-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Fj1A/fa2aZ7Rn7KuVZfYXSP7Q0atR+nBj4VwF48ESXscN0WTY7P3xSBHuhqv7nfr YUcvug0sqzgYWYv8MU58Lg== 0000922981-03-000023.txt : 20031112 0000922981-03-000023.hdr.sgml : 20031111 20031112143255 ACCESSION NUMBER: 0000922981-03-000023 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20030930 FILED AS OF DATE: 20031112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CNL RESTAURANT PROPERTIES INC CENTRAL INDEX KEY: 0000922981 STANDARD INDUSTRIAL CLASSIFICATION: LESSORS OF REAL PROPERTY, NEC [6519] IRS NUMBER: 593239115 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 033-78790 FILM NUMBER: 03993047 BUSINESS ADDRESS: STREET 1: 450 S ORANGE AVE STREET 2: STE 500 CITY: ORLANDO STATE: FL ZIP: 32801 BUSINESS PHONE: 4075402000 MAIL ADDRESS: STREET 1: 450 S ORANGE AVE STREET 2: STE 500 CITY: ORLANDO STATE: FL ZIP: 32801 FORMER COMPANY: FORMER CONFORMED NAME: CNL AMERICAN PROPERTIES INC DATE OF NAME CHANGE: 19950227 FORMER COMPANY: FORMER CONFORMED NAME: CNL INVESTMENT FUND INC DATE OF NAME CHANGE: 19941219 FORMER COMPANY: FORMER CONFORMED NAME: CNL INCOME FUND INC DATE OF NAME CHANGE: 19940511 10-Q 1 crp10q.txt CNL RESTAURANT PROPERTIES, INC. 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, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ____________ Commission file number 001-15581 CNL Restaurant Properties, Inc. (Exact name of registrant as specified in its charter) Maryland 59-3239115 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 450 South Orange Avenue Orlando, Florida 32801 (Address of principal executive offices, including zip code) Registrant's telephone number, including area code: (407) 540-2000 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 7, 2003. CONTENTS Part I Page ---- Item 1.Financial Statements: Condensed Consolidated Balance Sheets 1 Condensed Consolidated Statements of Operations 2-3 Condensed Consolidated Statements of Stockholders' Equity and Comprehensive Income/(Loss) 4 Condensed Consolidated Statements of Cash Flows 5-6 Notes to Condensed Consolidated Financial Statements 7-16 Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations 17-33 Item 3.Quantitative and Qualitative Disclosures About Market Risk 34 Item 4.Controls and Procedures 34 Part II Other Information 35-38 Item 1. Financial Statements CNL RESTAURANT PROPERTIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands except for share data) September 30, December 31, 2003 2002 ------------------ ----------------- ASSETS Real estate investment properties $ 556,496 $ 568,102 Net investment in direct financing leases 105,750 110,926 Real estate held for sale 76,756 169,679 Mortgage loans held for sale 26,594 37,847 Mortgage, equipment and other notes receivable, net of allowance of $11,318 and $12,062, respectively 313,125 334,149 Other investments 31,621 32,163 Cash and cash equivalents 28,940 16,584 Restricted cash 6,092 4,574 Receivables, less allowance for doubtful accounts of $2,970 and $1,182, respectively 4,928 3,289 Accrued rental income 26,988 22,191 Goodwill 56,260 56,260 Other assets 32,769 30,500 ------------------ ----------------- $ 1,266,319 $ 1,386,264 ================== ================= LIABILITIES AND STOCKHOLDERS' EQUITY Revolver $ 7,000 $ 14,000 Note payable 192,413 203,207 Mortgage warehouse facilities 63,159 145,758 Subordinated note payable 43,750 43,750 Bonds payable 409,937 424,508 Due to related parties 18,937 5,702 Other payables 38,698 36,326 ------------------ ----------------- Total liabilities 773,894 873,251 ------------------ ----------------- Minority interests, including redeemable partnership interest 6,804 18,862 Stockholders' equity: Preferred stock, without par value. Authorized and unissued 3,000,000 shares -- -- Excess shares, $0.01 par value per share. Authorized and unissued 78,000,000 shares -- -- Common stock, $0.01 par value per share. Authorized 62,500,000 shares, issued 45,286,297 shares, outstanding 45,248,670 shares 452 452 Capital in excess of par value 828,120 816,745 Accumulated other comprehensive loss (16,672 ) (16,862 ) Accumulated distributions in excess of net earnings (326,279 ) (306,184 ) ------------------ ----------------- Total stockholders' equity 485,621 494,151 ------------------ ----------------- $ 1,266,319 $ 1,386,264 ================== =================
See accompanying notes to condensed consolidated financial statements. CNL RESTAURANT PROPERTIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands except for share data) Quarter ended Nine months ended September 30, September 30, 2003 2002 2003 2002 --------------- ---------------- -------------- --------------- Revenues: Sale of real estate $ -- $ 39,467 $ -- $ 192,360 Rental income from operating leases 16,301 15,891 47,530 53,287 Earned income from direct financing leases 2,695 3,461 7,924 9,274 Interest income from mortgage, equipment and other notes receivable 7,361 8,302 22,882 26,246 Investment and interest income 1,199 1,395 3,533 3,801 Food and beverage sales 3,391 -- 10,324 -- Other income 3,049 3,221 7,284 9,062 Net decrease in value of mortgage loans held for sale, net of related hedge (483 ) (2,071 ) (2,734 ) (5,318 ) --------------- ---------------- -------------- --------------- 33,513 69,666 96,743 288,712 --------------- ---------------- -------------- --------------- Expenses: Cost of real estate sold -- 36,029 -- 177,483 General operating and administrative 6,136 7,133 21,145 22,520 Interest expense 12,662 13,989 38,233 44,730 Food and other restaurant costs 3,440 -- 10,077 -- Property expenses 530 476 948 2,113 State and other taxes 94 244 266 485 Depreciation and amortization 3,290 3,329 9,839 10,012 Provision for loss on loans 750 339 3,352 399 Impairment provisions 1,978 104 5,054 154 --------------- ---------------- -------------- --------------- 28,880 61,643 88,914 257,896 --------------- ---------------- -------------- --------------- Earnings from continuing operations before minority interest in income of consolidated joint ventures, equity in earnings of unconsolidated joint ventures and gain/(loss) on sale of assets 4,633 8,023 7,829 30,816 Minority interest in income of consolidated joint ventures (78 ) (469 ) (1,491 ) (1,564 ) Equity in earnings of unconsolidated joint ventures 30 28 89 76 Gain/(loss) on sale of assets (2 ) 22 (8 ) (352 ) --------------- ---------------- -------------- --------------- Earnings from continuing operations 4,583 7,604 6,419 28,976 --------------- ---------------- -------------- --------------- Discontinued operations Earnings/(loss) from discontinued operations, net 1,045 (74 ) 3,737 (1,888 ) Gain on disposal of discontinued operations, net 7,420 3,713 21,501 5,629 --------------- ---------------- -------------- --------------- 8,465 3,639 25,238 3,741 --------------- ---------------- -------------- --------------- Net Income $ 13,048 $ 11,243 $ 31,657 $ 32,717 =============== ================ ============== ===============
See accompanying notes to condensed consolidated financial statements. CNL RESTAURANT PROPERTIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS- CONTINUED (In thousands except for share data) Quarter ended Nine months ended September 30, September 30, 2003 2002 2003 2002 --------------- ---------------- -------------- --------------- Earnings per share of common stock (basic and diluted): From continuing operations $ 0.10 $ 0.17 $ 0.14 $ 0.65 From discontinued operations 0.19 0.08 0.56 0.09 --------------- ---------------- -------------- --------------- Net income $ 0.29 $ 0.25 $ 0.70 $ 0.74 =============== ================ ============== =============== Weighted average number of shares of common stock outstanding 45,248,670 44,969,003 45,248,670 44,408,454 =============== ================ ============== ===============
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, 2003 and Year Ended December 31, 2002 (In thousands except for share data and per share data) Accumulated distributions Accumulated Common stock Capital in in excess other Number Par excess of of net comprehensive Comprehensive of shares value par value earnings Income/(loss) Total Income/(loss) ------------ --------- ------------- -------------- -------------- ---------- -------------- Balance at December 31, 2001 44,075,641 $ 441 $ 798,154 $ (273,783 ) $ 1,370 $ 526,182 Shares issued 1,173,354 11 20,088 -- -- 20,099 Retirement of common stock (325 ) -- (4 ) -- -- (4 ) Stock issuance costs -- -- (1,493 ) -- -- (1,493 ) Net income -- -- -- 35,590 -- 35,590 $ 35,590 Other comprehensive loss, market revaluation on available for sale -- -- -- -- (775 ) (775 ) (775 ) securities Current period adjustment to recognize change in fair value of cash flow hedges, net of tax -- -- -- -- (17,457 ) (17,457 ) (17,457 ) ---------- Total comprehensive income -- -- -- -- -- -- $ 17,358 ========== Distributions declared and paid ($1.52 per share) -- -- -- (67,991 ) -- (67,991 ) ------------ --------- ------------- -------------- ------------- ------------ Balance at December 31, 2002 45,248,670 $ 452 $ 816,745 $ (306,184 ) $ (16,862 ) $ 494,151 Acquisition of minority interest -- -- 11,375 -- -- 11,375 Net income -- -- -- 31,657 -- 31,657 $ 31,657 Current period adjustment to recognize change in fair value of cash flow hedges, net of tax -- -- -- -- 190 190 190 ---------- Total comprehensive income -- -- -- -- -- -- $ 31,847 ========== Distributions declared and paid ($1.14 per share) -- -- -- (51,752 ) -- (51,752 ) ------------ --------- ------------- -------------- ------------- ------------ Balance at September 30, 2003 45,248,670 $ 452 $ 828,120 $ (326,279 ) $ (16,672 ) $ 485,621 ============ ========= ============= ============== ============= ============
See accompanying notes to condensed consolidated financial statements. CNL RESTAURANT PROPERTIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Nine months ended September 30, 2003 2002 ------------------ ----------------- Cash flow from operating activities: Net income $ 31,657 $ 32,717 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 9,995 11,181 Impairment provisions 7,933 4,823 Provision for loss on loans 3,352 399 Gain on sale of assets (1,282 ) (2,962 ) Investments in mortgage loans held for sale (112 ) (215 ) Collection on mortgage loans held for sale 6,166 14,805 Change in inventories of real estate held for sale 82,053 30,975 Changes in other operating assets and liabilities (553 ) (14,552 ) ------------------ ----------------- Net cash provided by operating activities 139,209 77,171 ------------------ ----------------- Cash flows from investing activities: Additions to real estate investment properties -- (6,232 ) Proceeds from sale of assets 15,445 46,686 Decrease (increase) in restricted cash (1,518 ) 8,528 Investment in joint ventures -- (150 ) Investment in mortgage, equipment and other notes receivable -- (6,607 ) Collections on mortgage, equipment and other notes receivable 14,484 11,994 ------------------ ----------------- Net cash provided by investing activities 28,411 54,219 ------------------ ----------------- Cash flows from financing activities: Payment of stock issuance costs (1,493 ) (1,493 ) Proceeds from borrowing on revolver and note payable 29,892 235,333 Payment on revolver and note payable (47,686 ) (60,833 ) Proceeds from borrowing on mortgage warehouse facilities 56,040 154,235 Payments on mortgage warehouse facilities (138,639 ) (412,992 ) Retirement of bonds payable (14,571 ) (11,896 ) Payment of loan costs (150 ) -- Proceeds from sale of shares -- 9,750 Loan from stockholder 14,960 7,500 Distributions to minority interests (1,865 ) (1,075 ) Distributions to stockholders (51,752 ) (50,741 ) ------------------ ----------------- Net cash used in financing activities $ (155,264 ) $ (132,212 ) -------------------- -----------------
See accompanying notes to condensed consolidated financial statements. CNL RESTAURANT PROPERTIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (In thousands) Nine months ended September 30, 2003 2002 ------------------ ------------------ Net increase (decrease) in cash and cash equivalents $ 12,356 $ (822 ) Cash and cash equivalents at beginning of period, as restated 16,584 20,399 ------------------ ------------------ Cash and cash equivalents at end of period $ 28,940 $ 19,577 ================== ================== Supplemental disclosures of cash flow information: Interest paid $ 36,926 $ 44,131 ================== =================== Supplemental disclosures of non-cash investing and financing activities: Mortgage notes accepted in exchange for sale of properties $ 400,000 $ -- ================== =================== Conversion of related party advances into shares of common stock $ -- $ 10,350 ================== =================== Redemption of minority interest in lieu of payment on accounts receivable $ 317 $ -- ================== =================== Acquisition of minority interest $ 11,375 $ -- ================== ===================
Non-Cash Transaction: During the nine months ended September 30, 2003, the Company foreclosed on seven loans held for sale from three borrowers and accepted the underlying collateral as settlement for the mortgage loans. The collateral received had a net realizable value of $6.4 million and consisted of real estate. 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, 2003 and 2002 1. Organization and Nature of Business: CNL Restaurant Properties, Inc. ("CNL Properties") formerly CNL American Properties Fund, Inc. was organized in Maryland in May of 1994, and is a self-administered real estate investment trust ("REIT"). The term "Company" includes, unless the context otherwise requires, CNL Properties and its majority owned and controlled subsidiaries. These subsidiaries include CNL Restaurant Investments, Inc. ("CNL-Investments") formerly CNL Restaurant Properties, Inc. and CNL Restaurant Capital Corp. ("CNL-Capital Corp.") formerly CNL Franchise Network Corp. The Company's operations are divided into two business segments, real estate and specialty finance. The real estate segment, operated principally through the Company's wholly owned subsidiary CNL-Investments and its subsidiaries, owns and manages a portfolio of primarily long-term triple-net lease properties. Its activities include portfolio management, property management and dispositions. In addition, it services approximately $550 million in affiliate portfolios and earns management fees related thereto. The specialty finance segment, operated through the Company's wholly-owned subsidiary CNL-Capital Corp. and a partnership with Bank of America, CNL Restaurant Capital, LP ("CNL-Capital"), formerly known as CNL Franchise Network, LP and its subsidiaries, delivers financial solutions in the form of financing, servicing, development and advisory services to national and regional restaurant operators. Effective January 1, 2003, CNL-Capital modified certain terms relating to the alliance with Bank of America allowing the bank to assume certain costs of its portfolio operations, decreasing the referral fees paid by the bank and decreasing the bank's ownership in the alliance accordingly. In addition, CNL CAS/Corp. an affiliate of the Company's chairman, agreed to reduce its interest in the alliance. As a result, the Company's effective ownership interest in CNL-Capital increased from 84.39% to 96.26%. The Company reduced the minority interest and increased stockholders' equity by approximately $11.4 million to reflect this change in ownership. 2. Basis of Presentation: The accompanying unaudited condensed financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and note disclosures required by generally accepted accounting principles. The financial statements reflect all adjustments consisting of normal recurring adjustments which, in the opinion of management, are necessary to a fair statement of the results for the interim periods presented. Operating results for the quarter and nine months ended September 30, 2003 may not be indicative of the results that may be expected for the year ending December 31, 2003. Amounts as of December 31, 2002, included in the financial statements, have been derived from audited financial statements as of that date. These unaudited financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Form 10-K for the year ended December 31, 2002. Certain items in the prior year's financial statements have been reclassified to conform with the 2003 presentation. These reclassifications had no effect on stockholders' equity or net income. 3. Adoption of New Accounting Standards: In November 2002, the Financial Accounting Standards Board (the "FASB") issued FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". FIN 45 clarifies the requirements relating to a guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it CNL RESTAURANT PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Quarters and Nine Months Ended September 30, 2003 and 2002 3. Adoption of New Accounting Standards - Continued: assumes under that guarantee. FIN 45's provisions for initial recognition and measurement are to be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The Company's previous accounting for guarantees issued prior to January 1, 2003 is not required to be revised or restated to reflect the effect of the recognition and measurement provisions of FIN 45. The Company has not issued or modified any guarantees since the adoption of FIN 45. In January 2003, FASB issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities." FIN 46 requires that a variable interest entity be consolidated by a company if that company is subject to a majority risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. Prior to FIN 46, a company generally included another entity in its consolidated financial statements only if it controlled the entity through voting interests. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003, and to older entities no later than the first fiscal year or interim period ending after December 15, 2003. Management adopted this standard in 2003 which resulted in the consolidation of two of the Company's previously unconsolidated subsidiaries. Adoption of this standard did not change the Company's accounting for the Company's bankruptcy remote securitization entities. The Company restated all prior periods presented to conform with the 2003 presentation. The consolidation did not significantly impact the Company's financial position or results of operations. In May 2003, the FASB issued FASB Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("FASB 150"). FASB 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. FASB 150 will require issuers to classify certain financial instruments as liabilities (or assets in some circumstances) that previously were classified as equity. Some of the examples of financial instruments covered by FASB 150 include shares that are mandatorily redeemable, and other financial instruments that embody an obligation to repurchase outstanding shares or a conditional obligation that requires settlement by issuing a variable number of the entity's shares. FASB 150 also requires that minority interests for majority owned finite lived entities be classified as a liability and recorded at fair market value. FASB 150 initially applied immediately to all financial instruments entered into or modified after May 31, 2003, and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003. Effective October 29, 2003, the FASB deferred implementation of FASB 150, as it applies to minority interests of finite lived Partnerships. The deferral of these provisions is expected to remain in effect while these interests are addressed in either Phase II of the FASB's Liabilities and Equity project or Phase II of the FASB's Business Combinations Project; therefore, no specific timing for the implementation of these provisions has been stated. The implementation of the currently effective aspects of FASB 150 did not have a material impact on the Company's results of operations. 4. Real estate investment properties: During the nine months ended September 30, 2003 and 2002, the Company recorded provisions for impairment of $5.0 million and $154,000, respectively. The tenants of these properties experienced financial difficulties and/or ceased payments of rents under the terms of their lease agreements. The provisions represent the amount necessary to reduce the carrying value to net realizable value of the properties at September 30, 2003 and 2002. CNL RESTAURANT PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Quarters and Nine Months Ended September 30, 2003 and 2002 5. Real estate held for sale: Real estate held for sale consists of the following: (In thousands) September 30, December 31, 2003 2002 ----------------- ------------------- Land and buildings $ 76,756 $ 169,679 ================= ===================
The Company's specialty finance business segment actively acquires real estate assets subject to leases with the intent to sell them. All assets are subject to the provisions of Statement of Financial Accounting Standards No. 144 ("FAS 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets" consequently, the operating results and gains or losses on dispositions of the assets are recorded as discontinued operations. The Company's real estate investment subsidiary, CNL-Investments, will divest properties from time to time when strategic to its longer-term goals. When CNL-Investments establishes its intent to sell a property, all operating results relating to the properties and the ultimate gain or loss on disposition of the assets are treated as discontinued operations for all periods presented. These financial statements reflect certain reclassifications of rental related income, interest expense and other categories so as to conform with the requirements of FAS 144. The operating results of the discontinued operations are as follows: Quarters ended Nine months ended September 30, September 30, (In thousands) 2003 2002 2003 2002 -------------- ----------- ----------- ----------- ------------ Rental income $ 2,280 $ 1,862 $ 8,903 $ 6,322 Interest expense (502 ) (145 ) (1,721 ) (1,254 ) Depreciation expense (36 ) (306 ) (156 ) (1,169 ) Impairment provisions (1,022 ) (1,523 ) (2,879 ) (4,669 ) Other income (expenses) 325 38 (410 ) (1,118 ) ----------- ----------- ----------- ------------ Earnings/(loss) from discontinued operations, net 1,045 (74 ) 3,737 (1,888 ) ----------- ----------- ----------- ------------ Sales of real estate 59,260 54,718 179,758 84,651 Cost of real estate sold (51,840 ) (51,005 ) (158,257 ) (79,022) ----------- ----------- ----------- ------------ Gain on disposal of discontinued operations, net 7,420 3,713 21,501 5,629 ----------- ----------- ----------- ------------ Earnings from discontinued operations, net $ 8,465 $ 3,639 $ 25,238 $ 3,741 =========== =========== =========== ============
