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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 September 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
November 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 6-8
Notes to Condensed Consolidated Financial
Statements 9-18
Item 2.Management's Discussion and Analysis of Financial
Condition and Results of Operations 19-37
Item 3.Quantitative and Qualitative Disclosures About
Market Risk 37
Item 4.Controls and Procedures 37-38
Part II
Other Information 39-42
Item 1. Financial Statements
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(In thousands except for per share data)
September 30, December 31,
2004 2003
------------------ -----------------
ASSETS
Real estate investment properties $ 537,807 $ 530,692
Net investment in direct financing leases 101,200 103,662
Real estate and restaurant assets held for sale 171,647 143,589
Mortgage loans held for sale 537 1,490
Mortgage, equipment and other notes receivable, net of allowance of
$7,128 and $13,964, respectively 304,627 320,900
Other investments 18,566 29,671
Cash and cash equivalents 17,499 36,955
Restricted cash 12,641 12,462
Receivables, net of allowance for doubtful accounts
of $1,365 and $872, respectively 5,141 3,382
Accrued rental income 28,068 25,836
Goodwill 56,260 56,260
Other assets 32,042 33,217
------------------ -----------------
$ 1,286,035 $ 1,298,116
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Revolver $ 12,000 $ 2,000
Notes payable 164,942 182,560
Mortgage warehouse facilities 135,181 93,513
Subordinated note payable 21,875 43,750
Bonds payable 410,650 430,011
Due to related parties 35,216 25,038
Other payables 35,759 34,096
------------------ -----------------
Total liabilities 815,623 810,968
------------------ -----------------
Minority interests, including redeemable partnership interest 6,637 7,262
Stockholders' equity:
Preferred stock, without par value. Authorized and unissued
3,000 shares -- --
Excess shares, $0.01 par value per share. Authorized and
unissued 78,000 shares -- --
Common stock, $0.01 par value per share. Authorized
62,500 shares, issued 45,286 shares, outstanding
45,249 shares 452 452
Capital in excess of par value 826,627 826,627
Accumulated other comprehensive loss (13,793 ) (14,447 )
Accumulated distributions in excess of net earnings (349,511 ) (332,746 )
------------------ -----------------
Total stockholders' equity 463,775 479,886
------------------ -----------------
$ 1,286,035 $ 1,298,116
================== =================
See accompanying notes to condensed consolidated financial statements.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands except for per share data)
Quarter ended Nine months ended
September 30, September 30,
2004 2003 2004 2003
------------- ------------- --------------- -------------
Revenues:
Rental income from operating leases $ 14,600 $ 15,860 $ 43,468 $ 46,162
Earned income from direct financing leases 2,544 2,695 7,734 7,924
Interest income from mortgage, equipment and
other notes receivable 6,635 7,361 19,962 22,880
Investment and interest income 1,641 1,199 3,811 3,533
Other income 2,130 3,113 4,633 7,285
Net decrease in value of mortgage loans
held for sale, net of related hedge -- (483 ) -- (2,734 )
------------- ------------- --------------- -------------
27,550 29,745 79,608 85,050
------------- ------------- --------------- -------------
Expenses:
General operating and administrative 6,305 5,635 19,486 20,140
Interest expense 12,246 12,662 36,070 38,233
Property expenses, state and other taxes 219 536 450 1,002
Depreciation and amortization 3,067 3,170 8,822 9,441
Loss on termination of cash flow hedge -- -- 940 --
Impairments and provisions on assets 1,998 1,447 3,479 6,009
------------- ------------- --------------- -------------
23,835 23,450 69,247 74,825
------------- ------------- --------------- -------------
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 3,715 6,295 10,361 10,225
Minority interest in income of consolidated joint ventures (640 ) (78 ) (2,597 ) (1,491 )
Equity in earnings of unconsolidated joint ventures 32 30 97 89
Gain/(loss) on sale of assets 134 (2 ) 140 (8 )
------------- ------------- --------------- -------------
Income from continuing operations, net 3,241 6,245 8,001 8,815
Income from discontinued operations, net of income tax
provision 11,675 6,803 26,985 22,842
------------- ------------- --------------- -------------
Net income $ 14,916 $ 13,048 $ 34,986 $ 31,657
============= ============= =============== =============
Income per share of common stock (basic and diluted):
From continuing operations $ 0.07 $ 0.14 $ 0.18 $ 0.19
From discontinued operations 0.26 0.15 0.59 0.51
------------- ------------- --------------- -------------
Net income $ 0.33 $ 0.29 $ 0.77 $ 0.70
============= ============= =============== =============
Weighted average number of shares of common stock
outstanding 45,249 45,249 45,249 45,249
============= ============= =============== =============
See accompanying notes to condensed consolidated financial statements.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE
INCOME/(LOSS)
Nine months ended September 30, 2004 and year ended December 31, 2003
(UNAUDITED)
(In thousands except for 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 45,249 $ 452 $ 816,745 $ (306,184 ) $ (16,862 ) $ 494,151
Acquisition of minority
interest -- -- 11,375 -- -- 11,375
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 45,249 $ 452 $ 826,627 $ (332,746 ) $ (14,447 ) $ 479,886
============ ========= ============= ============= ============== ===========
See accompanying notes to condensed consolidated financial statements.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE
INCOME/(LOSS)
Nine months ended September 30, 2004 and year ended December 31, 2003
(UNAUDITED)
(In thousands except for 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, 2003 45,249 $ 452 $ 826,627 $ (332,746 ) $ (14,447 ) $ 479,886
Net income -- -- -- 34,986 -- 34,986 $ 34,986
Other comprehensive income,
market revaluation on
available for sale
securities -- -- -- -- 3 3 3
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 $431 in tax
provision -- -- -- -- (289 ) (289 ) (289 )
--------------
Total comprehensive income -- -- -- -- -- -- $ 35,640
==============
Distributions declared and
paid ($1.14 per share) -- -- -- (51,751 ) -- (51,751 )
------------ --------- ------------- -------------- ---------------- -----------
Balance at September 30, 2004 45,249 $ 452 $ 826,627 $ (349,511 ) $ (13,793 ) $ 463,775
============ ========= ============= ============== ================ ===========
See accompanying notes to condensed consolidated financial statements.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Nine months ended
September 30,
2004 2003
------------------ -----------------
Cash flows from operating activities:
Net income $ 34,986 $ 31,657
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 9,390 9,995
