2.3) (16)
Other income 2.6 19 2.9 20
----------- -------- ------------ ---------
$ 13.9 100% $ 14.4 100%
=========== ======== ============ =========
o Interest income from mortgage, equipment and other notes receivable
decreased 15 percent and 19 percent for the quarter and six months
ended June 30, 2004, respectively, as compared to the same periods in
2003 partially due to the sale of $26.1 million in mortgage 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 and six
months ended June 30, 2004. This was the result of CNL-Capital's sale
in December 2003 of its remaining mortgage loans held for sale to
CNL-Investments, which then re-designated these loans as held for
investment purposes and issued bonds collateralized by the loans.
During the six months ended June 30, 2003, CNL-Capital recorded a $2.3
million decline in the fair value of these loans held for sale, net of
related hedge and net of estimated potential default losses.
Expenses
Expenses decreased for the quarter and six months ended June 30, 2004 from the
comparable periods 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 Note Payable 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, legal and other professional expenses. The following tables
illustrate the comparative period expenses by segment:
For the quarters ended June 30,
General operating and administrative % of % of
expenses by segment (in Millions) 2004 Total 2003 Total
----------- -------- ------------ ---------
CNL-Investments $ 2.2 32% $ 2.5 36%
CNL-Capital 5.0 74 5.0 71
Other holding company results and
consolidating eliminations (0.4) (6) (0.5) (7)
----------- -------- ------------ ---------
Total general operating and
administrative expenses $ 6.8 100% $ 7.0 100%
=========== ======== ============ =========
For the six months ended June 30,
General operating and administrative % of % of
expenses by segment (in Millions) 2004 Total 2003 Total
----------- -------- ------------ ---------
CNL-Investments $ 4.4 33% $ 5.9 40%
CNL-Capital 9.9 75 9.8 68
Other holding company results and
consolidating eliminations (1.1) (8) (1.2) (8)
----------- -------- ------------ ---------
Total general operating and
administrative expenses $ 13.2 100% $ 14.5 100%
=========== ======== ============ =========
o CNL-Investments' general operating and administrative expenses
decreased by 12 percent and 25 percent for the quarter and six months
ended June 30, 2004, respectively, as compared to the same periods 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 remained
fairly constant during the quarter and six months ended June 30, 2004
as compared with similar periods in 2003.
Interest expense constitutes one of the most significant operating expenses. A
portion of interest expense is also included in operating results from
discontinued operations. Components of interest expense from continuing
operations are as follows:
For the quarters ended June 30,
Interest expense by segment (in % of % of
Millions) 2004 Total 2003 Total
---------- -------- ------------ ---------
CNL-Investments $ 7.2 60% $ 6.9 53%
CNL-Capital 4.7 39 6.4 49
Other holding company results and
consolidating eliminations 0.1 1 (0.2) (2)
---------- -------- ------------ ---------
Total interest expense $ 12.0 100% $ 13.1 100%
========== ======== ============ =========
For the six months ended June 30,
Interest expense by segment (in % of % of
Millions) 2004 Total 2003 Total
---------- -------- ------------ ---------
CNL-Investments $ 14.3 60% $ 13.9 55%
CNL-Capital 9.4 39 12.1 47
Other holding company results and
consolidating eliminations 0.1 1 (0.4) (2)
---------- -------- ------------ ---------
Total interest expense $ 23.8 100% $ 25.6 100%
========== ======== ============ =========
o CNL-Investments had a slight increase in interest expense for the
quarter and six months ended June 30, 2004 from the comparable periods
in 2003 due to CNL-Investments issuing bonds payable in December 2003,
collateralized by approximately $46.6 million of mortgage loans.
o CNL-Capital had a 27 percent and 22 percent decrease in interest
expense for the quarter and six months ended June 30, 2004,
respectively, from the comparable periods in 2003. The decrease in
interest expense was partially the result of the $10 million pay down
on the Subordinated Note Payable and the related decrease of the
interest rate on this facility from 8.5 percent to 7 percent in January
2004. Interest expense also decreased because CNL-Capital paid down the
Mortgage Warehouse Facility by approximately $12.3 million in December
2003 when it sold the mortgage loans receivable to CNL-Investments, as
described above. As a result of the sale of these mortgage loans
receivable, CNL-Capital terminated the fair value hedge associated with
the mortgage loans receivable and eliminated the interest expense on
the hedge instrument. As a result of these transactions, the weighted
average balance outstanding, on which interest is calculated, was lower
during 2004 as compared to the same period in 2003.
Depreciation and amortization expenses primarily reflect the level of assets
invested in leased properties held by CNL-Investments. A portion of these
expenses are also reflected as a component of discontinued operations.
CNL-Capital recorded a loss on termination of cash flow hedge of $0.6 million
and $0.9 million for the quarter and six months ended June 30, 2004,
respectively. In conjunction with the Company paying margin calls of
approximately $5.8 million, as described above in "Liquidity and Capital
Resources -- CNL-Capital -- Indebtedness -- Note Payable," the Company unwound a
portion of its cash flow hedge to comply with its hedge agreement. No such loss
was recorded during the same periods in 2003.