CNL RESTAURANT PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Quarters and Nine Months Ended September 30, 2003 and 2002 6. Borrowing: As of December 31, 2002, the Company, through CNL-Capital, maintained a $125 million and a $260 million mortgage warehouse facility. In June 2003, the $125 million facility was renewed until June 2004, and the amended agreement reduced the advances available under the mortgage warehouse facility to $100 million. Advances under the mortgage warehouse facility bear interest at the rate of LIBOR plus a price differential (0.90 percent and 0.70 percent as of September 30, 2003 and December 2002, respectively). In October 2003, the Company's $260 million mortgage warehouse facility was extended to December 15, 2003. Management expects to renew this facility to December 2004 with generally similar terms. CNL-Investment's $30 million revolving line of credit (the "Revolver") matured in October 2003 and at that time the Company exercised its one-year renewal option. 7. Related Party Transactions: During the nine months ended September 30, 2003, CNL Financial Group, Inc., an affiliate, advanced approximately $15.0 million to the Company in the form of a demand balloon promissory note. The note is uncollateralized, bears interest at LIBOR plus 2.5 percent with interest payments and outstanding principal due upon demand. At September 30, 2003, $19.5 million in total demand loans, including accrued interest, were outstanding and are included in the due to related parties caption on the balance sheet. In February 2003, Maple & Main Orlando, LLC, a subsidiary of CNL-Investments, entered into a note payable with CNL Bank, an affiliate, with an original maturity date of September 2003. The note is collateralized by a mortgage on certain real property. In August 2003, Maple & Main Orlando, LLC modified the note and extended the maturity date to August 2005. The note bears interest at the rate of LIBOR plus 325 basis points per annum and requires monthly interest only payments. The balance at September 30, 2003 of $392,000 is included in notes payable. 8. Segment Information: The Company has established CNL-Investments and CNL-Capital Corp. as separate legal entities to operate and measure the real estate and specialty finance segments, respectively. CNL-Investments is the parent company of CNL APF Partners LP, a real estate company that acquires and holds real estate, mortgage and equipment loans generally until maturity. CNL-Capital Corp. is the parent of CNL-Capital, a specialty finance company that offers financing, servicing, advisory and other services to restaurant operators. CNL-Capital acquires restaurant real estate properties subject to triple-net leases, utilizing short-term debt, and then sells them generally within one year. The following table summarizes the operating results for the quarters and nine months ended September 30, 2003 and 2002 with segment information for the two lines of business. Consolidating eliminations and other results of the parent of CNL-Investments and CNL-Capital Corp. are reflected in the "other" column. CNL RESTAURANT PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Quarters and Nine Months Ended September 30, 2003 and 2002 8. Segment Information - Continued: Quarter ended September 30, 2003 (In thousands) CNL-Investments CNL-Capital Consolidated Corp. Other Totals ------------- --------------- ------------- -------------- Revenues $ 25,466 $ 8,935 $ (888 ) $ 33,513 ------------- --------------- ------------- -------------- General operating and administrative 1,455 5,374 (693 ) 6,136 Interest expense 6,857 5,932 (127 ) 12,662 Food and other restaurant costs 3,440 -- -- 3,440 Property expenses, state and other taxes 612 12 -- 624 Depreciation and amortization 2,987 303 -- 3,290 Provision for loss on loans -- 750 -- 750 Impairment provisions 1,978 -- -- 1,978 Minority interest net of equity in earnings 20 28 -- 48 (Gain)/loss on sale of assets (2 ) 4 -- 2 ------------- --------------- ------------- -------------- 17,347 12,403 (820 ) 28,930 ------------- --------------- ------------- -------------- Discontinued operations: Earnings/(loss) from discontinued operations, net (900 ) 1,945 -- 1,045 Gain on disposal of discontinued operations, net 825 6,595 -- 7,420 ------------- --------------- ------------- -------------- (75 ) 8,540 -- 8,465 ------------- --------------- ------------- -------------- Net income $ 8,044 $ 5,072 $ (68 ) $ 13,048 ============= =============== ============= ============== Assets at September 30, 2003 $ 803,018 $ 468,060 $ (4,759 ) $ 1,266,319 ============= =============== ============= ============== 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, 2003 and 2002 8. Segment Information - Continued: Quarter ended September 30, 2002 (In thousands) CNL-Investments CNL-Capital Consolidated Corp. Other Totals ------------- --------------- ------------ ---------------- Revenues $ 22,932 $ 47,625 $ (891 ) $ 69,666 ------------- --------------- ------------ ---------------- Cost of real estate sold -- 36,029 -- 36,029 General operating and administrative 3,009 4,808 (684 ) 7,133 Interest expense 7,733 6,463 (207 ) 13,989 Property expenses, state and other taxes 672 48 -- 720 Depreciation and amortization 3,020 309 -- 3,329 Provision for loss on loans -- 339 -- 339 Impairment provisions 127 (23 ) -- 104 Minority interest net of equity in earnings (18 ) 459 -- 441 Gain on sale of assets (22 ) -- -- (22 ) ------------- --------------- ------------ ---------------- 14,521 48,432 (891 ) 62,062 ------------- --------------- ------------ ---------------- Discontinued operations: Earnings/(loss) from discontinued operations, net (701 ) 627 -- (74 ) Gain on disposal of discontinued operations, net 1,837 1,876 -- 3,713 ------------- --------------- ------------ ---------------- 1,136 2,503 -- 3,639 ------------- --------------- ------------ ---------------- Net income $ 9,547 $ 1,696 $ -- $ 11,243 ============= =============== ============ ================ Assets at September 30, 2002 $ 866,838 $ 583,639 $ (4,168 ) $ 1,446,309 ============= =============== ============ ================ Investments accounted for under the equity method at September 30, 2002 $ 1,181 $ -- $ -- $ 1,181 ============= =============== ============ ================
CNL RESTAURANT PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Quarters and Nine Months Ended September 30, 2003 and 2002 8. Segment Information - Continued: Nine months ended September 30, 2003 (In thousands) CNL-Investments CNL-Capital Consolidated Corp. Other Totals --------------- -------------- ---------- -------------- Revenues $ 75,780 $ 23,361 $(2,398 ) $ 96,743 --------------- -------------- ---------- -------------- General operating and administrative 7,368 15,591 (1,814 ) 21,145 Interest expense 20,712 18,018 (497 ) 38,233 Food and other restaurant costs 10,077 -- -- 10,077 Property expenses, state and other taxes 1,214 -- -- 1,214 Depreciation and amortization 9,051 788 -- 9,839 Provision for loss on loans -- 3,352 -- 3,352 Impairment provisions 5,054 -- -- 5,054 Minority interest net of equity in earnings 74 1,328 -- 1,402 Loss on sale of assets -- 8 -- 8 --------------- -------------- ---------- -------------- 53,550 39,085 (2,311 ) 90,324 --------------- -------------- ---------- -------------- Discontinued operations: Earnings/(loss) from discontinued operations, net (1,419 ) 5,156 -- 3,737 Gain on disposal of discontinued operations, net 1,738 19,763 -- 21,501 --------------- -------------- ---------- -------------- 319 24,919 -- 25,238 --------------- -------------- ---------- -------------- Net income $ 22,549 $ 9,195 $ (87 ) $ 31,657 =============== ============== ========== ==============
CNL RESTAURANT PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Quarters and Nine Months Ended September 30, 2003 and 2002 8. Segment Information - Continued: Nine months ended September 30, 2002 (In thousands) CNL-Investments CNL-Capital Consolidated Corp. Other Totals ---------------- -------------- ----------- -------------- Revenues $ 66,722 $ 224,363 $ (2,373 ) $ 288,712 ---------------- -------------- ----------- -------------- Cost of real estate sold -- 177,483 -- 177,483 General operating and administrative 8,589 15,684 (1,753 ) 22,520 Interest expense 23,425 21,783 (478 ) 44,730 Property expenses, state and other taxes 2,355 243 -- 2,598 Depreciation and amortization 9,086 926 -- 10,012 Provision for loss on loans -- 399 -- 399 Impairment provisions 154 -- -- 154 Minority interest net of equity in earnings (38 ) 1,526 -- 1,488 Loss on sale of assets 335 17 -- 352 ---------------- -------------- ----------- -------------- 43,906 218,061 (2,231 ) 259,736 ---------------- -------------- ----------- -------------- Discontinued operations: Earnings/(loss) from discontinued operations, net (2,541 ) 653 -- (1,888 ) Gain on disposal of discontinued operations, net 3,314 2,315 -- 5,629 ---------------- -------------- ----------- -------------- 773 2,968 -- 3,741 ---------------- -------------- ----------- -------------- Net income $ 23,589 $ 9,270 $ (142 ) $ 32,717 ================ ============== =========== ==============
9. Income Tax: The Company elected to be taxed as a REIT under the Internal Revenue Code. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a current requirement that it distribute at least 90 percent of its taxable income to its stockholders. As a REIT the Company generally will not be subject to corporate level federal income tax on net income it distributes to its stockholders, except taxes applicable to its taxable REIT subsidiaries ("TRSs") as described below. This benefit allows earnings from a REIT to be subject to federal taxation at the stockholder level, and avoids the typical double taxation applicable to most corporations. If the Company fails to qualify as a REIT in any taxable year, it will be subject to federal income taxes at regular corporate rates (including any alternative minimum tax) and may not be able to qualify as a REIT for four subsequent tax years. Even if the Company qualifies for taxation as a REIT, the Company may be subject to state and local taxes on its income and property, and to federal income and excise taxes on its undistributed taxable income. CNL RESTAURANT PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Quarters and Nine Months Ended September 30, 2003 and 2002 9. Income Tax - Continued: Stockholder distributions that are characterized as return of capital are generally non-taxable to the stockholder and the amount reduces the stockholder's basis in Company stock. Through December 31, 2002 the Company has distributed approximately $4.17 per share of an investor's original purchase price since December 31, 1995 as a non-taxable return of capital for tax purposes. The taxability of the distribution made in 2003 will not be determined until January 2004, but is likely that a portion will be considered a return of capital for income tax purposes. Each stockholder must maintain records of the purchase price, distributions received, and the applicable tax treatment of such distributions in order to determine the gain or loss upon sale of Company stock. The Company has two TRSs in which activities of the specialty finance segment and select activities of the real estate segment are conducted. Prior to January 1, 2001, Company subsidiaries were not subject to federal income tax. Loan valuation adjustments, loss reserves, loan fees, and depreciation, among other items, are treated differently for tax than for financial reporting purposes. In the aggregate, the Company's TRSs have an excess of available future deductible items over future taxable items and as such may more fully benefit from these items when the related subsidiaries produce a greater level of taxable income. The subsidiaries involved do not have sufficient historical earnings on which to expect a full potential future benefit of these future deductions. Therefore the Company has recorded an allowance against a portion of the deferred tax asset associated with the future deductible items. The consolidated provision for federal income taxes differs from the amount computed by applying the statutory federal income tax rate to the earnings of the CNL-Capital Corp segment and the earnings of the real estate segment TRS as follows: Nine months ended September 30: ---------------------------------------------------------------- 2003 2002 ---------------------------- ---------------------------- Amount Amount (In thousands) Rate (In thousands) Rate ----------------- ------ ---------------- ------ Expected tax at US statutory rate $ 2,911 34% $ 3,152 34% Adjustments: Other (314) (4) 195 2 Change in valuation allowances (2,597 ) (30) (3,347 ) (36 ) ----------------- ------- ---------------- ------ Provision for income taxes $ -- --% $ -- --% ================= ======= ================ ======
CNL RESTAURANT PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Quarters and Nine Months Ended September 30, 2003 and 2002 9. Income Tax - Continued: Components of the net deferred tax asset are as follows: (In thousands) September 30, December 31, 2003 2002 ----------------- ---------------- Deferred tax asset: Cash flow hedge related difference $ 5,477 $ 5,789 Loan valuation and related hedge differences 241 1,899 Loan origination fees 559 619 Real estate loss reserves 1,175 300 Reserve for investment losses 839 736 Unconsolidated affiliates difference (665) -- Net operating losses 292 250 Book vs Tax Allocation of Earnings 239 -- Other 548 (19 ) ----------------- ---------------- Total 8,705 9,574 Valuation allowance (5,447 ) (7,846) ----------------- ---------------- Net recorded deferred tax asset $ 3,258 $ 1,728 ================= ================ The income tax provision consists of the following: Nine months ending September 30 (In thousands) 2003 2002* ------------ ------------ Current: Federal $ 2,804 $ -- State 454 -- ------------ ------------ 3,258 -- ------------ ------------ Deferred: Federal (2,804 ) -- State (454 ) -- ------------ ------------ (3,258 ) -- ------------ ------------ Total Provision $ -- ) $ -- ============ ============
* The TRS returns filed for the year ended December 31, 2001 reflected a net operating loss and through September 30, 2002 no current taxes were payable. For reasons stated above, there was no tax benefit recorded for the loss or other future deductible items. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. The following information, including, without limitation, the Quantitative and Qualitative Disclosures About Market Risk that are not historical facts, may be forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements generally are characterized by the use of terms such as "believe," "expect" and "may." Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, the Company's actual results could differ materially from those set forth in the forward-looking statements. Factors that might cause such a difference include: changes in general economic conditions, changes in real estate conditions, availability of capital from borrowings under the Company's credit facilities, the availability of other debt and equity financing alternatives, changes in interest rates under the Company's current credit facilities and under any additional variable rate debt arrangements that the Company may enter into in the future, the ability of the Company to refinance amounts outstanding under its credit facilities at maturity on terms favorable to the Company, the ability of the Company to locate suitable tenants for its restaurant properties and borrowers for its mortgage loans, the ability of tenants and borrowers to make payments under their respective leases, secured equipment leases or mortgage loans, the ability of the Company to re-lease properties that are currently vacant or that may become vacant and the ability of the Company to securitize or sell mortgage loans or net lease properties on a favorable and timely basis. Given these uncertainties, readers are cautioned not to place undue reliance on such statements. Organization and Business CNL Restaurant Properties, Inc. ("CNL-Properties" or the "Company"), formerly CNL American Properties Fund, Inc., is the nation's largest self-advised real estate investment trust ("REIT") focused on the restaurant industry. The Company 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, 2003, has financial interests in approximately 1,000 properties diversified among more than 127 restaurant concepts in 47 states. The Company's total real estate holdings subject to lease include over 600 properties, of which approximately 60 properties are classified as held for sale. At September 30, 2003, the servicing portfolio of net lease properties and mortgages consists of approximately 2,200 units, of which approximately 1,200 are serviced on behalf of third parties. The Company operates two business segments - real estate and specialty finance. o The real estate segment, operated principally through the Company's wholly owned subsidiary CNL Restaurant Investments, Inc. ("CNL-Investments"), formerly known as CNL Restaurant Properties, Inc. (a name used by the Company effective June 27, 2003), and its subsidiaries, manage a portfolio of primarily long-term triple-net lease properties. Those responsibilities include portfolio management, property management and dispositions. In addition, CNL-Investments services approximately $550 million in affiliate real estate portfolios and earns management fees related thereto. o The specialty finance segment, operated through the Company's wholly-owned subsidiary CNL Restaurant Capital Corp. ("CNL-Capital Corp"), formerly known as CNL Franchise Network Corp., is partnered with a financial institution, Bank of America, in owning CNL Restaurant Capital, LP ("CNL-Capital"). With its subsidiaries, CNL-Capital delivers financial solutions principally in the forms of financing, advisory and other services to national and larger regional restaurant operators primarily by acquiring restaurant real estate properties, which are subject to a triple-net lease, utilizing short-term debt and selling such properties at a profit. Effective January 1, 2003 CNL-Capital modified certain terms relating to the alliance with the financial institution allowing the bank to assume certain costs of its portfolio operations and decreasing the referral fees paid by the bank, and decreasing the bank's ownership interest in CNL-Capital. In addition, an affiliate of the Company's chairman agreed to reduce its interest in CNL-Capital. As a result, the Company's effective interest in the specialty finance operations increased from 84.39 percent to 96.26 percent. CNL-Capital Corp is treated as a taxable REIT subsidiary ("TRS"). As a TRS, CNL-Capital Corp engages in activities that would previously have caused income to the Company from CNL-Capital to be disqualified from being eligible REIT income under the federal income tax rules. Now CNL-Capital earnings are subject to tax, but management can control the timing of distributions to the Company. CNL-Capital Corp originates triple-net lease properties for sale to third parties and, when market conditions may allow, securitization. CNL-Capital Corp also performs net lease and loan servicing on behalf of non-Company owners. Also, certain activities of CNL-Investments are conducted in a subsidiary that has made a similar TRS election. When the Company was created in 1994, the intent was to provide stockholders liquidity by December 31, 2005 through either listing on a national exchange, merging with another public company or liquidating its assets. The Company's officers and directors continue to monitor the public markets for opportunities. The Company's board presently has no intention to liquidate the Company. To comply with certain tax guidelines governing the significance of taxable REIT subsidiaries, the Company may pursue other alternatives relative to CNL-Capital Corp that would provide stockholder liquidity for all or a portion of the Company's investment. Liquidity and Capital Resources The Company is a self-advised real estate investment trust that reflects the earnings of its two primary segment subsidiaries, CNL-Investments and CNL-Capital Corp. The Company elected to reinvest the earnings of the specialty finance business to date, as contemplated by the agreement with its financial institution partner. The Company will continue to reinvest earnings into this subsidiary if the subsidiary is able to generate acceptable returns. CNL-Properties has continued to declare and pay distributions to its stockholders that are primarily funded by CNL-Investments activities. The remainder of the distributions to date have been funded by sales of its common stock to the Company's Chairman through a private company affiliate, CNL Financial Group, Inc. ("CNL Financial Group"), and loans from CNL Financial Group. The Company'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 has elected to distribute amounts in excess of that required. In the nine months ended September 30, 2003 and 2002 the Company distributed $51.8 million and $50.7 million, respectively, or $0.38125 per share each quarter, to its stockholders. For 2002, these distributions constituted a return of capital for tax purposes and were generally not taxable to the shareholders, but did reflect tax deductions associated with impairments and loan loss reserves recorded in 2001 and differences in non-cash charges including depreciation and amortization. The REIT's taxable income in 2002 did not include any of CNL-Capital Corp's $12.6 million in earnings. Through December 31, 2002 the Company has distributed approximately $4.17 per share of an investor's original purchase price since December 31, 1995 as a non-taxable return of capital for tax purposes. The characterization for income tax purposes of the distribution made in 2003 will not be determined until January 2004, but is likely that a portion will be considered a return of capital. In order to ensure that the Company maintained its historical level of distributions to its stockholders, the Company's Chairman, through CNL Financial Group, advanced to the Company $15.0 million during the nine months ended September 30, 2003. Throughout 