Amortization of deferred financing costs 4,166 3,401
Impairments and provisions on assets 4,861 12,290
Gain on sales of assets (2,690 ) (1,282 )
Gain on investment in securities (495 ) --
Increase in income taxes payable 5,284 --
Investment in mortgage loans held for sale -- (112 )
Collection on mortgage loans held for sale -- 6,166
Changes in inventories of real estate held for sale (47,725 ) 82,053
Changes in other operating assets and liabilities (5,921 ) (4,687 )
------------------ -----------------
Net cash provided by operating activities 1,856 139,481
------------------ -----------------
Cash flows from investing activities:
Additions to real estate investment properties (13,997 ) --
Proceeds from sale of assets 15,826 15,445
Proceeds from sale of other investments 11,200 --
Increase in restricted cash (180 ) (1,518 )
Collection on mortgage, equipment and other notes
receivable 19,572 14,484
------------------ -----------------
Net cash provided by investing activities 32,421 28,411
------------------ -----------------
Cash flows from financing activities:
Payment of stock issuance costs (1,493 ) (1,493 )
Proceeds from borrowing on revolver 37,000 29,892
Payment on revolver, note payable and subordinated note
payable (66,493 ) (47,686 )
Proceeds from borrowing on mortgage warehouse facilities 185,044 56,040
Payments on mortgage warehouse facilities (143,376 ) (138,639 )
Proceeds from issuance of bonds 5,000 --
Retirement of bonds payable (24,547 ) (14,690 )
Payment of bond issuance and debt refinancing costs (920 ) (450 )
Loans from stockholder 10,900 14,960
Distributions to minority interest (2,339 ) (1,865 )
Distributions to stockholders (52,509 ) (51,752 )
------------------ ------------------
Net cash used in financing activities (53,733 ) (155,683 )
------------------ ------------------
Net (decrease)/increase in cash and cash equivalents (19,456 ) 12,209
Cash and cash equivalents at beginning of period 36,955 16,584
------------------ ------------------
Cash and cash equivalents at end of period $ 17,499 $ 28,793
================== ==================
See accompanying notes to condensed consolidated financial statements.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
(UNAUDITED)
(In thousands)
Nine months ended
September 30,
2004 2003
------------------ -------------------
Supplemental disclosures of cash flow information:
Interest paid $ 33,495 $ 35,836
================== ===================
Interest capitalized $ 17 $ 73
================== ===================
Income taxes paid $ 2,343 $ 4,021
================== ===================
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 $ --
================== ===================
Mortgage notes accepted in exchange for sale of properties $ -- $ 400
================== ===================
Notes receivable accepted in exchange for sale of properties $ 3,490 $ --
================== ===================
See accompanying notes to condensed consolidated financial statements.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters and nine months ended September 30, 2004 and 2003
(UNAUDITED)
1. Organization and Nature of Business:
Organization - CNL Restaurant Properties, Inc. ("the Company") was
organized in Maryland in May of 1994, and is the nation's largest
self-advised real estate investment trust ("REIT") focused on the
restaurant industry. 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 $501 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 nine months ended September 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 period'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 nine months ended September 30, 2004 and 2003, the Company
recorded provisions for impairments of $2.2 million and $1.6 million,
respectively. The tenants of these properties experienced financial
difficulties and/or ceased payments of rents under the terms of their
lease agreements. The provisions represent the amount necessary to
reduce the carrying value of the properties to their estimated fair
value.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters and nine months ended September 30, 2004 and 2003
(UNAUDITED)
4. Real Estate and Restaurant Assets Held for Sale:
Real estate and restaurant assets held for sale consists of the
following:
(In thousands)
September 30, December 31,
2004 2003
----------------- -------------------
Land and buildings $ 170,605 $ 141,976
Restaurant assets 1,042 1,613
----------------- -------------------
$ 171,647 $ 143,589
================= ===================
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 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 for all periods presented.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters and nine months ended September 30, 2004 and 2003
(UNAUDITED)
4. Real Estate and Restaurant Assets Held for Sale - Continued:
Operating results of discontinued operations are as follows:
(In thousands)
Quarters ended Nine months ended
September 30, September 30,
2004 2003 2004 2003
------------ -------------- ------------- -------------
Rental income $ 3,905 $ 2,521 $ 9,324 $ 10,214
Food and beverage income 3,549 3,392 11,106 10,324
Food and beverage expenses (3,839 ) (3,144 ) (11,564 ) (10,077 )
Other property related expenses (302 ) (17 ) (664 ) (1,119 )
Interest expense (1,085 ) (503 ) (2,575 ) (1,721 )
Impairment and provisions on assets (603 ) (2,865 ) (1,382 ) (6,281 )
------------ -------------- ------------- -------------
Earnings/(loss) from discontinued
operations 1,625 (616 ) 4,245 1,340
------------ -------------- ------------- -------------
Sales of real estate 97,619 59,260 224,088 179,758
Cost of real estate sold (83,177 ) (51,841 ) (193,722 ) (158,256 )
------------ -------------- ------------- -------------
Gain on disposal of discontinued
operations 14,442 7,419 30,366 21,502
------------ -------------- ------------- -------------
Income tax provision (4,392 ) -- (7,626 ) --
------------ -------------- ------------- -------------
Income from discontinued operations,
net $ 11,675 $ 6,803 $ 26,985 $ 22,842
============ ============== ============= =============
5. Other Investments:
The Company holds franchise loan investments arising from
securitization transactions which were either purchased from affiliates
or retained in connection with a transaction executed by the Company.
Prior to the quarter ended September 30, 2004, the Company classified
these investments for which it had the positive intent and ability to
hold to maturity as held-to-maturity securities and recorded them at
amortized cost in other investments. Investments in these securities
not classified as either held-to-maturity or trading securities were
classified as available-for-sale securities. Available-for-sale
securities are recorded at fair value in other investments on the
balance sheet, with the change in fair value during the period excluded
from earnings and recorded as a component of other comprehensive
income.