Impairments and provisions on assets consist of bad debt expense relating to
receivables that are 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 June 30,
Impairments and provisions on % of % of
assets (in Millions) 2004 Total 2003 Total
----------- -------- ------------ ---------
CNL-Investments $ 0.9 90% $ -- --%
CNL-Capital 0.1 10 2.5 100
----------- -------- ------------ ---------
Total impairments and provisions
on assets $ 1.0 100% $ 2.5 100%
=========== ======== ============ =========
For the six month ended June 30,
Impairments and provisions on % of % of
assets (in Millions) 2004 Total 2003 Total
----------- -------- ------------ ---------
CNL-Investments $ 1.2 75% $ 1.8 38%
CNL-Capital 0.4 25 3.0 62
----------- -------- ------------ ---------
Total impairments and provisions
on assets $ 1.6 100% $ 4.8 100%
=========== ======== ============ =========
o CNL-Investments recorded impairment provisions of $0.9 million and $1.2
million for the quarter and six months ended June 30, 2004,
respectively, excluding impairments on properties treated as
discontinued operations as described below. This segment recorded $1.8
million in impairment provisions for the six months ended June 30,
2003, and no such charges were recorded during the quarter ended June
30, 2003. The impairments recorded during 2004 and 2003 related
primarily to properties previously leased to Chevy's, which declared
bankruptcy in 2003. The impairments represented the difference between
the net carrying value of the properties and their estimated fair
values.
o CNL-Capital recorded provisions for loan losses of $2.2 million and
$2.6 million for the quarter and six months ended June 30, 2003,
respectively, associated with non-performing loans. CNL-Capital did not
record similar provisions during the comparable periods in 2004.
CNL-Capital also recorded $0.1 million and $0.4 million in bad debts
for the quarter and six months ended June 30, 2004, respectively,
compared to $0.3 million and $0.4 million for the quarter and six
months ended June 30, 2003, respectively. Bad debt expense relates 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 this 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 For the six months ended
Income from discontinued operations June 30, June 30,
by segment (in Millions) 2004 2003 2004 2003
---------- ---------- ----------- -----------
CNL-Investments discontinued operations:
Losses from operations $ (0.3) $ (0.4) $ (0.6) $ (1.0)
Gains on disposal 0.3 0.6 2.0 0.9
CNL-Capital discontinued operations:
Earnings from operations 1.5 1.8 3.2 3.2
Gains on disposal 8.7 6.7 14.0 13.2
Income tax provision (2.0) -- (3.2) --
---------- ---------- ----------- -----------
Total income from discontinued operations $ 8.2 $ 8.7 $ 15.4 $ 16.3
========== ========== =========== ===========
o Losses from discontinued operations of CNL-Investments include
impairment provisions of $0.3 million for the quarter and six months
ended June 30, 2004 as compared to $0.9 million and $2.2 million for
the quarter and six months ended June 30, 2003, respectively. The
earnings from discontinued operations of CNL-Capital include impairment
provisions of $0.4 million for the quarter and six months ended June
30, 2004, compared with $0.2 million and $1.0 million in such charges
during the quarter and six months ended June 30, 2003. These
impairments related primarily to properties designated as held for sale
or sold through June 30, 2004.
o Restaurant operations within CNL-Investments, which are recorded as
discontinued operations, generated revenues of $3.7 million and $3.5
million for the quarters ended June 30, 2004 and 2003, respectively,
and generated related expenses of $3.7 million and $3.4 million,
respectively. Restaurant operations reported $7.6 million and $6.9
million in revenues and $7.7 million and $6.7 million in expenses for
the six-month period ended June 30, 2004 and 2003, respectively.
o Gains on disposal of properties of CNL-Investments were higher during
the six months ended June 30, 2004 as a result of selling more
properties in 2004 as compared to the same period in 2003. Although
CNL-Capital sold 32 and 56 properties during the quarter and six months
ended June 30, 2004, respectively, compared to 50 and 91 properties
during comparable periods in 2003, gains on disposal of properties of
CNL-Capital were higher during 2004. Despite the decline in the number
of properties sold in 2004, the gain per property was higher during
2004 and the average gain as a percentage of the sales price increased
by approximately one percent. The gain per property was higher in 2004
as a result of CNL-Capital reducing its reliance on outside brokers
during 2004 to sell these properties. Additional information on actual
proceeds and related cost of sales is located in "Liquidity and Capital
Resources - CNL-Capital - Investment Property Sales Program."
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 an 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 income tax provisions of $2.0
million and $3.2 million for the quarter and six months ended June 30, 2004,
respectively, which were 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 June 30, 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 June 30, 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 June 30, 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 quarter ended June 30, 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.
(a) The regular annual meeting of stockholders of the Company was held
in Orlando, Florida on June 23, 2004 for the purpose of electing
the board of directors.
(b) Proxies for the meeting were solicited pursuant to Section 14(a)
of the Securities Exchange Act of 1934, as amended, and the
regulations promulgated thereunder, and there was no solicitation
in opposition to management's solicitations. All of management's
nominees for director were elected.
(c) One proposal was submitted to a vote of stockholders as follows:
(1) The stockholders approved the election of the following
persons as directors of the Company:
Name For Withheld
Robert A. Bourne 24,779,965 279,405
G. Richard Hostetter. Esq. 24,780,587 278,783
Richard C. Huseman 24,765,901 293,469
J. Joseph Kruse 24,747,243 312,127
James M. Seneff, Jr. 24,781,319 278,051
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. (included as Exhibit 3.1 to
the Registrant's Form 10-Q for the quarter ended March
31, 2004 and incorporated herein by reference.)
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. (included as Exhibit 10.23 to the
Registrant's Form 10-Q for the quarter ended March 31,
2004, and incorporated herein by reference).
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 June 30, 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 9th day of August, 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. (included as Exhibit 3.1 to
the Registrant's Form 10-Q for the quarter ended March
31, 2004 and incorporated herein by reference).
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. (included as Exhibit 10.23 to the
Registrant's Form 10-Q for the quarter ended March 31,
2004 and incorporated herein by reference).
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 3.2
THIRD AMENDED AND RESTATED BYLAWS OF
CNL RESTAURANT PROPERTIES, INC.
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