2002, the Chairman received 1,173,354 shares of the Company's stock in exchange for $20.1 million in cash, including the conversion of amounts previously treated as advances. Similar stock purchases occurred in 2001. This provided capital that allowed the Company to reinvest the earnings generated by the specialty finance business. The number of shares were determined using an estimated fair value per share of $17.13 as concluded in an early 2002 valuation from a third party firm, which based its valuation on an analysis of comparable publicly traded real estate investment trusts and a discounted cash flow analysis. Also, the Chairman advanced $4.2 million to the Company in December 2002. The Company's Chairman was under no obligation to do so. Should the Company's Chairman determine not to purchase additional shares or loan additional funds to the Company, and the Company does not generate adequate cash flow from other sources, the Company may have to reduce its distribution rate. As described above, during the nine months ended September 30, 2003, CNL Financial Group, an affiliate, advanced approximately $15.0 million to the Company in the form of a demand balloon promissory note. The note is non-collateralized, bears interest at LIBOR plus 2.5 percent with interest payments and outstanding principal due upon demand. At September 30, 2003, the principal amount of such loans outstanding was $19.2 million. The Company's management expects to continue meeting short-term and long-term liquidity requirements through distributions from CNL-Investments, issuance of debt and sales of common or preferred stock. To date CNL-Capital Corp has reinvested its earnings in ongoing operations. Management expects distributions from CNL-Capital Corp to begin within the next two years. The Company is currently exploring interest in an offering of the Company's preferred stock. The proceeds of any sale of preferred stock would be used for general corporate purposes and potentially to retire existing debt. The Company may continue selling additional shares of its common stock and borrowing additional funds in order to satisfy future distribution requirements. The Company's Chairman is under no obligation to purchase additional shares of the Company's common stock or loan additional funds to the Company in order to guarantee that the Company maintains its historical distribution level to stockholders. Selling additional shares of the Company's stock may dilute a shareholder's investment, affecting its future value. However, selling stock to enable CNL-Capital to reinvest earnings may be accretive to the extent that the value of the specialty finance segment increases. In connection with maintaining its historical distribution level, the Company may sell additional shares of its common stock to CNL Financial Group or to third party purchasers. Such sales may reduce the value a shareholder receives for his or her investment upon a future liquidity event. o Specialty Finance Segment (CNL Restaurant Capital Corp) CNL-Capital originates triple-net leases, temporarily financing those assets with warehouse credit facilities and periodically selling or refinancing those assets. CNL-Capital generates income by earning a spread on assets with a return greater than its cost of borrowings, and by selling assets at gains. A triple-net lease is a long-term lease with periodic rents that require the lessee to pay expenses on the property including maintenance, repair, real estate taxes or insurance. In a securitization refinancing, the Company sells or transfers a pool of loans or properties with triple-net leases to a special purpose entity which, in turn, issues to investors securities backed by an interest in the revenue originating from the loans or triple-net leases. These transactions generate cash that is used for additional acquisitions. CNL-Capital has the following borrowing sources as of September 30, 2003, with the stated total capacity and interest rate: In thousands Amount used Capacity Maturity Interest rate (4) ---------------- ------------- --------------- ------------------- Note payable (medium term financing) (1) $ 192,020 $ 192,020 Jun 2007 2.36% Mortgage warehouse facilities (1)(2) 63,159 360,000 Annual 2.57% Subordinated note payable 43,750 43,750 Jun 2007 8.50% Series 2001-4 bonds payable (3) 39,294 39,294 2009 - 2013 8.90% ---------------- ------------- $ 338,223 $ 635,064 ================ =============
(1) Average rate excludes the impact of hedge transactions that bring the total average rate to 5.76 percent on the medium term financing and 4.11 percent on financing the warehouse facilities. (2) The $260 million mortgage warehouse facility was recently extended to December 15, 2003. Management does not anticipate CNL-Capital will require the full current capacity, and will likely decrease its capacity. Management expects renewal of this facility to December 2004 with generally similar terms. The second mortgage warehouse facility of $100 million matures in June 2004. (3) Includes $4,892 in bonds held by CNL-Investments eliminated upon consolidation in Company financial statements. (4) Excludes debt issuance and other related costs. In forming the alliance with Bank of America, the Company invested certain assets and operations into CNL-Capital and Bank of America provided CNL-Capital with a $43.75 million subordinated debt facility (the "Subordinated Debt Facility") and a warehouse credit facility (the "Warehouse Credit Facility") with an initial capacity of $500 million. The securitization market experienced considerable volatility in late 2000 as a result of rising delinquencies in securitized loan pools, falling treasury rates, macroeconomic uncertainties and sluggish restaurant sales. Investors demanded higher interest rates on the securities backed by the underlying loans issued in securitizations while ratings agencies downgraded many of the securities. In response to the market conditions, management used private market sales channels to either refinance or sell existing mortgage loans and halted the origination of new loans. Company warehouse borrowings were initially designed to provide interim financing until periodic securitizations could occur. The instability of this market led to renegotiated terms of the relationship with Bank of America by October 2001, including the need to remove certain loans held as collateral on the Warehouse Credit Facility and the requirement that CNL-Investments guarantee the repayments. The guaranty has since been reduced from $15 million to $2 million. Management is seeking resolution to the last remaining $2 million in loans and may bundle them with other mortgage loans in a medium-term financing in the fourth quarter of 2003. Bank of America agreed to finance the remaining loans held as collateral on the Warehouse Credit Facility until December 2003. The mirror credit facility expired in October 2003. In June 2002, in order to repay warehouse financing, the Company entered into a five-year term $207 million financing collateralized with $225 million in mortgage loans re-designated to reflect the Company's intention to hold them to maturity. This five-year term financing carries a variable interest rate tied to the weighted average rate of commercial paper plus 1.25 percent with a portion of such interest fixed through the initiation of a hedge transaction. The transaction provides CNL-Capital ongoing earnings on the excess of interest income over interest expense. Most sources of debt financing require that CNL-Capital maintain certain standards of financial performance such as a fixed-charge coverage ratio, a tangible net worth requirement and certain levels of available cash. Any failure to comply with the terms of these covenants would constitute a default and may create an immediate need to find alternate borrowing sources. In 2001, CNL-Capital commenced selling investment properties to third parties (the "Investment Property Sales" program) adding diversity to its original securitization model. These leased properties can be sold and may qualify the buyer for special tax treatment under Section 1031 of the Internal Revenue Code (a "Section 1031 Exchange"). Generally, Section 1031 Exchanges allow an investor who realizes a gain from selling appreciated real estate to defer paying taxes on such gain by reinvesting the sales proceeds in like-kind real estate. During the nine months ended September 30, 2003 and 2002, CNL-Capital has generated gains of $19.8 million and $17.2 million respectively. The success of this program is dependent upon achieving an optimal balance of cash flows from lease income earned in excess of holding costs versus a maximum gain on the sale. The chart below illustrates cash flows from Investment Property Sales proceeds and purchases of properties in the comparative nine-month periods: (In thousands) Nine months ended Nine months ended September 30, 2003 September 30, 2002 --------------------- ----------------------- Proceeds from Investment Property Sales program sales $ 161,469 $ 211,527 ===================== ======================= Purchases of properties to be sold under the Investment $ 56,603 $ 158,729 Property Sales program ===================== =======================
CNL-Capital's earnings depend on its continued origination and holding of new real estate inventory in order to sustain the level of earnings and sales achieved in the initial nine months of 2003. By selling more properties than are originated during a period, CNL-Capital will have fewer properties on which to earn income in a future period. At September 30, 2003, CNL-Capital had $65.5 million in properties held for sale, an amount that management believes is significantly below the desirable level of inventory to sustain continued earnings. Purchases of new properties have been challenging. Management expects continued strong demand for Investment Property Sales assets but demand could diminish if interest rates increase. Management continues to investigate other sales channels in which to market net lease assets and to monitor the securitization market for potential re-entry in the future. During the nine months ended September 30, 2003, CNL-Capital Corp derived its primary cash flows from lease and interest income earned in excess of interest expense paid ("net spread"), net gains from the Investment Property Sales program and servicing revenues. Significant cash outflows consist of operating expenses, real property purchases and capital enhancements in the loan portfolio (excess of investment over related borrowings). CNL-Capital has taken steps to reduce its credit capacity in its warehouse credit facilities of $360 million at September 30, 2003. Management has and may continue to decrease the mortgage warehouse facility capacity from its present level in order to economize on its cost, provided that there continue to be costs associated with excess capacity. CNL-Capital may also be subject to margin calls on its warehouse credit facilities. The lenders monitor asset securitization market conditions, performance of the Company's derivatives and delinquencies and based on changes in market conditions, may require a margin call to reduce the level of warehouse financing. During the nine months ended September 30, 2003 CNL-Capital made $1.4 million in margin calls, with another $2.2 million made in October 2003. During the nine-month period in 2002, CNL-Capital funded approximately $16 million in net margin calls on its warehouse credit facilities. CNL-Capital's medium term financing that provides $192 million in financing secured by Company mortgage notes receivables also contains provisions that obligate the Company to make margin calls in the event of certain borrower non-payments. Significant cash outflows could result from all such margin call provisions. Management originally contemplated stronger demand for its core triple-net lease financing in 2003. The slight rise in interest rates has spurred recent demand for the net lease financing product, but originations year to date have trailed expectations. Management attributes the slow-down to two competitive factors: o A large number of identified leases have been lost to competitors offering mortgage debt financing. With the low prevailing interest rates, large national and regional banks have offered inexpensive mortgage financing that many premier restaurant operators find more attractive than leases. CNL-Capital does not currently offer debt financing to its clients due to the volatility and high cost of capital currently associated with the securitization market. CNL-Capital instead earns a fee for the referral of such opportunities to its financial institution partner pursuant to the terms of that alliance. While debt financing represents a threat to the net lease finance product and, as a result, the success of the Investment Property Sales program, management of CNL-Capital is convinced that a debt product is not currently in the best interest of CNL-Capital. Management continues to monitor the potential reemergence of a mortgage loan product, but does not expect this market to be viable in the foreseeable future. o CNL-Capital has also lost a few transactions as new competitors have emerged with a net lease program styled after CNL-Capital's Investment Property Sales program. Competitors have met mixed success at offering this product, and management believes it can recapture this piece of the market through differentiating its Investment Property Sales program as a highly efficient, turnkey program that brings value to our restaurant clients. For the nine months ended September 30, 2003, CNL-Capital purchased $56.6 million in net lease properties as compared with $53.1 million in the nine-month period last year. In both years these originations were low compared with the $119.9 million closed in the nine-month period in 2001. These originations provide inventory necessary to execute the Investment Property Sales program and CNL-Capital typically profits from the leases while holding them. At September 30, 2003, CNL-Capital is involved in several large opportunities for net lease originations with $108.4 million approved for funding and accepted by the client, and an additional $90.2 million approved with client acceptance pending. CNL-Capital's warehouse facilities provide advances for up to 97 percent of the real estate purchase value. The Company is reinvesting its operating profits to fund the amounts not advanced by the mortgage warehouse facilities. At September 30, 2003, CNL-Capital had approximately $73 million in capital supporting its loan and lease portfolio. CNL-Capital management maintains regular contact with its mortgage warehouse facility lenders and believes that the relatively low-cost, high-advance rate financing they provide has been integral to CNL-Capital's success. As is typical of revolving debt facilities, these facilities carry a 364-day maturity and accordingly CNL-Capital is vulnerable to any changes in the terms of these facilities. The warehouse facilities currently advance an average of 89.0 percent of the original real estate value, a decline in the current quarter from 95.1 percent at June 30, 2003. This decline resulted from special terms relating to the disposition of the remaining amounts of the $117 million portfolio of properties acquired in September 2002 and from the renewed terms of one mortgage warehouse facility lender. Management believes that the average advance rates offered by lenders could decline further as warehouse lenders continue to manage their respective risk. A five percent decrease in advance rates, for example, would create a $2.7 million cash requirement for CNL-Capital, based on the outstanding net lease properties in the warehouse credit facilities at September 30, 2003. With the expected increase in the level of net lease properties on the warehouse, that cash requirement would similarly increase. While management expects its mortgage warehouse facilities to renew, any non-renewal would create an immediate need to find alternate borrowing sources. Additional liquidity risks include the possible occurrence of economic events that could have a negative impact on the franchise asset-backed securitization market and affect the quality or perception of the loans or leases underlying CNL-Capital's securitization transactions. The Company conducted its previous securitizations using bankruptcy remote entities. These entities exist independent from the Company and their assets are not available to satisfy the claims of creditors of the Company, any subsidiary or its affiliates. To date, the ratings on the loans underlying the securities issued in these transactions have been affirmed unlike the ratings of many competitors' loan pools that have been downgraded. Upon the occurrence of a significant amount of delinquencies and/or defaults, one or more of the three rating agencies may choose to place a specific transaction on ratings watch or even downgrade one or more classes of securities to a lower rating. Should the loans underlying the securities default, and the securities undergo a negative ratings action, CNL-Capital could experience material adverse consequences impacting its ability to continue earning income as servicer, and its ability to engage in future profitable securitization transactions. To potentially avoid those consequences, CNL-Capital could choose to contribute capital to serve as additional collateral supporting one or more of the bankruptcy remote entities used to facilitate a securitization. CNL-Capital holds an interest in the following securitizations, the assets and liabilities of which are not consolidated in the Company financial statements: September 30, 2003 ------------------------------------------ (In thousands) Mortgage loans in Bonds outstanding pool at par at face value(1) -------------------- --------------------- Loans and debt supporting 1998-1 Certificates issued by CNL Funding 1998-1, LP $ 198,851 $ 196,501 Loans and debt supporting 1999-1 Certificates issued by CNL Funding 1999-1, LP $ 230,656 $ 230,656 -------------------- --------------------- $ 429,507 $ 427,157 ==================== =====================
(1) Certain bonds in both the 1998-1 and 1999-1 pools are owned by CNL-Investments; the aggregate amount of these bonds of $27,824 appears as investments in the consolidated financial statements of the Company. Liquidity risk also exists from the possibility of borrower delinquencies on the mortgage loans held for sale or held to maturity. In the event of a borrower delinquency, the Company could suffer not only shortfalls on scheduled payments but also margin calls by the lenders that provide the warehouse facilities and the five-year note, subjecting the Company to unanticipated cash outflows. The Company is obligated under the provisions of its mortgage warehouse facilities and its five-year refinancing to pay down certain debt associated with borrower delinquencies or defaults within a required time frame. Most properties acquired on the mortgage warehouse facilities are required to be sold within a certain time frame. Any delinquency, default or delay in the resale of properties financed through one of these facilities would generally result in an immediate pay-down of the related debt and may restrict the Company's ability to find alternative financing. The Company's debt, excluding bonds payable, generally provides for cross-default triggers. A default of a mortgage warehouse facility, for example from a failure to make a margin call, could result in other Company borrowings becoming immediately due and payable. Management believes the Investment Property Sales program will continue to be successful, but not without risk: o 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. o The program has also benefited from a loss of confidence in the stock market. Nonetheless, our property buyers can choose investments other than real estate for future purchases. o An increase in general levels of interest rates could result in buyers requiring a higher yield. Neither the rate of return on leased properties nor the rate of return required by a buyer correlate directly with prevailing interest rates. Net lease properties acquired in anticipation of sales through the Investment Property Sales program can typically be leased to tenants at a rate that exceeds the rate a buyer is willing to accept. CNL-Capital is at risk, however, that any interest rate increases causing buyers to demand higher yields may not be matched with higher yields from tenants. This risk could cause CNL-Capital to experience lower average gains or even losses on the future sales of Investment Property Sales properties. CNL-Capital's longer-term liquidity requirements (beyond one year) are expected to be met through successful renewal of its warehouse credit facilities, gains from the Company's Investment Property Sales program, and fees from portfolio debt referrals. In addition, management believes CNL-Capital's longer term liquidity requirements will be satisfied in part by operating cash flows provided by servicing and advisory services. CNL-Capital may also seek additional debt or equity financing. Any decision to pursue additional debt or equity capital will depend on a number of factors, such as compliance with the terms of existing credit agreements, the Company's financial performance, industry or market trends and the general availability of attractive financing transactions. However, there can be no assurance that future expansion will be successful due to competitive, regulatory, market, economic and other factors. o Real Estate Segment (CNL Restaurant Investments, Inc.) CNL-Investments cash flows primarily consist of rental income from tenants on restaurant properties owned, interest income on mortgage loans, dispositions of properties and income from holding interests in prior loan securitizations including those originated by predecessor entities of CNL-Capital. CNL-Investments' cash outflows are predominantly interest expense, operating expenses, reinvestment of disposition proceeds and distributions to CNL-Properties. Borrowing resources at September 30, 2003 for CNL-Investments include: (In thousands) Amount Used Capacity Maturity Interest Rate (1) --------------- -------------- -------------- ------------------ Revolver $ 7,000 $ 30,000 Oct 2004 3.62% Series 2000-A bonds payable 255,322 255,322 2009-2017 7.94% Series 2001 bonds payable 120,212 120,212 Oct 2006 1.59% --------------- -------------- $ 382,534 $ 405,534 =============== ==============