During September 2004, the Company accepted an unsolicited offer to
sell certain franchise loan investments, originally classified as held
to maturity, to a third party for $11.2 million, resulting in a gain on
sale of approximately $0.1 million. As a result of the sale, the
Company redesignated the remaining $16.2 million in franchise loan
investments originally classified as investments held to maturity, to
investments available for sale. As a result of the redesignation, the
Company recorded the change in the fair value of these redesignated
franchise loan investments as a component of other comprehensive
income.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters and nine months ended September 30, 2004 and 2003
(UNAUDITED)
5. Other Investments - Continued:
The carrying amounts of these investments, including accrued interest,
consist of the following:
(In thousands)
September 30, December 31,
2004 2003
----------------- -------------------
Held to maturity $ -- $ 27,442
Available-for-sale 18,566 2,229
----------------- -------------------
$ 18,566 $ 29,671
================= ===================
6. 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 September 2004, the Company repaid $11.88 million, which under the
amended terms was due by December 31, 2004, and further reduced the
Bank's potential ownership through the conversion feature in
CNL-Capital to 6.55 percent. The subordinated note will amortize over
five years beginning March 2005 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 percent of the
real estate purchase price. 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. All other material
terms on this warehouse facility remained unchanged.
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 is expected to mature in 2011.
In June 2004, CNL-Investments amended the terms of the Revolver to
extend the maturity date to July 2005. In September 2004,
CNL-Investments amended the terms and increased the capacity from $30
million to $40 million. All other material terms of the Revolver
remained unchanged.
7. Related Party Transactions:
During the nine months ended September 30, 2004, CNL Financial Group,
Inc., a stockholder, 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
September 30, 2004, $35.4 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.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters and nine months ended September 30, 2004 and 2003
(UNAUDITED)
7. Related Party Transactions - Continued:
During the nine months ended September 30, 2004, the Company paid real
estate brokerage fees of $0.1 million to CNL Commercial Net Lease
Realty, Inc., an affiliate of the Chairman and Vice Chairman of the
Company's Board of Directors in conjunction with the sale of a property
to an unrelated third party that resulted in a gain on sale of $1.5
million to the Company.
During the nine months ended September 30, 2004, the Company paid
environmental research and management fees of $0.1 million to Handex
Environmental, Inc. a member of a limited liability company affiliated
with the Company.
As of September 30, 2004 the Company was in the process of negotiating
a sale of its interest in a subsidiary engaged in restaurant operations
to CherryDen, LLC, an affiliate of the Chairman and Vice Chairman of
the Board of Directors. The Company originally acquired the operations
upon a tenant experiencing financial difficulties in an effort to
preserve the value of the underlying restaurant real estate. The
proceeds from the sale are anticipated to be approximately $0.7
million. The subsidiary has experienced cumulative operating losses
since acquisition and the Company has recorded a loss of approximately
$0.4 million relating to the difference between the estimated sale
proceeds and the carrying value of its investment in and loans to the
subsidiary. Upon the sale of the subsidiary, the Company will recognize
approximately $0.9 million in gains on the previous sales of real
estate used in its restaurant operations. In anticipation of the
proposed sale, CherryDen, LLC, paid a refundable deposit of $0.2
million to the subsidiary.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters and nine months ended September 30, 2004 and 2003
(UNAUDITED)
8. Segment Information:
The following tables summarize the operating results for the Company's
two business segments. Consolidating eliminations and other results of
the parent of CNL-Investments and CNL-Capital are reflected in the
"other" column.
Quarter ended September 30, 2004
(In thousands)
CNL- Consolidated
Investments CNL-Capital Other Totals
------------- --------------- ------------- --------------
Revenues $ 20,345 $ 8,133 $ (928 ) $ 27,550
------------- --------------- ------------- --------------
General operating and administrative 1,705 5,070 (470 ) 6,305
Interest expense 7,441 4,657 148 12,246
Property expenses, state and other taxes 219 -- -- 219
Depreciation and amortization 2,821 246 -- 3,067
Impairments and provisions on assets 1,696 302 -- 1,998
Minority interest net of equity in
earnings 2 606 -- 608
Gain on sale of assets (134 ) -- -- (134 )
------------- --------------- ------------- --------------
13,750 10,881 (322 ) 24,309
------------- --------------- ------------- --------------
Discontinued operations:
Income from discontinued
operations, net of income tax 1,946 9,729 -- 11,675
------------- --------------- ------------- --------------
Net income $ 8,541 $ 6,981 $ (606 ) $ 14,916
============= =============== ============= ==============
Assets at September 30, 2004 $ 788,998 $ 499,731 $ (2,694 ) $ 1,286,035
============= =============== ============= ==============
Investments accounted for under the
equity method at September 30, 2004 $ 995 $ -- $ -- $ 995
============= =============== ============= ==============
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters and nine months ended September 30, 2004 and 2003
(UNAUDITED)
8. Segment Information - Continued:
Quarter ended September 30, 2003
(In thousands)
CNL- Consolidated
Investments CNL-Capital Other Totals
------------- --------------- ------------ ----------------
Revenues $ 21,636 $ 8,935 $ (826 ) $ 29,745
------------- --------------- ------------ ----------------
General operating and administrative 1,705 4,561 (631 ) 5,635
Interest expense 6,857 5,932 (127 ) 12,662
Property expenses, state and other taxes 524 12 -- 536
Depreciation and amortization 2,867 303 -- 3,170
Impairments and provisions on assets (115 ) 1,562 -- 1,447
Minority interest net of equity in
earnings 20 28 -- 48
Loss/(Gain) on sale of assets (2 ) 4 -- 2
------------- --------------- ------------ ----------------
11,856 12,402 (758 ) 23,500
------------- --------------- ------------ ----------------
Discontinued operations:
Income/(loss) from discontinued
operations, net of income tax (1,736 ) 8,539 -- 6,803
------------- --------------- ------------ ----------------
Net income $ 8,044 $ 5,072 $ (68 ) $ 13,048
============= =============== ============ ================
Assets at September 30, 2003 $ 802,177 $ 468,060 $ (4,759 ) $ 1,265,478
============= =============== ============ ================
Investments accounted for under the
Equity method at September 30, 2003 $ 1,079 $ -- $ -- $ 1,079
============= =============== ============ ================
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters and nine months ended September 30, 2004 and 2003
(UNAUDITED)
8. Segment Information - Continued:
Nine months ended September 30, 2004
(In thousands)
CNL- Consolidated
Investments CNL-Capital Other Totals
------------- --------------- ------------ ----------------
Revenues $ 59,890 $ 22,061 $ (2,343 ) $ 79,608
------------- --------------- ------------ ----------------
General operating and administrative 6,079 14,918 (1,511 ) 19,486
Interest expense 21,805 14,067 198 36,070
Property expenses, state and other taxes 450 -- -- 450
Depreciation and amortization 8,204 618 -- 8,822
Loss on termination of cash flow hedge -- 940 -- 940
Impairments and provisions on assets 2,819 660 -- 3,479
Minority interest net of equity in
earnings 33 2,467 -- 2,500
Gain on sale of assets (140 ) -- -- (140 )
------------- --------------- ------------ ----------------
39,250 33,670 (1,313 ) 71,607
------------- --------------- ------------ ----------------
Discontinued operations:
Income from discontinued
operations, net of income tax 3,256 23,729 -- 26,985
------------- --------------- ------------ ----------------
Net income $ 23,896 $ 12,120 $ (1,030 ) $ 34,986
============= =============== ============ ================
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters and nine months ended September 30, 2004 and 2003
(UNAUDITED)
8. Segment Information - Continued:
Nine months ended September 30, 2003
(In thousands)
CNL- Consolidated
Investments CNL-Capital Other Totals
------------- --------------- ------------ ----------------
Revenues $ 64,087 $ 23,361 $ (2,398 ) $ 85,050
------------- --------------- ------------ ----------------
General operating and administrative 7,616 14,338 (1,814 ) 20,140
Interest expense 20,712 18,018 (497 ) 38,233
Property expenses, state and other taxes 1,002 -- -- 1,002
Depreciation and amortization 8,653 788 -- 9,441
Impairments and provisions on assets 1,403 4,606 -- 6,009
Minority interest net of equity in
earnings 74 1,328 -- 1,402
Loss on sale of assets -- 8 -- 8
------------- --------------- ------------ ----------------
39,460 39,086 (2,311 ) 76,235
------------- --------------- ------------ ----------------
Discontinued operations:
Income/(loss) from discontinued
operations, net of income tax (2,078 ) 24,920 -- 22,842
------------- --------------- ------------ ----------------
Net income $ 22,549 $ 9,195 $ (87 ) $ 31,657
============= =============== ============ ================
9. Income Tax:
The Company elected to be taxed as a REIT under the Internal Revenue
Code. To qualify as a REIT, the Company must meet a number of
organizational and operational requirements, including a current
requirement that it distribute at least 90 percent of its taxable
income to its stockholders. As a REIT, the Company generally 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 $4.4
million and $7.6 million during the quarter and nine months ended
September 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 nine months ended September 30, 2003 as a result
of the recognition of deferred tax assets previously subject to
valuation allowances.
CNL RESTAURANT PROPERTIES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Quarters and nine months ended September 30, 2004 and 2003
(UNAUDITED)
9. Income Tax: - Continued:
As of September 30, 2004, the CNL-Investments TRS had a deferred tax
asset of $0.6 million. This TRS has not yet consistently generated any
taxable income. Therefore, CNL-Investments has established a valuation
allowance to completely offset its deferred tax asset.
Recently, the Company concluded that certain loans, which when made by
the Company in 1998 satisfied the REIT qualification requirements then
applicable, may fail to meet subsequent REIT qualification
requirements. To eliminate any uncertainty, the Company is in the
process of seeking assurance from the Internal Revenue Service ("IRS")
that the loans would not cause the Company to fail to qualify as a
REIT. Although action by the IRS is discretionary, the Company, after
consulting with its outside tax counsel and based upon current
discussions with the IRS and upon actions taken by the IRS in similar
circumstances, believes that such assurance will be granted.
10. Merger Agreement:
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 as of August 9, 2004 owned or financed 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 percent 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 percent 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"), 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 September 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 653 properties.
At September 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 $501 million in affiliate
real estate portfolios and earns management fees related thereto.
Revenues from CNL-Investments represented approximately 75 percent
of the Company's total revenues from continuing operations for
each of the nine months ended September 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 from its
loan portfolio, advisory and other services represented
approximately 25 percent of the Company's total revenues from
continuing operations for each of the nine months ended September
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
as of August 9, 2004, owned 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 percent 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 percent 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 the
end of the first quarter of 2004, distributions had been primarily funded by
CNL-Investments' activities because the Company and the others Partners of
CNL-Capital had elected to reinvest the earnings of CNL-Capital, with the
remainder being funded by the Company's Chairman through a privately held
affiliate. CNL-Capital began making distributions to the Company in the second
quarter of 2004.
The Company has elected to distribute amounts in excess of that necessary to
qualify as a REIT. The Company declared distributions of $51.8 million or $1.14
per share to its stockholders for each of the nine months ended September 30,
2004 and 2003. The Company's cash provided by operations was $1.9 million and
$139.5 million for the nine months ended September 30, 2004 and 2003,
respectively. 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 $49.6
million and $51.4 million for the nine months ended September 30, 2004 and 2003,
respectively.
Beginning in 2001, the Board of Directors of the Company made the determination
that it was in the best interests of the Company's stockholders to maintain its
historical level of distributions during a period of volatility in the
restaurant finance sector. While not necessary for REIT tax purposes, to enable
the Company to maintain its historical level during this period, CNL Financial
Group, Inc., a stockholder controlled by James M. Seneff, Jr., the Company's
Chairman, provided loans to and purchased common stock of the Company. During
the nine months ended September 30, 2004 and 2003, these loans totaled $10.9
million and $15.0 million, respectively. The principal amount including accrued
interest at September 30, 2004 was $35.4 million. In addition, during 2002 and
2001, Mr. Seneff, through CNL Financial Group, Inc., purchased 1,173,354 shares
and 579,722 shares, respectively, of CNLRP stock in exchange for $20.1 million
and $9.7 million, respectively, in cash, including the conversion of amounts
previously treated as advances. The Company's Chairman was not obligated to make
loans or purchase shares and will not make any further loans or purchases of
stock to fund distributions once the Merger is completed. 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.
Recently, the Company concluded that certain loans, which when made by the
Company in 1998 satisfied the REIT qualification requirements then applicable,
may fail to meet subsequent REIT qualification requirements. To eliminate any
uncertainty, the Company is in the process of seeking assurance from the
Internal Revenue Service ("IRS") that the loans would not cause the Company to
fail to qualify as a REIT. A failure by the Company to qualify as a REIT would
substantially increase the Company's federal income tax liability and,
therefore, would have a material adverse effect upon the Company's results of
operations, its financial condition, and its ability to pay dividends. Although
action by the IRS is discretionary, the Company, after consulting with its
outside tax counsel and based upon current discussions with the IRS and upon
actions taken by the IRS in similar circumstances, believes that such assurance
will be granted.