(1) Excludes debt issuance and other related costs. CNL-Investments provides a guaranty of $2 million of CNL-Capital's mortgage warehouse facility debt and also provides a guaranty of up to ten percent of CNL-Capital's five year term financing. CNL-Investments short-term debt consists of the $30 million revolving line of credit (the "Revolver") entered into in October 2001. The Company utilizes the Revolver from time to time to manage the timing of inflows and outflows of cash from operating activities. The Company's Revolver matured in October 2003, and at that time the Company exercised its one-year renewal option. CNL-Investments also has medium-term and long-term bond financing. Rental income received on the 379 properties pledged as collateral on medium and long-term financing is used to make scheduled reductions in bond principal and interest. Liquidity risks within the real estate business include the potential that a tenant's financial condition could deteriorate, rendering it unable to make lease payments. Generally, CNL-Investments uses a triple-net lease to lease its properties to its tenants. The triple-net lease is a long-term lease that requires the tenant to pay expenses on the property. The lease somewhat insulates CNL-Investments from significant cash outflows for maintenance, repair, real estate taxes or insurance. However, if the tenant experiences financial problems, rental payments could be interrupted and in the event of tenant bankruptcy the Company may be required to fund certain expenses in order to retain control or take possession of the property and its operations. This could expose the Company to successor liabilities and further affect liquidity. Such events may adversely affect the Company's revenue and operating cash flow. Most sources of debt financing require that CNL-Investments maintain certain standards of financial performance such as a fixed-charge coverage ratio, and impose a limitation on the distributions from CNL-Investments to the Company tied to funds from operations. Any failure to comply with the terms of these covenants would constitute a default and may create an immediate need to find alternate borrowing sources. On October 10, 2003, a tenant of CNL-Investments, Chevy's Holding, Inc. and numerous operating subsidiaries, ("Chevy's") filed for voluntary bankruptcy under the provisions of Chapter 11. Chevy's operates the Chevy's, Rio Bravo and Fuzio concepts. CNL-Investment owns 22 Chevy's units, with a total investment of $54.1 million. As of September 30, 2003 the rental payments on the leases were current, however Chevy's has rejected 16 of the 22 leases. Rent for the month of October 2003 is currently unpaid on all 22 sites and will be included in the lease rejection claim for the closed sites. Management expects the 16 rejected sites to be re-leased or sold with no additional resulting impairment. Management expects Chevy's to pay rent on the six remaining sites, beginning with November 2003 rent, for so long as Chevy's actively operates those sites. Payment of October rent on these six sites would be made generally upon completion of the plan of reorganization. Management is aware of other multi-unit tenants that are also experiencing financial difficulties. In the event the financial difficulties continue, the Company's collection of rental payments could be interrupted. At present, most of these tenants continue to pay rent substantially in accordance with lease terms. However, the Company continues to monitor each tenant's situation carefully and will take appropriate action to place the Company in a position to maximize the value of its investment. Management has estimated the loss or impairment on the related properties and included such charge in earnings through September 30, 2003, but acknowledges that the estimation process is challenging due to the number of possible outcomes that may result from a default situation. While management believes it has recorded an appropriate impairment charge at September 30, 2003, based on its assessment of the tenants' financial difficulties and its knowledge of the properties, facts may develop in future periods that may suggest the need for a larger impairment charge. The Company has experienced tenant bankruptcies and may commit further resources in seeking resolution to these properties including funding restaurant businesses directly or on behalf of successor tenants. For example, where the value of the leased real estate is linked to the financial performance of the tenant, CNL-Investments may allocate capital to invest in turnaround opportunities. Certain net lease properties are pledged as collateral for the Series 2000-A and Series 2001 triple-net lease mortgage bonds payable. In the event of a tenant default relating to pledged properties, the Company may elect to contribute additional properties or substitute properties into these securitized pools from properties it owns not otherwise pledged as collateral. These pools contain properties potentially impacted by the recent bankruptcy filing of Chevy's and the financial difficulties of other restaurant operators; management is evaluating the impact to the pools, including any need to identify substitute properties. In the event that the Company has no suitable substitute property, the adverse performance of the pool might inhibit the Company's future capital raising efforts, including the ability to refinance the Series 2001 bonds maturing in 2006. CNL-Investments management believes the combination of availability on its line of credit and the projected disposition volume in 2003 will permit it to meet its short-term liquidity objectives. Long-term liquidity requirements will be met through a combination of selectively disposing assets and reinvesting the proceeds in higher-yielding investments and cash from operating activities. Off-Balance Sheet Transactions The Company holds a retained interest in approximately $450 million in loans transferred to unconsolidated trusts that provide the collateral for long-term bonds as discussed in the specialty finance segment liquidity section above. While the Company is not contractually obligated to guarantee the repayment of the bonds, in the event borrower repayments of principal and interest are not adequate to repay the bondholders, the Company may elect to contribute additional assets into these unconsolidated entities to supplement cash flows and maintain attractive ratings on these pools. Recent accounting pronouncements have not required the consolidation of these trusts. The Company is a partner in several joint ventures that are accounted for under the equity method. Recent accounting pronouncements requiring the Company to fully consolidate certain joint ventures have been implemented, and the Company's financial results in the accompanying financial statements reflect such consolidation. Those joint ventures not required by recent accounting pronouncements to be fully consolidated are not significant to the presentation of the Company's financial position or results of operations. Interest Rate Risk The Company generally invests in assets with a fixed return by financing a portion of them with variable rate debt. Floating interest rates on variable rate debt expose the Company to interest rate risk. As of September 30, 2003, the Company's variable rate debt includes the following: o $7 million on its Revolver; o $63 million on its mortgage warehouse facilities; o $192 million on the June 2002 five-year financing; and o $120 million outstanding on the Series 2001 bonds. Generally, the Company uses derivative financial instruments (primarily interest rate swap contracts) to hedge against fluctuations in interest rates from the time it originates fixed-rate mortgage loans until the time they are sold. The Company generally terminates certain of these contracts upon the sale of the loans, and both the gain or loss on the sale of the loans and the additional gain or loss on the termination of the interest rate swap contracts is recognized in the consolidated statement of operations. Additionally, the Company uses interest rate swaps and caps to hedge against fluctuations in interest rates on a portion of its floating rate debt. Under interest rate swaps, the Company agrees with other parties to exchange, at specified intervals, the difference between fixed-rate and floating-rate interest amounts calculated by reference to an agreed upon notional principal amount. Under a cap, a third party agrees to assume any interest costs above a stated rate. Changes in the values of these interest rate swaps and caps are reflected in other comprehensive income. The Company also invests in financial instruments that are subject to various forms of market risk such as interest rate fluctuations, credit risk and prepayment risk. The value of its mortgage loans held for sale and its investments change as a result of fluctuating interest rates, credit risk, market sentiment and other external forces, which could materially adversely affect liquidity and capital resources. Management estimates that a one-percentage point increase in long-term interest rates as of September 30, 2003 would have resulted in a decrease in the fair value of its fixed-rate loans held for sale of $1.0 million. This decline in fair value would have been offset by an increase in the fair value of certain interest rate swap positions of $1.3 million. In addition, a one-percentage point increase in short-term interest rates for the nine months ended September 30, 2003 would have resulted in additional interest costs of approximately $1.3 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 following discussion of results from operations is by segment. All segment results are before eliminating adjustments and results of the holding company. As a result, the sum of amounts applicable to each segment will not, in some cases, equal the Company total amount reflected in the condensed consolidated statement of operations. Company earnings by segment for comparative three-month and nine-month periods are reflected in the following table: Three months ended Nine months ended September 30, September 30, Net income by segment (in millions) 2003 2002 2003 2002 ------------ -------------- -------------- ------------- Real estate segment $ 8.0 $ 9.5 $ 22.5 $ 23.6 Specialty finance segment 5.1 1.7 9.2 9.3 Other holding company results and consolidating eliminations (0.1 ) -- -- (0.2 ) ------------ -------------- -------------- ------------- Net income $ 13.0 $ 11.2 $ 31.7 $ 32.7 ============ ============== ============== =============
o The real estate segment posted comparable earnings in three-month and nine-month periods ended September 30, 2003 compared with the same periods in 2002. Impairment charges, including amounts attributed to discontinued operations, have increased from $4.1 million to $6.9 million in the nine months ended September 30, 2002 and 2003 respectively. These additional costs are offset in part by a reduction in general and administrative expenses, decreased property expenses and decreased interest costs. A significant tenant default led to increased property expenses in early 2002 that have not been repeated to date in 2003. o The specialty finance business segment posted its strongest quarterly earnings this year, and has approximately the same year-to-date net income as the same period in 2002. Gains from the Investment Sales Program are approximately $19.8 million and $17.2 million in the nine months ended September 30, 2003 and 2002, respectively, and $6.6 million and $5.3 million in the quarters ended September 30, 2003 and 2002, respectively. This is offset somewhat by the narrowing of the net spread between the segment's rental and interest income and its interest expense as a result of slightly higher costs of debt. In addition, estimated potential loan losses on the portfolio of loans held for sale declined in the current quarter compared to last year, and hedge valuations improved, partially offset by an increase in estimated losses on the portfolio of loans held for long term investment for a net charge of $1.2 million and $2.4 million in the quarters ended September 30, 2003 and 2002, respectively. Revenues The total revenues by segment for comparative three-month and nine-month periods are as follows: For the three months ended For the nine months ended September 30, September 30, Total revenues by segment (in millions) 2003 2002 2003 2002 ------------- ------------- ------------- -------------- Real estate segment $ 25.4 $ 22.9 $ 75.8 $ 66.7 Specialty finance segment * 8.9 47.6 23.4 224.4 Other holding company results and consolidating eliminations (0.8 ) (0.8 ) (2.5 ) (2.4 ) ------------- ------------- ------------- -------------- Total revenues * $ 33.5 $ 69.7 $ 96.7 $ 288.7 ============= ============= ============= ==============
* See discussion below for the accounting treatment of sales of restaurant properties as discontinued operations. Revenues are discussed based on the individual segment results, beginning first with the results of the real estate segment: For the three months ended For the nine months ended September 30, September 30, Real estate segment revenues by line item (in millions) 2003 2002 2003 2002 ------------ ------------ ------------- ------------ Rental income from operating leases $ 16.3 $ 15.1 $ 47.6 $ 45.9 Earned income from direct financing 2.7 3.5 7.9 9.3 Interest income from mortgage equipment and other notes receivable 1.0 1.0 3.2 3.1 Investment and interest income 1.2 1.2 3.4 3.6 Food and beverage sales 3.4 - 10.3 - Other income 0.8 2.1 3.4 4.8 ------------ ------------ ------------- ----------- Total segment revenues $ 25.4 $ 22.9 $ 75.8 $ 66.7 ============ ============ ============= ===========
The rental revenue from vacant and other properties sold is classified as a component of discontinued operations for all periods presented and is not included in the segment revenues above. The combined amount of rental income from operating leases and earned income from direct financing leases from continuing operations between quarter and nine-month periods has not changed significantly. The most significant change in revenues relates to food and beverage sales. When management believes it will protect the real estate values, the Company may purchase or assume the operations of a restaurant tenant for a period of time. Revenues from these turnaround restaurant opportunities of approximately $10.3 million are offset by $10.1 million in related expenses during the nine months ended September 30, 2003. Revenues of approximately $3.4 million are offset by $3.4 million in related expenses during the three months ended September 30, 2003. Earnings from restaurant operations during the nine months ended September 30, 2003 constitute approximately 0.1 percent of the real estate segment earnings. Management views this activity as providing strength to the core real estate segment operations. Other income in the real estate segment has declined in the quarter and nine months ended September 30, 2003 compared with the same periods in 2002. The decline is primarily the result of decreased disposition fee income and other billings of direct costs to third parties using CNL-Investment for property management services. The revenues of the specialty finance segment are more variable than those of the real estate segment. The following table provides additional information relating to the revenues of this segment: For the three months ended For the nine months ended September 30, September 30, Specialty finance segment revenues by line item (in millions) 2003 2002 2003 2002 ------------- ------------ ------------ ------------- Sale of real estate $ -- $ 39.5 $ -- $ 192.4 Rental income from operating leases -- 0.8 -- 7.4 Interest income from mortgage equipment and other notes receivable 6.3 7.3 19.7 23.1 Investment and interest income 0.2 0.4 0.6 0.8 Other income 2.8 1.7 5.8 6.0 Net decrease in value of mortgage loans held for sale, net of related hedge (0.4 ) (2.1 ) (2.7 ) (5.3 ) ------------- ------------ ------------ ------------- Total segment revenues $ 8.9 $ 47.6 $ 23.4 $ 224.4 ============= ============ ============ =============
The comparability of the specialty finance segment revenues is significantly impacted by the method of accounting for its sales of real estate that are recorded pursuant to discontinued operations guidance described more fully below. The following information assembles select financial information, presented in accordance with generally accepted accounting principles, so as to improve comparability between periods of this segment's Investment Property Sales program sales: For the three months ended For the nine months ended September 30, September 30, Specialty finance segment Investment Property Sales program gains (in millions) 2003 2002 2003 2002 ------------- ------------- ------------- -------------- Sale of real estate, as reported $ -- $ 39.5 $ -- $ 192.4 Cost of real estate sold, as reported -- 36.0 -- 177.5 Gain on disposal of discontinued operations, net as reported 6.6 1.9 19.8 2.3 ------------- ------------- ------------- -------------- Total gains from Investment Property Sales program sales $ 6.6 $ 5.4 $ 19.8 $ 17.2 ============= ============= ============= ==============
Actual proceeds from Investment Property Sales program sales are $161.5 million and $211.5 million in the nine months ended 2003 and 2002 respectively. Approximately 126 and 135 properties were sold in the nine months ended September 30, 2003 and 2002, respectively. Gains from sales in the quarter and nine months ended September 30, 2003 outpace those in the same periods in 2002 as a result of an increase in the realized gain percentage between years. Inventory is lower than desired at September 30, 2003 and it is not likely that gains for the remainder of the year will continue at the same pace. Other matters impacting the comparability of the various components of revenues between the comparative periods presented include: o Rental income from operating leases reflects a decrease because in 2002 rental revenues associated with properties acquired after December 31, 2001 were recorded as a component of income from discontinued operations while properties acquired prior to January 1, 2002 were recorded in rental income. Beginning January 1, 2003, however, these revenues are recorded in discontinued operations regardless of the date of acquisition. All properties owned by this segment are held with the intent to be sold. o Interest income from mortgage, equipment and other notes receivable has decreased between the comparative quarters presented as a result of normal principal repayments as well as foreclosure actions, the modification of terms and other impacts of certain delinquent loans between years. The Company has not originated new mortgage loans since May of 2001, focusing instead on the opportunity to refer potential borrowers to CNL-Capital's financial institution partner. o Despite a hedging strategy designed to address market volatility in the value of loans held for sale, the loan valuation increases associated with decreases in interest rates in all four periods presented in the chart above, were more than offset by estimated potential default losses and valuation decreases (liability increases) in hedge contracts. The results have improved in both the quarter and nine months ending September 30, 2003 compared with the same periods in 2002 as a result of improvements in the hedge valuations partially offset by increased potential default related loan reserves. o Other income reflects, among other items, a $0.4 million increase associated with advisory services in the nine months ended September 30, 2003 compared with the prior nine-month period. Advisory fees in the three months ended September 30, 2003 are $1.5 million, outpacing the reported performance in all prior quarters of this unit, as several key transactions closed. On the other hand, referrals of other income reflects a $0.1 million reduction during the comparative nine-month periods relating to fees from loans and other products as a result of a modification of certain terms of the alliance agreement with Bank of America. Other income for the three months ended September 30, 2003 increased $1.1 million compared to the same period in 2002 including $1.0 million in additional advisory services revenue and $0.1 million in additional referral fees. The additional referral revenue is a result of increased referral volume. Expenses Cost of real estate sold is associated solely with the Investment Property Sales program of the specialty finance segment and relates to properties on hand at the beginning of 2002 that were sold by December 31, 2002. In 2002 costs associated with properties acquired after 2001 were required to be included as a component of the gain on disposal of discontinued operations, while in 2003 this treatment is required regardless of acquisition date. A table and related discussion of the comparative results is reported above under the discussion of related revenues. General operating and administrative expenses consist primarily of payroll-related and legal and other professional expenses. The following table illustrates the comparative period expenses by segment: For the three months ended For the nine months ended General operating and administrative expenses September 30, September 30, by segment (in millions) 2003 2002 2003 2002 ----------- ------------ ------------ ------------ Real estate segment $ 1.4 $ 3.0 $ 7.3 $ 8.6 Specialty finance segment 5.4 4.8 15.6 15.7 Other holding company results and consolidating eliminations (0.7 ) (0.7 ) (1.8 ) (1.8 ) ----------- ------------ ------------ ------------ Total general operating and administrative expenses $ 6.1 $ 7.1 $ 21.1 $ 22.5 =========== ============ ============ ============