CNL-Capital
CNL-Capital's current demand for funds includes payment of operating expenses,
funds necessary for net lease originations to be sold in its Investment Property
Sales Program (as defined below) and payment of principal and interest on its
outstanding indebtedness. Demand for funds increased during 2004 to cover the
$224.4 million of new originations of real estate properties that exceeded the
$197.4 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, and in September
2004 paid the $11.88 million due by December 31, 2004 under the modified terms.
CNL-Capital also paid margin calls of $5.8 million during the nine months ended
September 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 nine months ended September 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 $12.0 million and
$31.9 million at September 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 originated 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 nine months ended
September 30,
2004 2003
-------------- ----------------
Proceeds from Investment Property Sales $ 197.4 $ 161.5
============== ================
Cost of properties sold under the Investment Property
Sales program $ 171.9 $ 141.7
============== ================
Generally accepted accounting principles require that investment properties held
for sale be accounted for as discontinued operations when the operations and
cash flows of the properties will be eliminated from the ongoing operations of
the company as a result of the disposal transaction, and when the company will
not have any significant continuing involvement in the operations of the
properties after the disposal transaction. 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 nine months ended
September 30, September 30,
2004 2003 2004 2003
------------- ------------- --------------- ----------------
Revenues:
Sale of real estate $ 89.9 $ 50.0 $ 197.4 $ 161.5
Rental income 3.8 2.0 8.9 7.9
Other revenue items 8.1 9.0 22.3 23.5
------------- ------------- --------------- ----------------
101.8 61.0 228.6 192.9
------------- ------------- --------------- ----------------
Expenses:
Cost of real estate sold 78.4 43.4 171.9 141.7
Interest expense 5.7 6.4 16.6 19.7
Depreciation and amortization 0.3 0.3 0.8 0.8
Other expenses 6.0 5.8 19.6 21.5
------------- ------------- --------------- ----------------
90.4 55.9 208.9 183.7
------------- ------------- --------------- ----------------
Pre-tax income 11.4 5.1 19.7 9.2
Income tax provision (4.4) -- (7.6 ) --
------------- ------------- --------------- ----------------
Net income $ 7.0 $ 5.1 $ 12.1 $ 9.2
============= ============= =============== ================
Management expects continued demand for the Investment Property Sales Program.
Despite selling 101 properties versus 126 properties during the nine months
ended September 30, 2004 and 2003, respectively, gains per property sold 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 nine months ended
September 30, 2004 and 2003, CNL-Capital originated $224.4 million and $56.6
million in net leases respectively. Management expects continued demand for its
core triple-net lease financing during the rest of 2004 and into 2005 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 September 30, 2004, CNL-Capital was
involved in several opportunities for net lease originations with $38 million
approved for funding and accepted by the client. 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 nine months ended September 30, 2004, CNL-Capital used proceeds from
sales of properties, its "net spread", servicing and other revenues 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 nine months ended September 30, 2004 and 2003,
CNL-Capital made $5.8 million and $1.4 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 September 30, 2004, with the
stated total capacity and interest rate:
In thousands
Amount used Capacity Maturity Interest rate (3)
----------------- ------------- --------------- -------------------
Note payable (1) $ 164,550 $ 164,550 Jun 2007 2.50%
Mortgage warehouse facilities 135,181 260,000 Annual 2.61%
Subordinated note payable 21,875 21,875 Dec 2008 7.00%
Series 2001-4 bonds payable (2) 30,236 30,236 2009 - 2013 8.90%
----------------- -------------
$ 351,842 $ 476,661
================= =============
(1) Average rate excludes the impact of hedge transactions that bring the
total average rate to 5.78 percent.
(2) Balances include $1.3 million 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 $164.6 million and $182.0 million as of September 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 on the underlying collateral. 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's 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 91 percent of the original real estate cost. As of
September 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 September 30, 2004,
CNL-Capital had approximately $13.0 million in capital supporting its loan and
lease portfolio financed through its mortgage warehouse facilities. Amounts
outstanding under the mortgage warehouse facilities were $135.2 million and
$93.5 million as of September 30, 2004 and December 31, 2003, respectively. The
increase in the balance outstanding resulted from the 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 $21.875 million and $43.75 million at September 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. In September 2004,
CNL-Capital repaid $11.88 million on this facility, which under the amended
terms agreed to in January 2004 was due by December 31, 2004. CNL-Capital is
scheduled to 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. In September 2004, CNL-Capital retired $3.6
million of these bonds that had been held by CNL-Investments. No gain/loss was
recorded upon retirement of these bonds. Amounts outstanding were $30.2 million
and $38.9 million at September 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 and its warehouse
facilities 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 a pay-down in accordance with the
terms of the respective agreements 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 September 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, is scheduled to have an
approximate $1 million negative impact to cash flows over the twelve month
period ending March 2005. 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
September 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 $ 172,926 $ 171,083
Loans and debt supporting 1999-1 Certificates issued
by CNL Funding 1999-1, LP 219,945 219,945
------------------- ----------------------
$ 392,871 $ 391,028
=================== ======================
(1) Certain bonds in the 1998-1 pool are owned by CNL-Investments; the
aggregate net carrying value of $16.3 million appears as investments in
the condensed consolidated financial statements of the Company.
CNL-Investments
CNL-Investments' demand for funds are predominantly principal and interest
payments, 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. In September 2004, the Company sold $11.2 million of franchise loan
investments. As a result of this investment sale, the Company will recognize
reduced investment interest income in the future. CNL-Investments had cash and
cash equivalents of $5.4 million and $4.3 million at September 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 September 30, 2004, with
the stated total capacity and interest rate:
(In thousands)
Amount Used Capacity Maturity Interest Rate (1)
-------------- -------------- --------------- ------------------
Revolver $ 12,000 $ 40,000 July 2005 3.82%
Note payable 392 392 2005 4.92%
Series 2000-A bonds payable 241,472 241,472 2009-2017 7.95%
Series 2001 bonds payable 113,210 113,210 Oct 2006 1.70%
Series 2003 bonds payable 27,038 27,038 2005-2010 5.67%
-------------- --------------
$ 394,112 $ 422,112
============== ==============
(1) Excludes debt issuance and other related costs.
Revolver. Through August 2004, CNL-Investments' short-term debt consisted 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 and in September 2004, increased the capacity to $40 million. Amounts
outstanding were $12.0 million and $2.0 million at September 30, 2004 and
December 31, 2003, respectively.