o CNL-Investments general operating and administrative expenses include the costs associated with resolving delinquencies and pursuing turnaround opportunities presented by defaulted tenants. These expenses have decreased in both the three and nine-month periods ended September 30, 2003 compared to the prior year period. Fluctuations in the timing of professional, legal and other expenses can give rise to quarterly variations. In addition, management has identified certain operating efficiencies and has held its personnel costs below original plan. o CNL-Capital has maintained fairly constant levels of general and administrative expenses across nine-month periods presented. Fluctuations in the timing of professional, legal and other expenses can give rise to quarterly variations. Interest expense constitutes one of the most significant operating expenses, excluding cost of real estate sold by CNL-Capital, which is a component of the gain from the disposal of discontinued operations for properties acquired after 2001. Certain interest expense is included in operating results from discontinued operations. Components of interest expense are as follows: For the three months ended For the nine months ended September 30, September 30, Interest expense by segment (in millions) 2003 2002 2003 2002 ----------- ------------- ------------- -------------- Real estate segment $ 6.9 $ 7.7 $ 20.7 $ 23.4 Specialty finance segment 5.9 6.5 18.0 21.8 Other holding company results and consolidating eliminations (0.1 ) (0.2 ) (0.5 ) (0.5 ) ----------- ------------- ------------- -------------- Total interest expense $ 12.7 $ 14.0 $ 38.2 $ 44.7 =========== ============= ============= ==============
o CNL-Investments decreased its level of debt throughout most of 2002 through sales of real estate decreasing real estate segment interest expense. In addition the segment reflects a lower cost of debt as a result of the decline in interest rates. o CNL-Capital has reduced its interest-bearing debt, in particular as a result of decreased real estate assets, decreasing interest expense for the specialty finance segment. The decrease is due in part to a decrease in loan assets and the corresponding debt from 2002 as a result of principal amortization, payoffs and foreclosures without the origination of new loans to replace these assets. Interest expense associated with properties held for sale acquired after December 31, 2001 is recorded as a component of income from discontinued operations and in 2003 this same treatment is applied to all properties, regardless of acquisition date. This required accounting has served to decrease interest expense reported in this category from 2002 to 2003. While the weighted average effective interest charged by the mortgage warehouse facilities has decreased from 4.07 percent in the nine months ended September 30, 2002 to 3.33 percent in the nine months ended September 30, 2003, the weighted average rate charged by the five-year financing of over $225 million in loans entered into in June 2002 is 5.87 percent, so the cost to hold the loan portfolio has actually increased between years. By removing these assets from warehouse financing, the Company complied with the terms of the warehouse facility and was able to preserve net spread resulting from the excess of the interest income received over the interest expense paid, despite the increased interest expense on the five-year financing. During the three and nine months ended September 30, 2003, the Company incurred food and other restaurant costs associated with CNL-Investments' operation of restaurant units of $3.4 million and $10.1 million respectively. These amounts approximate the revenues attributed to food and beverage sales. No such operations existed prior to 2003. CNL-Investments employs a strategy of temporarily operating defaulted restaurant properties and potentially acquiring other restaurant operations to either recapture value in the underlying real estate or to take advantage of its access to turnaround specialists, and in so doing seeks to bring value to the Company. To date these operations have been insignificant to earnings. The Company recognized $0.5 million and $0.9 million in property expenses during the three and nine months ended September 30, 2003, respectively, compared with $0.5 million and $2.1 million in the three and nine months ended September 30, 2002. Property expenses typically occur when properties are defaulted in the real estate segment. In 2003, fewer vacant properties are on hand. Depreciation and amortization expenses reflect the level of assets invested in leased properties held by the real estate segment. Certain of these expenses have been reflected as a component of discontinued operations. The specialty finance segment does not depreciate its properties held for sale, but has recorded $0.3 million and $0.8 million in depreciation in the three and nine months ended September 30, 2003, respectively, on office and computer equipment compared with $0.3 million and $0.9 million during the three and nine months ended September 30, 2002, respectively. The Company through the specialty finance segment recorded a provision for loan losses of $0.8 million and $0.3 million in three months ended September 30, 2003 and 2002, respectively. The provision for loan losses is $3.4 million and $0.4 million during the nine months ended September 30, 2003 and 2002, respectively, resulting primarily from a second quarter charge in 2003 associated with non-performing loans. Management maintains a watch on the potential for future losses against its loan portfolio and records a reserve as potential losses become evident. The Company has recorded impairment provisions of $2.0 million and $5.0 million in the three and nine months ended September 30, 2003, excluding impairments on properties treated as discontinued operations as described below, compared with less than $0.1 million and $0.2 million in such charges during the three and nine months ended September 30, 2002. Impairments reflected in discontinued operations are $1.0 million and $1.9 million in the three and nine months ended September 30, 2003, respectively, compared with $1.6 million and $3.9 million in such charges during the three and nine months ended September 30, 2002, respectively. While total impairments have increased from $4.1 million to $6.9 million in the nine month periods as a result of increased estimated losses on properties leased to tenants experiencing financial difficulties, the Company has fewer such properties that management currently believes should be sold. Impairment provisions are recorded when circumstances indicate that future expected cash flows do not recover the carrying cost of the individual properties. As previously discussed, in the current periods certain properties required impairment charges due to financial difficulties experienced by the tenants. The Company's statement of operations reflects a charge for minority interest in income of consolidated joint ventures of $1.5 million and $1.6 million for the nine months ended September 30, 2003 and 2002, respectively. Similarly, the three-month periods ended September 30, 2003 and 2002 reflect a charge of $0.1 million and $0.5 million, respectively. The reduction between years resulted from the January 1, 2003, reduction in minority ownership of CNL-Capital. The Company accounts for certain of its revenues and expenses as originating from discontinued operations pursuant to Statement of Financial Accounting Standard No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS 144"). FAS 144 requires that sales of real estate, or the designation of a real estate asset as held for sale, be treated as discontinued operations. Any gain or loss from such disposition, and any income or expenses associated with these real estate assets, are included in the income statement as discontinued operations. CNL-Capital's Investment Property Sales program, a vital piece of its ongoing operating strategy and a contributor of substantial gains is nonetheless deemed to fall under the new guidance. Therefore, gains from properties sold under the Investment Property Sales program are included as discontinued operations, unless the gain was realized in 2002 for properties acquired before January 1, 2002. Income and expenses associated with Investment Property Sales program assets are also included in discontinued operations, except for 2002 income and expenses associated with properties acquired before January 1, 2002 and sold by December 31, 2002. In addition, CNL-Investments has designated certain real estate assets since December 31, 2001 as held for sale and has included income and expenses associated with the assets as well as the gain or loss from any dispositions of these assets as discontinued operations for all periods presented. The table below illustrates the treatment of discontinued operations by segment: For the three months ended For the nine months ended Income from discontinued operations September 30, September 30, by segment (in millions) 2003 2002 2003 2002 ------------- ------------ ----------- ------------- Real estate segment discontinued operations: Operating loss $ (0.9 ) $ (0.7 ) $ (1.4 ) $ (2.5 ) Gains on disposal of discontinued operations 0.8 1.8 1.7 3.3 Specialty finance segment discontinued operations: Operating income 1.9 0.6 5.1 0.6 Gains on disposal of discontinued operations 6.6 1.9 19.8 2.3 ------------- ------------ ----------- ------------- Total income from discontinued operations $ 8.4 $ 3.6 $ 25.2 $ 3.7 ============= ============ =========== =============
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. The Company has not reflected an income tax expense to date through September 30, 2003. This is attributed to the following: o At the time of the election, differences existed between the tax and the financial reporting treatment of certain items such as loan loss reserves and reserves for impairment and depreciation. In the aggregate, these differences served to defer deductions and accelerate income reported for tax purposes prior to the TRS election, with the benefit of the reversal of such differences inuring to the TRS. This benefit gave rise to a deferred tax asset. Management did not believe that the realization of the deferred tax asset was more likely than not. Therefore the deferred tax asset was completely offset by a valuation allowance, and no benefit was recognized January 1, 2001. o As CNL-Capital has generated earnings subsequent to its initial year, management has reversed the extent of the valuation allowance, thus recognizing some net deferred tax asset as adjusted by current changes. This reversal created a net deferred tax asset that has generally approximated the cumulative tax being paid. The activities of CNL-Capital can be characterized primarily as the holding or disposition of certain loans secured by restaurant real estate, and the direct purchase and re-sale of restaurant real estate as part of the Investment Property Sales program. The loan portfolios resulted from originations prior to July 2001, while the Investment Property Sales program remains a key component of the ongoing CNL-Capital business model. The activities of the Investment Property Sales program are characterized as discontinued operations, as required. The success of the Investment Property Sales program coupled with the rules governing accounting for discontinued operations generally cause the discontinued operations of CNL-Capital to be positive, as reflected by $24.9 million in income from discontinued operations in the nine months ended September 30, 2003, while the continuing operations of CNL-Capital reflect a loss of $15.7 million. The entire tax expense of CNL-Capital is attributed to discontinued operations until such time as earnings outside of discontinued operations reflect sustainable positive results. A current tax expense of $3.3 million is reflected in the nine months ended September 30, 2003. The deferred tax benefit recorded as a result of reducing the valuation allowance on deferred tax assets, while not directly related to the Investment Property Sales program, would not be recognized but for the Investment Property Sales program. Without the activities characterized as discontinued operations, the benefit of the deferred tax assets would not be recognizable. Thus the $3.3 million in deferred tax credits is reflected as a component of discontinued operations. In November 2002, the Financial Accounting Standards Board (the "FASB") issued FASB Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others". FIN 45 clarifies the requirements relating to a guarantor's accounting for, and disclosure of, the issuance of certain types of guarantees. FIN 45 requires that upon issuance of a guarantee, the guarantor must recognize a liability for the fair value of the obligation it assumes under that guarantee. FIN 45's provisions for initial recognition and measurement are to be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The Company's previous accounting for guarantees issued prior to January 1, 2003 is not required to be revised or restated to reflect the effect of the recognition and measurement provisions of FIN 45. The Company has not issued or modified any guarantees since the adoption of FIN 45. In January 2003, FASB issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities." FIN 46 requires that a variable interest entity be consolidated by a company if that company is subject to a majority risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. Prior to FIN 46, a company generally included another entity in its consolidated financial statements only if it controlled the entity through voting interests. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003, and to older entities no later than the first fiscal year or interim period ending after December 15, 2003. Management adopted this standard in 2003 which resulted in the consolidation of two of the Company's previously unconsolidated subsidiaries. Adoption of this standard did not change the Company's accounting for the Company's bankruptcy remote securitization entities. The Company restated all prior periods presented to conform with the 2003 presentation. The consolidation did not significantly impact the Company's financial position or results of operations. In May 2003, the FASB issued FASB Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("FASB 150"). FASB 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. FASB 150 will require issuers to classify certain financial instruments as liabilities (or assets in some circumstances) that previously were classified as equity. Some of the examples of financial instruments covered by FASB 150 include shares that are mandatorily redeemable, and other financial instruments that embody an obligation to repurchase outstanding shares or a conditional obligation that requires settlement by issuing a variable number of the entity's shares. FASB 150 also requires that minority interests for majority owned finite lived entities be classified as a liability and recorded at fair market value. FASB 150 initially applied immediately to all financial instruments entered into or modified after May 31, 2003, and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003. Effective October 29, 2003, the FASB deferred implementation of FASB 150, as it applies to minority interests of finite lived Partnerships. The deferral of these provisions is expected to remain in effect while these interests are addressed in either Phase II of the FASB's Liabilities and Equity project or Phase II of the FASB's Business Combinations Project; therefore, no specific timing for the implementation of these provisions has been stated. The implementation of the currently effective aspects of FASB 150 did not have a material impact on the Company's results of operations. Item 3. Quantitative and Qualitative Disclosures About Market Risk. Information regarding the Company's market risk at December 31, 2002 is included in its Annual Report on Form 10-K for the year ended December 31, 2002. The material changes in the Company's market risk are discussed in Item 2 above. Information regarding the Company's market risk relating to changes in interest rates are incorporated herein by reference to Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Interest Rate Risk" herein. Item 4. Controls and Procedures. The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed in the Company's filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. The principal executive and financial officers of the Company have evaluated the Company's disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q and have determined that such disclosure controls and procedures are effective. There was no change in internal control over financial reporting that occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting. PART II. OTHER INFORMATION Item 1. Legal Proceedings. Inapplicable. Item 2. Changes in Securities. Inapplicable. Item 3. Default upon Senior Securities. Inapplicable. Item 4. Submission of Matters to a Vote of Security Holders. Inapplicable. Item 5. Other Information. Inapplicable. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 2.1 Agreement and Plan of Merger, by and among the Registrant, CFA Acquisition Corp., CNL Fund Advisors, Inc. and CNL Group, Inc., dated March 11, 1999 (included as Exhibit 10.38 to the Registrant's Registration Statement No. 333-74329 on Form S-4 (the "Form S-4") as originally filed and incorporated herein by reference). 2.2 Agreement and Plan of Merger, by and among the Registrant, CFC Acquisition Corp., CFS Acquisition Corp., CNL Financial Corp., CNL Financial Services, Inc., CNL Group, Inc., Five Arrows Realty Securities L.L.C., Robert A. Bourne, Curtis B. McWilliams and Brian Fluck, dated March 11, 1999 (included as Exhibit 10.39 to the Form S-4 as originally filed and incorporated herein by reference). 3.1 CNL American Properties Fund, Inc. Amended and Restated Articles of Incorporation, as amended (included as Exhibit 3.1 to the Registrant's Form 10-Q for the quarter ended June 30, 1999 and incorporated herein by reference). 3.2 CNL American Properties Fund, Inc. Amended and Restated Bylaws (included as Exhibit 3.2 to the Registrant's Registration Statement No. 333-37657 on Form S-11 and incorporated herein by reference). 3.3 CNL American Properties Fund, Inc. Second Amended and Restated Articles of Incorporation (included as Exhibit 3.3 to the Registrant's Form 10-Q for the quarter ended June 30, 2000 and incorporated herein by reference). 3.4 Articles of Amendment to Second Amended and Restated Articles of Incorporation of CNL American Properties Fund, Inc. (included as Exhibit 3.4 to the Registrant's Form 10-Q for the quarter ended June 30, 2002 and incorporated herein by reference). 3.5 Articles of Amendment to Second Amended and Restated Articles of Incorporation of CNL American Properties Fund, Inc. (included as Exhibit 3.5 to the Registrants Form 10-Q for the quarter ended June 30, 2003 and incorporated herein by reference). 3.6 Second Amended and Restated Bylaws of CNL American Properties Fund, Inc. (filed herewith). 4.1 Form of Stock Certificate (included as Exhibit 4.5 to the Registrant's Registration Statement No. 33-78790 on Form S-11 and incorporated herein by reference). 10.1 Form of Indemnification Agreement dated as of April 18, 1995, between the Registrant and each of James M. Seneff, Jr., Robert A. Bourne, G. Richard Hostetter, J. Joseph Kruse, Richard C. Huseman, John T. Walker, Jeanne A. Wall, Lynn E. Rose and Edgar J. McDougall, dated as of January 27, 1997, between the Registrant and Steven D. Shackelford, dated as of February 18, 1998, between the Registrant and Curtis B. McWilliams, and dated as of September 1, 1999, between the Registrant and each of Howard J. Singer, John L. Farren, Timothy J. Neville, Michael I. Wood and Barry L. Goff (included as Exhibit 10.9 to the Registrant's Registration Statement No. 333-15411 on Form S-11 and incorporated herein by reference). 10.2 Amended and Restated Agreement of Limited Partnership of CNL APF Partners, LP (included as Exhibit 10.50 to Amendment No. 2 to the Form S-4 and incorporated herein by reference). 10.3 Franchise Receivable Funding and Servicing Agreement dated as of October 14, 1999 between CNL APF Partners, LP and Neptune Funding Corporation (included as Exhibit 10.5 to the Registrant's Form 10-K for the year ended December 31, 1999 and incorporated herein by reference). 10.4 Interim Wholesale Mortgage Warehouse and Security Agreement dated as of September 18, 1998, and Amended Agreement dated as of August 30, 1999 between CNL APF Partners, LP and Prudential Securities Credit Corporation (included as Exhibit 10.6 to the Registrant's Form 10-K for the year ended December 31, 1999 and incorporated herein by reference). 10.5 1999 Performance Incentive Plan (included as Exhibit 10.1 to Amendment No. 1 to the Form S-4 and incorporated herein by reference). 10.6 Registration Rights Agreement by and among the Registrant, Robert A. Bourne, Curtis B. McWilliams, John T. Walker, Howard Singer, Steven D. Shackelford and CNL Group, Inc., dated as of March 11, 1999 (included as Exhibit 10.40 to Amendment No. 1 to the Form S-4 and incorporated herein by reference). 10.7 Registration Rights Agreement by and among the Registrant, Five Arrows Realty Securities L.L.C., James M. Seneff, Jr., Robert A. Bourne, Curtis B. McWilliams and CNL Group, Inc., dated as of March 11, 1999 (included as Exhibit 10.41 to Amendment No. 1 to the Form S-4 and incorporated herein by reference). 10.8 Employment Agreement by and between Curtis B. McWilliams and the Registrant, dated September 15, 1999 (included as Exhibit 10.42 to Amendment No. 2 to the Form S-4 and incorporated herein by reference). 10.9 Employment Agreement by and between Steven D. Shackelford and the Registrant, dated September 15, 1999 (included as Exhibit 10.43 to Amendment No. 2 to the Form S-4 and incorporated herein by reference). 10.10 Employment Agreement by and between Barry L. Goff and the Registrant, dated September 15, 1999 (included as Exhibit 10.46 to Amendment No. 2 to the Form S-4 and incorporated herein by reference). 10.11 Employment Agreement by and between Robert W. Chapin and the Registrant, dated September 15, 1999 (included as Exhibit 10.47 to Amendment No. 2 to the Form S-4 and incorporated herein by reference). 10.12 Employment Agreement by and between Michael Wood and the Registrant, dated August 31, 1999 (included as Exhibit 10.19 to the Registrant's Form 10-Q for the quarter ended March 31, 2001 and incorporated herein by reference). 10.13 Employment Agreement by and between Brent Heaton and the Registrant, dated September 29, 1999 (included as Exhibit 10.20 to the Registrant's Form 10-Q for the quarter ended March 31, 2001 and incorporated herein by reference). 10.14 Addendum to Employment Agreement dated as of November 1, 1999, between the Registrant and Curtis McWilliams (included as Exhibit 10.21 to the Registrant's Form 10-Q for the quarter ended March 31, 2001 and incorporated herein by reference). The following persons have signed a substantially identical Addendum relating to their respective employment agreements; Steve Shackelford (dated November 1, 1999); John Walker (dated November 3, 1999); Barry Goff (dated November 1, 1999); and Brent Heaton (dated November 3, 1999). 