Note Payable. At September 30, 2004, the Company had $0.4 million outstanding
relating to a Note Payable to CNL Bank, an affiliate. Amounts outstanding are
collateralized by a mortgage on certain real property, bears interest at LIBOR
plus 325 basis points per annum and requires monthly interest only payments
until maturity in 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 is expected
to mature 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 September 30, 2004. Management believes it has
recorded an appropriate impairment charge at September 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 November 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 November 9, 2004 management
has sold four sites, re-leased three sites 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 November 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 November 9, 2004,
Ground Round had closed 7 of these sites. As of November 9, 2004, Ground Round
had rejected the leases on 7 sites. The remaining five leases have been assumed
by the new owner of Ground Round. Management has recorded impairments relating
to some of these sites.
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 September 30, 2004 the Company owned, through an
investment of $0.7 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. As of
September 30, 2004 the Company was in the process of negotiating a sale of its
interest in a subsidiary engaged in restaurant operations to CherryDen, LLC, an
affiliate of the Chairman and Vice Chairman of the Board of Directors. The
Company originally acquired the operations upon a tenant experiencing financial
difficulties in an effort to preserve the value of the underlying restaurant
real estate. The proceeds from the sale are anticipated to be approximately $0.7
million. The subsidiary has experienced cumulative operating losses since
acquisition and the Company has recorded a loss of approximately $0.4 million
relating to the difference between the estimated sale proceeds and the carrying
value of its investment in and loans to the subsidiary. Upon the sale of the
subsidiary, the Company will recognize approximately $0.9 million in gains on
the previous sales of real estate used in its restaurant operations. In
anticipation of the proposed sale, CherryDen, LLC, paid a refundable deposit of
$0.2 million to the subsidiary. As of November 9, 2004, the sale of these
restaurant operations had not occurred.
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 nine months ended September 30, 2004, the
Company was required to make additional debt reductions of approximately $1.8
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 $392.9 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 September 30, 2004,
the Company's variable rate debt includes the following:
o $12.0 million on its Revolver;
o $135.2 million on its mortgage warehouse facilities;
o $164.6 million on the June 2002 five-year financing, of which $126.4
million are subject to an interest-rate swap;
o $113.2 million outstanding on the Series 2001 bonds payable, all of
which is subject to an interest rate cap; and
o $27.0 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 September 30, 2004 would have resulted in additional interest costs
of approximately $2.2 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 $14.9 million and $35.0 million for the
quarter and nine months ended September 30, 2004, respectively as compared to
$13.0 million and $31.7 million for the comparable periods in 2003. Net income
increased 14.3 percent and 10.5 percent for the quarter and nine months ended
September 30, 2004, respectively, as compared to the same periods in 2003. The
increase in net income during the quarter and nine months ended September 30,
2004 as compared with the same periods in 2003 was due to higher gains on the
Investment Property Sales Program and lower impairments and provisions on assets
in the portfolio, as a result of fewer financial difficulties and defaults by
borrowers and tenants. The increase in net income was partially offset due to
CNL-Investments recording lower rental revenues as a result of bankruptcies of
two tenants and due to CNL-Capital recording an income tax provision in 2004. 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.
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 September 30,
% of % of
Net income by segment (in Millions) 2004 Total 2003 Total
--------------- --------- ----------- ---------
CNL-Investments $ 8.5 57% $ 8.0 62%
CNL-Capital 7.0 47 5.0 38
Other company results and consolidating
eliminations (0.6) (4) -- --
--------------- --------- ----------- ---------
Net income $ 14.9 100% $ 13.0 100%
=============== ========= =========== =========
For the nine months ended September 30,
% of % of
Net income by segment (in Millions) 2004 Total 2003 Total
--------------- --------- ----------- ---------
CNL-Investments $ 23.9 68% $ 22.6 71%
CNL-Capital 12.1 35 9.2 29
Other company results and consolidating
eliminations (1.0) (3) (0.1) --
--------------- --------- ----------- ---------
Net income $ 35.0 100% $ 31.7 100%
=============== ========= =========== =========
Revenues are discussed based on the individual segment results beginning with
the results of CNL-Investments:
For the quarters ended September 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 $ 17.1 84% $ 18.6 86%
Interest income from mortgage,
equipment and other notes receivable 1.5 7 1.0 5
Investment and interest income 1.2 6 1.2 5
Other income 0.5 3 0.8 4
-------------- -------- ------------ ---------
Total segment revenues $ 20.3 100% $ 21.6 100%
============== ======== ============ =========
For the nine months ended September 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 $ 51.2 85% $ 54.1 85%
Interest income from mortgage,
equipment and other notes receivable 3.9 7 3.2 5
Investment and interest income 3.4 6 3.4 5
Other income 1.4 2 3.4 5
-------------- -------- ------------ ---------
Total segment revenues $ 59.9 100% $ 64.1 100%
============== ======== ============ =========
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 nine months ended September 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, who filed for bankruptcy in 2003 and 2004, respectively.
o Interest income from mortgage, equipment and other notes receivable
increased 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 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 nine months ended
September 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.
CNL-Investments also transferred its property management services to
CNL-Capital further reducing its other income.
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 September 30,
CNL-Capital revenues by % of % of
line item (in Millions) 2004 Total 2003 Total
----------- -------- ------------ ---------
Interest income from mortgage
equipment and other notes
receivable $ 5.2 64% $ 6.3 71%
Investment and interest income 0.8 10 0.2 2
Net decrease in value of mortgage
loans held for sale, net of related hedge -- -- (0.5) (6)
Other income 2.1 26 2.9 33
----------- -------- ------------ ---------
$ 8.1 100% $ 8.9 100%
=========== ======== ============ =========
For the nine months ended September 30,
CNL-Capital revenues by % of % of
line item (in Millions) 2004 Total 2003 Total
----------- -------- ------------ ---------
Interest income from mortgage
equipment and other notes
receivable $ 16.1 73% $ 19.7 84%
Investment and interest income 1.2 5 0.6 3
Net decrease in value of mortgage
loans held for sale, net of related hedge -- -- (2.7) (12)
Other income 4.8 22 5.8 25
----------- -------- ------------ ---------
$ 22.1 100% $ 23.4 100%
=========== ======== ============ =========
o Interest income from mortgage, equipment and other notes receivable
decreased 17 percent and 18 percent for the quarter and nine months
ended September 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 Investment and interest income associated with other investments
increased by $0.6 million during the quarter and nine months ended
September 30, 2004 due to changes in the interest rate assumptions and
projected discounted cash flows.