10.15 Addendum to Employment Agreement dated as of November 1, 1999, between the Registrant and Robert Chapin (included as Exhibit 10.22 to the Registrant's Form 10-Q for the quarter ended March 31, 2001 and incorporated herein by reference). The following persons have signed a substantially identical Addendum relating to their respective employment agreements: Howard Singer (dated November 1, 1999); Michael Wood (dated November 8, 1999); and Timothy Neville (dated November 24, 1999). 10.16 Second Addendum to Employment Agreement dated as of June 16, 2000, between the Registrant and Curtis McWilliams (included as Exhibit 10.23 to the Registrant's Form 10-Q for the quarter ended March 31, 2001 and incorporated herein by reference). The following persons have signed a substantially identical Second Addendum relating to their respective employment agreements: Howard Singer (dated June 19, 2000); Robert Chapin (dated June 20, 2000); and Brent Heaton (dated October 30, 2000). 10.17 Second Addendum to Employment Agreement dated as of August 20, 2000, between the Registrant and Barry Goff (included as Exhibit 10.24 to the Registrant's Form 10-Q for the quarter ended March 31, 2001 and incorporated herein by reference). 10.18 Second Addendum to Employment Agreement dated as of September 1, 2000, between the Registrant and Steve Shackelford (included as Exhibit 10.25 to the Registrant's Form 10-Q for the quarter ended March 31, 2001 and incorporated herein by reference). 10.19 Second Addendum to Employment Agreement dated as of October 24, 2000, between the Registrant and Michael Wood (included as Exhibit 10.27 to the Registrant's Form 10-Q for the quarter ended March 31, 2001 and incorporated herein by reference). 10.20 Amended and Restated Master Purchase Agreement dated as of October 11, 2001, among Bank of America, N.A., CNL Financial VII, LP and CNL Franchise Network, LP (included as Exhibit 10.29 to the Registrant's Form 10-K for the year ended December 31, 2001 and incorporated herein by reference). 10.21 Third Amended and Restated Side Letter dated as of October 11, 2001, among Bank of America, N.A., CNL Financial VII, LP and CNL Franchise Network, LP (included as Exhibit 10.30 to the Registrant's Form 10-K for the year ended December 31, 2001 and incorporated herein by reference). 10.22 Loan and Security Agreement dated as of June 14, 2002 between CNL Financial IX, LP and Nieuw Amsterdam Receivables Corporation (included as Exhibit 10.31 to the Registrant's Form 10-Q for the quarter ended June 30, 2002 and incorporated herein by reference). 31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). 31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). (b) The Registrant filed no reports on Form 8-K during the quarter ended September 30, 2003. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Dated this 7th day of November, 2003. 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 American Properties Fund, Inc. Amended and Restated Articles of Incorporation, as amended (included as Exhibit 3.1 to the Registrant's Form 10-Q for the quarter ended June 30, 1999 and incorporated herein by reference). 3.2 CNL American Properties Fund, Inc. Amended and Restated Bylaws (included as Exhibit 3.2 to the Registrant's Registration Statement No. 333-37657 on Form S-11 and incorporated herein by reference). 3.3 CNL American Properties Fund, Inc. Second Amended and Restated Articles of Incorporation (included as Exhibit 3.3 to the Registrant's Form 10-Q for the quarter ended June 30, 2000 and incorporated herein by reference). 3.4 Articles of Amendment to Second Amended and Restated Articles of Incorporation of CNL American Properties Fund, Inc. (included as Exhibit 3.4 to the Registrant's Form 10-Q for the quarter ended June 30, 2002 and incorporated herein by reference). 3.5 Articles of Amendment to Second Amended and Restated Articles of Incorporation of CNL American Properties Fund, Inc. (included as Exhibit 3.5 to the Registrants Form 10-Q for the quarter ended June 30, 2003 and incorporated herein by reference). 3.6 Second Amended and Restated Bylaws of CNL American Properties Fund, Inc. (filed herewith). 4.1 Form of Stock Certificate (included as Exhibit 4.5 to the Registrant's Registration Statement No. 33-78790 on Form S-11 and incorporated herein by reference). 10.1 Form of Indemnification Agreement dated as of April 18, 1995, between the Registrant and each of James M. Seneff, Jr., Robert A. Bourne, G. Richard Hostetter, J. Joseph Kruse, Richard C. Huseman, John T. Walker, Jeanne A. Wall, Lynn E. Rose and Edgar J. McDougall, dated as of January 27, 1997, between the Registrant and Steven D. Shackelford, dated as of February 18, 1998, between the Registrant and Curtis B. McWilliams, and dated as of September 1, 1999, between the Registrant and each of Howard J. Singer, John L. Farren, Timothy J. Neville, Michael I. Wood and Barry L. Goff (included as Exhibit 10.9 to the Registrant's Registration Statement No. 333-15411 on Form S-11 and incorporated herein by reference). 10.2 Amended and Restated Agreement of Limited Partnership of CNL APF Partners, LP (included as Exhibit 10.50 to Amendment No. 2 to the Form S-4 and incorporated herein by reference). 10.3 Franchise Receivable Funding and Servicing Agreement dated as of October 14, 1999 between CNL APF Partners, LP and Neptune Funding Corporation (included as Exhibit 10.5 to the Registrant's Form 10-K for the year ended December 31, 1999 and incorporated herein by reference). 10.4 Interim Wholesale Mortgage Warehouse and Security Agreement dated as of September 18, 1998, and Amended Agreement dated as of August 30, 1999 between CNL APF Partners, LP and Prudential Securities Credit Corporation (included as Exhibit 10.6 to the Registrant's Form 10-K for the year ended December 31, 1999 and incorporated herein by reference). 10.5 1999 Performance Incentive Plan (included as Exhibit 10.1 to Amendment No. 1 to the Form S-4 and incorporated herein by reference). 10.6 Registration Rights Agreement by and among the Registrant, Robert A. Bourne, Curtis B. McWilliams, John T. Walker, Howard Singer, Steven D. Shackelford and CNL Group, Inc., dated as of March 11, 1999 (included as Exhibit 10.40 to Amendment No. 1 to the Form S-4 and incorporated herein by reference). 10.7 Registration Rights Agreement by and among the Registrant, Five Arrows Realty Securities L.L.C., James M. Seneff, Jr., Robert A. Bourne, Curtis B. McWilliams and CNL Group, Inc., dated as of March 11, 1999 (included as Exhibit 10.41 to Amendment No. 1 to the Form S-4 and incorporated herein by reference). 10.8 Employment Agreement by and between Curtis B. McWilliams and the Registrant, dated September 15, 1999 (included as Exhibit 10.42 to Amendment No. 2 to the Form S-4 and incorporated herein by reference). 10.9 Employment Agreement by and between Steven D. Shackelford and the Registrant, dated September 15, 1999 (included as Exhibit 10.43 to Amendment No. 2 to the Form S-4 and incorporated herein by reference). 10.10 Employment Agreement by and between Barry L. Goff and the Registrant, dated September 15, 1999 (included as Exhibit 10.46 to Amendment No. 2 to the Form S-4 and incorporated herein by reference). 10.11 Employment Agreement by and between Robert W. Chapin and the Registrant, dated September 15, 1999 (included as Exhibit 10.47 to Amendment No. 2 to the Form S-4 and incorporated herein by reference). 10.12 Employment Agreement by and between Michael Wood and the Registrant, dated August 31, 1999 (included as Exhibit 10.19 to the Registrant's Form 10-Q for the quarter ended March 31, 2001 and incorporated herein by reference). 10.13 Employment Agreement by and between Brent Heaton and the Registrant, dated September 29, 1999 (included as Exhibit 10.20 to the Registrant's Form 10-Q for the quarter ended March 31, 2001 and incorporated herein by reference). 10.14 Addendum to Employment Agreement dated as of November 1, 1999, between the Registrant and Curtis McWilliams (included as Exhibit 10.21 to the Registrant's Form 10-Q for the quarter ended March 31, 2001 and incorporated herein by reference). The following persons have signed a substantially identical Addendum relating to their respective employment agreements; Steve Shackelford (dated November 1, 1999); John Walker (dated November 3, 1999); Barry Goff (dated November 1, 1999); and Brent Heaton (dated November 3, 1999). 10.15 Addendum to Employment Agreement dated as of November 1, 1999, between the Registrant and Robert Chapin (included as Exhibit 10.22 to the Registrant's Form 10-Q for the quarter ended March 31, 2001 and incorporated herein by reference). The following persons have signed a substantially identical Addendum relating to their respective employment agreements: Howard Singer (dated November 1, 1999); Michael Wood (dated November 8, 1999); and Timothy Neville (dated November 24, 1999). 10.16 Second Addendum to Employment Agreement dated as of June 16, 2000, between the Registrant and Curtis McWilliams (included as Exhibit 10.23 to the Registrant's Form 10-Q for the quarter ended March 31, 2001 and incorporated herein by reference). The following persons have signed a substantially identical Second Addendum relating to their respective employment agreements: Howard Singer (dated June 19, 2000); Robert Chapin (dated June 20, 2000); and Brent Heaton (dated October 30, 2000). 10.17 Second Addendum to Employment Agreement dated as of August 20, 2000, between the Registrant and Barry Goff (included as Exhibit 10.24 to the Registrant's Form 10-Q for the quarter ended March 31, 2001 and incorporated herein by reference). 10.18 Second Addendum to Employment Agreement dated as of September 1, 2000, between the Registrant and Steve Shackelford (included as Exhibit 10.25 to the Registrant's Form 10-Q for the quarter ended March 31, 2001 and incorporated herein by reference). 10.19 Second Addendum to Employment Agreement dated as of October 24, 2000, between the Registrant and Michael Wood (included as Exhibit 10.27 to the Registrant's Form 10-Q for the quarter ended March 31, 2001 and incorporated herein by reference). 10.20 Amended and Restated Master Purchase Agreement dated as of October 11, 2001, among Bank of America, N.A., CNL Financial VII, LP and CNL Franchise Network, LP (included as Exhibit 10.29 to the Registrant's Form 10-K for the year ended December 31, 2001 and incorporated herein by reference). 10.21 Third Amended and Restated Side Letter dated as of October 11, 2001, among Bank of America, N.A., CNL Financial VII, LP and CNL Franchise Network, LP (included as Exhibit 10.30 to the Registrant's Form 10-K for the year ended December 31, 2001 and incorporated herein by reference). 10.22 Loan and Security Agreement dated as of June 14, 2002 between CNL Financial IX, LP and Nieuw Amsterdam Receivables Corporation (included as Exhibit 10.31 to the Registrant's Form 10-Q for the quarter ended June 30, 2002 and incorporated herein by reference). 31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). 31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). EXHIBIT 3.6 SECOND AMENDED AND RESTATED BYLAWS OF CNL AMERICAN PROPERTIES FUND, INC. EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER EXHIBIT 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER EX-3.(II) 3 articlesofamendment.txt EXHIBIT 3.6 SECOND AMENDED AND RESTATED BYLAWS SECOND AMENDED AND RESTATED BYLAWS OF CNL AMERICAN PROPERTIES FUND, INC. The Bylaws of CNL AMERICAN PROPERTIES FUND, INC., a corporation organized under the laws of the State of Maryland (the "Company"), having The Corporation Trust Incorporated as its resident agent located at 32 South Street, Baltimore, Maryland 21202, are as follows: ARTICLE I OFFICES SECTION 1. PRINCIPAL OFFICE. The principal office of the Company shall be located at such place or places as the Board of Directors may designate in the State of Maryland. SECTION 2. ADDITIONAL OFFICES. The Company may have additional offices at such places as the Board of Directors may from time to time determine or the business of the Company may require. ARTICLE II MEETINGS OF STOCKHOLDERS SECTION 1. PLACE. All meetings of stockholders shall be held at the principal office of the Company or at such other place within the United States as shall be stated in the notice of the meeting. SECTION 2. ANNUAL MEETING. An annual meeting of the stockholders for the election of Directors, as such term is defined below, and the transaction of any business within the powers of the Company shall be held upon reasonable notice and not less than 30 days after delivery of the annual report. SECTION 3. SPECIAL MEETINGS. Subject to the rights of the holders of any series of Preferred Shares (as such term is defined in the Company's Articles of Incorporation, as amended (the "Articles of Incorporation")) to elect additional Directors under specified circumstances, special meetings of the stockholders may be called by (i) a majority of the Board of Directors; (ii) a majority of the Independent Directors (as such term is defined herein); or (iii) the secretary at the request in writing of stockholders holding outstanding Voting Shares (as such term is defined in the Articles of Incorporation) representing at least 10% of all votes entitled to be cast on any issue proposed to be considered at any such special meeting, not less than 15 nor more than 60 days after such request is received. Written or printed notice of any special meeting called pursuant to subsection (iii) will be provided to all stockholders within ten days after any such request is received, stating the time and place of the meeting specified in the request, which shall be a time and place convenient to the stockholders. SECTION 4. NOTICE. Not less than 15 nor more than 60 days before each meeting of stockholders, the secretary shall give to each stockholder entitled to vote at such meeting, and to each stockholder not entitled to vote who is entitled to notice of the meeting, written or printed notice stating the time and place of the meeting and, in the case of a special meeting or as otherwise may be required by statute or these Bylaws, the purpose for which the meeting is called, either by mail to the address of such stockholder as it appears on the records of the Company, or by presenting it to such stockholder personally or by leaving it at his residence or usual place of business. If mailed, such notice shall be deemed to be given when deposited in the United States mail addressed to the stockholder at his post office address as it appears on the records of the Company, with postage thereon prepaid. SECTION 5. SCOPE OF NOTICE. Any business of the Company may be transacted at an annual meeting of stockholders without being specifically designated in the notice, except such business as is required by statute to be stated in such notice. No business shall be transacted at a special meeting of stockholders except as specifically designated in the notice. SECTION 6. QUORUM. At any meeting of stockholders, the presence in person or by proxy of stockholders holding 50% of the then outstanding shares shall constitute a quorum; but this section shall not affect any requirement under any statute, any other provision of these Bylaws, or the Articles of Incorporation for the vote necessary for the adoption of any measure. If, however, such quorum shall not be present at any meeting of the stockholders, the stockholders entitled to vote at such meeting, present in person or by proxy, shall have power to adjourn the meeting from time to time to a date not more than 120 days after the original record date without notice other than announcement at the meeting. At such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified. SECTION 7. VOTING. A majority of all the votes cast at a meeting of stockholders duly called and at which a quorum is present shall be sufficient to elect a Director, notwithstanding the concurrence of the Board of Directors to such action. Each share may be voted for as many individuals as there are Directors to be elected and for whose election the share is entitled to be voted. A majority of the votes cast at a meeting of stockholders duly called and at which a quorum is present shall be sufficient to approve any other matter which may properly come before the meeting, unless more than a majority of the votes cast is required by statute or by the Articles of Incorporation. Unless otherwise provided in the Articles of Incorporation, each Common Share owned of record on the applicable record date shall be entitled to one vote on each matter submitted to a vote at a meeting of stockholders. The Company's Advisor (as such term is defined in the Articles of Incorporation), the Directors and any affiliates are prohibited from voting on or consenting to matters submitted to the stockholders regarding the removal of the Advisor, Directors or any affiliate or any transaction between the Company and any of them, nor will such shares be counted in determining a quorum or a majority in such circumstances. SECTION 8. PROXIES. A stockholder may vote the shares owned of record by him, either in person or by proxy executed in writing by the stockholder or by his duly authorized attorney in fact. Such proxy shall be filed with the secretary of the Company before or at the time of the meeting. No proxy shall be valid after eleven months from the date of its execution, unless otherwise provided in the proxy. SECTION 9. VOTING OF SHARES BY CERTAIN HOLDERS. Shares registered in the name of a corporation, partnership, trust or other entity, if entitled to be voted, may be voted by the chief executive officer or a vice president, a general partner, trustee or other fiduciary thereof, as the case may be, or a proxy appointed by any of the foregoing individuals, unless some other person who has been appointed to vote such shares pursuant to a bylaw or a resolution of the board of directors of such corporation or other entity presents a certified copy of such bylaw or resolution, in which case such person may vote such shares. Any trustee or other fiduciary may vote shares registered in his name as such fiduciary, either in person or by proxy. Shares of the Company directly or indirectly owned by it shall not be voted at any meeting and shall not be counted in determining the total number of outstanding shares entitled to be voted at any given time, unless they are held by it in a fiduciary capacity, in which case they may be voted and shall be counted in determining the total number of outstanding shares at any given time. The Directors may adopt by resolution a procedure by which a stockholder may certify in writing to the Company that any shares registered in the name of the stockholder are held for the account of a specific person other than the stockholder. The resolution shall set forth the class of stockholders who may make the certification, the purpose for which the certification may be made, the form of certification and the information to be contained in it, if the certification is with respect to a record date or closing of the share transfer books, the time after the record date or closing of the share transfer books within which the certification must be received by the Company and any other provisions with respect to the procedure which the Directors consider necessary or desirable. On receipt of such certification, the person specified in the certification shall be regarded as, for the purposes set forth in the certification, the stockholder of record of the specified shares in place of the stockholder who makes the certification. SECTION 10. INSPECTORS. At any meeting of stockholders, the chairman of the meeting may, or upon the request of any stockholder shall, appoint one or more persons as inspectors for such meeting. Such inspectors shall ascertain and report the number of shares represented at the meeting based upon their determination of the validity and effect of proxies, count all votes, report the results and perform such other acts as are proper to conduct the election and voting with impartiality and fairness to all the stockholders. Each report of an inspector shall be in writing and signed by him or by a majority of them if there is more than one inspector acting at such meeting. If there is more than one inspector, the report of a majority shall be the report of the inspectors. The report of the inspector or inspectors on the number of shares represented at the meeting and the results of the voting shall be prima facie evidence thereof. SECTION 11. REPORTS TO STOCKHOLDERS. (a) Not later than 120 days after the close of each fiscal year of the Company, the Directors shall deliver or cause to be delivered a report of the business and operations of the Company during such fiscal year to the stockholders, containing (i) financial statements prepared in accordance with generally accepted accounting principles which are audited and reported on by independent certified public accountants; (ii) the ratio of the costs of raising capital during the period to the capital raised; (iii) the aggregate amount of advisory fees and the aggregate amount of other fees paid to the Company's Advisor and any affiliate of the Advisor by the Company and including fees or charges paid to the Advisor and any affiliate of the Advisor by third parties doing business with the Company; (iv) the Operating Expenses (as such term is defined in the Articles of Incorporation) of the Company, stated as a percentage of, for a specified period, the average of the aggregate book value of the assets of the Company invested, directly or indirectly, in Properties and loans secured by real estate before reserves for depreciation or bad debts or other similar non-cash reserves are subtracted, computed by taking the average of such values at the end of each month during such period as a percentage of the total revenues applicable to such period, less the total expenses applicable to such period excluding additions to reserves for depreciation, bad debts or other similar non-cash reserves, and excluding the gain from the sale of the Company's assets; (v) a report from the Independent Directors that the policies being followed by the Company are in the best interests of its stockholders and the basis for such determination; (vi) separately stated, full