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 nine
months ended September 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 quarter and nine months ended September 30, 2003,
CNL-Capital recorded a $0.5 million and a $2.7 million, respectively,
decline in the fair value of these loans held for sale, net of related
hedge and net of estimated potential default losses.
o Other income reflects, among other items, fees from advisory services,
servicing income and referral fees for loans and other products from
the Bank. Other income was 27 percent and 17 percent lower during the
quarter and nine months ended September 30, 2004, respectively, as
compared to similar periods in 2003 due to a decrease of approximately
$1.3 million in advisory services fees. During the quarter ended
September 30, 2003, advisory fees were $1.5 million as a result of
several key transactions closing during the quarter while $0.2 million
was recognized in the quarter ending September 30, 2004. The decrease
in advisory services fees was partially offset by a $0.4 million
increase in referral fees from loans and other products relating to
the alliance agreement with Bank of America due to higher referral
volume during the quarter and nine months ended September 30, 2004.
Other income also increased during the nine months ended September 30,
2004 compared to the same period in 2003 due to billings of property
management fees to affiliated entities using CNL-Capital for property
management services.
Expenses
Expenses increased for the quarter ended September 30, 2004 compared to the same
period in 2003 due to impairment losses relating to the properties and loans in
the portfolio as a result of financial difficulties and defaults by borrowers
and tenants. Lower property expenses and bad debts on accounts receivables
partially offset the increase in impairment losses. General operating and
administrative expenses increased for the quarter ended September 30, 2004 as
compared to the same period in 2003 due mainly to increased commission expense
in 2004 relating to higher volume of new originations of real estate properties
and increased gains on sales from the Investment Property Sales Program.
Expenses decreased for the nine months ended September 30, 2004 from the
comparable period in 2003. General operating and administrative expenses were
lower due to the Company's initiative of outsourcing some functions. 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 during the nine months ended September 30, 2004. 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. Interest expense also decreased
because the Company terminated a fair value hedge in December 2003 and unwound a
portion of a cash flow hedge during this year eliminating or reducing interest
expense on the hedge instruments, as described below.
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 September 30,
General operating and administrative % of % of
expenses by segment (in Millions) 2004 Total 2003 Total
----------- -------- ------------ ---------
CNL-Investments $ 1.7 27% $ 1.7 30%
CNL-Capital 5.0 79 4.5 80
Other company results and consolidating
eliminations (0.4) (6) (0.6) (10)
----------- -------- ------------ ---------
Total general operating and
administrative expenses $ 6.3 100% $ 5.6 100%
=========== ======== ============ =========
For the nine months ended September 30,
General operating and administrative % of % of
expenses by segment (in Millions) 2004 Total 2003 Total
----------- -------- ------------ ---------
CNL-Investments $ 6.1 31% $ 7.6 38%
CNL-Capital 14.9 76 14.3 71
Other company results and consolidating
eliminations (1.5) (7) (1.8) (9)
----------- -------- ------------ ---------
Total general operating and
administrative expenses $ 19.5 100% $ 20.1 100%
=========== ======== ============ =========
o CNL-Investments' general operating and administrative expenses
remained constant during the quarter ended September 30, 2004 as
compared to the same period in 2003 while for the nine months ended
September 30, 2004, this segment reported a 20 percent decrease in
general operating and administrative expenses over the comparable
period in 2003. The decline in expenses during the nine month period
was the 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 increased
during the quarter and nine months ended September 30, 2004 as
compared with similar periods in 2003 due mainly to increased
commission expense in 2004 relating to higher volume of new
originations of real estate properties and increased gains on sales
from the Investment Property Sales Program.
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 September 30,
Interest expense by segment (in % of % of
Millions) 2004 Total 2003 Total
---------- -------- ------------ ---------
CNL-Investments $ 7.4 61% $ 6.9 54%
CNL-Capital 4.7 39 5.9 46
Other company results and consolidating
eliminations 0.1 -- (0.1) --
---------- -------- ------------ ---------
Total interest expense $ 12.2 100% $ 12.7 100%
========== ======== ============ =========
For the nine months ended September 30,
Interest expense by segment (in % of % of
Millions) 2004 Total 2003 Total
---------- -------- ------------ ---------
CNL-Investments $ 21.8 60% $ 20.7 54%
CNL-Capital 14.1 39 18.0 47
Other company results and consolidating
eliminations 0.2 1 (0.5) (1)
---------- -------- ------------ ---------
Total interest expense $ 36.1 100% $ 38.2 100%
========== ======== ============ =========
o CNL-Investments had an increase in interest expense for the quarter
and nine months ended September 30, 2004 from the comparable periods
in 2003 due to CNL-Investments issuing bonds payable in December 2003
and May 2004, collateralized by approximately $46.6 million of
mortgage loans.
o CNL-Capital had a 20 percent and 22 percent decrease in interest
expense for the quarter and nine months ended September 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 7.0 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. Interest expense also
decreased because CNL-Capital unwound a portion of a cash flow hedge
this year, as further described below.
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 $0.9 million
for the nine months ended September 30, 2004. 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 period 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 September 30,
Impairments and provisions on % of % of
assets (in Millions) 2004 Total 2003 Total
----------- -------- ------------ ---------
CNL-Investments $ 1.7 85% $ (0.1) (7%)
CNL-Capital 0.3 15 1.5 107
----------- -------- ------------ ---------
Total impairments and provisions
on assets $ 2.0 100% $ 1.4 100%
=========== ======== ============ =========
For the nine months ended September 30,
Impairments and provisions on % of % of
assets (in Millions) 2004 Total 2003 Total
----------- -------- ------------ ---------
CNL-Investments $ 2.8 80% $ 1.4 23%
CNL-Capital 0.7 20 4.6 77
----------- -------- ------------ ---------
Total impairments and provisions
on assets $ 3.5 100% $ 6.0 100%
=========== ======== ============ =========
o CNL-Investments recorded impairment provisions of $1.7 million and
$2.8 million for the quarter and nine months ended September 30, 2004,
respectively, excluding impairments on properties treated as
discontinued operations as described below. This segment recorded $1.4
million in impairment provisions for the nine months ended September
30, 2003, and recorded a $0.1 million net recovery of previously
written off loans during the quarter ended September 30, 2003.