disclosure of all material terms, factors, and circumstances surrounding any and all transactions involving the Company, Directors, Advisors and any Affiliate thereof occurring in the year for which the annual report is made; and (vii) Distributions, as such term is defined in the Company's Articles of Incorporation, to the stockholders for the period, identifying the source of such Distributions, and if such information is not available at the time of the distribution, a written explanation of the relevant circumstances will accompany the Distributions (with the statement as to the source of Distributions to be sent to stockholders not later than 60 days after the end of the fiscal year in which the distribution was made) and such further information as the Board of Directors may determine is required pursuant to any law or regulation to which the Company is subject. A signed copy of the annual report and the accountant's certificate shall be filed by the Directors with the State Department of Assessments and Taxation of Maryland, and with such other governmental agencies as may be required by law and as the Directors may deem appropriate. Such report shall be submitted at the annual meeting of stockholders and, within 20 days after such meeting, placed on file at the Company's principal office. (b) Not later than 45 days after the end of each of the first three quarterly periods of each fiscal year and upon written request by a stockholder, the Directors shall deliver or cause to be delivered an interim report to such requesting stockholder containing unaudited financial statements for such quarter and for the period from the beginning of the fiscal year to the end of such quarter, and such further information as the Directors may determine is required pursuant to any law or regulation to which the Company is subject. SECTION 12. NOMINATIONS AND STOCKHOLDER BUSINESS. (a) Annual Meetings of Stockholders. (1) With respect to an annual meeting of stockholders, nominations of persons for election to the Board of Directors and the proposal of business to be considered by the stockholders may be made only (i) by or at the direction of the Board of Directors or (ii) by any stockholder of the Company who was a stockholder of record at the time of giving of notice, who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Section 12(a). (2) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (ii) of paragraph (a)(1) of this Section 12, the stockholder must have given timely notice thereof in writing to the secretary of the Company. To be timely, a stockholder's notice shall be delivered to the secretary at the principal executive offices of the Company not less than 60 days nor more than 90 days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made. Such stockholder's notice shall set forth: (i) as to each person whom the stockholder proposes to nominate for election or re-election as a Director all information relating to such person that is required to be disclosed in solicitations of proxies for election of Directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to being named in the proxy statement as a nominee and to serving as a Director if elected); (ii) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and of the beneficial owner, if any, on whose behalf the proposal is made; and (iii) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made, the name and address of such stockholder, as they appear on the Company's books, and of such beneficial owner and the class and number of shares of the Company which are owned beneficially and of record by such stockholder and such beneficial owner. (3) Notwithstanding anything in the second sentence of Section 12(a)(2) to the contrary, in the event that the number of Directors to be elected to the Board of Directors is increased and there is no public announcement naming all of the nominees for Director or specifying the size of the increased Board of Directors made by the Company at least 70 days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this Section 12(a) shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the secretary at the principal executive offices of the Company not later than the close of business on the tenth day following the day on which such public announcement is first made by the Company. (b) Special Meetings of Stockholders. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Company's notice of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders at which Directors are to be elected pursuant to the Company's notice of meeting (i) by or at the direction of the Board of Directors or (ii) provided that the Board of Directors has determined that Directors shall be elected at such special meeting, by any stockholder of the Company who is a stockholder of record at the time of giving of notice provided for in this Section 12(b), who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Section 12(b). In the event the Company calls a special meeting of stockholders for the purpose of electing one or more Directors to the Board of Directors, any such stockholder may nominate a person or persons (as the case may be) for election to such position as specified in the Company's notice of meeting, if the stockholder's notice complies with the requirements of Section 12(a)(2) and is delivered to the secretary at the principal executive offices of the Company not earlier than the 90th day prior to such special meeting and not later than the close of business on the later of the 60th day prior to such special meeting or the tenth day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Directors to be elected at such meeting. (c) General. (1) Only such persons who are nominated in accordance with the procedures set forth in this Section 12 shall be eligible to serve as Directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 12. The presiding officer of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made in accordance with the procedures set forth in this Section 12 and, if any proposed nomination or business is not in compliance with this Section 12, to declare that such defective nomination or proposal be disregarded. (2) For purposes of this Section 12, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable news service or in a document publicly filed by the Company with the Securities and Exchange Commission pursuant to Sections 13, 14 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). (3) Notwithstanding the foregoing provisions of this Section 12, a stockholder also shall comply with all applicable requirements of state law and of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 12. Nothing in this Section 12 shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Company's proxy statement pursuant to Rule 14a-8 under the Exchange Act. SECTION 13. VOTING BY BALLOT. Voting on any question or in any election may be viva voce unless the presiding officer shall order or any stockholder shall demand that voting be by ballot. SECTION 14. NO STOCKHOLDER ACTION BY WRITTEN CONSENT. Subject to the rights of the holders of any series of Preferred Shares to elect additional Directors under specific circumstances, any action required or permitted to be taken by the stockholders of the Company must be effected at an annual or special meeting of stockholders and may not be effected by any consent in writing by such stockholders. ARTICLE III DIRECTORS SECTION 1. GENERAL POWERS; NUMBER; QUALIFICATIONS. The business and affairs of the Company shall be managed under the direction of its Board of Directors (also referred to herein as "Director" or "Directors"). Notwithstanding the other requirements set forth herein and in the Articles of Incorporation, a Director shall be an individual at least 21 years of age who is not under legal disability. The number of Directors which shall constitute the whole board shall not be less than three nor more than fifteen. Within such limits, the actual number of directors which shall constitute the whole board shall be as fixed from time to time by resolution of the Board of Directors. SECTION 2. INDEPENDENT DIRECTORS; QUALIFICATIONS. A majority of Directors of the Company shall be Independent Directors. To qualify as an independent director, an individual must not be and within the last two years has not been directly or indirectly associated with the Advisor by virtue of (i) ownership of an interest in the Advisor or its Affiliates, (ii) employment by the Advisor or its Affiliates, (iii) service as an officer or director of the Advisor or its Affiliates, (iv) performance of services, other than as a Director, for the Company, (v) service as a director or trustee of more than three real estate investment trusts advised by the Advisor, or (vi) maintenance of a material business or professional relationship with the Advisor or any of its Affiliates. A business or professional relationship is considered material if the gross revenue derived by the Director from the Advisor and Affiliates exceeds five percent (5%) of either the Director's annual gross revenue during either of the last two years or the Director's net worth on a fair market value basis. An indirect relationship shall include circumstances in which a Director's spouse, parents, children, siblings, mothers- or fathers-in-law, sons- or daughters-in-law, or brothers- or sisters-in-law is or has been associated with the Advisor, any of its Affiliates, or the Company. SECTION 3. REGULAR MEETINGS. A meeting of the Directors shall be held quarterly in person or by telephone. The Directors may provide, by resolution, the time and place, either within or without the State of Maryland, for the holding of regular meetings of the Directors without other notice than such resolution. SECTION 4. SPECIAL MEETINGS. Special meetings of Directors may be called by or at the request of the chief executive officer or by a majority of the Directors then in office. The person or persons authorized to call special meetings of the Directors may fix any place, either within or without the State of Maryland, as the place for holding any special meeting of the Directors called by them. SECTION 5. NOTICE. Notice of any annual, regular or special meeting shall be given by written notice delivered personally, transmitted by facsimile, telegraphed or mailed to each Director at his business or residence address. Personally delivered, facsimile transmitted or telegraphed notices shall be given at least two days prior to the meeting. Notice by facsimile or telegraph shall be promptly followed by mailed notice. Notice by mail shall be given at least five days prior to the meeting. If mailed, such notice shall be deemed to be given when deposited in the United States mail properly addressed, with postage thereon prepaid. If given by telegram, such notice shall be deemed to be given when the telegram is delivered to the telegraph company. Neither the business to be transacted at, nor the purpose of, any annual, regular or special meeting of the Directors need be stated in the notice, unless specifically required by statute or these Bylaws. SECTION 6. QUORUM. A whole number of Directors equal to at least a majority of the whole Board of Directors, including a majority of Independent Directors, shall constitute a quorum for transaction of business at any meeting of the Directors; provided, that if less than a quorum are present at said meeting, a majority of the Directors present may adjourn the meeting from time to time without further notice; and provided further, that if, pursuant to the Articles of Incorporation or these Bylaws, the vote of a majority of a particular group of Directors is required for action, a quorum must also include a majority of such group. The Directors present at a meeting which has been duly called and convened may continue to transact business until adjournment, notwithstanding the withdrawal of enough Directors to leave less than a quorum. SECTION 7. VOTING. The action of the majority of the Directors present at a meeting at which a quorum is present shall be the action of the Directors, unless the concurrence of a particular group of Directors or of a greater proportion is required for such action by applicable statute, the Articles of Incorporation or these Bylaws. SECTION 8. TELEPHONE MEETINGS. Directors may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means shall constitute presence in person at the meeting. SECTION 9. INFORMAL ACTION BY DIRECTORS. Any action required or permitted to be taken at any meeting of the Directors may be taken without a meeting, if a consent in writing to such action is signed by each Director and such written consent is filed with the minutes of proceedings of the Directors. SECTION 10. VACANCIES. If for any reason any or all the Directors cease to be Directors, such event shall not terminate the Company or affect these Bylaws or the powers of the remaining Directors hereunder (even if fewer than three Directors remain). Any vacancy created by an increase in the number of Directors shall be filled, at any regular meeting or at any special meeting called for that purpose, by a majority of the Directors. Any other vacancy shall be filled at any annual meeting or at any special meeting of the stockholders called for that purpose, by a majority of the Common Shares outstanding and entitled to vote. Any individual so elected as Director shall hold office for the unexpired term of the Director he is replacing. In the event of a vacancy among the Independent Directors, the remaining Independent Directors shall nominate replacements for such position. SECTION 11. COMPENSATION. Each Director is entitled to receive $12,000 annually for serving on the Board of Directors, as well as fees of $1,000 per meeting of the Board of Directors attended and $500 for each telephonic meeting of the Board of Directors in which the Director participates. The Director serving as Chair of the Audit Committee is entitled to receive fees of $1,500 per meeting of the Audit Committee attended and $500 per telephonic meeting of the Audit Committee in which the Director participates. The Director serving as chair of any other Committee is entitled to receive fees of $1,000 per meeting of such committee attended and $500 per telephonic meeting of such committee in which the Director participates. Each other Director is entitled to receive fees of $1,000 per meeting of the Audit Committee attended, $1,000 per meeting of any Special Committee of the Board of Directors attended, $750 per meeting of any other committee attended and $500 for each telephonic meeting of any committee in which the Director participates. SECTION 12. ELECTION AND REMOVAL OF DIRECTORS; TERM. The stockholders may, at any time, remove any Director in the manner provided in the Articles of Incorporation. The term of service for a Director is one year, without limit on successive terms. SECTION 13. LOSS OF DEPOSITS. No Director shall be liable for any loss which may occur by reason of the failure of the bank, trust company, savings and loan association, or other institution with which moneys or shares have been deposited. SECTION 14. SURETY BONDS. Unless required by law, no Director shall be obligated to give any bond or surety or other security for the performance of any of his duties. SECTION 15. RELIANCE. Each Director, officer, employee and agent of the Company shall, in the performance of his duties with respect to the Company, be fully justified and protected with regard to any act or failure to act in reliance in good faith upon the books of account or other records of the Company, upon an opinion of counsel or upon reports made to the Company by any of its officers or employees or by the advisers, accountants, appraisers or other experts or consultants selected by the Directors or officers of the Company, regardless of whether such counsel or expert may also be a Director. SECTION 16. CERTAIN RIGHTS OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS. The Directors shall have no responsibility to devote their full time to the affairs of the Company. Any Director, officer, employee or agent of the Company, in his personal capacity or in a capacity as an affiliate, employee, or agent of any other person, or otherwise, may have business interests and engage in business activities similar to or in addition to those of or relating to the Company, subject to the adoption of any policies relating to such interests and activities adopted by the Directors and applicable law. ARTICLE IV COMMITTEES SECTION 1. NUMBER, TENURE AND QUALIFICATIONS. The Directors may, by resolution or resolutions passed by a majority of the whole Board, appoint from among its members an Audit Committee and other committees, composed of two or more Directors to serve at the pleasure of the Directors. At such time, if any, as the Shares become listed on a national securities exchange or over-the-counter market, the Company will form a Compensation Committee. At least a majority of the members of each committee of the Company's Board of Directors, or if a committee numbers two or less, both directors must be Independent Directors. SECTION 2. POWERS. The Directors may delegate to committees appointed under Section 1 of this Article IV any of the powers of the Board of Directors; provided, however, that the Directors may not delegate to committee the power to declare dividends or other Distributions, elect Directors, issue Preferred or Common Shares (as such terms are defined in the Articles of Incorporation) (hereinafter "Shares") in the Company other than as provided in the next sentence, recommend to the stockholders any action which requires stockholder approval, amend the Bylaws or approve any merger or share exchange which does not require stockholder approval. If the Board of Directors has given general authorization for the issuance of Shares in the Company to a committee of the Board, in accordance with a general formula or method specified by the Board by resolution or by adoption of an option or other plan, such committee may fix the terms of the Shares subject to classification or reclassification and the terms on which the shares may be issued, including all terms and conditions required or permitted to be established or authorized by the Board of Directors. SECTION 3. COMMITTEE PROCEDURES. Each committee may fix rules of procedure for its business. A majority of the members of a committee shall constitute a quorum for the transaction of business and the action of a majority of those present at a meeting at which a quorum is present shall be action of the committee. In the absence of any member of any committee, the members thereof present at any meeting, whether or not they constitute a quorum, may appoint another Director to act in the place of such absent member, subject to the requirements of Section 1 of this Article IV. Any action required or permitted to be taken at a meeting of a committee may be taken without a meeting, if a unanimous written consent which sets forth the action to be taken is signed by each member of the committee and filed with the minutes of the proceedings of such committee. The members of a committee may conduct any meeting thereof by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by such means shall constitute presence in person at the meeting. ARTICLE V OFFICERS SECTION 1. GENERAL PROVISIONS. The officers of the Company may consist of a chief executive officer, a president, a chief operating officer, one or more vice presidents, a chief financial officer and treasurer, a secretary, and one or more assistant secretaries, as determined by the Directors. In addition, the Directors may from time to time appoint such other officers with such powers and duties as they shall deem necessary or desirable. The officers of the Company shall be elected annually by the Directors at the first meeting of the Directors held after each annual meeting of stockholders. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as may be convenient. Each officer shall hold office until his or her successor is elected and qualifies or until his or her death, resignation or removal in the manner hereinafter provided. Any two or more offices except (i) chief executive officer and vice president, or (ii) president and vice president, may be held by the same person, although any person holding more than one office in the Company may not act in more than one capacity to execute, acknowledge or verify an instrument required by law to be executed, acknowledged or verified by more than one officer. In their discretion, the Directors may leave unfilled any office except that of the chief executive officer, the president, the treasurer and the secretary. Election of an officer or agent shall not of itself create contract rights between the Company and such officer or agent. SECTION 2. REMOVAL AND RESIGNATION. Any officer or agent of the Company may be removed by a majority of the members of the whole Board of Directors, with or without cause, if in their judgment the best interests of the Company would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Any officer of the Company may resign at any time by giving written notice of his resignation to the Directors, the chief executive officer or the secretary. Any resignation shall take effect at any time subsequent to the time specified therein or, if the time when it shall become effective is not specified therein, immediately upon its receipt. The acceptance of a resignation shall not be necessary to make it effective unless otherwise stated in the resignation. SECTION 3. VACANCIES. A vacancy in any office may be filled by the Directors for the balance of the term. SECTION 4. Reserved. SECTION 5. CHIEF EXECUTIVE OFFICER. The Directors may designate a chief executive officer from among the elected officers. The chief executive officer shall in general supervise the management of the business affairs of the Company and the implementation of the policies of the Company, as determined by the Directors. He or she may execute any deed, mortgage, bond, contract or other instrument, except in cases where the execution thereof shall be expressly delegated by the Directors or by these Bylaws to some other officer or agent of the Company or shall be required by law to be otherwise executed; and in general shall perform all duties incident to the office of chief executive officer and such other duties as may be prescribed by the Directors from time to time. SECTION 6. PRESIDENT. The president, subject to the control of the Board of Directors and with the chief executive officer, shall in general supervise and control all of the business and affairs of the Company. He or she shall, when present and in the absence of the chief executive officer, preside at all meetings of the stockholders and the Board of Directors. He or she may sign with the secretary or the chief financial officer and treasurer, certificates for shares of the Company. He or she may execute any deed, mortgage, bond, contract, or other instrument, except in cases where the signing and execution thereof shall be expressly delegated by the Directors or by these Bylaws to some other officer or agent of the Company or shall be required by law to be otherwise executed; and in general shall perform all duties incident to the office of president and such other duties as may be prescribed by the chief executive officer or the Directors from time to time. SECTION 7. CHIEF OPERATING OFFICER. The chief operating officer, under the direction of the chief executive officer, shall have general management authority and responsibility for the day-to-day implementation of the policies of the Company. He or she may execute any deed, mortgage, bond, contract or other instrument, except in cases where the execution thereof shall be expressly delegated by the Directors or by these Bylaws to some other officer or agent of the Company or shall be required by law to be otherwise executed; and in general shall perform all duties incident to the office of chief operating officer and such other duties as may be prescribed by the Directors from time to time. SECTION 8. VICE PRESIDENTS. In the absence of the chief executive officer, the president, the chief operating officer or in the event of a vacancy in all such offices, the vice president (or in the event there be more than one vice president, the vice presidents in the order designated at the time of their election or, in the absence of any designation, then in the order of their election) shall perform the duties of the chief executive officer or the president and when so acting shall have all the powers of and be subject to all the restrictions upon the chief executive officer and the president; and shall perform such other duties as from time to time may be assigned to him by the chief executive officer, by the president, by the chief operating officer or by the Directors. The Directors may designate one or more vice presidents as executive vice president or as vice president for particular areas of responsibility. SECTION 9. SECRETARY. The secretary shall: (i) keep the minutes of the proceedings of the stockholders, the Directors and committees of the Directors in one or more books provided for that purpose; (ii) see that all notices are duly given in accordance with the provisions of the Articles of Incorporation, these Bylaws or as required by law; (iii) be custodian of the trust records and of the seal (if any) of the Company; (iv) keep a register of the post office address of each stockholder which shall be furnished to the secretary by such stockholder; (v) have general charge of the share transfer books of the Company; and (vi) in general perform such other duties as from time to time may be assigned to him or her by the chief executive officer, by the president, by the chief operating officer or by the Directors. SECTION 10. CHIEF FINANCIAL OFFICER AND TREASURER. The chief financial officer and treasurer shall have the custody of the funds and securities of the Company and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Company and shall deposit all moneys and other valuable effects in the name and to the credit of the Company in such depositories as may be designated by the Directors. The chief financial officer shall disburse the funds of the Company as may be ordered by the Directors, taking proper vouchers for such disbursements, and shall render to the chief executive officer and Directors, at their regular meetings of the Directors or whenever they may require it, an account of all his or her transactions as chief financial officer and of the financial condition of the Company. If required by the Directors, he or she shall give the Company a bond in such sum and with such surety or sureties as shall be satisfactory to the Directors for the faithful performance of the duties of his or her office and for the restoration to the Company, in case of his or her death, resignation, retirement or removal from office, all books, papers, vouchers, moneys and other property of whatever kind in his or her possession or under his or her control belonging to the Company. SECTION 11. ASSISTANT SECRETARIES. The assistant secretaries, in general, shall perform such duties as shall be assigned to them by the secretary, or by the chief executive officer, the president, or the Directors. SECTION 12. SALARIES. The salaries of the officers shall be fixed from time to time by the Directors, and no officer shall be prevented from receiving such salary by reason of the fact that he or she is also a Director. ARTICLE VI CONTRACTS, LOANS, CHECKS AND DEPOSITS SECTION 1. CONTRACTS. The Directors may authorize any officer or agent to enter into any contract or to execute and deliver any instrument in the name of and on behalf of the Company and such authority may be general or confined to specific instances. Any agreement, deed, mortgage, lease or other document executed by one or more of the Directors or by an authorized person shall be deemed valid and binding upon the Directors and upon the Company when so authorized or ratified by action of the Directors. SECTION 2. CHECKS AND DRAFTS. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Company shall be signed by such officer or officers, agent or agents of the Company and in such manner as shall from time to time be determined by the Directors. SECTION 3. DEPOSITS. All funds of the Company not otherwise employed shall be deposited from time to time to the credit of the Company in such banks, trust companies or other depositories as the Directors may designate. ARTICLE VII SHARES SECTION 1. CERTIFICATES. The Company will not issue share certificates. A stockholder's investment will be recorded on the books of the Company. A stockholder wishing to transfer his or her Shares will be required to send only an executed form to the Company, and the Company will provide the required form upon a stockholder's request. The executed form and any other required documentation must be received by the Company at least one calendar month prior to the last date of the current quarter. SECTION 2. TRANSFERS. Transfers of Shares shall be effective, and the transferee of the Shares will be recognized as the holder of such Shares as of the first day of the following quarter on which the Company receives properly executed documentation. Stockholders who are residents of New York may not transfer fewer than 250 shares at any time. The Company shall be entitled to treat the holder of record of any Share or Shares as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the State of Maryland. SECTION 3. NOTICE OF ISSUANCE OR TRANSFER. Upon issuance or transfer of Shares, the Company shall send the stockholder a written statement that complies with the requirements of Section 7.6(xii) of Articles of Incorporation and reflects such investment or transfer. In addition such written statement shall set forth (i) the name of the Company; (ii) the name of the stockholder or other person to whom it is issued or transferred; (iii) the class of shares and number of shares purchased; (iv) the designations and any preferences, conversions and other rights, voting powers, restrictions, limitations as to distributions, qualifications and terms and conditions of redemption of the shares of each class which the Company is authorized to issue; (v) the differences in the relative rights and preferences between the shares of each series of shares to the extent they have been set; (vi) the authority of the Board of Directors to set the relative rights and preferences; (vii) the restrictions on transferability of the shares sold or transferred (without affecting ss. 8-204 of the Commercial Law Article of the Maryland General Corporation Law (the "MGCL"); and (viii) any other information required by law. The Company, alternatively, may furnish notice that a full statement of the information contained in the foregoing subsections (i) through (viii) and otherwise complying with Section 7.6(xii) of the Articles of Incorporation will be provided to any stockholder upon request and without charge. SECTION 4. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE. The Directors may set, in advance, a record date for the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders, or stockholders entitled to receive payment of any Distribution or the allotment of any other rights, or in order to make a determination of stockholders for any other proper purpose. Such date, in any case, shall not be prior to the close of business on the day the record date is fixed and shall not be more than 90 days and, in the case of a meeting of stockholders, not less than ten days, before the date on which the meeting or particular action requiring such determination of stockholders is to be held or taken. In the context of fixing a record date, the Directors may provide that the share transfer books shall be closed for a stated period but not longer than 20 days. If the share transfer books are closed for the purpose of determining stockholders entitled to notice of or to vote at a meeting of stockholders, such books shall be closed at least ten days before the date of such meeting. If no record date is fixed and the share transfer books are not closed for the determination of stockholders, (i) the record date for the determination of stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the date on which notice of meeting is mailed or the 30th day before the meeting, whichever is the closer date to the meeting, and (ii) the record date for the determination of stockholders entitled to receive payment of a Distribution or an allotment of any other rights shall be the close of business on the day on which the resolution of the Directors declaring the Distribution or allotment of rights is adopted, but the payment or allotment of rights may not be made more than 60 days after the date on which the resolution is adopted. When a determination of stockholders entitled to vote at any meeting of stockholders has been made as provided in this Section 4, such determination shall apply to any adjournment thereof, except where the determination has been made through the closing of the transfer books and the stated period of closing has expired. SECTION 5. SHARE LEDGER. The Company shall maintain at its principal office or at the office of its counsel, accountants or transfer agent, an original or duplicate share ledger, in written form or in any other form which can be converted within a reasonable time into written form for visual inspection, containing the name and address of each stockholder and the number of shares of each class held by such stockholder. SECTION 6. FRACTIONAL SHARES; ISSUANCE OF UNITS. Directors may issue fractional shares or provide for the issuance of scrip, all on such terms and under such conditions as they may determine. Notwithstanding any other provision of the Articles of Incorporation or these Bylaws, the Directors may issue units consisting of different securities of the Company. Any security issued in a unit shall have the same characteristics as any identical securities issued by the Company, except that the Directors may provide that for a specified period securities of the Company issued in such unit may be transferred on the books of the Company only in such unit. Before issuance of any shares classified or reclassified or otherwise issued in a unit, the Board of Directors will file articles supplementary with the Maryland State Department of Assessments and Taxation that describe such shares, including (a) the preferences, conversion and other rights, voting powers, restrictions, limitations as to distributions, qualifications, and terms and conditions of redemption, as set or changed by the Board of Directors; and (b) a statement that the shares have been classified or reclassified by the Board of Directors pursuant to its authority under the Company's charter. The articles supplementary will be executed in the manner provided by Title 7 of the Maryland General Corporation Law (the "MGCL"). ARTICLE VIII ACCOUNTING YEAR The Directors shall have the power, from time to time, to fix the fiscal year of the Company by a duly adopted resolution. ARTICLE IX DISTRIBUTIONS SECTION 1. DECLARATION. Distributions upon the shares of the Company may be declared by the Directors, subject to the provisions of law and the Articles of Incorporation. Distributions may be paid in cash or other property of the Company, subject to the provisions of law and the Articles of Incorporation. SECTION 2. CONTINGENCIES. Before payment of any Distributions, there may be set aside out of any funds of the Company available for Distributions such sum or sums as the Directors may from time to time, in their absolute discretion, think proper as a reserve fund for the contingencies, for equalizing Distributions, for repairing or maintaining any property of the Company or for such other purpose as the Directors shall determine to be in the best interest of the Company, and the Directors may modify or abolish any such reserve in the manner in which it was created. ARTICLE X INVESTMENT POLICY Subject to the provisions of the Articles of Incorporation, the Directors may from time to time adopt, amend, revise or terminate any policy or policies with respect to investments by the Company as they shall deem appropriate in their sole discretion. In addition, the Independent Directors shall review the Company's investment policies at least annually to determine that the policies are in the best interests of the stockholders. ARTICLE XI SEAL SECTION 1. SEAL. The Directors may authorize the adoption of a seal by the Company. The seal shall have inscribed thereon the name of the Company and the year of its organization. The Directors may authorize one or more duplicate seals and provide for the custody thereof. SECTION 2. AFFIXING SEAL. Whenever the Company is required to place its seal to a document, it shall be sufficient to meet the requirements of any law, rule or regulation relating to a seal to place the word "(SEAL)" adjacent to the signature of the person authorized to execute the document on behalf of the Company. ARTICLE XII WAIVER OF NOTICE Whenever any notice is required to be given pursuant to the Articles of Incorporation or these Bylaws or pursuant to applicable law, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Neither the business to be transacted at nor the purpose of any meeting need be set forth in the waiver of notice, unless specifically required by statute. The attendance of any person at any meeting shall constitute a waiver of notice of such meeting, except where such person attends a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. ARTICLE XIII AMENDMENT OF BYLAWS SECTION 1. AMENDMENTS. These Bylaws may be amended or repealed by either the affirmative vote of a majority of all Equity Shares, as such term is defined in the Company's Articles of Incorporation, outstanding and entitled to vote generally in the election of Directors, voting as a single group or by an affirmative vote of a majority of the Directors (including a majority of the Independent Directors), provided that such amendments are not inconsistent with the Articles of Incorporation, and further provided that the Directors may not amend these Bylaws, without the affirmative vote of a majority of the Equity Shares, to the extent that such amendments adversely affect the rights, preferences and privileges of Stockholders. SECTION 2. LOCATION OF BYLAWS. The original or a certified copy of these Bylaws, including any amendments thereto, shall be kept at the Company's principal office, as determined pursuant to Article I, Section 1 of these Bylaws. ARTICLE XIV ROLL-UP TRANSACTION SECTION 1. PROVISION IN CONFLICT WITH LAW OR REGULATIONS. The Board of Directors has determined, in accordance with Section 12.3 of the Articles of Incorporation, that the following sentence included in section 10.3 of the Articles of Incorporation is inconsistent with applicable state laws or regulations and, as a result, does not constitute part of the Articles of Incorporation. In connection with a proposed Roll-Up Transaction which has not been approved by a vote of at least two-thirds (2/3) of the Stockholders, the person sponsoring the Roll-Up Transaction shall offer to Stockholders who vote against the proposed Roll-Up Transaction the choice of: (i) accepting the securities of the Roll-Up Entity offered in the proposed Roll-Up Transaction; or (ii) one of the following: (a) remaining Stockholders of the Company and preserving their interests therein on the same terms and conditions as existed previously; or (b) receiving cash in an amount equal to the Stockholder's pro rata share of the appraised value of the net assets of the Company. SECTION 2. REPLACEMENT PROVISION. The following will apply to a Roll-Up Transaction in place of the sentence referenced above. In connection with a proposed Roll-Up Transaction, the person sponsoring the Roll-Up Transaction shall offer to Stockholders who vote against the proposed Roll-Up Transaction the choice of: (i) accepting the securities of a Roll-Up Entity offered in the proposed Roll-Up Transaction; or (ii) one of the following: (a) remaining Stockholders of the Company and preserving their interests therein on the same terms and conditions as existed previously; or (b) receiving cash in an amount equal to the Stockholder's pro rata share of the appraised value of the net assets of the Company. ARTICLE XV SUITABILITY SECTION 1. The Advisor and each person selling shares on behalf of the Company shall make every reasonable effort to determine that the purchase of shares is a suitable and appropriate investment for each stockholder. SECTION 2. In making this determination, the Advisor or each person selling shares on behalf of the Company shall ascertain that the prospective stockholder: (1) meets the minimum income and net worth standards established for the Company; (2) can reasonably benefit from the Company based on the prospective stockholder's overall investment objectives and portfolio structure; (3) is able to bear the economic risk of the investment based on the prospective stockholder's overall financial situation; and (4) has apparent understanding of: (A) the fundamental risks of the investment; (B) the risk that the stockholder may lose the entire investment; (C) the lack of liquidity of the shares; (D) the restrictions of transferability of the shares; (E) the background and qualifications of the Advisor; and (F) the tax consequences of the investment. SECTION 3. The Advisor or each person selling shares on behalf of the Company will make this determination on the basis of information it has obtained from a prospective stockholder. Relevant information for this purpose will include at least the age, investment objectives, investment experience, income, net worth, financial situation, and other investments of the prospective stockholder, as well as any other pertinent factors. SECTION 4. The Advisor or each person selling shares on behalf of the Company shall maintain records of the information used to determine that an investment in the shares is suitable and appropriate for a prospective stockholder. The Advisor or each person selling shares on behalf of the Company shall maintain these records for at least six years. SECTION 5. The Advisor shall disclose in each prospectus the responsibility of the Advisor and each person selling shares on behalf of the Company to make every reasonable effort to determine that the purchase of shares is a suitable and appropriate investment for each stockholder, based on information provided by the stockholder regarding the stockholder's financial situation and investment objectives. EX-31 4 curtiscert302.txt EXHIBIT 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO RULE 13a-14 AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Curtis B. McWilliams, the Chief Executive Officer of CNL Restaurant Properties, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of CNL Restaurant Properties, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 7, 2003 /s/ Curtis B. McWilliams ------------------------------- Curtis B. McWilliams Chief Executive Officer EX-31 5 sdscert302.txt EXHIBIT 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO RULE 13a-14 AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Steven D. Shackelford, the Chief Financial Officer of CNL Restaurant Properties, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of CNL Restaurant Properties, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors: (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 7, 2003 /s/ Steven D. Shackelford ---------------------------------- Steven D. Shackelford Chief Financial Officer EX-32 6 curtiscert906.txt EXHIBIT 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 The undersigned, Curtis B. McWilliams, the Chief Executive Officer of CNL Restaurant Properties, Inc. (the "Company"), has executed this certification in connection with the filing with the Securities and Exchange Commission of the Company's Quarterly Report on Form 10-Q for the period ending September 30, 2003 (the "Report"). The undersigned hereby certifies that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 7, 2003. /s/ Curtis B. McWilliams --------------------------------- Curtis B. McWilliams Chief Executive Officer A signed original of this writtenstatement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. EX-32 7 sdscert906.txt EXHIBIT 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 The undersigned, Steven D. Shackelford, the Chief Financial Officer of CNL Restaurant Properties, Inc. (the "Company"), has executed this certification in connection with the filing with the Securities and Exchange Commission of the Company's Quarterly Report on Form 10-Q for the period ending September 30, 2003 (the "Report"). The undersigned hereby certifies that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 7, 2003. /s/ Steven D. Shackelford --------------------------------- Steven D. Shackelford Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----