CNL-Investments recorded a provision for loan losses of $0.6 million
during the quarter ended September 30, 2004 as a result of American
Restaurant Group ("ARG") declaring bankruptcy in October 2004. The
impairments recorded during 2004 and 2003 related primarily to
properties previously leased to Chevy's, which declared bankruptcy in
2003, and properties leased to ARG. 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 $0.7 million and
$3.3 million for the quarter and nine months ended September 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 $0.3 million and $0.7 million in bad debts
for the quarter and nine months ended September 30, 2004,
respectively, compared to $0.8 million and $1.3 million for the
quarter and nine months ended September 30, 2003, respectively. Bad
debt expense relates to receivables that management does not believe
are recoverable.
Discontinued Operations
The Company accounts for revenues and expenses arising 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 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 nine months ended
Income from discontinued operations September 30, September 30,
by segment (in Millions) 2004 2003 2004 2003
---------- ---------- ------------ -----------
CNL-Investments discontinued operations:
Losses from operations $ (1.0) $ (2.6) $ (1.6) $ (3.8)
Gains on disposal 2.9 0.8 4.9 1.7
CNL-Capital discontinued operations:
Earnings from operations 2.6 2.0 5.8 5.1
Gains on disposal 11.5 6.6 25.5 19.8
Income tax provision (4.4) 0.0 (7.6) 0.0
---------- ---------- ------------ -----------
Total income from discontinued operations $11.6 $ 6.8 $ 27.0 $ 22.8
========== ========== ============ ===========
o Losses from discontinued operations of CNL-Investments include
impairment provisions of $0.6 million and $1.0 million for the quarter
and nine months ended September 30, 2004 as compared to $2.9 million
and $5.3 million for the quarter and nine months ended September 30,
2003, respectively. The earnings from discontinued operations of
CNL-Capital include impairment provisions of $0.4 million for the nine
months ended September 30, 2004, compared with $1.0 million in
impairments provisions during the nine months ended September 30,
2003. Included in the impairments is a $0.4 million impairment
provision recorded by CNL-Investments in September 2004 to reduce the
net carrying value of its investment in the restaurant operations
based on negotiations with a prospective buyer as described above in
"Liquidity and Capital Resources - CNL-Investments-Liquidity Risk".
However, upon the sale of the restaurant operations, the Company will
recognize $0.9 million in gains on sales of properties that had been
previously deferred in accordance with generally accepted accounting
principles. All other impairments relate primarily to properties
designated as held for sale or sold through September 30, 2004.
o Restaurant operations within CNL-Investments, which are recorded as
discontinued operations, posted operating losses of $0.3 million and
$0.5 million during the quarters and nine months ended September 30,
2004, respectively. This discontinued operations reported $0.3 million
and $0.2 million in operating earnings during the quarter and nine
months ended September 30, 2003, respectively. The decline in
operating results was due to increased operating expenses.
o Gains on disposal of properties of CNL-Investments were higher during
the quarter and nine months ended September 30, 2004 as compared to
the same periods in 2003. During the quarter and nine months ended
September 30, 2004, CNL-Investments sold two and three properties,
respectively, with gains exceeding $1.0 million per property. Although
CNL-Capital sold 101 properties during the nine months ended September
30, 2004 compared to 126 properties during comparable period in 2003,
in 2004 CNL-Capital reduced its reliance on outside brokers to sell
its properties increasing the average gain per property.
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 the recognition of deferred tax assets subject
to valuation allowances. In December 2003, CNL-Capital reversed the remaining
valuation allowance. CNL-Capital recorded income tax provisions of $4.4 million
and $7.6 million for the quarter and nine months ended September 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 September 30, 2004, the CNL-Investments' TRS had a deferred tax asset of
$0.6 million. This TRS has not yet consistently 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 September 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 September 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 September 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. Unregistered Sales of Equity Securities and Use of Proceeds.
Inapplicable.
Item 3. Defaults upon Senior Securities. Inapplicable.
Item 4. Submission of Matters to a Vote of Security Holders. Inapplicable.
Item 5. Other Information. Inapplicable.
Item 6. Exhibits
(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. (included as Exhibit 3.2 to the
Registrant's Form 10-Q for the quarter ended June 30,
2004 and incorporated herein by reference).
4.1 Form of Stock Certificate (included as Exhibit 4.5 to
the Registrant's Registration Statement No. 33-78790 on
Form S-11 and incorporated herein by reference).
10.1 Form of Indemnification Agreement dated as of April 18,
1995, between the Registrant and each of James M.
Seneff, Jr., Robert A. Bourne, G. Richard Hostetter, J.
Joseph Kruse, Richard C. Huseman, John T. Walker, Jeanne
A. Wall, Lynn E. Rose and Edgar J. McDougall, dated as
of January 27, 1997, between the Registrant and Steven
D. Shackelford, dated as of February 18, 1998, between
the Registrant and Curtis B. McWilliams, and dated as of
September 1, 1999, between the Registrant and each of
Howard J. Singer, John L. Farren, Timothy J. Neville,
Michael I. Wood and Barry L. Goff (included as Exhibit
10.9 to the Registrant's Registration Statement No.
333-15411 on Form S-11 and incorporated herein by
reference).
10.2 Amended and Restated Agreement of Limited Partnership of
CNL APF Partners, LP (included as Exhibit 10.50 to
Amendment No. 2 to the Form S-4 and incorporated herein
by reference).
10.3 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).
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 November, 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. (included as Exhibit 3.2 to the
Registrant's Form 10-Q for the quarter ended Jun 30,
2004 and incorporated herein by reference).
4.1 Form of Stock Certificate (included as Exhibit 4.5 to
the Registrant's Registration Statement No. 33-78790 on
Form S-11 and incorporated herein by reference).
10.1 Form of Indemnification Agreement dated as of April 18,
1995, between the Registrant and each of James M.
Seneff, Jr., Robert A. Bourne, G. Richard Hostetter, J.
Joseph Kruse, Richard C. Huseman, John T. Walker,
Jeanne A. Wall, Lynn E. Rose and Edgar J. McDougall,
dated as of January 27, 1997, between the Registrant
and Steven D. Shackelford, dated as of February 18,
1998, between the Registrant and Curtis B. McWilliams,
and dated as of September 1, 1999, between the
Registrant and each of Howard J. Singer, John L.
Farren, Timothy J. Neville, Michael I. Wood and Barry
L. Goff (included as Exhibit 10.9 to the Registrant's
Registration Statement No. 333-15411 on Form S-11 and
incorporated herein by reference).
10.2 Amended and Restated Agreement of Limited Partnership
of CNL APF Partners, LP (included as Exhibit 10.50 to
Amendment No. 2 to the Form S-4 and incorporated herein
by reference).
10.3 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 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